- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K

<Table>

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001.

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

</Table>

COMMISSION FILE NUMBER: 000-21953

ENVIRONMENTAL SAFEGUARDS, INC.
(Exact name of registrant as specified in its charter)

<Table>

NEVADA 87-0429198
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</Table>

2600 SOUTH LOOP WEST,
SUITE 645,
HOUSTON, TEXAS 77054
(Address of principal executive offices, including zip code)

(713) 641-3838
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------

Common Stock, $.001 par value American Stock Exchange
</Table>

SECURITIES REGISTERED PURSUANT TO 12(g) OF THE EXCHANGE ACT:
NONE

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

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

The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 25, 2002, based upon the last closing price on the American
Stock Exchange, was $0.28. As of March 25, 2002, there were 10,112,144 shares of
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's definitive proxy statement for the Annual Meeting
of Shareholders to be held in May 2002 are incorporated by reference into Part
III of this report.
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- --------------------------------------------------------------------------------

TABLE OF CONTENTS

<Table>
<Caption>
PAGE
----

PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6

PART II
Item 5. Market for Registrant's Common Equity and Related 8
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations...................................
Item 7A. Quantitative and Qualitative Disclosures About Market 15
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Changes in and Disagreements With Accountants on Accounting 16
and Financial Disclosure....................................

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 17
Item 11. Executive Compensation...................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and 17
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 17

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 17
8-K.........................................................
</Table>

PART I

ITEM 1. BUSINESS

INTRODUCTION

Environmental Safeguards, Inc. is engaged in the development, production
and sale of environmental recycling technologies and services to waste
management companies, oil and gas industry participants and other industrial
customers, through its wholly-owned subsidiaries National Fuel & Energy, Inc.
("NFE") and OnSite Technology, L.L.C. ("OnSite").

As of March 2002, OnSite operates internationally through its wholly-owned
subsidiaries OST Equipment Leasing L.L.C and OnSite Mexico, L.L.C., and its
50%-owned subsidiary, OnSite Arabia, Inc.. OnSite is in the final stages of
closing down the OnSite Colombia, Inc. and OnSite Environmental UK Ltd.
subsidiaries, and has completely closed-down its OnSite Venezuela, Inc.
subsidiary. OnSite has recently begun the close-down process for its
wholly-owned subsidiary OST Ambiental S de RL de CV.

The environmental recycling services that we provide involve the removal of
hydrocarbon contaminants and valuable drilling fluids from soil using indirect
thermal desorption recycling technology. We provide these services on-site or at
the central location to which the customer hauls the contaminated materials.

HISTORY

We were incorporated under the laws of the State of Nevada in December
1985, under the name of Cape Cod Investment Company. In December 1986, our name
was changed to Cape Cod Ventures, Inc. In August 1987, an initial public
offering was completed for 4,148,000 shares of Common Stock at a price of $0.001
per share pursuant to the exemption from the registration requirements of the
Securities Act of 1933 provided by Regulation A. In May 1993, an Agreement and
Plan of Reorganization was executed with National Fuel & Energy, Inc., a Wyoming
corporation, providing for the acquisition of NFE in exchange for shares of our
Common Stock. In connection with the reorganization, our name was changed to
Environmental Safeguards, Inc., and NFE became our wholly-owned subsidiary.

In January 1995, we entered into an agreement with Parker Drilling Company
("Parker"), a Delaware corporation, granting Parker exclusive marketing rights
to our proprietary processes for on-site recycling services in connection with
drill cuttings at oil and gas drilling sites throughout the United States and in
certain foreign countries. In August 1995, we expanded our agreement with Parker
by forming OnSite, a joint company between NFE and Parker, in which NFE and
Parker each owned 50%. In December 1997, we entered into a Purchase Agreement
(the "Purchase Agreement") with Parker which provided for our acquisition,
through NFE, of Parker's 50% equity interest in OnSite resulting in NFE becoming
the owner of 100% of the equity interest in OnSite. Pursuant to the terms of the
Purchase Agreement, we paid $8,000,000 for the 50% equity interest and repaid a
$3,000,000 loan that had been made to us by an affiliate of Parker. As part of
the transaction, Parker returned to us unexercised warrants to purchase 300,000
shares of our Common Stock.

Our sources of funds to effect the acquisition included the sale of
$8,000,000 of new Series B Convertible Preferred Stock and Series C Preferred
Stock to an investor group consisting of Cahill, Warnock Strategic Partners
Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H.
Stone, who is the Chairman of Stone Energy Corporation and a secured loan of
$6,000,000 from the same investor group ("Loan Agreement"). Pursuant to the
financing, David L. Warnock, a member of Cahill, Warnock & Co., L.L.C. and
general partner of Cahill, Warnock Strategic Partners Fund, L.P., was appointed
as one of our Directors.

BUSINESS ACTIVITIES

General: Substantially all of our activities are conducted through OnSite,
which is engaged in the development and production of recycling technology and
the sale of environmental recycling services. OnSite owns the technologies
included in its Indirect Thermal Desorption ("ITD") units, and the proprietary

processes for on-site recycling of hydrocarbon contaminated soil. To date, the
environmental recycling services we have provided have involved the removal of
petroleum contaminants from soil using our ITD units. Our ITD units are easily
transported processing systems which produce clean soil from contaminated soil
while recycling the hydrocarbons. Our customers consist primarily of large
corporations in the energy industry that have responded to the changing
regulatory climate with respect to soil and other environmental contamination
and waste management companies in the business of offering waste disposal
services.

The primary services we offer involve the recycling of soil contaminated by
oil-based drilling fluids, fuel spills, leakage at storage tanks, refinery
wastes, ship sludges, industrial wastes and other sources of hydrocarbon
contamination, as well as the recycling of industrial waste. To recycle the
contaminated soil, we utilize our ITD units consisting of (i) an indirect
thermal desorption unit wherein the hydrocarbon contaminated soil is indirectly
heated, thereby causing the hydrocarbon contamination to vaporize; and (ii) a
condensation process system, which causes the hydrocarbon vapor to condense to a
liquid, or an afterburner or thermal oxidizer, which incinerates the hydrocarbon
vapor resulting in a safe and clean process. Our ITD units are mobile, and thus,
contaminated soil can be recycled at the site where the contaminated soil is
located. We do not haul or dispose of soil or contaminants away from the
customer's location.

As of March 2002, we owned five ITD units outright, and had a 50% interest
in two additional units in our 50%-owned subsidiary OnSite Arabia, Inc.

Customers: Our customers consist primarily of large oil and gas industry
participants, waste management companies and other industrial companies. Through
OnSite, we typically submit a bid for a project based on the costs of moving the
equipment to the location, the estimated charges for labor and fuel, the nature
and extent of the contamination, the type and moisture content of the soil and
the estimated processing time. Alternatively, we may submit a bid for the
outright sale of one or more ITD units. Once a contract has been awarded,
equipment is moved to the client's desired location.

Indirect Thermal Recycling: The primary services we offer involve: (i) the
recycling of soil contaminated by oil-based drilling mud, fuel spills, leakage
at storage tanks, leakage from pipelines; (ii) the recycling of hydrocarbon
contamination at settling ponds, oil and gas exploration sites, refineries,
petrochemical facilities, abandoned production fields, Department of Defense
installations, ships and dock facilities and other similar sites; (iii) the
recycling of valuable drilling fluids which have been captured in soil and
drilling muds during the drilling process; and (iv) recycling of industrial
wastes. To date we have employed our ITD units to provide recycling services to
oil and gas industry drilling operations, tank farms and compressor sites,
industrial waste disposal facilities and oilfield waste disposal facilities.
This process is known as "indirect thermal desorption" because it reverses the
contamination process and removes the hydrocarbons from the soil and discharges
the contaminants previously absorbed without direct contact of the soil to a
flame.

Our ITD units, which are portable equipment, utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other
contaminated materials. Our ITD units consist of two principal components: (i)
an indirect thermal desorption unit wherein the hydrocarbon contaminated soil is
indirectly heated, thereby causing the hydrocarbon contamination to vaporize;
and (ii) a condensation process system, which causes the hydrocarbon vapor to
condense to a liquid for recycling. As an alternative to the condensing system,
the vapor can be passed through an afterburner or thermal oxidizer, which
destroys the hydrocarbon vapors.

The heat exchange system is comprised of a large fabricated steel shell
which houses a rotating trundle. Hot gases pass through the shell and around the
outside surface of the trundle. Hydrocarbon contaminated soil, or other
contaminated materials, are loaded into the elevated end of the trundle by a
conveyor belt or a front-end loader. As the trundle revolves, the soil is
agitated by internal lifts and oars as it passes through the inside of the
trundle by gravity flow and is heated to temperatures from 200 to 1,000 degrees
Fahrenheit. At these temperatures, the hydrocarbon contaminants in the soil
transform into vapors, which are vacuumed out of the heat exchange system into
the condensing system, afterburner or the thermal oxidizer. The clean soil then
drops out of the discharge door at the low end of the trundle and is passed
through an enclosed conveyor for re-hydration before final discharge. Soil
samples are tested at the end of the process to confirm that the

contaminants have been removed and the soil condition is within an acceptable
range. The soil is then returned to its original location or such other location
specified by the customer.

The hydrocarbon vapors removed from the heat exchange system by vacuum are
passed through a fan-cooled condensing system. The vapors are condensed into
liquids and collected in storage tanks and can then be recycled or disposed,
depending on the nature of the contaminant, the needs of the customer and the
specifications required for reuse. To date, our ITD units have demonstrated
their ability to process up to 192 tons of contaminated soil in a 24-hour period
with 30% hydrocarbon saturation. However, the processing capacity varies
significantly depending on the moisture content, degree of contamination, soil
type, contamination type and the recycling required. There can be no assurance
that our ITD units will continue to perform at this level, or that this
performance will continue to be competitive with other technologies available in
the market.

Recycling of Hydrocarbon Contaminants: We have developed proprietary
processes that are embodied in the condensation process system unit, one of the
two principal components of our ITD units. Within this component the hydrocarbon
contaminant(s) are condensed from the vapor state created in the dryer unit back
into a liquid state via the proprietary processes and placed into storage for
recycling back to the client. This allows the client to realize actual savings
from its ability to re-utilize the hydrocarbons. We believe that this ability to
recycle the hydrocarbon contaminant(s) is an important competitive advantage, as
compared to the bioremediation, direct burn or "dig and haul" remediation
technologies.

Manufacturing of ITD Units: We have historically contracted with outside
fabricators to manufacture our ITD units. Currently, we have no ITD units under
construction by fabricators.

EXISTING CONTRACTS FOR OPERATIONS

We operate with our own trained personnel through wholly or partially-owned
subsidiaries as discussed above. As of March 2002, five of our ITD units are
located in the United States and two in the United Arab Emirates. We are
currently operating three ITD units in Mexico under an Operations and
Maintenance contract for the party that purchased the three ITD units from us.

