ENVIRONMENTAL SAFEGUARDS INC/TX, 10-K405, 1999-03-19

ENVIRONMENTAL SAFEGUARDS INC/TX
10-K405, 1999-03-19
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED:
DECEMBER 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

COMMISSION FILE NUMBER: 000-21953

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

<TABLE>
<S> <C>
NEVADA 87-0429198
(State or other jurisdiction (IRS Employer
of 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>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
American Stock Exchange Common Stock, $.001 par value
</TABLE>

Securities registered pursuant to 12(g) of the Exchange Act:
None
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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 15, 1999, based upon the last closing price on the American
Stock Exchange, was $11,049,006. As of March 15, 1999, there were 10,092,444
shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
N/A

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TABLE OF CONTENTS

<S> <C> <C>
PART I
Item 1. Business.................................................... 1
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
Stockholder Matters....................................... 7
Item 6. Selected Financial Information.............................. 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 8. Financial Statements and Supplementary Data................. 15
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 15

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 15
Item 11. Executive Compensation...................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 22
Item 13. Certain Relationships and Related Transactions.............. 24

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 25
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS

INTRODUCTION

Environmental Safeguards, Inc. (the "Company"), is engaged in the
development, production and sale of environmental remediation and recycling
technologies and services, primarily to 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"). OnSite has two
wholly-owned subsidiaries, OnSite Venezuela, Inc. and OnSite Mexico, L.L.C., and
two 50%-owned subsidiaries, OnSite Colombia, Inc. and OnSite Arabia, Inc.,
through which the Company operates in foreign locations. The environmental
remediation and recycling services provided by the Company involve the removal
of hydrocarbon contaminants and valuable drilling fluids from soil using
indirect thermal desorption remediation and recycling technology. The Company
provides these services on site or at the central location to which the customer
hauls the materials. The Company does not haul remediated soil or recycled
material away from a site.

Unless otherwise indicated, references to the Company include related
subsidiaries, OnSite and NFE. The Company's Common Stock is traded on the
American Stock Exchange under the symbol "EVV."

HISTORY

The Company was incorporated under the laws of the State of Nevada in
December 1985, under the name of Cape Cod Investment Company. In December 1986,
the name of the Company was changed to Cape Cod Ventures, Inc. In August 1987,
the Company completed an initial public offering of 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, the Company executed an Agreement and Plan of Reorganization
(the "Reorganization Agreement") with National Fuel & Energy, Inc., a Wyoming
corporation ("NFE"), providing for the acquisition of NFE by the Company in
exchange for shares of the Company's Common Stock. In connection with the
reorganization, the name of the Company was changed to Environmental Safeguards,
Inc., and NFE became a wholly-owned subsidiary of the Company.

In January 1995, the Company entered into an agreement with Parker Drilling
Company ("Parker"), a Delaware corporation, granting Parker exclusive marketing
rights to the Company's proprietary processes for on-site remediation and
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, the Company expanded its agreement with Parker by forming OnSite, a joint
company between NFE and Parker, in which NFE and Parker each owned 50%. Pursuant
to its agreement with OnSite, NFE granted to OnSite certain exclusive licenses
to use the technologies relating to the Company's Indirect Thermal Desorption
Units (the "ITD Units"), and the proprietary processes for on-site remediation
and recycling of hydrocarbon contaminated soil.

In December 1997, the Company entered into a Purchase Agreement (the
"Purchase Agreement") with Parker which provided for the acquisition by the
Company, 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, the Company paid $8,000,000 for the 50% equity
interest and repaid a $3,000,000 loan that had been made to the Company by an
affiliate of Parker. As part of the transaction, Parker returned to the Company
unexercised warrants to purchase 300,000 shares of the Company's common stock.

The Company's 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 a Director of the Company.

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BUSINESS ACTIVITIES

General. Substantially all of the Company's activities are conducted
through OnSite, which is engaged in the development and production of
remediation and recycling technology and the sale of environmental remediation
and recycling services. OnSite owns the technologies included in the ITD Units,
and the proprietary processes for on-site remediation and recycling of
hydrocarbon contaminated soil. To date, the environmental remediation and
recycling services provided by the Company have involved the removal of
petroleum contaminants from soil using the ITD Units. Each ITD Unit is an easily
transportable processing system which produces clean soil from contaminated soil
while reclaiming the hydrocarbons. ITD Units may be transported from one
clean-up site to another. The Company's customers are large corporations in the
oil and gas drilling industry that have responded to the changing regulatory
climate with respect to soil and other environmental contamination.

The primary services offered by the Company involve remediation and
recycling of soil contaminated by oil-based drilling fluids, fuel spills,
leakage at storage tanks and other sources of hydrocarbon contamination, as well
as the remediation of industrial waste. To remediate and recycle the
contaminated soil, the Company utilizes 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. The ITD Units are mobile, and thus, contaminated soil can be remediated
and recycled at the site where the contaminated soil is located. The Company
does not haul or dispose of soil or contaminants away from the customer's
location.

As of March, 1999, the Company: (i) owns six ITD Units (including two ITD
Units in later stages of fabrication); (ii) operates two other ITD Units, which
are owned by affiliates of the Company; and (iii) operates two additional ITD
Units which are leased-backed by affiliates of the Company from third party
financing organizations, which makes a total of ten ITD Units owned or operated
by the Company.

Customers. The Company's customers are large oil and gas industry
participants, and other industrial companies. The Company, through OnSite,
typically submits 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. Once a contract has been awarded, OnSite moves its
equipment to the client's desired location.

During 1998, the Company's customers were British Petroleum Exploration, in
Colombia, Newpark Resources in Louisiana, and ELF in Venezuela.

Indirect Thermal Remediation and Recycling. The primary services offered by
the Company involve: (i) the remediation and recycling of soil contaminated by
oil-based drilling mud, fuel spills, leakage at storage tanks, leakage from
pipelines; (ii) the remediation and 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 type sites; and (iii) the
remediation and recycling of valuable drilling fluids which have been captured
in soil and drilling muds during the drilling process. To date the Company has
employed its ITD Units to provide remediation and recycling services to oil and
gas industry drilling operations, tank farms and compressor sites. 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.

The ITD Units are portable pieces of equipment which utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other
contaminated materials. An ITD Unit consists 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 client recycling. As an alternative to the condensing
system, the vapor can be passed through an afterburner or thermal oxidizer which
incinerates the hydrocarbon vapors.

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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, is 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 degrees to 1200
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, the 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 rehydration before final discharge.
Random soil samples are tested at the end of the process to confirm that the
contaminants have been removed and the soil condition is within the permitted
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, an ITD Unit has processed up to 192
tons of contaminated soil in a 24-hour period with a 30% hydrocarbon saturation.
However, the processing capacity varies significantly depending on the moisture
content, degree of contamination, soil type, contamination type and the
remediation and recycling required. There can be no assurance that the ITD Units
will continue to perform at this level, or that this performance will continue
to be competitive with other technology available in the market.

Recycling of Hydrocarbon Contaminants. The Company has developed
proprietary processes which are embodied in the condensation process system
unit, one of the two principal components of the ITD Unit. 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. This ability to
recycle the hydrocarbon contaminant(s) is an important competitive advantage
which the Company believes it possesses as compared to the bioremediation,
direct burn and "dig and haul" remediation technologies.

Manufacturing of ITD Units. The Company contracts with outside fabricators
to manufacture ITD Units. The primary contractors which the Company uses are
Roberds-Johnson Industries and Houston ProFAB. Currently, two ITD Units are
under construction by fabricators for the Company and the Company expects
delivery of these two ITD Units beginning in the second quarter of 1999, but
there can be no assurance that these deliveries will occur as scheduled.

EXISTING CONTRACTS FOR OPERATIONS

As of March, 1999, three ITD Units are operating in the Republic of
Colombia, one ITD Unit is operating in the Republic of Venezuela, and two ITD
Units are either in transit or have arrived in the Arabian Gulf region. The
remaining five ITD Units are in Houston, Texas.

COMPETITION

There are many companies which currently dispose of hazardous and
industrial wastes and remediate or clean up sites which have been contaminated,
and 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 the Company's competitors are well established and have
substantially greater capital resources, larger research and development staffs
and facilities and substantially greater marketing capabilities than the
Company. There can be no assurance that the Company will be competitive in the
remediation and recycling industry in the future.

The Company obtains its contracts through competitive bidding and is in
direct competition with firms providing alternative means of, and utilizing
alternative technologies for, remediating environmental problems.
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The most significant competition comes from firms 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. The Company believes that
the technology utilized by the Company is competitive with dig and haul methods
because the Company's equipment is mobile, and thus, contaminated soil can be
remediated on location. The waste processing, remediation and recycling
businesses are, to a large extent, dependent upon and constrained by the costs
and regulations associated with transporting such wastes. More importantly, the
Company's remediation and recycling process addresses the latent liability
associated with the contamination at the site. The Company is currently
investigating techniques and technologies capable of evaporation of non-needed
liquids and ultra-filtration applications. There can be no assurance that the
Company 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. Because of the closed nature of the
heat transfer system, the ITD Unit 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 the
ITD Unit has processed materials with contamination levels as high as 40%. In
addition, the portable nature of the ITD Unit permits it to be located at the
contamination site. ITD Units also permit the customer to recapture certain
valuable liquids which are otherwise destroyed.

The Company differentiates itself from its competitors primarily on what
the Company believes to be a significantly higher operational service level and
a significantly higher value-added result for its clients for the remediation 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 features of the Company's ITD Unit design, which the company believes
provide service-level advantages, include:

Remediation: The Company's ITD Units remove 99.9% of hydrocarbon
contaminants from the waste-stream soil, effectively eliminating the latent
liability of the client. Conversely, some competitive technologies such as
incineration, solidification and bio-remediation result in continuing latent
liability.

Recycling: The Company's ITD Units transform waste streams into value for
its clients by reclaiming valuable hydrocarbons for client recycling or resale.
For example, the Company's equipment has reclaimed approximately 7.1 million
gallons of diesel oil while processing drill cuttings for a major oil and gas
participant in Colombia.

Tonnage: The Company's ITD Units have proven processing capability of 5-10
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 the
Company.

Portability: The Company's ITD Units are built on two 44 foot trailer beds
for portability to the clients location, avoiding costly hauling expenses of
contaminated materials to a central location. In addition, the ITD Unit design
permits rig-down and/or rig-up in less than a day. Some competitive units are
much less transportable, or not portable at all.

Wide Range of Hydrocarbons Treated: The Company's ITD Units operate at low
temperatures (200 degrees Fahrenheit), high temperatures 1,000-1,200 degrees
Fahrenheit), and anywhere in between, thereby enabling the remediation of wide
ranges of hydrocarbon contaminants encountered at a client's site including both
oil and gas and industrial waste. The Company believes that competition in the
industry is concentrated in remediation services, whereas the Company's ITD
technology not only provide remediation services, but also is capable of
reclaiming and recycling valuable drilling fluids and hydrocarbons. The Company
further believes that its pricing policies are competitive. No assurance,
however, can be given that the Company will be able to successfully compete with
other companies or alternative technologies.

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GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE

The Company renders services in connection with the remediation, 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 the Company be deemed to
be responsible for contamination or pollution caused or increased by any
evaluation, remediation or cleanup effort conducted by the Company, or for an
accident which occurs in the course of such remediation or cleanup effort. There
can be no assurance that the Company's policy of establishing and implementing
proper procedures for complying with environmental regulations will be effective
at preventing the Company from incurring a substantial environmental liability.
If the Company were to incur a substantial uninsured liability for environmental
damage, its financial condition could be materially adversely affected.

The Company presently has the ability to deliver soil remediation and
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, the Company may not be able to comply in either the delivery of its
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 the Company's 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. Moreover, site-related permits are generally the
responsibility of the customer, not the Company.

EMPLOYEES

The Company currently has 20 full-time employees, 10 of whom are in
management positions, including corporate and administrative operations. None of
the Company's employees are represented by a union and the Company considers its
employee relations to be good.

RECENT EVENTS

In December, 1998, the Company and an investor formed OnSite Arabia, Inc.
("OnSite Arabia"), a Cayman Islands company for the purpose of providing
environmental remediation, reclamation and recycling services in Saudi Arabia,
Qatar, Yemen, the United Arab Emirates, Bahrain, Kuwait and Oman. The Company
owns 50% of OnSite Arabia. Concurrent with the formation of OnSite Arabia, the
Company sold 500,000 shares of common stock of the Company in a private
placement to an investor who is an affiliate of an investor in OnSite Arabia,
Inc. at a purchase price of $1.50 per share for total cash consideration of
$750,000.

In December 1998, the Company redeemed 1,037,736 shares of its Series B
Convertible Preferred stock from a related party, Newpark Resources,
Inc.("Newpark"), a New York Stock Exchange listed company, in consideration for
certain receivables due to the Company from Newpark. This transaction had the
combined effect of reducing the Company's working capital and stockholders'
equity by approximately $1,100,000, and a reduction in common stock equivalents
of 1,037,736 shares on a fully diluted basis. After the 1,037,736 share
redemption, Newpark continues to hold 847,975 shares of the Company's Series B
Convertible Preferred stock.

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TRANSFER AGENT AND REGISTRAR

The co-transfer agents and registrars for the Common Stock of the Company
are Colonial Stock Transfer Company, Inc. ("Colonial Transfer") and Registrar
and Transfer Company. Colonial Transfer's address is 455 East 400 South, Suite
100, Salt Lake City, Utah 84111; (801) 355-5740.

ITEM 2. PROPERTIES

The Company's principal executive offices are located in leased facilities
at 2600 South Loop West, Suite 645, Houston, Texas 77054, which consist of a
total of approximately 2,000 square feet. The current monthly rental for these
executive offices is $2,500. The lease for the executive offices will expire in
May, 1999. The Company believes that its offices are adequate for its present
needs and that suitable space will be available to accommodate its future needs.

ITEM 3. LEGAL PROCEEDINGS

The Company was named as a defendant in 1993 by Goldfield Engineering and
Machine Works ("Goldfield"), styled as Huron, Inc dba Goldfield Engineering &
Machine vs Don Cox, et. al. Cause No. 930400525 in the fourth District Court of
Utah County, Utah. The litigation originally involved claims by Goldfield that
the Company owed additional compensation of approximately $150,000 for ITD Units
constructed which the Company believes did not meet required performance
criteria. The Company filed a counterclaim for $200,000 to obtain damages from
Goldfield. The Company has been advised that Goldfield filed a petition seeking
Chapter 11 Bankruptcy protection in 1994. A Notice of Automatic Stay was filed
in August, 1994, based on the Chapter 11 Petition in In Re Huron, et al filed in
the U.S. Bankruptcy Court for the Central Division of Utah, Case No. 94A-20001.
In January, 1995, a Plan of Reorganization was confirmed by the Bankruptcy Court
whereby the Company received nothing and no adversary pleadings were filed
against the Company by Goldfield. The Company believes, after consultation with
counsel, that the risk of material financial exposure to the Company is remote.

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

Not applicable.

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PART II

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

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is currently traded on the American Stock
Exchange under the symbol "EVV". Prior to February 12, 1998, the Company's
Common Stock was traded in the over-the-counter securities market on the OTC
Bulletin Board. The following table sets forth, for the periods indicated,
closing prices on the American Stock Exchange or the high and low closing bid
prices for the Common Stock of the Company as reported on the OTC Bulletin
Board. The bid prices reflect inter-dealer quotations, do not include retail
mark ups, markdowns or commissions and do not necessarily reflect actual
transactions.

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COMMON STOCK PRICE RANGE
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HIGH CLOSING LOW CLOSING
SALES PRICE SALE PRICE
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1997
First Quarter.................................. $3 7/8 $2 3/8
Second Quarter................................. $3 5/8 $2 1/4
Third Quarter.................................. $3 3/8 $2 3/8
Fourth Quarter................................. $4 9/16 $2 3/16
1998
First Quarter.................................. $7 7/8 $3 1/8
Second Quarter................................. $ 6.00 $4 1/16
Third Quarter.................................. $6 1/4 $2 1/16
Fourth Quarter................................. $2 1/2 $1 3/16
</TABLE>

On March 15, 1999, the closing price for the Common Stock of the Company on
the American Stock Exchange was $1 3/16 per share. On March 15, 1999, there were
approximately 1,000 stockholders of record of the Common Stock, including
broker-dealers holding shares beneficially owned by their customers.

