SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~June~~September 30, 2003

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

For the transition period from ~~_______________~~_________ to ~~_______________~~_________

Commission File Number: 001-13259

U S LIQUIDS INC. ~~(Exact name of registrant as specified in its charter)~~

(Exact name of registrant as specified in its charter)


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

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

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

x Indicate ~~Yes~~by ocheck mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

o Yes x No

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

Common Stock, $0.01 par value 16,233,149 shares as of ~~August~~December 410, 2003

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit Index
EXHIBIT INDEX
16th Amend. to Second Amended Credit Agreement
17th Amendment to 2nd Amended Credit Agreement
18th Amendment to 2nd Amended to Credit Agreement
19th Amendment to 2nd Amended Credit Agreement
Chief Executive Officer Certification
Chief Accounting Officer Certification
Certifications pursuant to Section 906
Certification of PEO & PFO Pursuant to Sec. 906

U S LIQUIDS INC. FORM 10-Q FOR THE QUARTER ENDED ~~JUNE~~SEPTEMBER 30, 2003 INDEX

			Page
PART I — FINANCIAL INFORMATION				1
PART I - FINANCIAL INFORMATION				1
	ITEM 1. Financial Statements			1
	—	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 (unaudited)		1
		- Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (unaudited)		1
	—	Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2003 and 2002 (unaudited) (as restated)		2
		- Condensed Consolidated Statements of Operations for the three and nine month periods ended September 30, 2003 and 2002 (unaudited) (as restated)		2
	—	Condensed Consolidated Statements of Cash Flows for the three and six month periods ended June 30, 2003 and 2002 (unaudited) (as restated)		3
		- Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2003 and 2002 (unaudited) (as restated)		3
	—	Notes to Condensed Consolidated Financial Statements (unaudited)		4
		- Notes to Condensed Consolidated Financial Statements (unaudited)		4
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			2120
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			3230
	ITEM 4. Controls and Procedures			3330
PART II — OTHER INFORMATION				33
PART II – OTHER INFORMATION				31
	ITEM 1. Legal Proceedings			3331
	ITEM 2. Changes in Securities and Use of Proceeds			3733
	ITEM 3. Defaults Upon Senior Securities			3733
	ITEM 4. Submission of Matters to a Vote of Security Holders			3733
	ITEM 5. Other Information			3733
	ITEM 6. Exhibits and Reports on Form 8-K			3734
Signatures				3935