COMPETITION

There are many companies that currently dispose of hazardous and industrial
wastes and remediate or clean contaminated sites. Such companies are continually
attempting to develop new and improved products and services. Other companies
utilize competing technologies and techniques in an attempt to provide more
economical or superior remediation services. Many of our competitors are
established companies with substantially greater capital resources, larger
research and development staffs and facilities and greater marketing
capabilities than us. There can be no assurance that we will be competitive in
the recycling industry in the future.

We obtain our contracts through competitive bidding and are in direct
competition with companies providing alternative means of, and utilizing
alternative technologies for, remediating environmental problems. The most
significant competition comes from companies utilizing "dig and haul," direct
burn, and bioremediation technology to remediate soil contamination.

Companies utilizing the "dig and haul" method generally transport the
contaminated soil to other facilities for processing. We believe that the
technology we utilize is competitive because our equipment is mobile, and thus,
contaminated soil can be processed on location. The waste processing, recycling
businesses are, to a large extent, dependent upon and constrained by the costs
and regulations associated with transporting such wastes. More importantly, our
recycling process addresses the latent liability associated with the
contamination at the site. There can be no assurance that we will be able to
develop or acquire such technology and skill or that, if obtained, will be
competitive with other alternatives available in the market.

Companies utilizing direct burn technology use direct heat sources to
incinerate contaminants found in the soil. Due to the closed nature of the heat
transfer systems of our ITD units, we can safely handle much higher
concentrations of contaminants than conventional direct burn methods.
Conventional direct burn

methods process material with maximum contamination levels of 3% to 4% while our
ITD units have processed materials with contamination levels as high as 40%. In
addition, the portable nature of our ITD units permit them to be located at the
contamination site. Our ITD units also permit the customer to recapture certain
valuable liquids which are otherwise destroyed.

We differentiate ourselves from our competitors by providing significantly
higher operational service and a significantly higher value-added result for our
clients for the recycling of hydrocarbons from soils and other mediums, and the
subsequent reclaiming of the hydrocarbons into liquids for customer recycling or
resale. For example, some of the design features of our ITD unit, which we
believe provide service-level advantages, include:

Recycling: Our ITD units remove 99.9% of hydrocarbon contaminants from the
waste-stream soil, effectively eliminating the client's latent liability. Our
ITD units transform waste streams into value for our clients by reclaiming
valuable hydrocarbons for client recycling or resale. For example, our equipment
has reclaimed millions of gallons of diesel oil while processing drill cuttings
for major oil and gas participants.

Tonnage: Our ITD units have proven processing capability of 1 to 10 tons
per hour with up to 30% hydrocarbon-saturation in the soil. Some competitors are
capable of similar processing speeds, but at lower hydrocarbon-saturation
levels, resulting in throughput advantages for us.

Portability: Our ITD units are built on two trailer beds for easier
transport to our client's location, avoiding costly hauling expenses of
contaminated materials to a central location. In addition, the design of our ITD
units permit rig-down and/or rig-up in less than a day. Some competitive units
are much less transportable, or not transportable at all.

Wide Range of Hydrocarbons Treated: Our ITD units operate at low
temperatures (200 degrees Fahrenheit), high temperatures (1,000 degrees
Fahrenheit), and anywhere in between, thereby enabling the processing of wide
ranges of hydrocarbon contaminants encountered at a client's site including both
oil and gas and industrial waste. We believe that competition in the industry is
concentrated in remediation services, whereas our ITD technology is capable of
recycling valuable hydrocarbons. Further, we believe that our pricing policies
are competitive. No assurance, however, can be given that we will be able to
successfully compete with other companies or alternative technologies.

GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE

We render services in connection with the recycling and disposal of various
wastes. Federal, state and local laws and regulations have been enacted
regulating the handling and disposal of wastes and creating liability for
certain environmental contamination caused by such waste. Environmental laws
regulate, among other things, the transportation, storage, handling and disposal
of waste. Governmental regulations govern matters such as the disposal of
residual chemical wastes, operating procedures, waste water discharges, air
emissions, fire protection, worker and community right-to-know, and emergency
response plans. Moreover, so-called "toxic tort" litigation has increased
markedly in recent years as persons allegedly injured by chemical contamination
seek recovery for personal injuries or property damage. These legal developments
present a risk of liability should we be deemed to be responsible for
contamination or pollution caused or increased by any evaluation, remediation or
cleanup effort conducted by us, or for an accident which occurs in the course of
such remediation or cleanup effort. There can be no assurance that our policy of
establishing and implementing proper procedures for complying with environmental
regulations will be effective at preventing us from incurring a substantial
environmental liability. If we were to incur a substantial uninsured liability
for environmental damage, our financial condition could be materially adversely
affected.

We presently have the ability to deliver soil recycling services that meet
applicable federal and state standards for the delivery of its services, and for
the level of contaminant removal. The government can, however, impose new
standards. If new regulations were to be imposed, we may not be able to comply
in either the delivery of our services, or in the level of contaminant removal
from the soil.

Operating permits are generally required by federal and state environmental
agencies for the operation of our ITD units. Most of these permits must be
renewed periodically and the governmental authorities involved

have the power, under various circumstances, to revoke, modify, or deny issuance
or renewal of these permits. Site-related permits, however, are generally the
responsibility of the client.

EMPLOYEES

We currently have 33 employees, 9 of whom are in domestic and international
management or supervisory positions, including corporate and administrative
functions. None of our employees are represented by a union. We consider our
employee relations to be good.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our Common Stock is Colonial Stock
Transfer Company, Inc., addressed at 455 East 400 South, Suite 100, Salt Lake
City, Utah 84111; (801) 355-5740.

ITEM 2. PROPERTIES

Our principal executive offices are located in leased facilities at 2600
South Loop West, Suite 645, Houston, Texas 77054, which consist of 3,852 square
feet. The lease for the executive offices will expire in May 2002. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs at reasonable prices.

We incorporate by reference in response to this item the information set
forth in item 1 of this annual report and the information set forth in Note 6 of
the Notes to Consolidated Financial Statements included in item 8 of this annual
report.

ITEM 3. LEGAL PROCEEDINGS

We are from time to time involved in litigation incidental to our business,
and which at times involves claims for significant monetary amounts, some of
which would not be covered by insurance. Presently we have no existing
litigation.

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

There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT

We have presented the below information about our executive officers as of
March 2002. Officers are elected annually by the Board of Directors and serve
until their successors are chosen or until their resignation or removal.

<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------

James S. Percell..................... 58 Director, Chairman, CEO and President
Chief Financial Officer, Treasurer and
Ronald L. Bianco..................... 55 Secretary
</Table>

JAMES S. PERCELL, age 58, serves as Director, Chairman, CEO and President
and also serves as President of the subsidiaries, NFE and OnSite. Mr. Percell
became a director and President, Chief Executive Officer and a director of NFE
in November, 1995. Mr. Percell became President and CEO of our Consolidated
company in January, 1996. Mr. Percell also serves as President of Percell &
Associates, a project developer of facilities in the hydrocarbon industry. From
1985-1993, Mr. Percell served as Vice-President of Belmont Constructors, Inc., a
heavy industrial contractor. From 1982-1984, he served as President of Capital
Services Unlimited, an international supply company for refining, petrochemical
and oil field compressor stations, modular refineries and modular oilfield
components. From 1977-1980, Mr. Percell served as President of Percell & Lowder,
Inc., an oilfield fabricator of onshore and offshore facilities, and from 1960-
1977, he served as project manager for various onshore and offshore projects. He
attended Amarillo College in Amarillo, Texas.

RONALD L. BIANCO, age 55, joined us in April 1997 as Chief Financial
Officer. Mr. Bianco is presently the C.F.O., Treasurer and Secretary of the
Company. From 1975 through 1991, Mr. Bianco was with Dresser Industries where he
served as Controller of Dresser Rand Power in Norway, as the Controller for
North America Operations of Dresser Masonelian Valve and in other headquarters
and division assignments. From 1992 through 1993, Mr. Bianco was an independent
business consultant. From 1994 through 1996, Mr. Bianco served as Chief
Financial Officer of Sweco Oilfield Services. Mr. Bianco received his B.B.A. in
accounting in 1970 from St. Bonaventure University in Olean, New York, and his
M.B.A. in 1983 from Southern Methodist University in Dallas, Texas.

CERTAIN SECURITIES FILINGS

The Company believes that the reports required by section 16(a) of the
Exchange Act have been filed timely.

PART II

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

PRICE RANGE OF COMMON STOCK

Our Common Stock is currently traded on the American Stock Exchange under
the symbol "EVV". The following table sets forth the range of high and low
closing sales prices of our Common Stock for the periods shown:

COMMON STOCK PRICE RANGE

<Table>
<Caption>
HIGH LOW
----- -----

2000
First Quarter............................................... $1 11/16 $13/16
Second Quarter.............................................. $1 1/16 $9/16
Third Quarter............................................... $11/16 $5/16
Fourth Quarter.............................................. $3/8 $3/16
2001
First Quarter............................................... $0.43 $0.15
Second Quarter.............................................. $0.20 $0.05
Third Quarter............................................... $0.16 $0.08
Fourth Quarter.............................................. $0.38 $0.06
</Table>

On March 25, 2002, the closing price of our Common Stock was $.28 per
share. On the same date, we had approximately 1,000 stockholders of record,
including broker-dealers holding shares beneficially owned by their customers.

DIVIDEND POLICY

We have not paid, and do not currently intend to pay cash dividends on our
Common Stock in the foreseeable future. The current policy of our Board of
Directors is to retain all earnings, if any, to provide funds for the operation
and expansion of our business. The declaration of dividends, if any, will be
subject to the discretion of our Board of Directors, which may consider such
factors as our results of operations, financial condition, capital needs and
acquisition strategy, among other factors.

ITEM 6. SELECTED FINANCIAL DATA

We have derived the following selected consolidated financial information
as of December 31, 2001 and 2000, and for each of the years in the three-year
period ended December 31, 2001, from our audited consolidated financial
statements included in item 8 of this annual report. You should read this
information in conjunction with those consolidated financial statements and the
notes thereto. We have derived the selected consolidated financial information
as of December 31, 1999, 1998 and 1997, and for each of the years in the
two-year period ended December 31, 1998, from our audited consolidated financial
statements of the

Company, that are not included herein. Please read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in item 7 of this
annual report.