DIVIDEND POLICY

The Company has not paid, and the Company does not currently intend to pay
cash dividends on its Common Stock in the foreseeable future. The current policy
of the Company's Board of Directors is for the Company to retain all earnings,
if any, to provide funds for operation and expansion of the Company's business.
The declaration of dividends, if any, will be subject to the discretion of the
Board of Directors, which may consider such factors as the Company's results of
operations, financial condition, capital needs and acquisition strategy, among
others. The Company may not, except for dividends payable in connection with its
Series C Preferred Stock, authorize or pay any dividends at any time if any
amount is unpaid with respect to the Company's $6,000,000 Loan Agreement.

RECENT SALES OF UNREGISTERED SECURITIES

In December, 1998, the Company sold 500,000 shares of common stock of the
Company in a private placement to an accredited investor at a purchase price of
$1.50 per share for total cash consideration of $750,000. The Company believes
that the investor, Nadia L.L.C., had knowledge and experience in financial and
business matters which it to evaluate the merits and risk of the purchase of
these securities of the Company, and that it was knowledgeable about the
Company's operations and financial condition. This transaction was effected by
the Company in reliance upon exemptions from registration under the Securities
Act of 1933 as amended (the "Act") as provided in Regulation D and Section 4(2)
thereof. Each certificate issued for these unregistered securities contained a
legend stating that the securities have not been registered under the Act and
setting forth the restrictions on the transferability and the sale of the
securities. No underwriter participated in, nor did the Company pay any
commissions or fees to any underwriter in connection with this transactions.
This transaction did not involve a public offering.

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ITEM 6. SELECTED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net service revenues..................... $10,672 $ 6,678 $ -- $ 53 $ 731
Income (loss) from operations............ 1,404 590 (511) (1,265) (653)
Net loss................................. (799) (1,849) (647) (1,216) (678)
Basic and dilutive earnings (loss) per
common share
Before extraordinary item.............. (0.17) (0.61) (0.11) (0.26) (0.21)
Extraordinary item..................... -- (0.04) 0.01 -- --
Net loss per common share.............. (0.17) (0.65) (0.10) (0.26) (0.21)
BALANCE SHEET DATA:
Total assets............................. 20,164 18,298 5,468 318 888
Long-term debt (including capital lease
obligations)........................... 6,636 5,210 3,694 -- 69
</TABLE>

For the years ended December 31, 1996 and 1995, the Company's investments
in OnSite Technology, L.L.C. ("OnSite") was accounted for using the equity
method, because the Company's 50% ownership interest did not provide effective
control of OnSite. However, on December 17, 1997, the Company acquired the
remaining 50% of OnSite from its former Joint Venture partner. Accordingly, the
Company has consolidated OnSite for the years ended December 31, 1998 and 1997.
The Company believes that this transaction of OnSite may affect the
comparability of selected financial data for periods prior to the year ended
December 31, 1997.

Included in the 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. Net loss for the year ended December 31, 1995 includes a $737,000
charge to reduce certain long-lived assets to their estimated net realizable
value.

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

The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
Report. See, Financial Statements.

INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

The Company is 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, or on behalf of, the Company. 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. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, 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 the view of the Company,
could cause material adverse affects on the Company's financial condition and
results of operations: the ability of the Company to attain widespread market
acceptance of its technology; the ability of the Company to obtain acceptable
forms and amounts of financing to fund planned expansion; the demand for, and
price level of, the Company's services; competitive
8
<PAGE> 11

factors; the actual useful life of the Company's ITD Units; 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 the ability
of the Company to maintain acceptable utilization rates on its equipment. The
Company has no obligation to update or revise these forward-looking statements
to reflect the occurrence of future events or circumstances.

OVERVIEW

The Company is engaged in the development, production and sale of
environmental reclamation and recycling technologies and services. Substantially
all of the Company's technologies and services are provided through OnSite and
the Company is devoting substantially all of its efforts to the development of
markets for OnSite's services. The Company is currently providing reclamation
and recycling services to companies engaged in land-based oil and gas
exploration, and other industrial applications.

Oil and gas exploration and other types of industrial activities, often
produce significant quantities of petroleum-contaminated drill cuttings and
waste, from which the Company's 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. The Company has
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 and petrochemical sites, as well as
at Superfund, DOD and DOE sites.

On December 17, 1997, the Company acquired the remaining 50% interest in
OnSite from Parker Drilling Co. ("Parker"), giving the Company complete control
of the ITD technology owned by OnSite, and providing the Company with a
wholly-owned operating subsidiary that forms the cornerstone of the Company's
future operations. Total purchase consideration in the OnSite acquisition was
financed by the Company through a private placement of Convertible Preferred and
Preferred Stock, combined with senior secured notes and warrants to purchase
shares of the Company's Common Stock. The Company has included OnSite's
operating results in its statement of operations for the year ended December
31,1997, as though the acquisition took place at the beginning of that year, and
has deducted as a separate line item the pre-acquisition earnings attributable
to the former 50% owner.

The Company has focused essentially all of its attention on its now wholly
owned business operations in OnSite. OnSite was formed, as a 50/50 joint company
with Parker, as a means for assembling the capital necessary to build and
improve the ITD Units and to generate market awareness and acceptance of ITD
technology. The Company expects that a substantial portion of its revenues will
continue to be generated from international major oil and gas industry
participants, as well as from other industrial applications.

In November 1996, OnSite formed a 50/50 joint company, OnSite Colombia,
Inc. ("OnSite Colombia") with a group of South American investors. OnSite
Colombia was established to provide hydrocarbon contaminated soil reclamation
and recycling services to oil and gas industry participants operating in
Colombia. OnSite Colombia's operations are included in the Company's
consolidated results in 1997 because the Company has effective voting control as
a result of its acquisition of the remaining 50% interest in OnSite on December
17, 1997.

In January, 1998, OnSite Venezuela, Inc. ("OnSite Venezuela"), OnSite's
100% owned subsidiary, commenced operations to provide hydrocarbon contaminated
soil reclamation and recycling services to oil and gas industry participants
operating in Venezuela.

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

9
<PAGE> 12

RESULTS OF OPERATIONS

COMPARISON OF OPERATING RESULTS -- YEARS ENDED DECEMBER 31, 1998 AND 1997

Summary. For the year ended December 31, 1998, the Company incurred a net
loss of $799,000 as compared to a 1997 net loss of $1,849,000. The $1,050,000
reduction in net loss was primarily due to higher service revenue and associated
gross margins from a greater average number of ITD systems in service, and the
sale of an ITD system to a newly formed 50%-owned joint partnership. Also
contributing to the reduction in net loss were favorable income tax provisions
in foreign operations and the absence of the prior year's extraordinary charge
from debt retirement. These factors were partially offset by the effect of
slightly lower gross margins, and increased selling, general and administrative
expenses, reflecting increased staffing, expanded marketing efforts, start-up
expenses for Venezuela, and higher interest expense due to higher debt.
Additional information follows.

Revenues and Gross Margin. Service revenue of $10.7 million for 1998
generated $5.3 million (50% of revenue) gross margin in 1998 as compared to
service revenue of $6.7 million and gross margin of $3.5 million (52% of
revenue) in 1997. The majority of the 1998 increase in service revenue was due
to operating an average of 3.6 ITD systems during 1998 as compared to an average
of 2.5 in 1997, an increase of 44%. The 2% decline in gross margin ratio was
largely due to startup expenses in Venezuela and Mexico, and site relocation in
Colombia.

Selling, General and Administrative ("SGA") Expense. SGA expense increased
during 1998 due to increased business activity in general, combined with startup
expenses in OnSite Venezuela, increased efforts to market the Company's
technology, and corporate-level personnel additions and/or upgraded skills in
such key areas as contract law, regulatory matters and international operations.
Overall, the average number of management employees increased 33% in 1998,
resulting in a total of 9 managerial personnel at the end of 1998.

Research & Development Costs ("R&D") Expense. The 1997 R&D expense is
primarily the writeoff of acquired research and development based on a valuation
of in-process technology that resulted from the acquisition of Parker Drilling
Company's 50% interest in OnSite.

Amortization of Engineering Design and Developed Technology
("AEDDT"). 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.

Interest Income. In 1998, the Company earned interest income from
investment of proceeds from long-term debt obtained in December 1997 and June
1998. During 1997, the Company earned interest income mainly from long-term debt
received in the fourth quarter of 1996, which was paid back to Parker Drilling
in December 1997. See Interest Expense below for additional details on long-term
debt.

Interest Expense. The 1998 increase in interest expense was due to
increased borrowing to both fund the Company's December 1997 purchase of
Parker's 50% interest in OnSite, and to fund current operations and planned
capital expenditures. During 1998, the Company incurred $1,159,000 interest
expense (including amortization of debt issuance costs of $488,000). That
compared to interest expense of $466,000 for 1997 which primarily related to the
$3 million in debt retired in December 1997.

Income Taxes. The Company's reported tax provision in 1998 and 1997
primarily relates to foreign income taxes incurred by OnSite Colombia, a 50%
owned consolidated subsidiary of OnSite. The Company has 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 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. The Company is implementing tax planning strategies, which if
successful, may result in the Company recognizing these deferred tax assets in
future periods, which would significantly reduce the current effective tax rate.
There can be no assurances that the NOLs and foreign tax credits will be
utilizable.

10
<PAGE> 13

Elimination of Minority Interest. Minority interest for 1998 and 1997
reflects the 50% minority ownership's interest in the net income of OnSite
Colombia for each respective year.

Extraordinary Item. The extraordinary loss of $352,000 for 1997 resulted
from the writeoff of deferred financing costs that resulted from the early
repayment of the $3 million long-term debt due to Parker. This debt was repaid
in connection with the Company's acquisition of OnSite.

COMPARISON OF OPERATING RESULTS -- YEARS ENDED DECEMBER 31, 1997 AND 1996

The Company's historical consolidated operating results have been
significantly affected by the acquisition of the remaining 50% interest in
OnSite. In order to make a more meaningful period-to-period comparison of the
Company's operating results, the table below compares historical results (on the
left side) and pro forma financial data (on the right side). Historical
financial data is based on the consolidated method of reporting for 1997
(adopted in December 1997), and is based on the equity method for 1996
consistent with historical reporting prior to the change to the consolidated
method. Pro forma financial data assumes the acquisition and related financing
transaction were consummated as of the beginning of the periods presented. The
pro forma data presents both 1997 and 1996 using the consolidated method of
reporting to enhance comparability. The pro forma results of operations are not
necessarily indicative of the results that would have occurred had the
acquisitions been consummated as of the beginning of the periods presented or
that might be attained in the future.

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------
1997 1996 VARIANCE 1997 1996 VARIANCE
------- ----- -------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Service revenue................................. $ 6,678 $ -- $ 6,678 $ 6,678 $ 730 $ 5,948
Gross margin.................................... 3,452 -- 3,452 3,307 18 3,289
Selling, general and administrative expense..... (2,076) (511) (1,565) (2,467) (1,332) (1,135)
Acquired research & development costs........... (786) -- (786) (24) -- (24)
------- ----- ------- ------- ------- -------
Operating income (loss)......................... 590 (511) 1,101 816 (1,314) 2,130
Other income (expense):
Investment in OnSite.......................... -- (93) 93 -- -- --
Interest income............................... 192 18 174 192 18 174
Interest (expense)............................ (466) (138) (328) (1,253) (1,218) (35)
Foreign currency.............................. (31) -- (31) (31) -- (31)
Other......................................... 4 3 1 -- -- --
------- ----- ------- ------- ------- -------
Income (loss) before provision for income tax... 289 (721) 1,010 (276) (2,514) 2,238
Provision for income tax........................ (1,205) -- (1,205) (1,205) (22) (1,183)
------- ----- ------- ------- ------- -------
Loss before minority interest................... (916) (721) (195) (1,481) (2,536) 1,055
Elimination of minority interest................ (581) -- (581) (547) 82 (629)
------- ----- ------- ------- ------- -------
Loss before extraordinary item.................. (1,497) (721) (776) (2,028) (2,454) 426
Extraordinary item.............................. (352) 74 (426) -- 74 (74)
------- ----- ------- ------- ------- -------
Net loss............................... $(1,849) $(647) $(1,202) $(2,028) $(2,380) $ 352
======= ===== ======= ======= ======= =======
</TABLE>

The pro forma consolidated net loss from 1997 and 1996 includes pro forma
interest expense of $1.1 million in each year, which is not necessarily
indicative of future years' expenses. For example, the Company is evaluating
additional equity financing which could be utilized to retire certain debt. In
such case, the incremental interest expense could be eliminated on a go-forward
basis, but there can be no assurances that the Company will be successful in
that effort.

The pro forma consolidated net loss for 1997 and 1996 also includes in each
year pro forma expense of $151,000 additional depreciation expense resulting
from the adjustment of OnSite's ITD Units to fair value at the time of
acquisition (to be depreciated over a 4.5 year weighted average remaining
economic life of that

11
<PAGE> 14

equipment); and $407,000 amortization of engineering design and developed
technology costs, an intangible asset related to the acquisition of the 50%
interest in OnSite (to be amortized over an 8 year estimated economic life).

The pro forma data for 1997 excludes the $762,000 acquired research and
development writeoff and the $352,000 extraordinary charge from extinguishment
of debt, as these charges are one-time events.

COMPARISON OF HISTORICAL OPERATING RESULTS

Summary. For the year ended December 31, 1997, the Company incurred a net
loss of $1,849,000 as compared to a 1996 net loss of $647,000. The $1,202,000
increase essentially resulted from a $352,000 extraordinary charge from
retirement of debt, a $762,000 write-off of acquired research and development in
connection with the Company's acquisition of OnSite, and the non-recurrence of a
$74,000 extraordinary gain on elimination of debt recorded in 1996.

The following line-by-line comparison reflects 1997 using the consolidated
method of reporting (adopted as a consequence of the Company's acquiring the
remaining 50% of OnSite), whereas 1996 results use the equity method (the 1996
historical basis of reporting). (The pro forma comparison which follows the
historical comparison reflects both 1997 and 1996 under the consolidated method
in order to enhance comparability).

Revenues and Gross Margin. Service revenue of $6.6 million for 1997 was
primarily generated by ITD Units under contract in Colombia. Gross margin for
1997 was $3.4 million, or 51% of revenue. In 1996, neither revenue nor gross
margin were reported, as the Company accounted for the operations of OnSite
under the equity method. (See comments under pro forma comparison for additional
details).

Selling, General and Administrative ("SGA") Expense. SG&A expenses
increased by $1,565,000 compared with the amount reported in 1996 due in part to
OnSite being accounted for on the equity method in 1996. SGA expenses in 1997
were the result of increased operations in Colombia which increased from one ITD
Unit in operation in November 1996 to three ITD Units in full operation starting
in June 1997. The higher level of business activity also prompted personnel
additions and/or recruitment of more experienced personnel at the Corporate
level in such key areas as international operations, accounting/finance,
engineering design and procurement, and regulatory matters. The number of
management employees increased from four at the end of 1996 to six at the end of
1997.

Research and Development ("R&D") Expense. The 1997 R&D expense is primarily
the writeoff of acquired research and development based on a valuation of
in-process technology that resulted from the acquisition of Parker Drilling
Company's 50% interest in OnSite.

Interest Income. In 1997, the Company earned interest income from
investment of proceeds from long-term debt of $3 million received in the fourth
quarter of 1996, and investment of net proceeds of approximately $800,000 from
the company's Regulation D offering that closed in February 1997. During 1996
the Company had little excess cash to invest.

Interest Expense. The 1997 increase to $466,000 resulted from increased
borrowing to finance the construction of additional ITD Units.

Income Taxes. The Company's reported tax provision in 1997 primarily
relates to foreign income taxes incurred by OnSite Colombia, a 50% owned
consolidated subsidiary of OnSite. (The 1996 taxes were included in the loss
from investment in OnSite). The Company has 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 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. The
Company is implementing tax planning strategies, which if successful, may result
in the Company recognizing these deferred tax assets in future periods, which
would significantly reduce the current effective tax rate. There can be no
assurances that the NOL and foreign tax credits will be utilizable.

12
<PAGE> 15

Elimination of Minority Interest. Minority interest for 1997 reflects the
50% minority ownership's interest in the 1997 net income of OnSite Colombia. In
1996, the Company accounted for its 50% ownership in OnSite Colombia using the
equity method (which excluded the minority ownership).