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue...................................... $ 2,987 $11,250 $13,514 $10,672 $ 6,678
Income (loss) from operations................ (3,683) 1,029 3,098 1,404 590
Net income (loss)(1)......................... 1,507 (1,462) (483) (799) (1,849)
Basic and dilutive net income (loss) per
share:
Before extraordinary item.................. 0.05 (0.19) (0.12) (0.17) (0.61)
Extraordinary item........................... -- -- -- -- (0.04)
Net income (loss) per share:
Basic...................................... $ 0.12 $ (0.19) $ (0.12) $ (0.17) $ (0.65)
Diluted.................................... $ 0.05 $ (0.19) $ (0.12) $ (0.17) $ (0.65)
BALANCE SHEET DATA:
Working capital surplus (deficit)............ $ 766 $ (258) $ 1,564 $ 5,431 $ 5,277
Property and equipment, net.................. 6,539 8,929 10,835 8,256 6,286
Total assets................................. 10,396 15,153 18,990 20,164 18,298
Long-term debt............................... -- 2,163 4,235 6,636 5,210
Minority interest............................ 2,040 2,872 3,554 2,073 628
Shareholders' equity......................... 6,879 5,664 6,956 7,813 9,206
</Table>

- ---------------

(1) Included in net loss for the year ended December 31, 1997 is a $786,000
charge for acquired research and development in connection with the
acquisition of OnSite.

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

The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in item 8 of this
annual report, and our "Forward-Looking Statements" which discusses certain
limitations inherent in such statements.

INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

We are including the following cautionary statement in this Form 10-K to
make applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by us, or on behalf of us. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Certain statements in this Form 10-K are forward-looking
statements. Words such as "expects", "anticipates", "estimates" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties are set forth
below. Our expectations, beliefs and projections are expressed in good faith and
are believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished.

In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause material adverse
affects on our financial condition and results of operations: our ability to
secure contracts for our ITD units; our ability to attain widespread market
acceptance of our technology; our ability to obtain acceptable forms and amounts
of financing to fund planned expansion; the demand for, and price level of, our
services; competitive factors; the actual useful life of our ITD Units; ability
to mitigate concentration of business in a small number of customers; the
evolving industry and technology standards; the ability to protect proprietary
technology; the dependence on key personnel; the effect of business interruption
due to political unrest; the foreign exchange fluctuation risk; and our ability
to maintain acceptable utilization rates on our equipment. We are not obligated
to update or revise these forward-looking statements to reflect the occurrence
of future events or circumstances.

OVERVIEW

We are engaged in the development, production and sale of environmental
recycling technologies and services. Substantially all of our technologies and
services are provided through OnSite and we are devoting substantially all of
our efforts to the development of markets for OnSite's services. We are
currently providing recycling services to companies engaged in land-based oil
and gas exploration and production, refining, waste management, and other
industrial applications.

Oil and gas exploration, refinery and other types of industrial activities,
often produce significant quantities of petroleum-contaminated drill cuttings
and waste, from which our Indirect Thermal Desorption ("ITD") process can
extract and recover the hydrocarbons as re-useable or re-saleable liquids, and
produce recycled soil compliant with environmental regulations. We have expanded
the activities of OnSite to include use of ITD technology to address hydrocarbon
contamination problems and hydrocarbon recycling and reclamation opportunities
at heavy industrial, refining, petrochemical and waste management sites, as well
as at Superfund, DOD and DOE sites.

In December 1997, we acquired the remaining 50% interest in OnSite from
Parker Drilling Co. ("Parker"), giving us complete control of the ITD technology
owned by OnSite, and providing us with a wholly-owned operating subsidiary that
forms the cornerstone of our future operations. Total purchase consideration in
the OnSite acquisition was financed by us through a private placement of
Convertible Preferred and Preferred Stock, combined with senior secured notes
and warrants to purchase shares of our Common Stock. We included OnSite's
operating results in our statement of operations for the year ended December 31,
1997, as though the acquisition took place at the beginning of that year, and
deducted as a separate line item the pre-acquisition earnings attributable to
the former 50% owner of OnSite.
10

We have focused essentially all of our attention on our now wholly-owned
business operations in OnSite. OnSite was formed, as a 50%-owned joint company
with Parker, as a means for assembling the capital necessary to build and
improve the ITD process and to generate market awareness and acceptance of ITD
technology.

During the period 1996-2000 a substantial portion of our revenues were
generated from major international oil and gas industry participants in Latin
America (Colombia, Venezuela and Mexico) as well as from other domestic and
foreign industrial applications. As of March 2002 we have for the most part
completed our foreign contract operations, and have in fact taken steps to close
down certain of our foreign subsidiaries as outlined below. We are now
concentrating our marketing efforts and resources on domestic downstream plants,
manufacturing facilities and waste management facilities, where our proprietary
equipment and process have a competitive advantage in waste minimization, and
recycling/reuse of hazardous waste markets -- including industrial, petroleum
and petro-chemical waste streams.

Highlights of our foreign operations follow:

OnSite Colombia, Inc. ("OSC"): In November 1996, we formed a 50%-owned
joint company OSC to provide hydrocarbon contaminated soil recycling services to
oil and gas industry participants operating in Colombia. Having completed
contract operations in Colombia, we re-acquired the 50% minority ownership of
OSC and subsequently initiated formal procedures to close-down OSC. As of March
2002 the close-down process was in its final stages.

OnSite Venezuela, Inc. ("OSV"): In January 1998, we formed our 100% owned
subsidiary OSV, and commenced operations to provide hydrocarbon contaminated
soil recycling services to oil and gas industry participants operating in
Venezuela. Following completion of contract operations in Venezuela, we
initiated formal procedures to close-down OSV, and as of March 2002 the
close-down was completed.

OnSite Arabia, Inc. ("OSA"): In December 1998, we formed a 50%-owned joint
company OSA to provide hydrocarbon contaminated soil recycling services to oil
and gas industry participants operating in the Arabian Gulf region.

OnSite Environmental UK, Ltd ("OSE"): In April 1999, we formed OSE, a
wholly-owned subsidiary, for operations in Scotland. Having completed contract
operations in Scotland, we initiated formal procedures to close-down OSE. As of
March 2002 the close-down was in its final phases.

OnSite Mexico LLC ("OSM"): In July 1999, we registered OSM, a wholly-owned
subsidiary, for operations in Mexico.

OST Ambiental S de RL de CV ("SRL"): In March 2001, we registered SRL, a
wholly-owned subsidiary, for operations in Mexico. SRL has recently completed
all operations and its close-down procedures are being initiated.

RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS -- YEARS ENDED DECEMBER 31, 2001 AND 2000

Summary. For the year ended December 31, 2001, we earned net income of
$1,507,000 as compared to a 2000 net loss of $1,462,000. The $2,969,000 net
income increase was primarily due to the gain on sale of three ITD units and
certain licensing rights during the fourth quarter of 2001, partly offset by 57%
lower equipment utilization during 2001. Additional information follows.

Revenue and Gross Margin. Revenue of $2,987,000 for 2001 generated
$559,000 negative gross margin as compared to revenue of $11,250,000 and gross
margin of $5,219,000 in 2000. The decrease in revenue and gross margin was due
to a substantial drop in ITD utilization during 2001, where on average we had
1.8 units in operation as compared to 4.2 units during 2000. Nearly 80% of the
decreased utilization was due to the completion of contract operations in
Colombia at the end of 2000.

Selling, General and Administrative ("SGA") Expense. SGA expenses during
2001 were nearly 29% below the prior year level primarily due to the
winding-down of contract operations in Colombia.
11

Amortization of Engineering Design and Technology. This represents the
amortization of Acquired Engineering Design and Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an
8-year estimated economic life.

Research & Development Costs ("R&D") Expense. The expense for 2001 is at
the 2000 level, and reflects ongoing R&D improvements to our Series 6000 ITD
system design.

Interest Expense. During 2001, $839,000 of interest expense was incurred
(including amortization of debt issuance costs of $344,000), compared to
interest expense of $1,018,000 for 2000 (including amortization of debt issuance
costs of $372,000). The $179,000 overall decrease in interest expense for 2001
was mainly due to lower interest rates during 2001, and to a lesser degree, to
less amortization of debt issuance costs as noted above.

Gain on Sale of Assets. In December 2001 we completed the sale of three
ITD units along with certain licensing rights. No ITD units were sold in the
prior year.

Other Income (Expense). Other income is mainly composed of foreign
currency translation gains. The financial statements of our foreign subsidiaries
are measured as if the functional currency was the U.S. Dollar ("USD"). The
re-measurement of local currencies into USD created favorable translation
adjustments that were included in net income in each respective year 2001 and
2000.

Income Taxes. Approximately half of the 2001 tax provision relates to
state income tax effects, with the balance due to foreign income tax effects
mainly in our Mexico subsidiaries. The tax provision in 2000 primarily related
to foreign income tax effects in our Colombia, Venezuela, Mexico and Scotland
subsidiaries. We incurred net operating losses ("NOLs") in the U.S. in recent
years, some of which were used in 2001 to offset taxes on our 2001 taxable
income. The balance of our NOLs may be used to offset taxable income reported in
future periods. The NOLs have generated deferred tax assets, but due to
uncertainties regarding the future realization of these assets, a valuation
allowance has been provided for the full amount of the deferred tax assets. We
are implementing tax planning strategies, which if successful, may result in our
recognizing these deferred tax assets in future periods, which would result in
significantly reduced effective tax rates. However, presently there can be no
assurances that the NOLs will be utilized.

Minority Interest. Minority interest for 2001 reflects our 50% minority
partner's interest in the net loss of OnSite Colombia and OnSite Arabia. During
2000, minority interest reflects our 50% minority partner's interest in the net
income of OnSite Colombia, partly offset by the net loss of OnSite Arabia.

COMPARISON OF OPERATING RESULTS -- YEARS ENDED DECEMBER 31, 2000 AND 1999

Summary. For the year ended December 31, 2000, we incurred a net loss of
$1,462,000 as compared to a 1999 net loss of $483,000. The $979,000 increase in
net loss was primarily due to the sale of an ITD unit during the first quarter
of 1999 (not repeated during 2000), 10% lower equipment utilization during 2000
and the cost of equipment relocations during the first quarter of 2000.
Additional information follows.

Revenue and Gross Margin. Revenue of $11.3 million for 2000 generated $5.2
million (46% of revenue) gross margin as compared to revenue of $13.5 million
and gross margin of $7.3 million (54% of revenue) in 1999. The majority of the
2000 decrease in revenue was due to operating an average of 4.2 ITD units during
2000 as compared to an average of 4.6 in 1999, a reduction of 10%, combined with
the sale of an ITD unit to a 50%-owned subsidiary during the first quarter of
1999 (not repeated during 2000). The 8% decrease in gross margin ratio was
mainly due to the combination of increased ITD depreciation expense in 2000 (two
additional ITDs compared with 1999) and transportation and customs duty expenses
associated with movements of ITD units in and out of Latin America in the first
quarter of 2000.

Selling, General and Administrative ("SGA") Expense. SGA expenses were at
about the same level as 1999, both in amount and by type of expense. The average
number of management employees classified as SGA remained essentially the same
in 2000 as with 1999.

Amortization of Engineering Design and Technology. Reflects the
amortization of Engineering Design and Developed Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an
8-year estimated economic life.

Research & Development Costs ("R&D") Expense. The expense for 2000,
unchanged from 1999, reflects ongoing R&D improvements to our Series 6000 ITD
system design.

Interest Income. The reduction in interest income resulted from a lower
average cash balance available for short term investment income during 2000.

Interest Expense. During 2000, $1,018,000 of interest expense was incurred
(including amortization of debt issuance costs of $372,000), compared to
interest expense of $1,455,000 for 1999 (including amortization of debt issuance
costs of $522,000, partly offset by $45,000 of interest capitalized in
connection with the first quarter 1999 construction of ITD units). The $437,000
overall decrease in interest expense for 2000 was due to lower interest expense
on two international leases in Colombia, lower amortization of debt issuance
costs as noted above, and no interest capitalization in 2000, as compared to
$45,000 in 1999.

Other Income (Expense). Other income is mainly composed of foreign
currency translation gains. The financial statements of our foreign subsidiaries
are measured as if the functional currency were the U.S. Dollar ("USD"). The
re-measurement of local currencies into USD created favorable translation
adjustments which were included in net income in each respective year 2000 and
1999.

Income Taxes. The tax provision primarily relates to foreign income tax
effects in our Colombia, Venezuela, Mexico and Scotland subsidiaries in 2000,
and in our Colombia, Scotland and Mexico subsidiaries in 1999. We have incurred
net operating losses ("NOLs") in the U.S. in recent years, which may be used to
offset taxable income reported in future periods. The NOLs and certain foreign
tax credits associated with the taxes paid primarily in Colombia have generated
deferred tax assets, but due to uncertainties regarding the future realization
of these assets, a valuation allowance has been provided for the full amount of
the deferred tax assets. We are implementing tax planning strategies, which if
successful, may result in our recognizing these deferred tax assets in future
periods, which would result in significantly reduced effective tax rates.
However, presently there can be no assurances that the NOLs and foreign tax
credits will be utilized.

Minority (Interest) Income. Minority interest expense for 2000 reflects
our 50% minority partner's interest in the net income of OnSite Colombia, partly
offset by net loss of OnSite Arabia. During 1999, the minority interest expense
reflects our 50% minority partner's interest in the net income of OnSite
Colombia.

LIQUIDITY AND CAPITAL RESOURCES

We currently have no significant commitments for capital expenditures.

Since our inception, we have expended a significant portion of our
resources to develop markets and industry awareness of our ITD recycling process
technology. Our efforts have been focused primarily on hydrocarbon soil
contamination inherent in oil and gas exploration and downstream activities. Our
efforts to develop markets and produce equipment have required significant
amounts of capital, including long-term debt secured by our ITD units and
related ITD technology.

In December 2001, we completed the sale of three of our ITD units along
with certain licensing rights, and utilized the bulk of the proceeds from the
sale to retire our senior debt. With the exception of this sale, we have
incurred recurring net losses and have been dependent on revenue from a limited
customer base to provide cash flows. We completed our most significant service
contract in December 2000 and during 2001 have been exploring ways to replace
that revenue. During 2001 we've experienced a continued tightening of cash
reserves and prior to repaying our senior debt in December 2001, we took actions
to delay payments on that debt. Details of amounts deferred are described in
Note 4 of the Notes to Consolidated Financial Statements included in item 8 of
this annual report, and as discussed below.

We are currently seeking to obtain service contracts in our served markets
and are considering strategic alternatives including the possible additional
sale of certain of our assets. To the extent our cash reserves and
13

cash flows from operations are insufficient to meet future cash requirements, we
will need to successfully raise funds through an equity infusion, the issuance
of debt securities or the sale of ITD units. Financing may not be available on
terms acceptable to us, or at all. Further, the sale of additional equity or
convertible debt securities may result in dilution to our stockholders.

Our independent accountants PricewaterhouseCoopers LLP have provided us
their report which sets forth factors that raise substantial doubt about our
ability to continue as a going concern. Our viability as a going concern is
dependent on increased utilization of our ITD units, and the achievement of a
sustaining level of profitability. There can be no assurances, however, that we
will increase ITD utilization or become sufficiently profitable in a time frame
necessary to meet our obligations.

We have evaluated the carrying value of long-lived assets, including
associated intangibles. We performed an evaluation of recoverability by
comparing the estimated future undiscounted cash flows associated with the
assets to their carrying amount to determine if a write-down to market value or
discounted cash flow is required. Given the homogeneous nature and geographic
deployment flexibility of our assets, and based upon this evaluation by us,
impairment of our long-lived assets has not been deemed necessary.

The functional currency of our foreign operations is the U.S. dollar
because customer invoicing, customer receivables, imported equipment and many of
the operating cost factors are denominated in U.S. dollars. We plan to continue
to implement the same approach to minimize our risks associated with foreign
exchange fluctuation and its affect on our profitability.

ACCOUNTING MATTERS

In June 1998 and June 2000, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
respectively. These statements establish accounting and reporting standards
requiring that every derivative instrument be recorded on the balance sheet as
either an asset or liability measured at its fair value. SFAS No. 133 and SFAS
No. 138 also require that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 and SFAS No. 138 are effective for fiscal years beginning after June 15,
2000. We do not currently hold derivative instruments or engage in hedging
activities and, accordingly, these standards do not have a material impact on
our results of operations or financial position.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
No. 142 "Goodwill and Other Intangible Assets. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
desegregate and report separately previously identified intangible assets, and
in certain cases reclassify certain intangible assets into goodwill. SFAS No.
142 eliminates the amortization of goodwill and requires that goodwill be
reviewed annually for impairment. SFAS No. 142 also requires that the useful
lives of previously recognized intangible assets be reassessed and the remaining
amortization periods be adjusted accordingly. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 and affects all goodwill and
other intangible assets recorded on a company's balance sheet at that date,
regardless of when the assets were initially recorded. The effects of
implementation of SFAS No. 142 on our results of operations or financial
position has not yet been determined. SFAS No. 142 may require that we obtain
annual independent appraisal of acquired engineering design and technology
costs, reported in the accompanying December 31, 2001 balance sheet with a
remaining unamortized carrying value of $1,610,000.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2001. We believe its adoption is not expected to have a
material impact on our results of operations or financial position.

In July 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of
Long-Lived Assets", which is effective for fiscal years beginning after December
15, 2001. The provisions of this statement provide a single accounting model for
impairment of long-lived assets. We believe its adoption is not expected to have
a material impact on our results of operations or financial position.

ACCOUNTING ESTIMATES AND CHOICES

Preparation of financial statements under generally accepted accounting
principles in the United States of America requires us to make choices between
acceptable methods of accounting and to make estimates of future events to
determine the value we report for certain assets and liabilities at the date of
our financial statements and the value we report for revenues and expenses in a
period covered by our financial statements. While we try to be as precise as
possible in making these estimates, many of them are subjective in nature and
involve matters of judgement. We believe the most subjective and material
estimates in our financial statements are the reserve, if any, which we report
for accounts receivable, the amount of our deferred taxes and our accrued
warranty costs.

Accounts Receivable. When an account receivable is considered impaired,
the amount of the impairment is measured based on the present value of expected
future cash flows or the fair value of collateral. Impairment losses
(recoveries) are included in the allowance for doubtful accounts.

Deferred Taxes. We record a valuation allowance to reduce our deferred
income tax assets to an amount that we believe to be realizable under the
"more-likely-than-not" recognition criteria. While we consider future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for a valuation allowance, in the future we may change our estimate of the
amount of the deferred income tax assets that would "more-likely-than-not" be
realized, resulting in an adjustment to the deferred income tax asset valuation
allowance that would either increase or decrease, as applicable, reported net
income in the period.

Accrued Warranty and Other Contingent Costs. We record an accrual for
product warranty and other contingencies when estimated future expenditures
associated with such contingencies become probable, and the amounts can
reasonably be estimated. However, new information may become available, or
circumstances (such as applicable laws and regulations) may change, thereby
resulting in an increase or decrease in the amount required to be accrued for
such matters (and therefore a decrease or increase in reported net income in the
period of such change).

We believe that all of the estimates we used to prepare our financial
statements were reasonable at the time we made them, but circumstances may
change requiring us to revise our estimates in ways that could have a material
adverse impact on our results of operations or financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk related to fluctuations in the value of the
U.S. dollar compared to certain foreign currencies. We currently have foreign
subsidiaries which operate in Mexico and the Arabian Gulf region. However, the
functional currency used by each of these operating units is the U.S. dollar.
Substantial portions of these operating units' invoicing, customer receivables,
imported equipment and many operating cost factors are denominated in dollars.
We attempt to maintain a balance between assets and liabilities denominated in
foreign currencies, however, such currency levels are generally not significant.
These factors serve to mitigate the impact on our financial statements
associated with foreign exchange fluctuations.

A hypothetical 10% fluctuation of the U.S. dollar relative to the
currencies of Mexico and the Arabian Gulf region would not have materially
adversely affected our fiscal year ended December 31, 2001 financial position,
results of operations or cash flows (regardless of the direction of the change
in relation to the U.S. dollar). Our sensitivity analysis of the effects of
changes in foreign currency exchange rates does not factor in a potential change
in revenue levels.

While we are not a purchaser or producer of crude oil or related products,
our customers to date include large multinational oil and gas producing
companies which are directly impacted by the fluctuations in the price of crude
oil. Decreases in the price of crude oil directly affect our current customers'
cash flows and may
15

therefore affect our ability to collect receivables and our ability to generate
repeat and new business. To a lesser extent, our historical customer base has
included waste management companies and other industrial companies, whose
fluctuations in business levels could also have an impact our ability to collect
receivables and generate repeat and new business.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required hereunder is included in this report as set forth
in the "Table of Contents" on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in or disagreements with our independent
accountants regarding accounting and financial disclosure matters.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") within 120 days of our fiscal year ended December
31, 2001.

Information with respect to our executive officers is set forth under the
caption "Executive Officers of the Registrant" in Part I of the report.

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

(A) Financial Statements

Reports of Independent Accountants

Consolidated Balance Sheet as of December 31, 2001 and 2000.

Consolidated Statement of Operations for the years ended December 31,
2001, 2000 and 1999.

Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999.

Consolidated Statement of Cash Flows for the years ended December 31,
2001, 2000 and 1999.

Notes to Consolidated Financial Statements.