COMPARISON OF CONSOLIDATED PRO FORMA OPERATING RESULTS

Summary. The pro forma consolidated data presents 1997 and 1996 operating
results as if the acquisition and related financing transaction were consummated
as of the beginning of each year, and also presents OnSite for both years under
the consolidated method of reporting to enhance line-by-line comparability.

The 1997 pro forma consolidated net loss of $2,028,000 indicates an
improvement of $352,000 as compared to the pro forma consolidated net loss of
$2,380,000 for 1996. The $352,000 improvement is due to $3,289,000 higher gross
margin from increased volume of ITD Units operating in Colombia, partially
offset by increases of $1,135,000 in SGA expense, $1,183,000 in Colombian income
tax and $629,000 in minority interests (each resulting from higher revenues and
business activity).

Following are line-by-line comparisons of 1997 to 1996 on a consolidated
pro forma basis, where variances are significant:

Revenues and Gross Margin. The Company's consolidated pro forma revenues
for 1997 increased from $730,000 to $6,678,000 as a direct result of OnSite's
construction and subsequent deployment of additional ITD Units under contract
with a major oil and gas industry participant in Colombia.

During 1997, based on the positive recycling and remediation results that
were initially achieved, the Company was able to expand the scope of its initial
contract in Colombia and increase, from one to three, the number of ITD Units
deployed there. In 1996, the Company had concentrated its efforts and resources
on a single contract in Lysite, Wyoming and on the construction and improvement
of its ITD and Ultra-filtration technology. The Lysite project provided valuable
feedback concerning ITD Unit performance. Such feedback formed the basis for
improvements which were made to the current Series 6000 ITD design.

Consolidated pro forma gross margin reached $3,307,000 or 49% of revenue
during 1997, reflecting economies of scale from operating 2.3 average units per
month in Colombia throughout 1997 versus one unit for two months only in 1996.

Selling, General and Administrative ("SGA") Expense. Pro forma consolidated
SGA expenses increased by $1,135,000, an increase of 85% over 1996, versus a
corresponding revenue increase of over 800%, which demonstrates the benefits
derived from economies of scale on profitability. The increased SGA included
additions to the Corporate staff of important skills (as discussed above in the
historical analysis).

LIQUIDITY AND CAPITAL RESOURCES

During 1997 and 1996, the Company raised additional debt and equity capital
to fund current operations, support the construction of ITD Units necessary for
its future growth, and acquire the remaining 50% of OnSite from Parker. In
December 1997, the Company raised $14 million in a private placement of Series B
Convertible Preferred Stock, non-convertible Series C Preferred Stock, senior
secured notes and warrants to purchase the Company's Common Stock. The proceeds
from this private placement were primarily used to fund the $8 million
acquisition of OnSite, repay $3 million of long-term debt to a Parker
subsidiary, and provide the Company with capital resources to continue funding
current operations and planned capital expenditures. In the 1997 private
placement, the Company received $6 million in proceeds from senior secured notes
and a commitment by the investors for an additional $5 million of long-term
debt, provided that the Company remains in compliance with the loan covenants of
the secured notes. The Company subsequently borrowed the additional $5 million
in June 1998.

13
<PAGE> 16

Prior to the $14 million in funding described above, in the first quarter
of 1997, the Company converted debt and related accrued interest totaling
$1,262,000 to equity and completed a Regulation D offering of its common stock.
The proceeds from these transactions, along with the $3 million long-term debt
proceeds raised by the Company in December 1996 were used to support operations
throughout most of 1997.

During 1997 the Company arranged capital leasing with third party lenders
for two ITD Units operated in OnSite Colombia in order to improve cash flows.
The Company has and will continue to make capital expenditures for ITD Units,
and at December 31, 1997, had placed orders for four additional units at an
aggregate cost of approximately $4.6 million. The Company plans to finance
additional ITD Units through a combination of surplus operating cash flows,
additional third party sale leaseback transactions, bank term financing, and
potentially an additional sale of equity. There can be no assurances that the
Company will be able to obtain this additional financing.

In December, 1998, the Company and an investor formed OnSite Arabia, Inc.
("OnSite Arabia"), a Cayman Islands company for the purpose of providing
environmental remediation, reclamation and recycling services in Saudi Arabia,
Qatar, Yemen, the United Arab Emirates, Bahrain, Kuwait and Oman. The Company
owns 50% of OnSite Arabia. Concurrent with the formation of OnSite Arabia, the
Company sold 500,000 shares of common stock of the Company in a private
placement to an investor at a purchase price of $1.50 per share for total cash
consideration of $750,000.

The functional currency of OnSite Colombia 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. The Company plans to
continue to implement the same approach as other foreign operations come on
stream in the course of conducting business abroad in an effort to minimize
risks associated with foreign exchange fluctuation and its affect on Company
profitability.

The Company expects that its existing cash reserves, cash flows from
operations and available financing for additional ITD units will be sufficient
to cover the Company's cash requirements for 1999. However, there can be no
assurance that existing sources of cash will cover the Company's 1999 cash flow
requirements.

IMPACT OF YEAR 2000

The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of business activities.

Based on ongoing assessments, the Company believes that no significant
modifications of existing computer software will be required. The Company
believes that its computer systems will function properly with respect to dates
in the year 2000 and thereafter. The Company's ITD units are not dependent on
computer software or hardware, and therefore the Year 2000 issue is not expected
to pose material operational problems. The Company also believes that costs
related to the Year 2000 issue have not and will not be significant and will not
exceed $10,000.

The Company has assessed its relationships with significant suppliers and
major customers to determine the extent to which the Company is vulnerable to
any third party's failure to remedy their own Year 2000 issues. Based on these
assessments, management believes that significant exposure does not exist with
respect to third parties. Management has developed a contingency plan to address
potential Year 2000 problems that could arise. This plan includes identification
of alternative supplies for critical parts and components needed to mitigate the
possibility of interruptions in business operations.

14
<PAGE> 17

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk exposure related to changes in
interest rates on its long-term debt facility. These instruments carry interest
at a pre-agreed upon percentage point spread from the prime interest rate. At
December 31, 1998, the Company had $8.3 million outstanding under this facility.
Based on this balance, an immediate change of one percent in the interest rate
would cause a change in interest expense of approximately $83,000 on an annual
basis. The Company's objective in maintaining these variable rate borrowings is
the lower overall cost as compared with fixed-rate borrowings.

The Company is subject to market risk related to fluctuations in the value
of the U.S. dollar compared to certain foreign currencies. The Company has
subsidiaries which operate in Colombia, Venezuela and Mexico. 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.
The Company attempts to maintain a balance between assets and liabilities
denominated in foreign currencies, to the extent that such items exist. These
factors serve to mitigate the impact on the Company's financial statements
associated with foreign exchange fluctuations.

A hypothetical 10% fluctuation of the U.S. dollar relative to the
currencies of Colombia, Venezuela and Mexico would not materially adversely
affect the Company's expected 1999 earnings or cash flows regardless of the
direction of the change in relation to the U.S. dollar. The Company's
sensitivity analysis of the effects of changes in foreign currency exchange
rates does not factor in a potential change in sales levels.

While the Company is not a purchaser or producer of crude oil or related
products, the Company's customers to date have generally been 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 the Company's current customers' cash flows and may therefore
affect the Company's ability to collect on receivables or gain new business.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

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

Not applicable.

PART III

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

The following table sets forth the directors and executive officers of the
Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James S. Percell............................. 56 Director, Chairman, CEO and President
Bryan Sharp.................................. 55 Director
Albert M. Wolford............................ 77 Director and Secretary
David L. Warnock............................. 41 Director
Douglas A. Schonacher, Jr.................... 43 Vice-President and Chief Operating Officer
Ronald L. Bianco............................. 52 Chief Financial Officer, Treasurer and
Vice-Secretary
</TABLE>

Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company or until their successors are elected
and qualified. Officers serve at the discretion of the Board of Directors. There
is no family relationship between or among any of the directors and executive
officers of the Company.

15
<PAGE> 18

BIOGRAPHIES

JAMES S. PERCELL serves as Director, Chairman, CEO and President of the
Company and also serves as President of the Company's subsidiaries, NFE and
OnSite. Mr. Percell became a director of the Company and President, Chief
Executive Officer and a director of NFE in November, 1995. Mr. Percell became
President and CEO of the 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.

BRYAN SHARP has served as a director of the Company since November, 1995.
Mr. Sharp currently serves as Principal-in-Charge and Director of Espey, Huston
& Associates, Inc. ("EH&A"), an environmental consulting company, and from
1990-1993, he served as President of EH&A. Mr. Sharp has also been employed by
North Texas State University, the Department of the Interior, and the University
of Texas. Mr. Sharp has a B.S. degree in Education from North Texas State
University, a M.S. degree in Biology from North Texas State University and
studied for his Ph.D. in Zoology from The University of Texas at Austin.

ALBERT M. WOLFORD has served as director of the Company since August 5,
1997. Mr. Wolford is a member of the Company's compensation committee. Mr.
Wolford is also the Company's Secretary. Mr. Wolford has been an independent
business consultant since 1988. From 1970 to 1988, Mr. Wolford served with Texas
United Corporation as a director, a member of the executive committee, senior
vice-president, and as the chairman of the executive development and
compensation committees. As a senior vice-president of Texas United Corporation,
Mr. Wolford served its subsidiaries as president and CEO of Texas United
Chemical Corporation, as the chairman, president and CEO of United Salt
Corporation, and as the president of American Borate Corporation. He has also
served the Texas Chemical Council, an industry trade group, as a director, a
member of its executive committee, and as secretary-treasurer. Mr. Wolford
served as a member of the executive committee of the Salt Institute, an industry
trade group. Mr. Wolford is a graduate of The University of Texas.

DAVID L. WARNOCK was appointed as Director of the Company in December, 1997
in connection with the December, 1997 financing. Mr. Warnock is a founding
partner of Cahill, Warnock & Company, L.L.C., an asset management firm
established in 1995 to invest in small public companies. From 1983 to 1995, Mr.
Warnock was with T. Rowe Price Associates in senior management positions
including President of the corporate general partner of T. Rowe Price Strategic
Partners I and T. Rowe Price Strategic Partners II, and as the Executive
Vice-president of T. Rowe Price New Horizons Fund. Mr. Warnock also serves on
the Boards of Directors of other companies including Children's Comprehensive
Services, Inc., SRB Corporation, and ALLIANCE National Incorporated. Mr. Warnock
received a Bachelor of Arts Degree, History, from the University of Delaware and
a Masters Degree, Finance, from the University of Wisconsin.

DOUGLAS A. SCHONACHER, JR. joined the Company in March 1997 and is the
Company's Vice-president and Chief Operating Officer. Mr. Schonacher has 23
years of experience in the fields of drilling fluids control and drilling waste
management. From 1992 until 1997, Mr. Schonacher was with Tubescope/Vetco
International in the solids control division, serving as manager of Latin
American operations. Mr. Schonacher also served as the manager of technical
services for the solids control division of Tubescope/Vetco International. From
1987 until 1992, Mr. Schonacher was with Sun Drilling Products Corp. serving as
vice president of Sun Environmental Services, Inc. and Gulf Coast operations
manager. Mr. Schonacher was responsible for sales engineering and all product
applications. Mr. Schonacher also was with Sun Drilling Products Corp. 1979
until 1983 where he was responsible for hiring drilling fluid engineers and for
the application of drilling fluids specialty products in offshore Gulf Coast
regions. From 1974 until 1979, and again from 1983 until 1987, Mr. Schonacher
was a drilling fluids consultant. Mr. Schonacher attended Nichols State
University and Louisiana State University.

16
<PAGE> 19

RONALD L. BIANCO joined the Company in April 1997 as Chief Financial
Officer. Mr. Bianco is presently the C.F.O., Treasurer and Vice-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.

INFORMATION CONCERNING THE BOARD OF DIRECTORS AND ITS COMMITTEES

James S. Percell and Albert M. Wolford are the only directors of the
Company who are also officers of the Company. In 1997, the Board of Directors
established an independent compensation committee whose members are David L.
Warnock and Albert Wolford. Also in 1997, the Board of Directors established an
independent audit committee whose members are Bryan Sharp and David L. Warnock.
The Company held eight meetings of the Board of Directors during the period
covered by the fiscal year ended December 31, 1998. All four Directors were
present for at least 75% of the Board meetings.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

The Company does not currently pay any cash director's fees, but it pays
the expenses, if any, of its directors in attending board meetings. In 1998, the
Board adopted a stock option plan which included participation in the Plan by
directors. See below, the 1998 Stock Option Plan.

EXECUTIVE COMPENSATION

Mr. James Percell, became Chief Executive Officer of the Company in
January, 1996. The Company has an employment contract with Mr. Percell (the
"Employment Agreement"). The Employment Agreement which commenced in April 1997,
has a term of three years. The Employment Agreement automatically extends,
unless terminated by the Company or Mr. Percell, for additional successive one
year periods after the initial three year term. Mr. Percell's employment
contract provides that he receive annual compensation from the Company in the
amount of $125,000. However in November, 1997, the Company's Board of Directors
increased Mr. Percell's annual compensation to $250,000.

17
<PAGE> 20

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS PAYOUTS
------------------------------- ----------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING ALL
NAME AND ANNUAL STOCK OPTIONS/ LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
- ------------------ ---- -------- ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James S. Percell 1998 $209,167 0 0 0 201,775
0
Chief Executive 1997 $168,750 0 0 0 0 0 0
Officer
1996 0 0 0 0 0 0 0
Douglas Schonacher 1998 $135,000 0 0 0 75,687 0 0
V.P. -- C.O.O. 1997 $ 70,830 0 0 0 0 0 0
1996 0 0 0 0 0 0 0
</TABLE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS/SARS STOCK PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM:
UNDERLYING EMPLOYEES ------------------------
NAME AND OPTIONS/SARS IN FISCAL EXERCISE OF EXPIRATION
PRINCIPAL POSITION GRANTED YEAR BASE PRICE DATE 5% 10%
- ------------------ ------------ -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James S. Percell 76,775 9.8% $5.00 3/31/08 $241,417 $611,798
Chief Executive 125,000 16.0% $1.69 12/7/08 $132,854 $336,678
Officer
Douglas Schonacher 687 0.1% $5.00 3/31/08 $ 2,160 $ 5,475
V.P. -- C.O.O. 75,000 9.6% $1.69 12/7/08 $ 79,712 $202,007
</TABLE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FISCAL YEAR-END FISCAL YEAR-END
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
James S. Percell (*) (*) 1,178,042/125,000 520,000/0
Chief Executive Officer
Douglas Schonacher (*) (*) 69,516/75,000 0/0
V.P. -- C.O.O
</TABLE>

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

(*) Did not exercise any options.

1998 STOCK OPTION PLAN

While the Company has been successful in attracting and retaining qualified
personnel, the Company believes that its future success will depend in part on
its continued ability to attract and retain highly qualified personnel. The
Company pays wages and salaries which it believes are competitive. The Company
also believes that equity ownership is an important factor in its ability to
attract and retain skilled personnel, and on December 9, 1998, the Board of
Directors of the Company approved the 1998 Stock Option Plan (the "Plan") for
the Company submitted for approval of the Stockholders at the 1999 annual
meeting of stockholders. If approved by the Stockholders, the Plan will allow
Incentive Stock Option as determined by the Compensation Committee, or the Board
of Directors if there is no compensation committee (the "Committee"). The Board
of Directors has reserved 800,000 shares of Common Stock for issuance pursuant
to the Plan. The purpose of

18
<PAGE> 21

the Plan is to foster and promote the financial success of the Company and
increase stockholder value by enabling eligible key employees, directors and
consultants to participate in the long-term growth and financial success of the
Company.

ELIGIBILITY. The Plan is open to key employees (including officers and
directors) and consultants of the Company and its affiliates ("Eligible
Persons").

TRANSFERABILITY. The grants are not transferrable.

CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The Plan will not effect the
right of the Company to authorize adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure. In the
event of an adjustment, recapitalization or reorganization the award shall be
adjusted accordingly. In the event of a merger, consolidation, or liquidation,
the Eligible Person will be eligible to receive a like number of shares of stock
in the new entity he would have been entitled to if immediately prior to the
merger he had exercised his option. The Board may waive any limitations imposed
under the Plan so that all options are immediately exercisable.