(B) Exhibits

<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1* -- Certificate of Incorporation of the Registrant, as amended.
3.2* -- Bylaws of the Registrant.
4.1* -- See Exhibits 3.1 and 3.2. for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights
of holders of common stock of the Registrant.
4.2* -- Common Stock specimen.
4.3.1** -- Certificate of Designation, Preferences, Rights and
Limitations of Series B Convertible Preferred Stock.
4.3.2** -- Certificate of Designation, Preferences, Rights and
Limitations of Series C Preferred Stock.
4.3.3***** -- Certificate of Designation, Preferences, Rights and
Limitations of Series D Convertible Preferred Stock.
4.4* -- Form of Warrant Certificate dated December 17, 1997
(Included in Exhibit 4.8).
4.5* -- Form of Registration Rights Agreement pursuant to Private
Placement Memorandum dated September 18, 1996.
4.6* -- Form of Registration Rights Agreement dated December 17,
1997, between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
4.7* -- Form of Warrant Agreement dated December 17, 1997, between
the Company and Cahill, Warnock Strategic Partners Fund,
L.P., Strategic Associates, L.P., Newpark Resources, Inc.
and James H. Stone.
4.8*** -- Form of Registration Rights Agreement dated December 7,
1998.
10.1.1***** -- Agreement in Principal dated August 17, 2000.
10.1.2****** -- Agreement dated March 1, 2001.
10.1.3******* -- Agreement dated August 31, 2001.
10.2* -- Loan and Security Agreement dated December 17, 1997 by and
among the Company, National Fuel & Energy, and OnSite
Technology, L.L.C. as Borrowers and Cahill, Warnock
Strategic Partners Fund, L.P., Strategic Associates, L.P.,
Newpark Resources, Inc. and James H. Stone, as Lenders.
10.3* -- Form of Registration Rights Agreement pursuant to Private
Placement Memorandum dated September 18, 1996.
10.4* -- Form of Registration Rights Agreement dated December 17,
1997, between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
10.5* -- Form of Warrant Agreement dated December 17, 1997, between
the Company and Cahill, Warnock Strategic Partners Fund,
L.P., Strategic Associates, L.P., Newpark Resources, Inc.
and James H. Stone.
10.6* -- Employment Agreement of James S. Percell.
10.7**** -- 1998 Stock Option Plan
21.1* -- Subsidiaries
</Table>

- ---------------

* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1997, and
incorporated by reference thereto.

** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated December 17, 1997 and filed December 30, 1997, and
incorporated herein by reference thereto.

*** Previously filed with Form S-3 as amended effective Feb 8, 1999.

**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1998, and
incorporated by reference thereto.
18

***** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 17, 2000, and filed August 28, 2000, and incorporated
herein by reference thereto.

****** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 1, 2001, and filed March 6, 2001, and incorporated
herein by reference thereto.

******* Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 31, 2001, and filed September 11, 2001, and
incorporated herein by reference.

There were no reports filed on Form 8-K during the fourth quarter of 2001.

SIGNATURES

In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 26, 2002.

ENVIRONMENTAL SAFEGUARDS, INC.

By: /s/ JAMES S. PERCELL
------------------------------------
James S. Percell
Director, Chairman of the Board,
Chief Executive Officer and
President

Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:

<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----

/s/ JAMES S. PERCELL Director, Chairman of the Board, March 26, 2002
------------------------------------------------ Chief Executive Officer and
James S. Percell President

/s/ THOMAS R. BRAY Director March 26, 2002
------------------------------------------------
Thomas R. Bray

/s/ BRYAN SHARP Director March 26, 2002
------------------------------------------------
Bryan Sharp

/s/ DAVID L. WARNOCK Director March 26, 2002
------------------------------------------------
David L. Warnock

/s/ ALBERT WOLFORD Director March 26, 2002
------------------------------------------------
Albert Wolford

/s/ RONALD L. BIANCO Chief Financial Officer, Treasurer March 26, 2002
------------------------------------------------ and Secretary
Ronald L. Bianco
</Table>

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

ENVIRONMENTAL SAFEGUARDS, INC.

TABLE OF CONTENTS

<Table>
<Caption>
PAGE
----

Report of Independent Accountants........................... F-2
Audited Financial Statements
Consolidated Balance Sheet as of December 31, 2001 and
2000................................................... F-3
Consolidated Statement of Operations for the years ended
December 31, 2001, 2000 and 1999....................... F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999........... F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</Table>

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Environmental Safeguards, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of
Environmental Safeguards, Inc. as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has incurred losses from
operations and has not generated sufficient business backlog. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

PRICEWATERHOUSECOOPERS LLP

Houston, Texas
February 28, 2002

F-2

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED BALANCE SHEET

<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 798 $ 3,068
Accounts receivable....................................... 1,309 1,023
Prepaid expenses.......................................... 128 66
Deferred taxes............................................ -- 30
Other assets.............................................. 8 9
------- -------
Total current assets................................... 2,243 4,196
Property and equipment, net................................. 6,539 8,929
Acquired engineering design and technology, net of
accumulated amortization of $1,648 and $1,240 as of
December 31, 2001 and 2000, respectively.................. 1,611 2,019
Other assets................................................ 3 9
------- -------
Total assets........................................... $10,396 $15,153
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ -- $ 2,945
Accounts payable.......................................... 146 156
Dividends payable......................................... 364 225
Accrued interest.......................................... 20 220
Other accrued liabilities................................. 693 688
Income taxes payable...................................... 254 220
------- -------
Total current liabilities.............................. 1,477 4,454
Long-term debt.............................................. -- 2,163
Minority interest........................................... 2,040 2,872
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock; Series B convertible; voting, $.001 par
value (aggregate liquidation value -- $2,898) 5,000,000
shares authorized; 2,733,686 shares issued and
outstanding............................................ 3 3
Preferred stock; Series D convertible, non-voting,
cumulative $.001 par value (aggregate liquidation value
$4,000); 400,000 shares authorized, issued and
outstanding............................................ 1 1
Common stock; $.001 par value; 50,000,000 shares
authorized; 10,112,144 shares issued and outstanding... 10 10
Additional paid-in capital................................ 14,981 14,935
Accumulated deficit....................................... (8,116) (9,285)
------- -------
Total stockholders' equity............................. 6,879 5,664
------- -------
Total liabilities and stockholders' equity............. $10,396 $15,153
======= =======
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)

Revenue..................................................... $ 2,987 $11,250 $13,514
Cost of revenue............................................. 3,546 6,031 6,197
------- ------- -------
Gross margin.............................................. (559) 5,219 7,317
Selling, general and administrative expenses................ 2,645 3,711 3,741
Amortization of acquired engineering design and
technology................................................ 408 408 408
Research and development.................................... 71 71 70
------- ------- -------
Income (loss) from operations.......................... (3,683) 1,029 3,098
Other income (expense):
Gain on sale of assets.................................... 6,252 -- --
Interest income........................................... 32 28 130
Interest expense.......................................... (839) (1,018) (1,455)
Other..................................................... 40 105 61
------- ------- -------
Income before provision for income taxes and minority
interest.................................................. 1,802 144 1,834
Provision for income taxes.................................. 536 1,117 1,396
------- ------- -------
Income (loss) before minority interest...................... 1,266 (973) 438
Minority interest........................................... 241 (489) (921)
------- ------- -------
Net income (loss)........................................... $ 1,507 $(1,462) $ (483)
======= ======= =======
Net income (loss) applicable to common stockholders......... $ 1,169 $(1,945) $(1,244)
======= ======= =======
Net income (loss) per share -- basic........................ $ 0.12 $ (0.19) $ (0.12)
======= ======= =======
Net income (loss) per share -- diluted...................... $ 0.05 $ (0.19) $ (0.12)
======= ======= =======
Weighted average shares outstanding -- basic................ 10,112 10,112 10,112
======= ======= =======
Weighted average shares outstanding -- diluted.............. 23,142 10,112 10,102
======= ======= =======
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-4

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<Table>
<Caption>
TOTAL
SERIES B SERIES C SERIES D ADDITIONAL STOCK-
PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED HOLDERS'
STOCK STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
--------- --------- --------- ------ ---------- ----------- --------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Balance as of December 31, 1998.......... $ 3 $ 1 $-- $10 $14,318 $(6,519) $ 7,813
Exercise of stock options (19,700
shares)................................ -- -- -- -- 11 -- 11
Dividends on series C preferred stock.... -- -- -- -- -- (385) (385)
Net loss................................. -- -- -- -- -- (483) (483)
--- --- --- --- ------- ------- -------
Balance as of December 31, 1999.......... 3 1 -- 10 14,329 (7,387) 6,956
Issuance of 417,066 warrants to purchase
common stock in connection with senior
secured debt (Note 4).................. -- -- -- -- 438 -- 438
Issuance of Series D Preferred Stock in
exchange for Series C Preferred Stock
(Note 4)............................... -- (1) 1 -- 168 -- 168
Dividends of $287 and $149 on Series C
and Series D Preferred Stock,
respectively........................... -- -- -- -- -- (436) (436)
Net loss................................. -- -- -- -- -- (1,462) (1,462)
--- --- --- --- ------- ------- -------
Balance as of December 31, 2000.......... $ 3 $-- $ 1 $10 $14,935 $(9,285) $ 5,664
Issuance of 188,571 warrants to purchase
common stock in connection with senior
secured debt (Note 4).................. -- -- -- -- 46 -- 46
Dividends on Series D Preferred Stock.... -- -- -- -- -- (338) (338)
Net income............................... -- -- -- -- -- 1,507 1,507
--- --- --- --- ------- ------- -------
Balance as of December 31, 2001.......... $ 3 $-- $ 1 $10 $14,981 $(8,116) $ 6,879
=== === === === ======= ======= =======
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
F-5

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Cash flows from operating activities:
Net income (loss)......................................... $ 1,507 $(1,462) $ (483)
Adjustment to reconcile net income (loss) to net cash
provided (used) by operating activities:
Minority interest...................................... (241) 489 921
Deferred tax expense................................... 30 3 18
Depreciation expense................................... 2,080 2,245 1,814
Amortization of acquired engineering design and
technology........................................... 408 408 408
Amortization of discount............................... 344 372 522
Gain on sale of assets................................. (6,252) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. (286) 2,491 (1,845)
Equipment held for sale.............................. -- -- 545
Prepaid expenses and other assets.................... (55) 88 371
Accounts payable..................................... (10) (511) 39
Accrued liabilities.................................. (195) 237 203
Income taxes payable................................. 34 (398) 556
------- ------- -------
Net cash provided (used) by operating
activities...................................... (2,636) 3,962 3,069
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of assets.............................. 6,900 -- --
Purchases of equipment.................................... (260) (274) (1,835)
------- ------- -------
Net cash provided (used) by investing
activities...................................... 6,640 (274) (1,835)
------- ------- -------
Cash flows from financing activities:
Payments on long-term debt................................ (5,406) (1,081) (2,470)
Payments on capital lease obligations..................... -- -- (648)
Net proceeds from sale of common stock, preferred stock,
stock warrants and stock options....................... -- -- 11
Dividends paid on Series C and Series D preferred stock... (199) (312) (385)
Distribution to minority interest......................... (669) (1,171) (590)
------- ------- -------
Net cash used by financing activities............. (6,274) (2,564) (4,082)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (2,270) 1,124 (2,848)
Cash and cash equivalents, beginning of year................ 3,068 1,944 4,792
------- ------- -------
Cash and cash equivalents, end of year...................... $ 798 $ 3,068 $ 1,944
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 695 $ 476 $ 1,469
======= ======= =======
Cash paid for income taxes................................ $ 472 $ 1,515 $ 840
======= ======= =======
</Table>

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

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Environmental Safeguards, Inc. (the "Company") provides environmental
recycling services principally to oil and gas multi-nationals and to a lesser
extent, waste management and other industrial companies, using proprietary
Indirect Thermal Desorption ("ITD") technology. To date the primary service
offered by the Company has been the remediation of soil contaminated by
oil-based drill cuttings, refinery waste and industrial waste and the subsequent
recovery of diesel and synthetic oils.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its majority owned or controlled subsidiaries after elimination of all
significant intercompany accounts and transactions.

MANAGEMENT ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. These estimates mainly involve the useful
lives of property and equipment, the valuation of deferred tax assets and the
realizability of accounts receivable.

RESEARCH AND DEVELOPMENT

Research and development activities are expensed as incurred, including
costs relating to patents or rights which may result from such expenditures.

REVENUE RECOGNITION

Revenue is recognized at the time services are performed, or in the event
of the sale of an ITD unit, when the sale is closed.

SHIPPING AND DELIVERY COSTS

The cost of shipping and delivery of ITD units for their initial use are
included in the cost of the units and depreciated as a cost of services over the
life of the units. The cost of subsequent shipments of individual units are
charged directly to cost of service at the time of shipment.

WARRANTY RESERVE

During the year ended December 31, 2001, the Company completed the sale of
three of its ITD units and certain licensing rights (See Note 3). As part of the
sale, the Company warranted those ITD units against defects in design and
workmanship generally for one year, commencing from the time of delivery. A
provision for estimated future costs relating to this warranty was recorded when
the ITD units were sold.

CONCENTRATIONS OF CREDIT RISK

Financial instruments which subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with major financial institutions
selected based upon management's assessment of the banks' financial stability.
Balances periodically exceed the $100,000 federal depository insurance limit.
The Company has not experienced any losses on deposits. Accounts receivable
generally arise from sales of services to customers operating in the United
States and Latin America. Collateral is generally not required for credit
granted. As of December 31,

F-7

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2001, all of the Company's trade receivables were due from two customers for
services performed in Mexico. As of December 31, 2000, all of the Company's
trade receivables were due from two customers for services performed in Latin
America (Mexico and Colombia).

CASH EQUIVALENTS

The Company considers all short-term investments with an original maturity
of three months or less when purchased to be cash equivalents.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of 5 years for ITD
Units and 3 to 5 years for office furniture and equipment and transportation and
other equipment. Additions or improvements that increase the value or extend the
life of an asset are capitalized. Expenditures for normal maintenance and
repairs are expensed as incurred. Disposals are removed from the accounts at
cost less accumulated depreciation and any gain or loss from disposition is
reflected in operations currently.

INCOME TAXES

The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. A valuation
allowance, if necessary, is provided against deferred tax assets, based upon
management's assessment as to their realization.

STOCK-BASED COMPENSATION

Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") established financial accounting and reporting
standards for stock-based employee compensation plans. It defined a fair value
based method of accounting for an employee stock option or similar equity
instrument and encouraged all entities to adopt that method of accounting for
all of their employee stock compensation plans and include the cost in the
income statement as compensation expense. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company accounts
for compensation cost for stock option plans in accordance with APB Opinion No.
25.

ACQUIRED ENGINEERING DESIGN AND TECHNOLOGY

Acquired engineering design and technology represents the intangible value
associated with certain proprietary equipment and process designs acquired by
the Company in the acquisition of OnSite Technology, L.L.C. ("OnSite") in 1997.
In the acquisition of OnSite, the purchase price was allocated to the assets
acquired and liabilities assumed based on independent appraisal. This intangible
asset is being amortized over an estimated useful life of 8 years using the
straight-line method.

IMPAIRMENT OF LONG-LIVED ASSETS

In the event facts and circumstances indicate the carrying value of a
long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow is
required. Given the homogeneous nature and geographic

F-8

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

deployment flexibility of such assets, and based upon an evaluation by
management, an impairment write-down of the Company's long-lived assets was not
deemed necessary.

TRANSLATION OF FOREIGN CURRENCIES

The financial statements of foreign subsidiaries are measured as if the
functional currency were the U.S. dollar. The remeasurement of local currencies
into U.S. dollars creates translation adjustments which are included in net
income.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different from
the book value. When the book value approximates fair value, no additional
disclosure is made.

ACCOUNTING PRONOUNCEMENTS

In June 1998 and June 2000, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards (SFAS") No. 133,
("Accounting for Derivative Instruments and Hedging Activities" and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" respectively. These statements establish accounting reporting
standards requiring that every derivative instrument be recorded on the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
and SFAS No. 138 also require that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 and SFAS No. 138 are effective for fiscal years beginning
after June 15, 2000. The Company does not currently hold derivative instruments
or engage in hedging activities and, accordingly, these standards do not have an
impact on our results of operations or financial position.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method. In addition, companies are required to review goodwill and
intangible assets reported in connection with prior acquisitions, possibly
desegregate and report separately previously identified intangible assets, and
in certain cases reclassify certain intangible assets into goodwill. SFAS No.
142 eliminates the amortization of goodwill and requires that goodwill be
reviewed annually for impairment. SFAS No. 142 also requires that the useful
lives of previously recognized intangible assets be reassessed and the remaining
amortization periods be adjusted accordingly. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 and affects all goodwill and
other intangible assets recorded on the Company's balance sheet at that date,
regardless of when the assets were initially recorded. The effects of
implementation of SFAS No. 142 on the Company's results of operations or
financial position has not yet been determined. SFAS No. 142 may require that
the Company obtain annual independent appraisal of acquired engineering design
and technology costs, reported in the accompanying December 31, 2001 balance
sheet with a remaining unamortized carrying value of $1,611,000.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This statement is effective for fiscal years
beginning after June 15, 2001. The Company believes the adoption of these new
standards is not expected to have a material impact on its results of operations
or financial position.

F-9

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounting model for impairment of long-lived assets. The Company believes the
adoption of these new standards is not expected to have a material impact on its
results of operations or financial position.

2. LIQUIDITY ISSUES

Since its inception, the Company has expended a significant portion of its
resources to develop markets and industry awareness of the capabilities of its
indirect thermal desorption recycling process. The Company's efforts have been
focused on the development, production and sale of environmental recycling
technologies and services to oil and gas industry participants, waste management
companies and other industrial customers. The Company's efforts to develop
markets and produce equipment have required significant amounts of capital
including long-term debt secured by the Company's ITD units and related ITD
technology. With the exception of the profitability impact from the Company's
sale of three ITD units and certain licensing rights in late 2001 (as noted
below and in Note 3), the Company has incurred recurring net losses and has been
dependent on revenue from a limited customer base to provide cash flows. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.

The Company is currently seeking to obtain service contracts in the markets
that it serves and is also considering strategic alternatives including a
possible additional sale of certain of its assets. In December 2001, the company
completed the sale of three of its ITD units and certain licensing rights, and
the proceeds were used to pay off all the Company's senior debt. (See Notes 3
and 4).

The Company's long-term viability as a going concern is dependent on the
repositioning of its asset base and the achievement of a sustaining level of
profitability. To the extent the Company's cash reserves and cash flows from
operations are insufficient to meet future cash requirements, the Company will
need to raise funds through the infusion of equity, the issuance of debt
securities or the sale of ITD units. Such financing may not be available on
terms acceptable to the Company or at all. Further, the sale of additional
equity or convertible debt securities may result in dilution to the Company's
stockholders. The accompanying financial statements do not include any
adjustments that might be necessary if the company is unable to continue as a
going concern.

Management has evaluated the carrying value of long-lived assets, including
associated intangibles. An evaluation of recoverability is performed by
comparing the estimated future undiscounted cash flows associated with the
assets to their carrying amount to determine if a write-down to market value or
discounted cash flow is required. Given the homogeneous nature and geographic
deployment flexibility of such assets, and based upon this evaluation by
management, impairment of the Company's long-lived assets has not been deemed
necessary.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)

ITD Remediation/Recycling Units and auxiliary equipment..... $11,777 $14,973
Office furniture and equipment.............................. 36 36
Transportation and other equipment.......................... 49 49
------- -------
11,862 15,058
Less accumulated depreciation............................... 5,323 6,129
------- -------
Property and equipment, net....................... $ 6,539 $ 8,929
======= =======
</Table>

F-10

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In December 2001 the Company completed the sale of three of its ITD units
and licensing rights to a customer in Mexico. The total sales price for the ITD
units and licensing rights was $6,900,000 and the Company recognized a gain on
the sale of $6,252,000. In connection with the sale, the Company granted its
customer in Mexico an exclusive license for, and right to use, the Company's ITD
technology in Mexico (subject to an existing agreement) and an option to acquire
a fourth ITD unit from the Company.

4. LONG-TERM DEBT

Long-term debt as of December 31, 2000 consisted of senior secured notes
payable to certain corporate and individual investors (the "Investor Notes")
funded in connection with the Company's acquisition of OnSite and subsequent
exercise of an option for $5 million of additional debt under similar terms. The
Investor Notes had an original face value of $11 million, and were fully repaid
in December 2001.

Following is an analysis of long-term debt as of December 31, 2000, (In
thousands):

<Table>

Contractual balance......................................... $5,406
Less unaccreted discount.................................... (298)
------
Long-term debt............................................ 5,108
Less current maturities..................................... 2,945
------
Long-term debt, net of current portion.................... $2,163
======
</Table>

As part of a plan to deal with liquidity issues, in August 2000 the Company
obtained a six-month deferral for payment of certain quarterly installments on
its long-term debt. In order to obtain the deferrals, the Company exchanged
400,000 newly issued shares of Series D convertible Preferred Stock for all
issued shares of Series C non-convertible Preferred Stock held by the Company's
primary lender. The conversion feature associated with the 400,000 shares of
Series D Preferred Stock was valued at $168,000 based on an independent
appraisal. The value of the conversion feature, representing unaccreted
discount, was amortized to expense over the remaining fifteen-month term of the
debt using the effective interest method.

Effective March 5, 2001 the Company entered into an agreement (the
"Agreement") with its primary lenders and holders of its outstanding preferred
stock that provided for a further three-month deferral (with a provision for
further deferral under certain circumstances) of all principal and interest
payments (both currently due and previously deferred) due in March on the
Company's senior secured debt. In exchange for the deferral of senior secured
debt and preferred stock dividend payments, the conversion price of the Series D
Preferred Stock was reset at the default rate or $0.37 per share. This change in
the conversion price resulted in further dilution to the Company's stockholders.
Based on a review by an independent appraiser, no value was assigned to the
change in conversion feature.

The Investor Notes also included a provision for the Company to issue to
the lenders warrants to acquire shares of the Company's Common Stock upon the
earlier of an event of default under the terms of the Investor Notes or February
17, 2000, provided, however, that the Investor Notes were repaid in full prior
to February 17, 2000. Based on this provision, on February 17, 2000, the Company
issued the lenders warrants to acquire 417,066 shares of the Company's common
stock at $0.01 per share. These warrants had an approximate value of $438,000 at
the date of issue based on an independent appraisal and such value was treated
as additional interest and was amortized to expense over the remaining
twenty-two month term of the debt using the effective interest method.