OPTIONS. The Plan provides for both Incentive and Nonqualified Stock
Options.

Option price. Incentive options shall be not less than the greater of
(i)100% of fair market value on the date of grant, or (ii) the aggregate par
value of the shares of stock on the date of grant. The Compensation Committee,
at its option, may provide for a price greater than 100% of fair market value.
The price for Incentive Stock Options for Stockholders owning 10% or more of the
Company's shares ("10% Stockholders") shall be not less than 110% of fair market
value.

Amount exercisable -- incentive options. In the event an Eligible Person
exercises incentive options during the calendar year whose aggregate fair market
value exceeds $100,000, the exercise of options over $100,000 will be considered
non qualified stock options.

Duration. No option may be exercisable after the expiration date as set
forth in the option agreement.

Exercise of Options. Options may be exercised by written notice to the
President of the Company with:

(i) cash, certified check, bank draft, or postal or express money
order payable to the order of the Company for an amount equal to the option
price of the shares;

(ii) stock at its fair market value on the date of exercise;

(iii) an election to make a cashless exercise through a registered
broker-dealer (if approved in advance by the Compensation Committee);

(iv) an election to have shares of stock, which otherwise would be
issued on exercise, withheld in payment of the exercise price (if approved
in advance by the Compensation Committee); and/or

(v) any other form of payment which is acceptable to the Compensation
Committee, including without limitation, payment in the form of a
promissory note, and specifying the address to which the certificates for
the shares are to be mailed.

TERMINATION OF OPTIONS.

Termination of Employment. Any Option which has not vested at the time the
Optionee ceases continuous employment for any reason other than death,
disability or retirement shall terminate upon the last day that the Optionee is
employed by the Company. Incentive Stock Options must be exercised within three
months of cessation of Continuous Service for reasons other than death,
disability or retirement in order to qualify for Incentive Stock Option tax
treatment. Nonqualified Options may be exercised any time during the Option
Period regardless of employment status.

Death. Unless the Option expires sooner, the Option will expire one year
after the death of the Eligible Person.

19
<PAGE> 22

Disability. Unless the Option expires sooner, the Option will expire one
year after the disability of the Eligible Person.

Retirement. Any Option which has not vested at the time the Optionee ceases
continuous employment due to retirement shall terminate upon the last day that
the Optionee is employed by the Company. Upon retirement Incentive Stock Options
must be exercised within three months of cessation of Continuous Service in
order to qualify for Incentive Stock Option tax treatment. Nonqualified Options
may be exercised any time during the Option Period regardless of employment
status.

AMENDMENT OR TERMINATION OF THE PLAN. The Committee may amend, terminate or
suspend the Plan at any time, in its sole and absolute discretion; provided,
however, that to the extent required to qualify the Plan under Rule 16b-3
promulgated under Section 16 of the Exchange Act, no amendment that would (a)
materially increase the number of shares of stock that may be issued under the
Plan, (b) materially modify the requirements as to eligibility for participation
in the Plan, or (c) otherwise materially increase the benefits accruing to
participants under the Plan, shall be made without the approval of the Company's
Stockholders; provided further, however, that to the extent required to maintain
the status of any incentive option under the Code, no amendment that would (a)
change the aggregate number of shares of stock which may be issued under
incentive options, (b) change the class of employees eligible to receive
incentive options, or (c) decrease the option price for incentive options below
the fair market value of the stock at the time it is granted, shall be made
without the approval of the Stockholders. Subject to the preceding sentence, the
Board shall have the power to make any changes in the Plan and in the
regulations and administrative provisions under it or in any outstanding
incentive option as in the opinion of counsel for the Company may be necessary
or appropriate from time to time to enable any incentive option granted under
this Plan to continue to qualify as an incentive stock option or such other
stock option as may be defined under the Code so as to receive preferential
federal income tax treatment. No amendment, suspension or termination of the
Plan shall act to impair or extinguish rights in Options already granted at the
date of such amendment, suspension or termination.

NEW PLAN BENEFITS
1998 STOCK OPTION PLAN

<TABLE>
<CAPTION>
NAME AND POSITION DOLLAR VALUE(1) NUMBER OF OPTIONS
- ----------------- --------------- -----------------
<S> <C> <C>
James S. Percell, CEO....................................... $210,937 125,000
Douglas Schonacher, COO..................................... $126,562 75,000
Ronald L. Bianco, CFO....................................... $ 84,376 50,000
Executive Group........................................... $421,875 250,000
Non-executive Director Group................................ $101,250 60,000
Non-executive Officer Employee Group........................ $506,250 300,000
</TABLE>

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

(1) Dollar value was calculated based on the exercise price of $1.6875, which
was also the market value per share on the date of the grants.

20
<PAGE> 23

STOCK PRICE PERFORMANCE GRAPH

The performance graph as set forth below compares the cumulative total
stockholder return of Environmental Safeguards Inc. Common Stock from December
31, 1993 through December 31, 1998, with Standard & Poors 500 Index (the
Company's Broad Market Index) and with Standard & Poors Oil Composite Index (the
Company's Peer Group Index). The graph assumes that the value of the investment
in Environmental Safeguards Common Stock and each index was 100 on December 31,
1993, and that all dividends, if any, were reinvested. The comparisons in this
table are not intended to forecast or be indicative of possible future price
performance.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN OF
ENVIRONMENTAL SAFEGUARDS, INC., THE S&P 500 INDEX (BROAD
MARKET INDEX), AND THE S&P OIL COMPOSITE INDEX (PEER GROUP INDEX)

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Environmental Safeguards,
Inc....................... 100 16 16 57 60 24
Broad market Index.......... 100 98 132 159 208 264
Peer Group Index............ 100 101 127 152 182 193
</TABLE>

[GRAPH]

21
<PAGE> 24

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 17, 1999,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who is known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, each
stockholder has sole voting and investment power with respect to the shares
shown.

<TABLE>
<CAPTION>
NUMBER OF PERCENT CLASS OF
NAME SHARES OWNED(1) OF CLASS SECURITIES
---- --------------- -------- ------------
<S> <C> <C> <C>
James S. Percell............................... 1,471,560(2) 12.9% Common Stock
2600 South Loop West, Ste #645
Houston, Texas 77054
Bryan Sharp.................................... 1,132,264(3)(10) 10.1% Common Stock
3200 Wilcrest, #200
Houston, Texas 77042
Albert M. Wolford.............................. 89,346(4)(10) .9% Common Stock
2600 South Loop West, Ste #645
Houston, Texas 77054
David L. Warnock............................... 2,179,308(5)(6)(10) 17.8% Common Stock
One South Street, Ste #2150
Baltimore, Maryland 21202
Edward L. Cahill............................... 2,159,308(5)(6) 17.6% Common Stock
One South Street, Ste #2150
Baltimore, Maryland 21202
Cahill, Warnock Strategic Partners Fund, 2,159,308(5)(6) 17.6% Common Stock
L.P............................................
One South Street, Ste #2150
Baltimore, Maryland 21202
Strategic Associates, L.P...................... 2,159,308(5)(6) 17.6% Common Stock
One South Street, Ste #2150
Baltimore, Maryland 21202
Cahill, Warnock & Company, L.L.C............... 2,159,308(5)(6) 17.6% Common Stock
One South Street, Ste #2150
Baltimore, Maryland 21202
Cahill, Warnock Strategic Partners, L.P........ 2,159,308(5)(6) 17.6% Common Stock
One South Street, Ste #2150
Baltimore, Maryland 21202
Douglas A. Schonacher, Jr...................... 144,516(7) 1.4% Common Stock
2600 South Loop West, Ste 645
Houston, Texas 77054
Ronald L. Bianco............................... 119,516(8) 1.2% Common Stock
2600 South Loop West, Ste 645
Houston, Texas 77054
Newpark Resources, Inc......................... 1,201,546(6)(9) 10.6% Common Stock
3850 N. Causeway, Ste #1770
Metairie, LA 70002-1756
</TABLE>

22
<PAGE> 25

<TABLE>
<CAPTION>
NUMBER OF PERCENT CLASS OF
NAME SHARES OWNED(1) OF CLASS SECURITIES
---- --------------- -------- ------------
<S> <C> <C> <C>
Nadia, L.L.C................................... 593,500 5.9% Common Stock
Grosvenot Trust Co.
33 Church Street
Hamilton, Bermuda
All officers and directors as a Group (6 5,136,510 34.2% Common Stock
persons).......................................
</TABLE>

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

(1) Under the rules of the Securities and Exchange Commission (the
"Commission"), a person who directly or indirectly has or shares voting
power or investment power with respect to a security is considered a
beneficial owner of the security. Voting power is the power to vote or
direct the voting of shares, and investment power is the power to dispose of
or direct the disposition of shares. Shares as to which voting power or
investment power may be acquired within 60 days are also considered as
beneficially owned under the Commission's rules and are, accordingly,
included as shares beneficially owned.

(2) Includes an option to purchase 800,000 shares of Common Stock of the Company
at $0.60 per share, an option to purchase 301,267 shares of Common Stock of
the Company at $3.00 per share, an option to purchase 76,775 shares of
Common Stock of the Company at $5.00 per share. These options are fully
vested and immediately exercisable. Also includes an option to purchase
125,000 shares of Common Stock of the Company at $1.69 per share, half of
which vest in December, 1999 and half of which vest in December, 2000.

(3) Includes an option to purchase 800,000 shares of Common Stock of the Company
at $0.60 per share, an option to purchase 301,267 shares of Common Stock of
the Company at $3.00 per share, and an option to purchase 10,997 shares of
Common Stock of the Company at $5.00 per share. These options are fully
vested and immediately exercisable.

(4) Includes an option to purchase 9,415 shares of Common Stock of the Company
at $3.00 per share, an option to purchase 25,000 shares of Common Stock at
$3.75 per share, and an option to purchase 8,931 shares of Common Stock of
the Company at $5.00 per share. These options are fully vested and
immediately exercisable.

(5) Includes 1,722,900 shares of Series B Convertible Preferred Stock and a
warrant to purchase 323,044 shares of common stock of the Company at $0.01
per share issued to Cahill, Warnock Strategic Partners Fund, L.P. ("Cahill
Warnock Fund"), whose sole general partner is Cahill, Warnock Strategic
Partners, L.P. ("Cahill Warnock Partners"). In addition, includes 95,464
shares of Series B Convertible Preferred Stock and a warrant to purchase
17,900 shares of common stock of the Company at $0.01 per share issued to
Strategic Associates, L.P. ("Strategic Associates"), whose sole general
partner is Cahill, Warnock & Company, L.L.C. ("Cahill Warnock"). Each share
of Series B Convertible Preferred Stock is immediately convertible into one
share of common stock of the Company, subject to adjustment under certain
conditions. The warrant is fully vested and immediately exercisable. David
L. Warnock and Edward L. Cahill are the sole general partners of Cahill
Warnock Partners and the sole members of Cahill Warnock. David L. Warnock
and Edward L. Cahill are control persons of Cahill Warnock Fund, Cahill
Warnock Partners, Strategic Associates, and Cahill Warnock. David L.
Warnock, Edward L. Cahill, Cahill Warnock Fund, Cahill Warnock Partners,
Strategic Associates and Cahill Warnock have shared voting power and shared
dispositive power of these shares and each disclaim beneficial ownership of
the shares and warrants, except with respect to their pecuniary interest
therein, if any.

(6) Not included herein are other warrants which could be issuable under certain
circumstances pursuant to the terms of the Loan Agreement as follows: (i)
warrants for up to a total of 707,142 shares of Common Stock of the Company
are issuable upon the earlier of an event of default under the terms of the
Loan Agreement or February 17, 2000, provided, however, that if the loans
are repaid in full prior to February 17, 2000, then no additional warrants
would be issued, and further provided that if a portion of the loans are
repaid prior to February 17, 2000, then warrants for a number of shares of
Common Stock of the Company would be issued on a pro rata basis; and (ii)
warrants for up to a total of 188,571 shares

23
<PAGE> 26

of Common Stock of the Company are issuable if loans made pursuant to the
Loan Agreement are not repaid in full by December 17, 2001.

(7) Includes an option to purchase 50,000 shares of Common Stock of the Company
at $2.50 per share, an option to purchase 18,829 shares of Common Stock of
the Company at $3.00 per share, and an option to purchase 687 shares of
Common Stock of the Company at $5.00 per share. These options are fully
vested and immediately exercisable. Also includes an option to purchase
75,000 shares of Common Stock of the Company at $1.69 per share, half of
which vest in December, 1999 and half of which vest in December, 2000.

(8) Includes an option to purchase 50,000 shares of Common Stock of the Company
at $2.50 per share, an option to purchase 18,829 shares of Common Stock of
the Company at $3.00 per share, and an option to purchase 687 shares of
Common Stock of the Company at $5.00 per share. These options are fully
vested and immediately exercisable. Also includes an option to purchase
50,000 shares of Common Stock of the Company at $1.69 per share, half of
which vest in December, 1999 and half of which vest in December, 2000.

(9) Includes 847,975 shares of Series B Convertible Preferred Stock which are
immediately convertible into shares of the Company's Common Stock. The
number of shares of Common Stock into which each share of Preferred Stock
may be converted is presently one share of Common Stock for each share of
Series B Convertible Preferred Stock, subject to adjustment under certain
conditions. Also includes a warrant to purchase 353,571 shares of Common
Stock of the Company at $0.01 per share. The warrant is fully vested and
immediately exercisable.

(10) Also includes an option to purchase 20,000 shares of Common Stock of the
Company at $1.69 per share, half of which vest in December, 1999 and half
of which vest in December, 2000.

The Company knows of no arrangement or understanding, the operation of
which may at a subsequent date result in a change of control of the Company.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATED TRANSACTIONS

The Board of Directors of the Company has adopted a policy that Company
affairs will be conducted in all respects by standards applicable to
publicly-held corporations and that the Company will not enter into any
transactions and/or loans between the Company and its officers, directors and 5%
stockholders unless the terms are no less favorable than could be obtained from
independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company.

In December, 1997, the Company sold $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 the Company obtained a loan of $6,000,000 from the same
investor group. Pursuant to this financing, David L. Warnock, a member of
Cahill, Warnock & Co., which is the general partner of Cahill, Warnock Strategic
Partners Fund, L.P., was appointed a Director of the Company. Subsequently, in
June, 1998, the Company obtained an additional loan of $5,000,000 from the same
investor group.

In December, 1998, the Company and an investor formed OnSite Arabia, Inc.
("OnSite Arabia"), a Cayman Islands company for the purpose of providing
environmental remediation, reclamation and recycling services in Saudi Arabia,
Qatar, Yemen, the United Arab Emirates, Bahrain, Kuwait and Oman. The Company
owns 50% of OnSite Arabia. Concurrent with the formation of OnSite Arabia, the
Company sold 500,000 shares of common stock of the Company in a private
placement to an investor who is an affiliate of OnSite-Arabia, Inc. at a
purchase price of $1.50 per share for total cash consideration of $750,000.

24
<PAGE> 27

effect of reducing the Company's working capital and stockholders' equity by
approximately $1,100,000, and a reduction in common stock equivalents of
1,037,736 shares on a fully diluted basis. After the 1,037,736 share redemption,
Newpark continues to hold 847,975 shares of the Company's Series B Convertible
Preferred stock.

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

(A)(1) FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
(PAGE)
------
<S> <C>
Reports of Independent Auditors............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Stockholders Equity for the years
ended December 31, 1998, 1997 and 1996.................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-9
Notes to Consolidated Financial Statements.................. F-10
</TABLE>

(A)(2) FINANCIAL STATEMENT SCHEDULES

Financial statement schedules are not included in this Form 10-K Annual
Report because they are not applicable or the required information is shown in
the financial statements or notes thereto.

(B) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
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.
4.4* -- 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.
10.2* -- 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.
</TABLE>

25
<PAGE> 28

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
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.
21.2**** -- Additional Subsidiaries.
27.1**** -- Financial Data Schedule.
</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.

**** Filed herewith.

Not applicable.

26
<PAGE> 29

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 16, 1999.