The Investor Notes included a further provision for the Company to issue
the lenders warrants to acquire an additional 188,571 shares of the Company's
common stock at $0.01 per share if the Investor Notes are not prepaid in full by
December 17, 2001. Based on this provision, on December 17, 2001, the Company
issued the lenders warrants to acquire 188,571 shares of the company's common
stock at $0.01 per share. These warrants

F-11

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

had an approximate value of $46,000 at the date of issue and such value was
treated as additional interest and was amortized to expense in the month of
December 2001 to coincide with the full repayment of senior debt in December
2001.

During the years ended December 31, 2001, 2000 and 1999, the Company
incurred interest charges as follows:

<Table>
<Caption>
2001 2000 1999
---- ------ ------
(IN THOUSANDS)

Interest charged to expense................................. $839 $1,018 $1,455
Interest capitalized as construction period interest........ -- -- 45
---- ------ ------
Total interest............................................ $839 $1,018 $1,500
==== ====== ======
</Table>

5. OTHER ACCRUED LIABILITIES

Other accrued liabilities consists of the following:

<Table>
<Caption>
2001 2000
------ ------
(IN THOUSANDS)

Accrued warranty reserve.................................... $146 $ --
Accrued property and franchise taxes........................ 76 60
Accrued professional fees................................... 85 120
Accrued joint-company expenses.............................. 259 140
Accrued foreign VAT and withholding taxes................... 42 116
Accrued operating costs..................................... 85 252
---- ----
$693 $688
==== ====
</Table>

6. LEASE COMMITMENTS

The Company leases certain equipment and facilities (mainly offices and
vehicles) under cancelable operating leases. Certain of the leases provide for
renewal options; however, none of the leases have a remaining term of greater
than one year. Rental expense for operating leases was $50,000, $100,000 and
$115,000 during the years ended December 31, 2001, 2000 and 1999, respectively.

F-12

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities were as follows:

<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)

Deferred tax liabilities:
Tax on undistributed foreign income....................... $ -- $ 232
Basis of property and equipment........................... 315 656
------- -------
Total deferred tax liabilities.................... 315 888
------- -------
Deferred tax assets:
Net operating loss carryforwards.......................... 1,170 2,389
Undistributed foreign losses.............................. 352 456
Foreign tax credit carryforwards.......................... -- 378
All other, net............................................ 452 452
------- -------
Total deferred tax assets......................... 1,974 3,675
------- -------
Valuation allowance....................................... (1,659) (2,757)
------- -------
315 918
------- -------
Net deferred tax assets........................... $ -- $ 30
======= =======
</Table>

For financial reporting purposes, income before provision for income taxes
and minority interest includes the following components:

<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

United States........................................... $ 4,839 $(1,066) $(1,521)
Foreign................................................. (3,037) 1,210 3,355
------- ------- -------
Income before provision for income taxes and minority
interest........................................... $ 1,802 $ 144 $ 1,834
======= ======= =======
</Table>

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

<Table>
<Caption>
2001 2000 1999
---- ------ ------
(IN THOUSANDS)

Current:
State..................................................... $247 $ -- $ --
Foreign................................................... 259 1,110 1,378
---- ------ ------
Total current.......................................... 506 1,110 1,378
---- ------ ------
Deferred:
Foreign................................................... 30 7 18
---- ------ ------
Total deferred......................................... 30 7 18
---- ------ ------
Provision for income taxes........................... $536 $1,117 $1,396
==== ====== ======
</Table>

F-13

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The differences between the statutory income tax rate and the Company's
effective income tax rate are as follows:

<Table>
<Caption>
2001 2000 1999
---- ---- ----

Federal statutory rate...................................... 34% 34% 34%
State income tax............................................ 9% -- --
Foreign income taxes........................................ 10% 776% 76%
Foreign tax credits and other............................... 38% -- --
Change in valuation allowance............................... (61)% (34)% (34)%
--- --- ---
30% 776% 76%
=== === ===
</Table>

As of December 31, 2001, for U.S. federal income tax reporting purposes,
the Company has approximately $3,444,000 of unused net operating losses ("NOLs")
to future years. The Company's NOLs do not include the undistributed losses from
certain controlled foreign corporations. The benefit from such NOLs will expire
during the years ending December 31, 2017 to 2020. Because United States of
America tax laws limit the time during which NOLs may be applied against future
taxable income, the Company may be unable to take full advantage of its NOLs for
federal income tax purposes should the Company generate taxable income. Further,
the benefit from utilization of NOLs could be subject to limitations if material
ownership changes occur in the Company. Based on such limitation, the Company
has significant NOLs for which realization of tax benefits is uncertain.

8. STOCKHOLDERS' EQUITY

The Company's articles of incorporation authorize the issuance of up to
10,000,000 shares of preferred stock with characteristics determined by the
Company's board of directors. In 1997 the board of directors authorized the
issuance and sale of up to 5,000,000 shares of Series B convertible preferred
stock and up to 400,000 shares of Series C non-voting non-convertible preferred
stock. During the year ended December 31, 2000, the board of directors
authorized the issuance of up to 400,000 shares of Series D convertible
preferred stock. The Series D shares were issued in exchange for Series C as
discussed below.

SERIES B CONVERTIBLE PREFERRED STOCK

In 1997, the Company issued 3,771,422 shares of $0.001 par value Series B
convertible preferred stock for $4,000,000, or $1.06 per share. Dividends are
paid at the same rate as common stock based upon the conversion rate. The Series
B convertible preferred stock can be converted to common stock at any time at
the option of the holder. The initial rate is 1 common share for each preferred
share; however, the conversion rate is subject to adjustments to prevent
dilution. The holders of the Series B convertible preferred stock have the right
to vote on all matters except the election of Directors that are voted on by
holders of the Company's Common Stock. However, Series B convertible preferred
stockholders have the right to vote separately, as a class, for the election of
one Director. The Series B convertible preferred stock has a liquidation
preference of $1.06 per share plus any unpaid dividends. In December 1998, the
Company canceled 1,037,736 shares of Series B convertible preferred stock in
exchange for accounts receivable.

SERIES C PREFERRED STOCK

In 1997, the Company issued 400,000 shares of Series C non-voting preferred
stock with a $0.001 per share par value and a $10 per share stated value. The
Series C preferred stock carries a quarterly dividend payable in arrears of
prime plus 1.5% based on the stated value of the stock. The Series C preferred
stock is redeemable at the option of the Company at a price of $10 per share
plus any unpaid dividends. Proceeds of $4,000,000 from the Series C preferred
stock were recorded net of a discount of $809,000, which included

F-14

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

related offering costs incurred and the allocation of a portion of the proceeds
to the warrants issued to the same investors. The allocation of proceeds between
the Series C preferred stock, Investor Notes (See Note 4) and the warrants (See
stock warrants below) was based upon relative fair values of the underlying
securities. The Series C preferred stock was accreted to its liquidation value
over a period of 26 months to February 17, 2000. The accretion of the Series C
preferred stock is deducted from the net loss to derive the net loss applicable
to common stockholders in the calculation of earnings per share (See Note 9).
During 2001 the Company redeemed all outstanding shares of Series C preferred in
exchange for Series D preferred as noted below.

SERIES D PREFERRED STOCK

During 2000, the Company exchanged 400,000 newly issued shares of Series D
convertible Preferred Stock for Series C non-convertible Preferred Stock held by
the Company's primary lender. The newly issued shares of Series D Preferred
stock are convertible into common stock at a conversion price of $2.25 per share
until December 31, 2002, and a conversion price of $1.00 after December 31,
2002. In the event of a default under the loan agreement, the conversion price
shall be the lesser of $1.00 per share or the averaging thirty-day trailing
price. The conversion feature associated with the 400,000 shares of Series D
Preferred Stock was valued at $168,000 based on an independent appraisal. The
value of the conversion feature, representing unaccreted discount, was amortized
to expense over the remaining term of the debt using the effective interest
method. Other than the conversion feature of the Series D Preferred Stock, its
features and preferences are the same as the Series C Preferred Stock. As shown
in Note 4, in March 2001, the conversion price of the Series D Preferred Stock
was reset at the default rate of $0.37 per share, in exchange for the deferral
of senior secured debt and preferred stock dividend payments. This change in the
conversion price resulted in further dilution to the Company's stockholders.

STOCK OPTIONS

The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the success
of the Company's business and to enhance the ability to attract and retain the
services of qualified persons. The issuance of such options are approved by the
Board of Directors. The exercise price of an option granted is determined by the
fair market value of the stock on the date of grant.

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation", requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options is greater than or equals the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized.

Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model. No options were granted in 2001,
2000 or 1999 and, accordingly, no option pricing assumptions are presented.

The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in

F-15

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

STOCK OPTION PLAN

The Company has adopted the 1998 Stock Option Plan (the "Option Plan")
under which incentive stock options for up to 800,000 shares of the Company's
common stock may be awarded to officers, directors and key employees. The Option
Plan is designed to attract and reward key executive personnel. During the year
ended December 31, 1998, the Company had options for 610,000 of a total of
800,000 shares of common stock reserved for issuance under the Option Plan.
During 2000, 62,500 options were forfeited resulting in a 547,500 of a total of
800,000 share of common stock reserved for the issuance under the Option Plan.

Stock options granted pursuant to the Option Plan expire not more than ten
years from the date of grant and typically vest over two years, with 50% vesting
after one year and 50% vesting in the succeeding year. All of the options
granted by the Company were granted at an option price equal to the fair market
value of the common stock at the date of grant.

PROFORMA DISCLOSURES

For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the option's vesting period or expected
life.

Prior to September 1, 1999, 626,730 of the Company's stock options were
repriced from original exercise prices ranging from $2.50 to $5.00 per share to
a new exercise price of $1.44 per share. The new exercise price was based on the
quoted market value of the Company's common stock at the date of repricing. The
repricing of options significantly impacted proforma financial information in
1999. The Company's proforma information follows:

<Table>
<Caption>
2001 2000 1999
------ ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)

Proforma net income (loss)............................... $1,507 $(1,637) $(1,197)
Proforma net income (loss) available to common
stockholders........................................... $1,169 $(2,120) $(1,958)
Proforma basic income (loss) per share................... $ 0.12 $ (0.20) $ (0.19)
Dilutive income (loss) per share......................... $ 0.05 $ (0.20) $ (0.19)
</Table>

F-16

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's stock option activity and related information
for the years ended December 31, 2001, 2000 and 1999 follows:

<Table>
<Caption>
NUMBER OF
SHARES
UNDER WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------

Outstanding -- December 31, 1998.......................... 4,870,862 $ 1.62
Granted................................................... -- --
Exercised................................................. (19,700) 0.60
Forfeited................................................. -- --
Repricing................................................. -- (0.24)
---------
Outstanding -- December 31, 1999.......................... 4,851,162 $ 1.38
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. (62,500) 1.69
---------
Outstanding -- December 31, 2000.......................... 4,788,662 $ 1.38
---------
Granted................................................... -- --
Exercised................................................. -- --
Forfeited................................................. -- --
---------
Outstanding -- December 31, 2001.......................... 4,788,662 $ 1.38
=========
Exercisable -- December 31, 2001.......................... 4,788,662 $ 1.38
</Table>

No options were granted during the years ended December 31, 2001, 2000 or
1999; however the repricing of certain options reduced the weighted average
exercise price by $0.24 in 1999.