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
--------- ----- ----
<C> <S> <C>
/s/ JAMES S. PERCELL Director, Chairman of the March 16, 1999
- ----------------------------------------------------- Board, Chief Executive
James S. Percell Officer and President

/s/ BRYAN SHARP Director March 16, 1999
- -----------------------------------------------------
Bryan Sharp

/s/ ALBERT WOLFORD Director and Secretary March 16, 1999
- -----------------------------------------------------
Albert Wolford

/s/ DAVID L. WARNOCK Director March 16, 1999
- -----------------------------------------------------
David L. Warnock

/s/ RONALD BIANCO Chief Financial Officer, March 16, 1999
- ----------------------------------------------------- Treasurer and Vice-Secretary
Ronald Bianco
</TABLE>

27
<PAGE> 30

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORTS OF INDEPENDENT AUDITORS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<PAGE> 31

ENVIRONMENTAL SAFEGUARDS, INC.

TABLE OF CONTENTS

Reports of Independent Auditors............................. F-2
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997
and 1996............................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996........... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997
and 1996............................................... F-9
Notes to Consolidated Financial Statements.................. F-10
</TABLE>

F-1
<PAGE> 32

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Environmental Safeguards, Inc.

We have audited the accompanying consolidated balance sheets of
Environmental Safeguards, Inc. as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Environmental Safeguards, Inc. as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Houston, Texas
March 5, 1999

F-2
<PAGE> 33

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Environmental Safeguards, Inc.

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Environmental Safeguards, Inc. for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Environmental Safeguards, Inc. for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.

/s/ HAM, LANGSTON & BREZINA, LLP

Houston, Texas
March 18, 1997

F-3
<PAGE> 34

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 4,792 $ 6,686
Accounts receivable....................................... 1,734 1,554
Equipment held for sale................................... 1,953 --
Prepaid expenses.......................................... 273 206
Deferred taxes............................................ 51 85
Other assets.............................................. 270 --
------- -------
Total current assets.............................. 9,073 8,531
Property and equipment, net................................. 8,256 6,286
Acquired engineering design and technology, net............. 2,835 3,242
Other assets................................................ -- 239
------- -------
Total assets...................................... $20,164 $18,298
======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt......................... $ 1,735 $ 844
Current portion of capital lease obligation............... 648 1,039
Accounts payable.......................................... 628 480
Accrued liabilities....................................... 569 366
Income taxes payable...................................... 62 525
------- -------
Total current liabilities......................... 3,642 3,254
Long-term debt.............................................. 6,636 4,117
Capital lease obligation.................................... -- 1,093
Minority interest........................................... 2,073 628
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting, $.001 par
value (aggregate liquidation value -- $2,897,700 and
$3,998,000 at December 31, 1998 and 1997,
respectively); 5,000,000 shares authorized; 2,733,686
and 3,771,422 shares issued and outstanding at December
31, 1998 and 1997, respectively........................ 3 4
Preferred stock; Series C non-convertible, non-voting,
cumulative; $.001 par value (aggregate liquidation
value -- $4,000,000); 400,000 shares authorized, issued
and outstanding at December 31, 1998 and 1997.......... 1 1
Common stock; $.001 par value; 50,000,000 shares
authorized; 10,092,444 and 9,282,265 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 10 9
Unissued common stock..................................... -- 56
Additional paid-in capital................................ 14,318 14,459
Accumulated deficit....................................... (6,519) (5,323)
------- -------
Total stockholders' equity........................ 7,813 9,206
------- -------
Total liabilities and stockholders' equity........ $20,164 $18,298
======= =======
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE> 35

ENVIRONMENTAL SAFEGUARDS, INC.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net service revenue......................................... $10,672 $ 6,678 $ --
Cost of providing services.................................. 5,378 3,226 --
------- ------- ------
Gross margin.............................................. 5,294 3,452 --
Selling, general and administrative expenses................ 3,435 2,059 511
Amortization of acquired engineering design and
technology................................................ 407 17 --
Research and development.................................... 48 786 --
------- ------- ------
Income (loss) from operations............................. 1,404 590 (511)
Other income (expenses):
Loss from investment in joint venture..................... -- -- (93)
Interest income........................................... 290 192 18
Interest expense.......................................... (1,159) (466) (138)
Foreign currency transaction losses....................... (23) (31) --
Other..................................................... 40 4 3
------- ------- ------
Income (loss) before provision for income taxes, minority
interest, elimination of pre-acquisition earnings of
subsidiary and extraordinary item......................... 552 289 (721)
Provision for income taxes.................................. 756 1,205 --
------- ------- ------
Loss before minority interest, elimination of
pre-acquisition earnings of subsidiary and extraordinary
item...................................................... (204) (916) (721)
Minority interest........................................... (595) (547) --
Elimination of pre-acquisition earnings of subsidiary....... -- (34) --
------- ------- ------
Loss before extraordinary item.............................. (799) (1,497) (721)
Extraordinary gain (loss) on extinguishment of debt......... -- (352) 74
------- ------- ------
Net loss.................................................... $ (799) $(1,849) $ (647)
======= ======= ======
Net loss applicable to common stockholders.................. $(1,572) $(5,880) $ (647)
======= ======= ======
Basic and dilutive earnings (loss) per common share:
Before extraordinary item................................. $ (0.17) $ (0.61) $(0.11)
Extraordinary item........................................ -- (0.04) .01
------- ------- ------
Net loss per common share................................. $ (0.17) $ (0.65) $(0.10)
======= ======= ======
Weighted average shares outstanding......................... 9,495 9,075 6,375
======= ======= ======
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 36

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SERIES B SERIES C UNISSUED ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ -------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996..... $-- $-- $6 $ 50 $2,449 $(2,810) $ (305)
Issuance of common stock....... 1 -- 409 -- 410
Issuance for which the proceeds
were received in 1995 (62,500
shares)...................... -- -- -- (50) 50 -- --
Exercise of stock options and
warrants (410,000 shares).... -- -- -- -- 190 -- 190
Issuances for services,
compensation and settlement
of debt (318,378 shares)..... -- -- -- -- 594 -- 594
Proceeds received on Regulation
D offering that closed in
February 1997................ -- -- -- 689 -- -- 689
Issuance declared in payment of
accrued interest on
convertible debentures
(84,791 shares).............. -- -- -- 68 -- -- 68
Shares to be issued in January
1998 under terms of a note
settlement agreement......... -- -- -- 56 -- -- 56
Fair value of warrants issued
in connection with the
funding of long term debt
(See Note 1)................. -- -- -- -- 460 -- 460
Net loss....................... -- -- -- -- -- (647) (647)
-- -- -- ---- ------ ------- ------
Balance at December 31, 1996... $-- $-- $7 $813 $4,152 $(3,457) $1,515
== == == ==== ====== ======= ======
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE> 37

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SERIES B SERIES C UNISSUED ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ -------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... $ -- $ -- $ 7 $ 813 $ 4,152 $(3,457) $ 1,515
Issuance of common stock
including shares for which
the proceeds were received in
1996 (333,400 shares)........ -- -- -- (689) 833 -- 144
Exercise of stock options
(100,000 shares)............. -- -- -- -- 60 -- 60
Issuance in conversion of
debentures and related
accrued interest (1,994,037
shares)...................... -- -- 2 (68) 1,125 -- 1,059
Repurchase and cancellation of
stock warrants originally
issued in connection with the
funding of long-term debt in
1996......................... -- -- -- -- (170) -- (170)
Issuance of 3,771,422 shares of
Series B preferred stock..... 4 -- -- -- 3,998 -- 4,002
Issuance of 400,000 shares of
Series C preferred stock..... -- 1 -- -- 3,191 -- 3,192
Issuance of 707,142 warrants to
purchase common stock........ -- -- -- -- 1,270 -- 1,270
Dividends on Series C preferred
stock........................ -- -- -- -- -- (17) (17)
Net loss....................... -- -- -- -- -- (1,849) (1,849)
---- ---- ---- ----- ------- ------- -------
Balance at December 31, 1997... $ 4 $ 1 $ 9 $ 56 $14,459 $(5,323) $ 9,206
==== ==== ==== ===== ======= ======= =======
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE> 38

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
SERIES B SERIES C UNISSUED ADDITIONAL
PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ------ -------- ---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997.... $ 4 $ 1 $ 9 $ 56 $14,459 $(5,323) $9,206
Issuance of common stock for
agreements reached in 1995
(40,179 shares)............... -- -- -- (56) 56 -- --
Exercise of stock options
(270,000 shares).............. -- -- -- -- 162 -- 162
Cancellation of Series B
Preferred stock in exchange
for accounts receivable from
an affiliate (1,037,736
shares) (Note 13)............. (1) -- -- -- (1,099) -- (1,100)
Issuance of common stock for
cash (500,000 shares)......... -- -- 1 -- 740 -- 741
Dividends on Series C preferred
stock......................... -- -- -- -- -- (397) (397)
Net loss........................ -- -- -- -- -- (799) (799)
--- --- --- ---- ------- ------- ------
Balance at December 31, 1998.... $ 3 $ 1 $10 $ -- $14,318 $(6,519) $7,813
=== === === ==== ======= ======= ======
</TABLE>

See notes to consolidated financial statements.

F-8
<PAGE> 39

ENVIRONMENTAL SAFEGUARDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (799) $(1,849) $ (647)
Adjustment to reconcile net loss to net cash used in
operating activities:
Extraordinary (gain) loss............................... -- 352 (74)
Minority interest....................................... 595 -- --
Elimination of pre-acquisition earnings of subsidiary... -- 34 --
Write-off of acquired research and development.......... -- 762 --
Common stock exchanged for services and interest
expense................................................ -- 30 418
Loss from investment in joint venture................... -- -- 93
Deferred tax expense.................................... 34 -- --
Depreciation expense.................................... 1,208 45 55
Amortization expense.................................... 407 119 --
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable................................... (1,280) (116) (57)
Equipment held for sale............................... (1,546) -- --
Prepaid expenses and other assets..................... (98) (344) (1)
Accounts payable...................................... 148 163 (131)
Accrued liabilities................................... 203 19 47
Income taxes payable.................................. (463) 118 --
------- ------- -------
Net cash used in operating activities.............. (1,591) (667) (297)
------- ------- -------
Cash flows from investing activities:
Acquisition of remaining 50% interest in OnSite, net of
cash acquired........................................... -- (6,609) --
Purchase of property and equipment........................ (2,435) (40) --
Investment in OnSite...................................... -- (1,050) (1,692)
Proceeds from sale of property and equipment.............. -- -- 6
------- ------- -------
Net cash used in investing activities.............. (2,435) (7,699) (1,686)
------- ------- -------
Cash flows from financing activities:
Payments on notes payable................................. -- -- (95)
Net proceeds from long-term debt and convertible
debentures.............................................. 5,000 6,191 4,055
Payments on long-term debt................................ (1,590) (3,000) (26)
Payments on capital lease obligations..................... (1,484) -- --
Repurchase of stock warrants.............................. -- (170) --
Net proceeds from sale of common stock, preferred stock
and stock warrants...................................... 903 8,668 1,218
Dividends paid on Series C preferred stock................ (397) -- --
Distribution to minority interest......................... (300) -- --
------- ------- -------
Net cash provided by financing activities.......... 2,132 11,689 5,152
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (1,894) 3,323 3,169
Cash and cash equivalents, beginning of year................ 6,686 3,363 194
------- ------- -------
Cash and cash equivalents, end of year...................... $ 4,792 $ 6,686 $ 3,363
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 1,120 $ 421 $ 5
======= ======= =======
Cash paid for income taxes................................ $ 1,185 $ 859 $ --
======= ======= =======
</TABLE>

See notes to consolidated financial statements.

F-9
<PAGE> 40

ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Environmental Safeguards, Inc. (the "Company") provides environmental
remediation and hydrocarbon reclamation/recycling services principally to oil
and gas 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 and the subsequent
recovery of diesel and synthetic oils which were in the drill cuttings. A
substantial portion of the Company's operations to date have been conducted for
one customer in Colombia by the Company's 50% owned subsidiary, OnSite Colombia,
Inc.

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 (See Note 4).

Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues 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 when products
are shipped.

Concentrations of Credit Risk

Financial instruments which subject the Company to concentrations of credit
risk include cash and accounts receivable. The Company maintains its cash in
well known banks selected based upon management's assessment of the banks'
financial stability and international capability. Balances periodically exceed
the $100,000 federal depository insurance limit; however, the Company has not
experienced any losses on deposits. Accounts receivable generally arise from
sales of services to multinational energy companies operating in the United
States and South America. Collateral is generally not required for credit
granted. Essentially all of the Company's trade receivables were due from two
multinational energy companies for services performed in Colombia and Venezuela.
Management believes that all receivables are fully collectible.

Cash Equivalents

For purposes of reporting cash flows, the Company considers all short-term
investments with an original maturity of three months or less when purchased to
be cash equivalents.

Equipment Held for Sale

Equipment held for sale represents ITD Units awaiting shipment or held for
sale to third parties. Such units are stated at the lower of cost or market and
cost is determined based upon specific identification.

F-10
<PAGE> 41
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of 5
years for ITD Units and 3-5 years for office furniture and equipment, and
transportation and other equipment.

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.

Stock-Based Compensation

The Company accounts for its stock compensation arrangements under the
provisions of APB 25, Accounting for Stock Issued to Employees.

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 (See Note 2). This intangible asset is
being amortized over an estimated useful life of 8 years using the straight-line
method. As of December 31, 1998 and 1997, the accumulated amortization was
$424,000 and $17,000, respectively.

Impairment of Long-Lived Assets

In the event that facts and circumstances indicate that 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.

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.

Comprehensive Income

Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income".
Comprehensive income includes such items as unrealized gains or losses on
certain investment securities and certain foreign currency translation
adjustments. The Company's financial statements include none of the additional
elements that affect comprehensive income. Accordingly, comprehensive income and
net income are identical.

2. ACQUISITION OF ONSITE TECHNOLOGY, L.L.C.

Prior to December 17, 1997, the Company held a 50% non-controlling interest
in OnSite Technology, L.L.C. ("OnSite"). On December 17, 1997, the Company
acquired Parker Drilling Company's 50% interest in OnSite and, accordingly,
OnSite became a wholly-owned consolidated subsidiary of the Company. Prior to
this transaction, the Company accounted for the investment in OnSite on the
equity method. The $8 million

F-11
<PAGE> 42
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase price and the required repayment of $3 million of long-term debt due to
a Parker subsidiary was financed through a private placement of Series B
convertible preferred stock, Series C preferred stock, senior secured notes, and
warrants for shares of the Company's common stock to a third party investor
group. This acquisition has been accounted for using the purchase method of
accounting and the results of operations of OnSite have been consolidated with
the Company's for the year ended December 31, 1997 with a deduction in the
consolidated statement of operations for preacquisition earnings attributable to
Parker's interest prior to December 17, 1997.

The $8 million purchase price has been allocated to the assets acquired and
liabilities assumed based on independent valuation. Approximately $762,000 of
the purchase price was allocated to research and development activities which
had not yet reached technological feasibility. This amount has been included in
the Company's 1997 consolidated statement of operations as acquired research and
development. The following is a summary of assets acquired and liabilities
assumed in the purchase.

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Assets acquired:
Fair value of tangible assets acquired.................... $5,072
Engineering design and technology......................... 3,259
Acquired research and development......................... 762
------
9,093
Cash paid to Parker, net of cash in OnSite.................. 6,609
------
Liabilities assumed......................................... $2,484
======
</TABLE>

The following unaudited summary proforma information presents the
consolidated results of operations as if the effective date of the acquisition
occurred at the beginning of 1997 and 1996 after giving effect to certain
adjustments which include increased depreciation of ITD units, the expensing of
acquired research and development and the additional interest expense associated
with the financing of the transaction:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Service revenue............................................. $ 6,678 $ 730
Loss before extraordinary item.............................. $(2,028) $(2,454)
Net loss.................................................... $(2,028) $(2,380)
Net loss available to common stockholders................... $(2,696) $(7,153)
Basic and dilutive net loss per common share................ $ (0.30) $ (1.12)
</TABLE>

F-12
<PAGE> 43
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
ITD Remediation/Recycling Units, including the cost of units
currently under construction of $1,638,000 and $1,338,000
at December 31, 1998 and 1997, respectively............... $9,369 $7,019
Office furniture and equipment.............................. 258 18
Transportation and other equipment.......................... 349 111
------ ------
9,976 7,148
Less accumulated depreciation and amortization............ 1,720 862
------ ------
$8,256 $6,286
====== ======
</TABLE>

The Company presently contracts with one fabricator for the manufacture of
ITD Units and one fabricator for the manufacture of Condensing Units used in the
Company's operations. As of December 31, 1998, the Company had 2 ITD Units and 2
Condensing Units in process. Commitments to third parties for completion of
these units totaled $707,000 at December 31, 1998. An unexpected disruption of
the fabricators' ability to timely deliver ITD Units could cause a delay in the
Company's ability to meet future service orders. Should a delay occur, the
Company has taken steps to facilitate the placement of orders with alternative
fabricators.

4. INVESTMENT IN ONSITE TECHNOLOGY, L.L.C.

During the year ended December 31, 1996, the Company accounted for its
investment in OnSite on the equity method (See Note 2). The following summarized
financial information presents the consolidated results of operations of OnSite
for the year ended December 31, 1996:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Service revenue............................................. $ 542
Cost of providing services.................................. 416
-----
Gross margin.............................................. 126
General and administrative expenses......................... 242
Loss from investment in OnSite Colombia..................... 69
-----
Net loss.................................................... $(185)
=====
</TABLE>

In November 1996, OnSite entered into a joint venture, OnSite Colombia,
Inc., ("OnSite Colombia") with a group of South American investors. OnSite
Colombia was established to provide hydrocarbon contaminated soil
reclamation/remediation services in Colombia. OnSite owns a 50% interest in the
assets, liabilities, capital and profits of the Investee and, prior to December
17, 1997, OnSite accounted for this investment using the equity method.
Effective with the Company's acquisition of the remaining 50% interest in OnSite
on December 17, 1997, OnSite and the Company obtained voting control of OnSite
Colombia. As a result, subsequent to December 17, 1997, the financial statements
of OnSite Colombia are consolidated with those of the Company (See Note 2).

F-13
<PAGE> 44
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summarized financial information presents the results of
operations of OnSite Colombia for the period from inception, November 25, 1996,
to December 31, 1996:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Service revenue............................................. $ 189
Cost of providing services.................................. 145
-----
Gross margin.............................................. 44
General and administrative expenses......................... 161
-----
Loss before provision for income taxes...................... (117)
Provision for income taxes.................................. 22
-----
Net loss.................................................... $(139)
=====
</TABLE>

5. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
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. (See Note 2) The
notes have an original face value of $11 million and are
carried net of an unamortized discount of approximately
$586,000 at December 31, 1998. Payments are due in
quarterly principal installments of $560,000 plus accrued
interest at a stated rate of prime plus 1.5% per year
through December 2002. After considering the amortization
of the discount, the notes bear an effective interest rate
that approximates prime plus 9.9% per year. These notes
are collateralized by all assets of the Company........... $8,371 $4,961
Less current maturities..................................... 1,735 844
------ ------
Long-term debt.............................................. $6,636 $4,117
====== ======
</TABLE>

The Investor Notes contain certain covenants, the most restrictive of which
requires the Company to maintain positive working capital of at least $2 million
and precludes the Company from paying common dividends until the Investor Notes
are repaid. Management believes the Company is in compliance with all debt
covenants at December 31, 1998.

The Investor Notes included a commitment by the lenders to provide an
additional $5 million supplemental loan under provisions similar to the initial
loan provided that the Company remains in compliance with the terms of the
initial loan. The Company exercised its option to obtain the $5 million
supplemental loan in June 1998. The Investor Notes also include a 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 2001.

Further, the Investor Notes include a provision for the Company to issue to
the lenders warrants to acquire up to a total of 707,142 shares of Common Stock
of the Company upon the earlier of an event of default under the terms of the
Investor Notes or February 17, 2000, provided, however, that if the Investor
Notes are repaid in full prior to February 17, 2000, then no additional warrants
would be issued, and further provided that if a portion of the Investor Notes
are repaid prior to February 17, 2000, then warrants for a number of shares of
Common Stock of the Company would be issued on a pro rata basis.

F-14
<PAGE> 45
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Following is an analysis of future annual maturities of long-term debt:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, (IN THOUSANDS)
- ------------ --------------
<S> <C>
1999...................................................... $1,735
2000...................................................... 2,148
2001...................................................... 2,239
2002...................................................... 2,249
------
$8,371
======
</TABLE>

During the years ended December 31, 1998, 1997 and 1996, the Company
incurred interest charges as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Interest charged to expense................................. $1,159 $466 $138
Interest capitalized as construction period interest........ 228 -- --
------ ---- ----
Total interest.................................... $1,387 $466 $138
====== ==== ====
</TABLE>

6. LEASE COMMITMENTS

During 1997, OnSite Colombia sold and leased back two indirect thermal
desorption units. No gain or loss resulted from sale of the first ITD unit and a
gain of $172,000 resulted from the sale of the second ITD unit. The gain on sale
of the second unit was deferred and is being recognized as a reduction in
depreciation expense over the remaining life of the ITD unit. The related leases
are being accounted for as capital leases. Amortization of leased assets is
included in depreciation and amortization expense. Included in property and
equipment in the accompanying consolidated balance sheets at December 31, 1998
and 1997 are the following assets held under capital leases:

<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Indirect thermal desorption units........................... $2,028 $2,028
Accumulated amortization.................................... (797) (391)
------ ------
Assets under capital leases, net............................ $1,231 $1,637
====== ======
</TABLE>

OnSite Colombia also leases certain equipment and facilities under
operating leases. Certain of the leases provide for renewal options; however,
only one such lease has an original term of greater than one year. Rental
expense for operating leases was $69,000, $52,000 and $7,000 during the years
ended December 31, 1998, 1997 and 1996, respectively.

Minimum lease payments due under leases with original lease terms of
greater than one year and expiration dates subsequent to December 31, 1998 are
summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
- ------------ ------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999................................................... $685 $27
2000................................................... -- 14
---- ---
Total minimum leases........................................ 685 $41
===
Less amount representing interest........................... 37
----
Present value of minimum lease payments..................... $648
====
</TABLE>

F-15
<PAGE> 46
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Included in other current assets at December 31, 1998 and in other assets
at December 31, 1997, is $238,000 of restricted cash deposits that secure a
letter of credit. Such letter of credit serves as a payment bond on one existing
capital lease.

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>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax on undistributed foreign income....................... $ 176 $ 196
Deferred tax assets:
Net operating loss carryforwards.......................... 1,244 1,217
Foreign tax credit carryforwards.......................... 636 301
Purchased in-process research and development............. 259 259
Deferred gain on sale of licensing agreement.............. 66 66
Deferred foreign municipal tax............................ 26 85
Other..................................................... 25 26
------- -------
Total deferred tax assets......................... 2,256 1,954
Valuation allowance for deferred tax assets............... (2,029) (1,673)
------- -------
227 281
------- -------
Net deferred tax assets........................... $ 51 $ 85
======= =======
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax income (loss):
United States........................................... $(1,027) $(2,011) $(721)
Foreign................................................. 1,579 2,300 --
------- ------- -----
$ 552 $ 289 $(721)
======= ======= =====
</TABLE>

F-16
<PAGE> 47
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ------ ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $--
Foreign................................................... 722 1,290 --
---- ------ --
Total current..................................... 722 1,290 --
---- ------ --
Deferred:
Federal................................................... -- -- --
Foreign................................................... 34 (85) --
---- ------ --
Total deferred.................................... 34 (85) --
---- ------ --
$756 $1,205 $--
==== ====== ==
</TABLE>

The Company consolidates its 50% owned subsidiary, OnSite Colombia, Inc., a
Cayman Island company that conducts operations in Colombia. The Cayman Island
imposes no income tax on such operations. However, the operations in Colombia
are subject to Colombian federal and local taxes. Accordingly, the Company has
included in its financial statements the Colombian income tax expense related to
such operations. The Company had tax losses in all other foreign and domestic
jurisdictions.

The differences between the Federal statutory income tax rates and the
Company's effective income tax rates were as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34% 34% 34%
Foreign (Colombian) income taxes............................ 137% 417% --
Increase in valuation allowance............................. (34)% (34)% (34)%
--- --- ---
137% 417% 0%
=== === ===
</TABLE>

At December 31, 1998, for U.S. federal income tax reporting purposes, the
Company has approximately $3,659,000 of unused net operating losses available
for carryforward to future years. The benefit from carryforward of such net
operating losses will expire during the years ended December 31, 2001 to 2014.
The benefit from utilization of net operating loss carryforwards could be
subject to limitations if significant ownership changes occur in the Company.

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. Effective December 17, 1997, in connection with
the Company's acquisition of OnSite (See Note 2), 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 preferred
stock.

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 $1.05 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

F-17
<PAGE> 48
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
essentially the same voting rights as the holders of common stock. The Series B
convertible preferred stock has a liquidation preference of $1.06 per share plus
any unpaid dividends. As discussed in Note 13, 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 (7.75% at December 31, 1998) 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 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 5) and
the warrants (see stock warrants below) was based upon relative fair values of
the underlying securities. The Series C preferred stock is accreted to its
liquidation value over a period of 26 months. 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).

Common Stock

In February 1997, the Company completed a public registration of 2,304,792
shares of its common stock. The Company's 10% convertible debentures provided
for automatic conversion into shares of the Company's common stock upon the
effective registration by the Company of its common stock under the Securities
Exchange Act of 1934, as amended. Of the 2,304,792 shares registered, 1,934,792
were newly issued shares for conversion of the 10% debentures and payment of
related accrued interest.

In February 1997, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933. The Company collected cash proceeds of $833,500
for the issuance of 333,400 shares of common stock $(688,500 collected in 1996
and $145,000 in 1997).

In February 1996, the Company closed an exempt offering under Regulation D
of the Securities Act of 1933. The Company collected cash proceeds of $700,000
for issuance of 875,000 shares of common stock ($290,000 collected in 1995 and
$410,000 in 1996).

Unissued Common Stock

Unissued common stock at December 31, 1997 and 1996 represents shares for
which cash proceeds or other consideration had been received but shares had not
been issued.

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
F-18
<PAGE> 49
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 with the following weighted-average
assumptions for 1998, 1997 and 1996: risk-free interest rate of 7% (6% for 1997
and 1996); no dividend yield; weighted average volatility factor of the expected
market price of the Company's common stock of 0.873 (0.698 for 1997 and 1996);
and a weighted-average expected life of the options of 5 years.

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 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 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. At December 31, 1998,
the Company had granted options for 610,000 of a total of 800,000 shares of
common stock reserved for 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.

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. The Company's proforma information follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Proforma net loss........................................ $(1,457) $(4,676) $ (647)
Proforma net loss available to common stockholders....... $(2,230) $(8,707) $ (647)
Proforma basic and dilutive loss per share............... $ (0.23) $ (0.96) $(0.10)
</TABLE>

F-19
<PAGE> 50
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, 1998, 1997 and 1996 follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDER WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding -- January 1, 1996............................ 3,363,542 $1.21
Granted................................................. -- --
Exercised............................................... (40,000) 0.60
Forfeited............................................... -- --
--------- -----
Outstanding -- December 31, 1996........................ 3,323,542 1.21
Granted................................................. 1,598,144 2.82
Exercised............................................... (100,000) 0.60
Forfeited............................................... -- --
--------- -----
Outstanding -- December 31, 1997........................ 4,821,686 1.76
Granted................................................. 782,718 2.41
Exercised............................................... (270,000) 0.60
Forfeited............................................... (463,542) 5.00
--------- -----
Outstanding -- December 31, 1998........................ 4,870,862 $1.62
========= =====
Exercisable -- December 31,
1996.................................................... 3,323,542 $1.21
1997.................................................... 4,821,686 1.76
1998.................................................... 4,260,862 1.61
</TABLE>

The weighted-average fair value of options granted during the years ended
December 31, 1998 and 1997 was $1.74 and $1.77, respectively.

A summary of outstanding stock options at December 31, 1998, follows:

<TABLE>
<CAPTION>
REMAINING
CONTRACTUAL
NUMBER OF EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE
SHARES -- --------------- ------------ --------------
<C> <S> <C> <C> <C>
Exercisable at December 31, 1998:
2,490,000 ..................................... November 2005 6.9 $0.60
602,500 ..................................... March 2007 8.2 $2.50
25,000 ..................................... November 2007 8.9 $3.75
970,644 ..................................... December 2007 9.0 $3.00
1,053 ..................................... January 2008 9.1 $2.38
800 ..................................... January 2008 9.1 $3.12
770 ..................................... January 2008 9.1 $3.25
625 ..................................... January 2008 9.1 $4.00
169,470 ..................................... April 2008 9.7 $5.00
Non-exercisable at December 31, 1998:
610,000 ..................................... December 2008.. 10.0 $1.69
---------
4,870,862
=========
</TABLE>

F-20
<PAGE> 51
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
--------- ------------ -------------
<S> <C> <C> <C>
Warrants outstanding at January 1, 1996....... 370,000 $0.45 $0.45
Issued...................................... 250,000 $2.50 $2.50
Canceled.................................... -- -- --
Exercised................................... (370,000) $0.45 --
--------
Warrants outstanding at December 31, 1996... 250,000 $2.50 $2.50
Issued...................................... 757,143 $0.01 - $2.50 $0.17
Canceled.................................... (300,000) $2.50 --
Exercised................................... -- -- --
--------
Warrants outstanding at December 31, 1997... 707,143 $0.01 $0.01
Issued...................................... -- -- --
Canceled.................................... -- -- --
Exercised................................... -- -- --
--------
Warrants outstanding at December 31, 1998... 707,143 $0.01 $0.01
========
</TABLE>

All warrants outstanding at December 31, 1998 and 1997 were issued in
connection with the sale of the Company's Series B and Series C preferred stock
and the funding of the Investor Notes (See Note 5). The warrants bear an
exercise price of $0.01 per share, are currently exercisable, and expire in
December 2007.

9. EARNINGS PER SHARE

For the years ended December 31, 1998, 1997 and 1996, 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 future periods, the calculation of diluted earnings per share
may require that the common stock equivalents disclosed in Note 8 be included in
the calculation of the weighted average shares outstanding for periods in which
net income is reported, using the treasury stock method. Following is the
reconciliation of net loss to the net loss applicable to common stockholders.

The Series B convertible preferred stock was deemed to be issued with a
beneficial conversion feature because on issuance date, the securities could be
converted into shares of the Company's common stock at a substantial discount to
the then fair value of the Company's common stock. The beneficial conversion
feature was calculated as the difference between the conversion price and the
fair value of the common stock on the date of issue, multiplied by the number of
shares into which the security is convertible. The beneficial conversion feature
is analogous to a dividend to the holders of the Series B convertible preferred
shares and is deducted from the net loss available to common stockholders in the
calculation of earnings per share.

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss.................................................. $ (799) $(1,849) $(647)
Less: Beneficial conversion feature Series B preferred
stock............................................... -- (3,998) --
Series C Preferred stock dividends $(0.9925 per
share).............................................. (397) (17) --
Accretion of discount on Series C preferred stock
(Note 8).......................................... (376) (16) --
------- ------- -----
Net loss applicable to common stockholders................ $(1,572) $(5,880) $(647)
======= ======= =====
</TABLE>

F-21
<PAGE> 52
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. RESEARCH AND DEVELOPMENT

During the year ended December 31, 1998 and 1997, expenditures for research
and development were $48,000 and $786,000, respectively. Expenditures for the
year ended December 31, 1997 included approximately $762,000 of acquired
research and development (See Note 2). During the year ended December 31, 1996,
all research and development was conducted by OnSite and such expenses are not
included separately in the 1996 consolidated financial statements as OnSite was
accounted for under the equity method.

11. 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 1998.

12. LITIGATION

The Company is involved as a defendant in certain litigation filed by an
engineering company (the "Engineering Company") that constructed certain soil
remediation units for the Company. The litigation originally involved claims by
the Engineering Company that the Company owed additional compensation of
approximately $150,000 for units which the Company believes did not meet
required performance criteria. The Company filed a counter claim for $200,000 to
obtain damages from the Engineering Company. The Company has been advised that
in 1994, the Engineering Company filed a petition seeking Chapter 11 Bankruptcy
Protection. A Notice of Automatic Stay was filed in August 1994. In January
1995, the Engineering Company filed a Plan of Reorganization with the Bankruptcy
Court whereby the Company received nothing and no adversary pleadings were filed
against the Company. The Company believes, after consultation with legal
counsel, that the risk of material financial exposure to the Company is remote.