As shown above, all outstanding stock options are exercisable as of
December 31, 2001. A summary of outstanding stock options as of December 31,
2001, follows:

<Table>
<Caption>
NUMBER OF REMAINING
COMMON STOCK CONTRACTUAL
EQUIVALENTS EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE
- ------------ --------------- ------------ --------------

2,470,300 November 2005 3.9 $0.60
112,500 March 2007 5.2 1.44
480,000 March 2007 5.2 2.50
35,000 November 2007 5.9 1.44
356,813 December 2007 6.0 1.44
613,831 December 2007 6.0 3.00
1,053 January 2008 6.1 2.38
800 January 2008 6.1 3.12
770 January 2008 6.1 3.25
625 January 2008 6.1 4.00
47,053 April 2008 6.3 5.00
122,417 April 2008 6.3 1.44
547,500 December 2008 6.9 1.69
---------
4,788,662
=========
</Table>

F-17

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK WARRANTS

Following is a summary of stock warrant activity:

<Table>
<Caption>
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE AVERAGE PRICE
--------- -------- -------------

Warrants outstanding as of December 31, 1998......... 707,143 $0.01 $0.01
Issued............................................. -- -- --
Canceled........................................... -- -- --
Exercised.......................................... -- -- --
---------
Warrants outstanding as of December 31, 1999......... 707,143 $0.01 $0.01
Issued............................................. 417,066 $0.01 $0.01
Canceled........................................... -- -- --
Exercised.......................................... -- -- --
---------
Warrants outstanding as of December 31, 2000......... 1,124,209 $0.01 $0.01
Issued............................................. 188,571 $0.01 $0.01
Canceled........................................... -- -- --
Exercised.......................................... -- -- --
---------
Warrants outstanding as of December 31, 2001......... 1,312,780 $0.01 $0.01
=========
</Table>

All warrants outstanding were issued in connection with the funding of the
Investor Notes (See Note 4). All warrants bear an exercise price of $0.01 per
share, are currently exercisable, and expire in December 2007.

9. EARNINGS PER SHARE

Basic earnings per common share are based on the weighted average number of
common shares outstanding in each year and after preferred stock dividend
requirements. Diluted earnings per common share assume that any dilutive
convertible debentures and convertible preferred shares outstanding at the
beginning of each year were converted at those dates, with related interest,
preferred stock dividend requirements and outstanding common shares adjusted
accordingly. It also assumes that outstanding common shares were increased by
shares issuable upon exercise of those stock options for which market price
exceeds exercise price, less shares which could have been purchased by the
Company with related proceeds. The convertible preferred stock and outstanding
stock options and warrants were not included in the computation of diluted
earnings per common share for 2000 or 1999 since their effect was antidilutive.

For the years ended December 31, 2000 and 1999, due to the fact that the
Company incurred net losses, all common stock equivalents have been excluded
from the calculation of earnings per share because their effect is
anti-dilutive. In periods when net income is reported, the calculation of
diluted earnings per share may require that the common stock equivalents
(totaling 19,645,939 as of December 31, 2001) disclosed in Note 8 be included in
the calculation of the weighted average shares outstanding for periods in which
net income is

F-18

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reported, using the treasury stock method. The following table sets forth the
computation of basic and diluted earnings per share:

<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Net income (loss)....................................... $ 1,507 $(1,462) $ (483)
Less: Series C and D Preferred stock dividends ($0.85,
$1.09 and $0.96 per share) in 2001, 2000 and 1999,
respectively.......................................... (338) (436) (385)
Accretion of discount on Series C preferred stock
(Note 8).............................................. -- (47) (376)
------- ------- -------
Net income (loss) applicable to common stockholders..... $ 1,169 $(1,945) $(1,244)
======= ======= =======
Basic earnings per share-weighted average shares...... 10,112 10,112 10,112
Effect of dilutive securities:
Warrants........................................... 1,069 -- --
Convertible Series B preferred stock............... 2,734 -- --
Convertible Series D preferred stock............... 9,227 -- --
------- ------- -------
Dilutive potential common shares...................... 13,030 -- --
------- ------- -------
Diluted earnings per share-adjusted weighted average
shares and assumed conversions........................ 23,142 10,112 10,112
======= ======= =======
Basic earnings per share................................ $ 0.12 $ (0.19) $ (0.12)
======= ======= =======
Diluted earnings per share.............................. $ 0.05 $ (0.19) $ (0.12)
======= ======= =======
</Table>

10. 401(k) SALARY DEFERRAL PLAN

The Company has a 401(k) salary deferral plan (the "Plan") which became
effective on January 1, 1998, for eligible employees who have met certain
service requirements. The Plan does not provide for Company matching or
discretionary contributions and, accordingly, the Company recognized no expense
under the Plan in 2001, 2000 or 1999.

11. LITIGATION

The Company is from time to time involved in litigation incidental to its
business, and which at times involves claims for significant monetary amounts,
some of which would not be covered by insurance. Presently the Company has no
existing litigation.

12. RELATED PARTY TRANSACTIONS

In March 2001 and September 2000, the company entered into agreements with
its primary lenders and holders of its outstanding preferred stock to defer
various principal and interest payments on its senior debt. The senior debt was
fully repaid in December 2001.

During 1998, the Company entered into a marketing assistance agreement (the
"Marketing Agreement") with the minority owners of OnSite Colombia, Inc. Under
the terms of the Marketing Agreement, in exchange for assisting the Company in
its business expansion efforts, the minority owners and the Company each
received marketing assistance fees totaling $320,000 during each of the years
ended December 31, 2000 and 1999.

During December 1998, the Company formed a joint company, OnSite Arabia,
Inc., with an investor group for the purpose of providing environmental
remediation in the Arabian Gulf region. The Company sold

F-19

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

two ITD Units to the newly formed joint company (one in 1999 and one in 1998)
and recognized gains to the extent proceeds received exceeded the Company's
proportional basis in the assets.

13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION

The Company currently operates in the environmental hydrocarbon recycling
services. Substantially all revenues result from the sale of services using the
Company's ITD units. The Company's reportable segments are based upon geographic
area and all intercompany revenue and expenses are eliminated in computing
revenues and operating income (loss).

A significant portion of the Company's historical foreign operations were
conducted by the Company's 50% owned joint company in Colombia. All foreign
subsidiaries of the Company operate with the U.S. dollar as their functional
currency and, accordingly, no cumulative translation adjustment is presented in
the accompanying balance sheet.

The Company and OnSite share office facilities and certain employees.
Shared costs are generally specifically identified by company; however, certain
costs must be allocated based upon management's estimates.

The corporate component of operating income (loss) represents corporate
general and administrative expenses. Corporate assets include cash and cash
equivalents, and restricted cash investments.

Following is a summary of segment information:

<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Revenue:
United States......................................... $ 140 $ 1,464 $ 1,150
United Kingdom........................................ -- 52 993
Latin America......................................... 2,847 9,734 11,371
------- ------- -------
Total revenue................................. $ 2,987 $11,250 $13,514
======= ======= =======
Depreciation and Amortization:
United States......................................... $ 1,810 $ 1,566 $ 1,034
United Kingdom........................................ 259 253 154
Latin America......................................... 419 834 1,034
------- ------- -------
Total depreciation and amortization........... $ 2,488 $ 2,653 $ 2,222
======= ======= =======
Income (Loss) From Operations:
United States......................................... $(2,930) $(1,245) $ (230)
United Kingdom........................................ (559) (513) 342
Latin America......................................... 93 3,561 3,399
Middle East........................................... (286) (452) --
Corporate............................................. (1) (322) (413)
------- ------- -------
Total income (loss) from operations........... $(3,683) $ 1,029 $ 3,098
======= ======= =======
</Table>

F-20

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Interest Expense:
Latin America......................................... $ -- $ 15 $ 270
Corporate............................................. 839 1,003 1,185
------- ------- -------
Total interest expense........................ $ 839 $ 1,018 $ 1,455
======= ======= =======
Provision (Benefit) For Income Taxes:
United States......................................... $ 247 $ -- $ --
United Kingdom........................................ -- (70) 76
Latin America......................................... 289 1,187 1,320
------- ------- -------
Total provision for income taxes.............. $ 536 $ 1,117 $ 1,396
======= ======= =======
Number of Customers:
United States......................................... 1 1 1
United Kingdom........................................ -- 1 1
Latin America......................................... 3 4 4
------- ------- -------
4 6 6
======= ======= =======
</Table>

<Table>
<Caption>
2001 2000
------- -------
(IN THOUSANDS)

Assets:
United States............................................. $ 4,515 $ 5,891
United Kingdom............................................ 826 1,173
Latin America............................................. 1,226 4,624
Middle East............................................... 3,419 3,440
Corporate................................................. 410 25
------- -------
Total assets...................................... $10,396 $15,153
======= =======
Long-lived Assets:
United States............................................. $ 4,083 $ 5,021
United Kingdom............................................ 677 1,009
Latin America............................................. 3 1,537
Middle East............................................... 3,390 3,390
------- -------
Total long-lived assets........................... $ 8,153 $10,957
======= =======
Capital Expenditures:
United States............................................. $ 260 $ 274
------- -------
Total capital expenditures........................ $ 260 $ 274
======= =======
</Table>

During the years ended December 31, 2001, 2000 and 1999, the Company's
largest customer accounted for 93%, 50% and 58% of revenue, respectively.

F-21

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. NON-CASH INVESTING AND FINANCING ACTIVITIES

The Company engaged in certain non-cash investing and financing activities
as follows:

<Table>
<Caption>
2001 2000 1999
---- ---- ------
(IN THOUSANDS)

Stock warrants issued to extend the due date of senior
secured notes payable..................................... $ 46 $438 $ --
Dividends declared but not yet paid......................... 338 -- --
ITD Unit returned by minority Owner......................... 78 -- --
Series D convertible preferred stock exchanged for Series C
non-convertible preferred stock........................... -- 168 --
Property and equipment for settlement of accounts
receivable................................................ -- 65 --
Indirect Thermal Desorption Unit value contributed to 50/50
joint company in Arabia................................... -- -- 1,150
Net ITD Unit cost transferred between property and equipment
from equipment held for sale, net of accumulated
depreciation of $350 in 1999 and 1998..................... -- -- 1,408
</Table>

F-22