13. RELATED PARTY TRANSACTIONS

Effective January 1, 1998, the Company entered into a one year, $240,000
per month, remediation and recycling contract (the "Contract") with a
corporation that is a significant preferred stockholder (the "Stockholder") and
a member of the investment group that funded the Investor Notes (See Note 5).
After the Contract was signed, the Stockholder was unable to fully utilize the
Company's services and subsequently requested a release. The Company granted the
release under the condition that the Stockholder compensate the Company for the
six and one-half months of service. To fulfill its obligation, the Stockholder
agreed that in addition to $460,000 of payments that had been made, the
Stockholder would surrender 1,037,736 shares of Series B preferred stock in
satisfaction of the remaining $1,100,000 receivable on the Company's books. The
total revenue recognized under this contract during 1998 was $1,560,000.

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 an ITD unit to the
newly formed joint company and recognized a gain to the extent proceeds received
exceeded the Company's proportional basis in the asset.

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 operations of the
Company and OnSite were consolidated for the year ended December 31, 1998 and
combined in a manner described in Note 4 during the year ended December 31,
1997. However, during the period from January 1, 1997 through December 17, 1997
and the year ended December 31, 1996, 50% of OnSite's operations were
attributable to Parker, the former owner of a 50% interest in OnSite.

F-22
<PAGE> 53
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION

The Company currently operates in the environmental remediation and
hydrocarbon reclamation/ recycling services. Substantially all revenues result
from the sale of services using the Company's ITD units. The Company's
reportable segments under FAS No. 131 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 foreign operations were conducted by
the Company's 50% owned joint company in Colombia. The Company's Colombian and
Venezuelan subsidiaries operate with the U.S. dollar as their functional
currency and, accordingly, no cumulative translation adjustment is presented in
the accompanying balance sheet.

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>
1998 1997 1996
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service Revenue:
United States.......................................... $ 2,708 $ 246 $ --
Latin America.......................................... 7,964 6,432 --
------- ------- ------
Total service revenue.......................... $10,672 $ 6,678 $ --
======= ======= ======
Depreciation and Amortization:
United States.......................................... $ 851 $ 139 $ 55
Latin America.......................................... 764 25 --
------- ------- ------
Total depreciation and amortization............ $ 1,615 $ 164 $ 55
======= ======= ======
Income From Operations:
United States.......................................... $ 140 $(1,418) $ --
Latin America.......................................... 1,814 2,496 --
Corporate.............................................. (550) (488) (511)
------- ------- ------
Total income (loss) from operations............ $ 1,404 $ 590 $ (511)
======= ======= ======
Assets:
United States.......................................... $ 8,474 $ 8,041 $1,981
Latin America.......................................... 6,221 5,751 --
Middle East............................................ 1,150 -- --
Corporate.............................................. 4,319 4,506 3,487
------- ------- ------
Total assets................................... $20,164 $18,298 $5,468
======= ======= ======
Capital Expenditures:
United States.......................................... $ 959 $ 40 $ --
Latin America.......................................... 326 -- --
Middle East............................................ 1,150 -- --
------- ------- ------
Total capital expenditures..................... $ 2,435 $ 40 $ --
======= ======= ======
</TABLE>

F-23
<PAGE> 54
ENVIRONMENTAL SAFEGUARDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Number of Customers:
United States.......................................... 1 1 --
Latin America.......................................... 2 1 --
------- ------- ------
3 2 --
======= ======= ======
</TABLE>

Prior to December 17, 1997, OnSite Colombia was treated as an equity
investment (See Note 2). During the years ended December 31, 1998 and 1997, the
Company's largest customer accounted for 71% and 96% of service revenue,
respectively.

15. NON-CASH INVESTING AND FINANCING ACTIVITIES

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

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
One-half interest in an ITD Unit received in exchange for
minority interest in a subsidiary...................... $ 1,150 $ -- $ --
ITD Unit transferred to inventory........................ 407 -- --
Series B preferred stock repurchased in exchange for
accounts receivable.................................... 1,100 -- --
Conversion of debentures to common stock, net of deferred
offering costs......................................... -- 889 --
Assumption of liabilities upon acquisition of OnSite
Technology, L.L.C. (Includes $607 minority interest in
OnSite Colombia, Inc.)................................. -- 2,484 --
Deferred gain offset in acquisition of OnSite............ -- 193 --
Investment in the Joint Venture company in exchange for
an all-inclusive license for ITD technology............ -- -- 203
Converted short-term notes and accrued liabilities to
common stock........................................... -- -- 276
</TABLE>

F-24

<PAGE> 1
EXHIBIT 10.7

ENVIRONMENTAL SAFEGUARDS, INC.
1998 STOCK OPTION PLAN

1. PURPOSE. The purpose of the Environmental Safeguards, Inc.
1998 Stock Option Plan ("the Plan") is to promote the financial
interests of the Company, its subsidiaries and its shareholders by
providing incentives in the form of stock options to key employees and
directors who contribute materially to the success and profitability of
the Company. The grants will recognize and reward outstanding
individual performances and contributions and will give such persons a
proprietary interest in the Company, thus enhancing their personal
interest in the Company's continued success and progress. This Plan
will also assist the Company and its subsidiaries in attracting,
retaining and motivating key employees and directors. The options
granted under this Plan may be either Incentive Stock Options, as that
term is defined in Section 422 of the Internal Revenue Code of 1986, as
amended, or Nonqualified options taxed under Section 83 of the Internal
Revenue Code of 1986, as amended.

RULE 16B-3 PLAN. The Company is subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
therefore the Plan is intended to comply with all applicable conditions of Rule
16b-3 (and all subsequent revisions thereof) promulgated under the Exchange Act.
To the extent any provision of the Plan or action by the Committee or the Board
of Directors or Committee fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee. In
addition, the Committee or the Board of Directors may amend the Plan from time
to time as it deems necessary in order to meet the requirements of any
amendments to Rule 16b-3 without the consent of the shareholders of the Company.

EFFECTIVE DATE OF PLAN. The effective date of this Plan shall be
December 9, 1998 (the "Effective Date"). The Board of Directors shall, within
one year of the Effective Date, submit the Plan for approval to the shareholders
of the Company. The plan shall be approved by at least a majority of
shareholders voting in person or by proxy at a duly held shareholders' meeting,
or if the provisions of the corporate charter, by-laws or applicable state law
prescribes a greater degree of shareholder approval for this action, the
approval by the holders of that percentage, at a duly held meeting of
shareholders. No Incentive Option or Nonqualified Stock Option shall be granted
pursuant to the Plan ten years after the Effective Date. In the event that the
Plan is not approved by the shareholder's of the Company, the Plan shall be
deemed to be a non-qualified stock option plan.

2. DEFINITIONS. The following definitions shall apply to this
Plan:

(a) "Affiliate" means any parent corporation and any subsidiary
corporation. The term
<PAGE> 2
"parent corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if, at the time of the action or transaction, each of
the corporations other than the Company owns stock possessing
50% or more of the total combined voting power of all classes
of stock in one of the other corporations in the chain. The
term "subsidiary corporation" means any corporation (other
than the Company) in an unbroken chain of corporations
beginning with the Company if, at the time of the action or
transaction, each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or
more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.

(b) "Agreement" means, individually or collectively, any agreement
entered into pursuant to the Plan pursuant to which Options
are granted to a participant.

(d) "Board" means the board of directors of the Company.

(e) "Cause" shall mean, for purposes of whether and when a
participant has incurred a Termination of Employment for
Cause: (i) any act or omission which permits the Company to
terminate the written agreement or arrangement between the
participant and the Company or a Subsidiary or Parent for
Cause as defined in such agreement or arrangement; or (ii) in
the event there is no such agreement or arrangement or the
agreement or arrangement does not define the term "cause,"
then Cause shall mean an act or acts of dishonesty by the
participant resulting or intending to result directly or
indirectly in gain to or personal enrichment of the
participant at the Company's expense and/or gross negligence
or willful misconduct on the part of the participant.

(f) "Change in Control" means, for purposes of this Plans

i. there shall be consummated (i) any consolidation or
merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to
which shares of the Company's common stock would be
converted into cash, securities or other property,
other than a merger of the Company in which the
holders of the Company's common stock immediately
prior to the merger have substantially the same
proportionate ownership of common stock of the
surviving corporation immediately after the merger;
or (ii) any sale, lease, exchange or other transfer
(in one transaction or a series of related
transactions) of all or substantially all of the
assets of the Company; or

2
<PAGE> 3

ii. the shareholders of the Company shall approve any
plan or proposal for the liquidation or dissolution
of the Company; or

(g) "Code" means the Internal Revenue Code of 1986, as amended,
final Treasury Regulations thereunder and any subsequent
Internal Revenue Code.

(h) "Committee" means the Compensation Committee of the Board of
Directors or such other committee designated by the Board of
Directors. The Committee shall be comprised solely of at least
two members who are both Disinterested Persons and Outside
Directors.

(i) "Common Stock" means the Common Stock, par value per share of
the Company whether presently or hereafter issued, or such
other class of shares or securities as to which the Plan may
be applicable, pursuant to Section 11 herein.

(j) "Company" means Environmental Safeguards, Inc., a Nevada
Corporation and includes any successor or assignee company
corporations into which the Company may be merged, changed or
consolidated; any company for whose securities the securities
of the Company shall be exchanged; and any assignee of or
successor to substantially all of the assets of the Company.

(l) "Continuous Service" means the absence of any interruption or
termination of employment with or service to the Company or
any Parent or Subsidiary of the Company that now exists or
hereafter is organized or acquired by or acquires the Company.
Continuous Service shall not be considered interrupted in the
case of sick leave, military leave, or any other bona fide
leave of absence of less than ninety (90) days (unless the
participants right to reemployment is guaranteed by statute or
by contract) or in the case of transfers between locations of
the Company or between the Company, its Parent, its
Subsidiaries or its successors

(m) "Date of Grant" means the date on which the Committee grants
an Option.

(n) "Director" means any member of the Board of Directors of the
Company or any Parent or subsidiary of the Company that now
exists or hereafter is organized or acquired by or acquires
the Company.

(o) "Non Employee Director" means a "Non Employee Director" as
that term is defined in Rule 16b-3 under the Exchange Act.

(p) "Eligible Persons" shall mean, with respect to the Plan, those
persons who, at the time that an Award is granted, are
(i)officers, directors or employees of the Company or
Affiliate or (ii) consultants or subcontractors of the Company
or affiliate.

3
<PAGE> 4

(q) "Employee" means any person employed on an hourly or salaried
basis by the Company or any Parent or Subsidiary of the
Company that now exists or hereafter is organized or acquired
by or acquires the Company.

(r) "Exchange Act" means the Securities Exchange Act of 1934, as
amended and the rules and regulations promulgated thereunder.

(s) "Fair Market Value" means (i) if the Common Stock is not
listed or admitted to trade on a national securities exchange
and if bid and ask prices for the Common Stock are not
furnished through NASDAQ or a similar organization, the value
established by the Committee, in its sole discretion, for
purposes of the Plan; (ii) if the Common Stock is listed or
admitted to trade on a national securities exchange or a
national market system, the closing price of the Common Stock,
as published in the Wall Street Journal, so listed or admitted
to trade on such date or, if there is no trading of the Common
Stock on such date, then the closing price of the Common Stock
on the next preceding day on which there was trading in such
shares; or (iii) if the Common Stock is not listed or admitted
to trade on a national securities exchange or a national
market system, the mean between the bid and ask price for the
Common Stock on such date, as furnished by the National
Association of Securities Dealers, Inc. through NASDAQ or a
similar organization if NASDAQ is no longer reporting such
information. If trading in the stock or a price quotation does
not occur on the Date of Grant, the next preceding date on
which the stock was traded or a price was quoted will
determine the fair market value.

(t) "Incentive Stock Option" means a stock option, granted
pursuant to either this Plan or any other plan of the Company,
that satisfies the requirements of Section 422 of the Code and
that entitles the Optionee to purchase stock of the Company or
in a corporation that at the time of grant of the option was a
Parent or subsidiary of the Company or a predecessor company
of any such company.

(u) "Nonqualified Stock Option" means an Option to purchase Common
Stock in the Company granted under the Plan other than an
Incentive Stock Option within the meaning of Section 422 of
the Code.

(v) "Option" means a stock option granted pursuant to the Plan.

(w) "Option Period" means the period beginning on the Date of
Grant and ending on the day prior to the tenth anniversary of
the Date of Grant or such shorter termination date as set by
the Committee.

(x) "Optionee" means an Employee (or Director or subcontractor)
who receives an Option.

4
<PAGE> 5

(y) "Parent" means any corporation which owns 50% or more of the
voting securities of the Company.

(z) "Plan" means this Stock Option Plan as may be amended from
time to time.

(aa) "Share" means the Common Stock, as adjusted in accordance with
Paragraph 11 of the Plan.

(bb) "Ten Percent Shareholder" means an individual who, at the time
the Option is granted, owns Stock possessing more than 10% of
the total combined voting power of all classes of stock of the
Company or of any Affiliate. An individual shall be considered
as owning the Stock owned, directly or indirectly, by or for
his brothers and sisters (whether by the whole or half blood),
spouse, ancestors, and lineal descendants; and Stock owned,
directly or indirectly, by or for a corporation, partnership,
estate, or trust, shall be considered as being owned
proportionately by or for its shareholders, partners, or
beneficiaries.

(cc) "Termination" or "Termination of Employment" means the
occurrence of any act or event whether pursuant to an
employment agreement or otherwise that actually or effectively
causes or results in the person's ceasing, for whatever
reason, to be an officer or employee of the Company or of any
Subsidiary or Parent including, without limitation, death,
disability, dismissal, severance at the election of the
participant, retirement, or severance as a result of the
discontinuance, liquidation, sale or transfer by the Company
or its Subsidiaries or Parent of all businesses owned or
operated by the Company or its Subsidiaries. A Termination of
Employment shall occur to an employee who is employed by an
Subsidiary if the Subsidiary shall cease to be a Subsidiary
and the participant shall not immediately thereafter become an
employee of the Company or a Subsidiary.

(dd) "Subsidiary" means any corporation 50% or more of the voting
securities of which are owned directly or indirectly by the
Company at any time during the existence of this Plan.

In addition, certain other terms used in this Plan shall have the
definitions given to them in the first place in which they are used.

3. ADMINISTRATION.

a. This Plan will be administered by the Committee. A majority of
the full Committee constitutes a quorum for purposes of
administering the Plan, and all determinations of the
Committee shall be made by a majority of the members present
at a meeting at which a quorum is present or by the unanimous
written consent of the Committee.

5
<PAGE> 6

b. If no Committee has been appointed, members of the Board may
vote on any matters affecting the administration of the Plan
or the grant of any Option pursuant to the Plan, except that
no such member shall act on the granting of an Option to
himself, but such member may be counted in determining the
existence of a quorum at any meeting of the Board during which
action is taken with respect to the granting of Options to
him.

c. Subject to the terms of this Plan, the Committee has the sole
and exclusive power to:

i. select the participants in this Plan;

ii. establish the terms of the Options granted to each
participant which may not be the same in each case;

iii. determine the total number of options to grant to an
Optionee, which may not be the same in each case;

iv. fix the Option period for any Option granted which may
not be the same in each case; and

v. make all other determinations necessary or advisable
under the Plan.

vi. determine the minimum number of shares with respect to
which Options may be exercised in part at any time.

vii. The Committee has the sole and absolute discretion to
determine whether the performance of an eligible
Employee warrants an award under this Plan, and to
determine the amount of the award.

viii. The Committee has full and exclusive power to construe
and interpret this Plan, to prescribe and rescind rules
and regulations relating to this Plan, and take all
actions necessary or advisable for the Plan's
administration. Any such determination made by the
Committee will be final and binding on all persons.

d. A member of the Committee will not be liable for performing
any act or making any determination in good faith.

4. SHARES SUBJECT TO OPTION. Subject to the provisions of Paragraph
11 of the Plan, the maximum aggregate number of Shares that may be
optioned and sold under the Plan shall be 800,000. Such shares may be
authorized but unissued, or may be treasury shares. If

6
<PAGE> 7
an Option shall expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares that were subject
to the Option shall, unless the Plan has then terminated, be available
for other Options under the Plan.

a. Eligible Persons. Every Eligible Person, as the Committee in
its sole discretion designates, is eligible to participate in
this Plan. Directors who are not employees of the Company or
any subsidiary or Parent shall only be eligible to receive
Incentive Stock Options if and as permitted be applicable law
and regulations. The Committee's award of an Option to a
participant in any year does not require the Committee to
award an Option to that participant in any other year.
Furthermore, the Committee may award different Options to
different participants. The Committee may consider such
factors as it deems pertinent in selecting participants and in
determining the amount of their Option, including, without
limitation;

(i) the financial condition of the Company or its Subsidiaries;

(ii) expected profits for the current or future years;

(iii) the contributions of a prospective participant to the
profitability and success of the Company or its Subsidiaries;
and

(iv) the adequacy of the prospective participant's other
compensation.

Participants may include persons to whom stock, stock options, or
other benefits previously were granted under this or another plan of
the Company or any Subsidiary, whether or not the previously granted
benefits have been fully exercised.

b. No Right of Employment. An Optionee's right, if any, to
continue to serve the Company and its Subsidiaries as an
Employee will not be enlarged or otherwise affected by his
designation as a participant under this Plan, and such
designation will not in any way restrict the right of the
Company or any Subsidiary, as the case may be, to terminate at
any time the employment of any

5. REQUIREMENTS OF OPTION GRANTS. Each Option granted under this Plan
shall satisfy the following requirements.

a. Written Option. An Option shall be evidenced by a written
Agreement, a sample of which is attached hereto as Exhibit A,
specifying (i) the number of Shares that may be purchased by
its exercise, (ii) the intent of the Committee as to whether
the Option is be an Incentive Stock Option or a Non-qualified
Stock Option, (iii) the Option period for any Option granted.
and (iv) such

7
<PAGE> 8

terms and conditions consistent with the Plan as the Committee
shall determine, all of which may differ between various
Optionees and various Agreements.

b. Duration of Option. Each Option may be exercised only during
the Option Period designated for the Option by the Committee.
At the end of the Option Period the Option shall expire.

c. Option Exercisability. The Committee, on the grant of an
Option, each Option shall be exercisable only in accordance
with its terms.

d. Acceleration of Vesting. Subject to the provisions of Section
5(b), the Committee may, it its sole discretion, provide for
the exercise of Options either as to an increased percentage
of shares per year or as to all remaining shares. Such
acceleration of vesting may be declared by the Committee at
any time before the end of the Option Period, including, if
applicable, after termination of the Optionee's Continuous
Service by reason of death, disability, retirement or
termination of employment.

e. Option Price. Except as provided in Section 6(a) the Option
price of each Share subject to the Option shall equal the Fair
Market Value of the Share on the Option's Date of Grant.

f. Termination of Employment. Any Option which has not vested at
the time the Optionee ceases Continuous Service for any reason
other than death, disability or retirement shall terminate
upon the last day that the Optionee is employed by the
Company. Incentive Stock Options must be exercised within
three months of cessation of Continuous Service for reasons
other death, disability or retirement in order to qualify for
Incentive Stock Option tax treatment. Nonqualified Options may
be exercised any time during the Option Period regardless of
employment status.

g. Death. In the case of death of the Optionee, the beneficiaries
designated by the Optionee shall have one year from the
Optionee's demise or to the end of the Option Period,
whichever is earlier, to exercise the Option, provided,
however, the Option may be exercised only for the number of
Shares for which it could have been exercised at the time the
Optionee died, subject to any adjustment under Sections 5(d)
and 11.

h. Retirement. Any Option which has not vested at the time the
Optionee ceases Continuous Service due to retirement shall
terminate upon the last day that the Optionee is employed by
the Company. Upon retirement Incentive Stock Options must be
exercised within three months of cessation of Continuous

8
<PAGE> 9
Service in order to qualify for Incentive Stock Option tax
treatment. Nonqualified Options may be exercised any time
during the Option Period regardless of employment status

i. Disability. In the event of termination of Continuous Service
due to total and permanent disability (within the meaning of
Section 422 of the Code), the Option shall lapse at the
earlier of the end of the Option Period or twelve months after
the date of such termination, provided, however, the Option
can be exercised at the time the Optionee became disabled,
subject to any adjustment under Sections 5(d) and 11.

6. INCENTIVE STOCK OPTIONS. Any Options intended to qualify as an
Incentive Stock Option shall satisfy the following requirements in
addition to the other requirements of the Plan:

a. Ten Percent Shareholders. An Option intended to qualify as an
Incentive Stock Option granted to an individual who, on the
Date of Grant, owns stock possessing more than ten (10)
percent of the total combined voting power of all classes of
stock of either the Company or any Parent or Subsidiary, shall
be granted at a price of 110 percent of Fair Market Value on
the Date of Grant and shall be exercised only during the
five-year period immediately following the Date of Grant. In
calculating stock ownership of any person, the attribution
rules of Section 425(d) of the Code will apply. Furthermore,
in calculating stock ownership, any stock that the individual
may purchase under outstanding options will not be considered.

b. Limitation on Incentive Stock Options The aggregate Fair
Market Value, determined on the date of Grant, of stock in the
Company exercisable for the first time by any Optionee during
any calendar year, under the Plan and all other plans of the
Company or its Parent or Subsidiaries (within the meaning of
Subsection (d) of Section 422 of the Code) in any calendar
year shall not exceed $100,000.00.

c. Exercise of Incentive Stock Options. No disposition of the
shares underlying an Incentive Stock Option may be made within
two years from the Date of Grant nor within one year after the
exercise of such incentive Stock Option.

d. Approval of Plan. No Option shall qualify as an Incentive
Stock Option unless this Plan is approved by the shareholders
within one year of the Plan's adoption by the Board.

7. NONQUALIFIED AND INCENTIVE STOCK OPTIONS. Any Option not intended to
qualify as an Incentive Stock Option shall be a Nonqualified Stock
Option. Nonqualified Stock

9
<PAGE> 10
Options shall satisfy each of the requirements of Section 5 of the
Plan. An Option intended to qualify as an Incentive Stock Option, but
which does not meet all the requirements of an Incentive Stock Option
shall be treated as a Nonqualified Stock Option.

8. METHOD OF EXERCISE. An Option granted under this Plan shall be deemed
exercised when the person entitled to exercise the Option (i) delivers
written notice to the President of the Company of the decision to
exercise, (ii) concurrently tenders to the Company full payment for the
Shares to be purchased pursuant to the exercise, and (iii) complies
with such other reasonable requirements as the Committee establishes
pursuant to Section 3 of the Plan. During the lifetime of the Employee
to whom an Option is granted, such Option may be exercised only by him.
Payment for Shares with respect to which an Option is exercised may be
in cash, or by certified check, or wholly or partially in the form of
Common Stock of the Company having a fair market value equal to the
Option Price. No person will have the rights of a shareholder with
respect to Shares subject to an Option granted under this Plan until a
certificate or certificates for the Shares have been delivered to him.

An Option granted under this Plan may be exercised in increments of not
less than 10% of the full number of Shares as to which it can be exercised. A
partial exercise of an Option will not effect the holder's right to exercise the
Option from time to time in accordance with this Plan as to the remaining Shares
subject to the Option.

9. TAXES. COMPLIANCE WITH LAW: APPROVAL OF REGULATORY BODIES. The Company,
if necessary or desirable, may pay or withhold the amount of any tax
attributable to any Shares deliverable or amounts payable under this
Plan, and the Company may defer making delivery or payment until it is
indemnified to its satisfaction for the tax. Options are exercisable,
and Shares can be delivered and payments made under this Plan, only in
compliance with all applicable federal and state laws and regulations,
including, without limitation, state and federal securities laws, and
the rules of all stock exchanges on which the Company's stock is listed
at any time. An Option is exercisable only if either (i) a registration
statement pertaining to the Shares to be issued upon exercise of the
Option has been flied with and declared effective by the Securities and
Exchange Commission and remains effective on the date of exercise, or
(ii) an exemption from the registration requirements of applicable
securities laws is available. This plan does not require the Company,
however, to file such registration statement or to assure the
availability of such exemptions. Any certificate issued to evidence
Shares issued under the Plan may bear such legends and statements, and
shall be subject to such transfer restrictions, as the Committee deems
advisable to assure compliance with federal and state laws and
regulations and with the requirements of this Section 9 of the Plan. No
Option may be exercised, and no Shares may be issued under this Plan,
until the Company has obtained the consent or approval of every
regulatory body, federal or state, having jurisdiction over such matter
as the Committee deems advisable.

10
<PAGE> 11

Each Person who acquires the right to exercise an Option by bequest or
inheritance may be required by the Committee to furnish reasonable evidence of
ownership of the Option as a condition to his exercise of the Option. In
addition, the Committee may require such consents and release of taxing
authorities as the Committee deems advisable.

10. ASSIGNABILITY. An Option granted under this Plan is not transferable
except by will or the laws of descent and distribution. The Option may
be exercised only by the Optionee during the life of the Optionee. More
particularly, but without limitation of the foregoing, the Option may
be not be assigned or transferred except as provided above and shall
not be assignable by operation of law and shall not be subject to
execution, attachment or similar process. Any attempted assignment,
transfer or distribution contrary to the provisions hereof shall be
null and void and without effect.

11. ADJUSTMENT UPON CHANGE OF SHARES. If a reorganization, merger,
consolidation, reclassification, recapitalization, combination or
exchange of shares, stock split, stock dividend, rights offering, or
other expansion or contraction of the Common Stock of the Company
occurs, the number and class of Shares for which Options are authorized
to be granted under this Plan, the number and class of Shares then
subject to Options previously granted under this Plan, and the price
per Share payable upon exercise of each Option outstanding under this
Plan shall be equitably adjusted by the Committee to reflect such
changes. To the extent deemed equitable and appropriate by the
Committee or the Board, subject to any required action by shareholders,
in any merger, consolidation, reorganization, liquidation or
dissolution, any Option granted under the Plan shall pertain to the
securities and other property to which a holder of the number of Shares
of stock covered by the Option would have been entitled to receive in
connection with such event.

12. ACCELERATIONS OF OPTIONS UPON CHANGE IN CONTROL. In the event that a
Change of Control has occurred with respect to the Company, any and all
Options will become fully vested and immediately exercisable with such
acceleration to occur without the requirement of any further act by
either the Company or the participant, subject to Section 9 hereof.

13. LIABILITY OF THE COMPANY. The Company, its Parent and any Subsidiary
that is in existence or hereafter comes into existence shall not be
liable to any person for any tax consequences expected but not realized
by an Optionee or other person due to the exercise of an Option.

14. EXPENSES OF PLAN. The Company shall bear the expenses of administering
the Plan.

15. DURATION OF PLAN. Options may be granted under his Plan only within 10
years from the effective date of the Plan.

16. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN. The Board of Directors
of the Company may amend, terminate or suspend this Plan at any time,
in its sole and absolute

11
<PAGE> 12
discretion; provided, however, that to the extent required to qualify
this Plan under Rule 16b-3 promulgated under Section 16 of the Exchange
Act, no amendment that would (a) materially increase the number of
shares of Stock that may be issued under this Plan, (b) materially
modify the requirements as to eligibility for participation in this
Plan, or (c) otherwise materially increase the benefits accruing to
participants under this Plan, shall be made without the approval of the
Company's shareholders; provided further, however, that to the extent
required to maintain the status of any Incentive Option under the Code,
no amendment that would (a) change the aggregate number of shares of
Stock which may be issued under Incentive Options, (b) change the class
of employees eligible to receive Incentive Options, or (c) decrease the
Option price for Incentive Options below the Fair Market Value of the
Stock at the time it is granted, shall be made without the approval of
the Company's shareholders. Subject to the preceding sentence, the
Board of Directors shall have the power to make any changes in the Plan
and in the regulations and administrative provisions under it or in any
outstanding Incentive Option as in the opinion of counsel for the
Company may be necessary or appropriate from time to time to enable any
Incentive Option granted under this Plan to continue to qualify as an
incentive stock option or such other stock option as may be defined
under the Code so as to receive preferential federal income tax
treatment. Notwithstanding the foregoing, no amendment, suspension or
termination of the Plan shall act to impair or extinguish rights in
Options already granted at the date of such amendment, suspension or
termination.

17. FORFEITURE. Notwithstanding any other provisions of this Plan, if the
Committee finds by a majority vote after full consideration of the facts that an
Eligible Person, before or after termination of his employment with the Company
or an Affiliate for any reason (a) committed or engaged in fraud, embezzlement,
theft, commission of a felony, or proven dishonesty in the course of his
employment by the Company or an Affiliate, which conduct damaged the Company or
Affiliate, or disclosed trade secrets of the Company or an Affiliate, or (b)
participated, engaged in or had a material, financial or other interest, whether
as an employee, officer, director, consultant, contractor, shareholder, owner,
or otherwise, in any commercial endeavor anywhere which is competitive with the
business of the Company or an Affiliate without the written consent of the
Company or Affiliate, the Eligible Person shall forfeit all outstanding Options,
including all exercised Options and other situations pursuant to which the
Company has not yet delivered a stock certificate. Clause (b) shall not be
deemed to have been violated solely by reason of the Eligible Person's ownership
of stock or securities of any publicly owned corporation, if that ownership does
not result in effective control of the corporation.

The decision of the Committee as to the cause of an Employee's
discharge, the damage done to the Company or an Affiliate, and the extent of an
Eligible Person's competitive activity shall be final. No decision of the
Committee, however, shall affect the finality of the discharge of the Employee
by the Company or an Affiliate in any manner.

18. INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With
respect to administration of this Plan, the Company shall indemnify each present
and future member of the

12
<PAGE> 13

Committee and the Board of Directors against, and each member of the Committee
and the Board of Directors shall be entitled without further act on his part to
indemnity from the Company for, all expenses (including attorney's fees, the
amount of judgments and the amount of approved settlements made with a view to
the curtailment of costs of litigation, other than amounts paid to the Company
itself) reasonably incurred by him in connection with or arising out of any
action, suit, or proceeding in which he may be involved by reason of his being
or having been a member of the Committee and/or the Board of Directors, whether
or not he continues to be a member of the Committee and/or the Board of
Directors at the time of incurring the expenses, including, without limitation,
matters as to which he shall be finally adjudged in any action, suit or
proceeding to have been found to have been negligent in the performance of his
duty as a member of the Committee or the Board of Directors. However, this
indemnity shall not include any expenses incurred by any member of the Committee
and/or the Board of Directors in respect of matters as to which he shall be
finally adjudged in any action, suit or proceeding to have been guilty of gross
negligence or willful misconduct in the performance of his duty as a member of
the Committee and the Board of Directors. In addition, no right of
indemnification under this Plan shall be available to or enforceable by any
member of the Committee and the Board of Directors unless, within 60 days after
institution of any action, suit or proceeding, he shall have offered the Company
the opportunity to handle and defend same at its own expense. The failure to
notify the Company within 60 days shall only affect a Director or committee
member's right to indemnification if said failure to notify results in an
impairment of the Company's rights or is detrimental to the Company. This right
of indemnification shall inure to the benefit of the heirs, executors or
administrators of each member of the Committee and the Board of Directors and
shall be in addition to all other rights to which a member of the Committee and
the Board of Directors may be entitled as a matter of law, contract, or
otherwise.

19. GENDER. If the context requires, words of one gender when used in this
Plan shall include the others and words used in the singular or plural shall
include the other.

20. HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of the Plan and shall
not be used in construing the terms of the Plan.

21. OTHER COMPENSATION PLANS. The adoption of this Plan shall not affect
any other stock option, incentive or other compensation or benefit plans in
effect for the Company or any Affiliate, nor shall the Plan preclude the Company
from establishing any other forms of incentive or other compensation for
employees of the Company or any Affiliate.

22. OTHER OPTIONS OR AWARDS. The grant of an Option or Awards shall not
confer upon the Eligible Person the right to receive any future or other Options
or Awards under this Plan, whether or not Options or Awards may be granted to
similarly situated Eligible Persons, or the right to receive future Options or
Awards upon the same terms or conditions as previously granted.

23. GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Texas.

<PAGE> 1

EXHIBIT 21.2

Additional Subsidiaries

OnSite Arabia, Inc. ("OnSite Arabia"), a Cayman Islands company, 50% owned by
the Company.

OnSite Mexico, L.L.C., a Texas limited liability company, 100% owned.

<ARTICLE> 5
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