PART I —– FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

U S LIQUIDS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

				June 30,				December 31,
						September 30, 2003				December 31, 2002
				2003				2002
ASSETS
ASSETS
CURRENT ASSETS:
CURRENT ASSETS:
		Cash and cash equivalents				$	2,789			$	4,068
	Cash and cash equivalents			$	3,214			$	4,068
		Accounts receivable, less allowances of $424 and $693, respectively					12,446				18,599
	Accounts receivable, less allowances of $1,063 and $1,018, respectively				25,296				32,165
		Inventories					578				492
	Inventories				1,785				1,536
		Prepayments and other current assets					4,818				4,631
	Prepayments and other current assets				3,400				5,062
		Current assets of discontinued operations					1,101				17,894
	Current assets of discontinued operations				2,238				2,853
			Total current assets				21,732				45,684
		Total current assets			35,933				45,684
PROPERTY, PLANT AND EQUIPMENT, net							19,772				33,025
PROPERTY, PLANT AND EQUIPMENT, net					82,105				86,295
GOODWILL, net							1,320				5,360
GOODWILL, net					13,756				13,459
INTANGIBLE ASSETS, net							986				964
INTANGIBLE ASSETS, net					4,282				3,877
OTHER ASSETS							1,020				2,169
OTHER ASSETS					3,590				2,213
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS							1,253				65,809
NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS					1,239				1,483
			Total assets			$	46,083			$	153,011
		Total assets		$	140,905			$	153,011
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
CURRENT LIABILITIES:
		Current maturities of long-term obligations				$	21,275			$	78,384
	Current maturities of long-term obligations			$	80,674			$	78,474
		Accounts payable					5,782				11,453
	Accounts payable				13,690				17,669
		Accrued expenses and other current liabilities					18,643				19,719
	Accrued expenses and other current liabilities				21,724				23,376
		Current liabilities of discontinued operations					1,617				12,047
	Current liabilities of discontinued operations				2,075				2,084
			Total current liabilities				47,317				121,603
		Total current liabilities			118,163				121,603
LONG-TERM OBLIGATIONS, net of current maturities							2,065				1,572
LONG-TERM OBLIGATIONS, net of current maturities					2,431				2,672
CLOSURE RESERVES, net of current portion							336				705
PROCESSING RESERVE, net of current portion					2,632				3,007
OTHER LONG-TERM LIABILITIES							697				882
CLOSURE AND REMEDIATION RESERVES, net of current portion					3,838				6,490
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS							424				10,319
OTHER LONG-TERM LIABILITIES					685				882
			Total liabilities				50,839				135,081
NON-CURRENT LIABILITIES OF DISCONTINUED OPERATIONS					427				427
COMMITMENTS AND CONTINGENCIES
		Total liabilities			128,176				135,081
STOCKHOLDERS’ EQUITY (DEFICIT):
COMMITMENTS AND CONTINGENCIES
	Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding						—				—
STOCKHOLDERS’ EQUITY:
	Common stock, $0.01 par value, 30,000,000 shares authorized, 16,233,149 and 16,095,222 shares issued and outstanding, respectively						162				161
	Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued or outstanding				—				—
	Additional paid-in capital						177,213				177,166
	Common stock, $0.01 par value, 30,000,000 shares authorized, 16,233,149 and 16,095,222 shares issued and outstanding, respectively				162				161
	Accumulated deficit						(182,141	)			(159,407	)
	Additional paid-in capital				177,213				177,166
	Accumulated other comprehensive income – foreign currency translation adjustment						10				10
	Accumulated deficit				(164,656	)			(159,407	)
			Total stockholders’ equity (deficit)				(4,756	)			17,930
	Accumulated other comprehensive income — foreign currency translation adjustment				10				10
			Total liabilities and stockholders’ equity (deficit)			$	46,083			$	153,011
		Total stockholders’ equity			12,729				17,930
		Total liabilities and stockholders’ equity		$	140,905			$	153,011

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

U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
				(As Restated,						(As Restated,
				see Note 13)						see Note 13)
				see Note 12)						see Note 12)
REVENUES	$	3717,~~247~~688		$	3919,~~311~~567		$	7453,~~077~~201		$	7555,~~222~~944
OPERATING EXPENSES		2814,~~561~~154			2616,~~024~~483			5642,~~487~~968			5143,~~200~~690
OPERATING MARGIN		83,~~686~~534			133,~~287~~084			1710,~~590~~233			2412,~~022~~254
DEPRECIATION AND AMORTIZATION		21,~~598~~317			21,~~725~~489			54,~~276~~293			54,~~415~~552
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		93,~~504~~920			54,~~684~~815			14,~~647~~884			1112,~~599~~807
SPECIAL INCOME		(121	)		(110	)		(425	)		(110	)
ASSET IMPAIRMENT		12,026			35,387			12,026			35,387
INCOME (LOSS) FROM OPERATIONS		(3,295	)		4,988			(1,908	)		7,118
SPECIAL INCOME		—			(2,150	)		(425	)		(2,260	)
INTEREST EXPENSE		2,624			2,269			5,956			3,931
LOSS FROM OPERATIONS		(13,729	)		(36,457	)		(20,545	)		(38,232	)
OTHER INCOME, net		(40	)		(40	)		(107	)		(202	)
INTEREST EXPENSE		1,244			1,226			4,610			3,101
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		(5,879	)		2,759			(7,757	)		3,389
OTHER EXPENSE (INCOME), net		(51	)		9			(77	)		(162	)
PROVISION FOR INCOME TAXES		15			140			60			204
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		(14,922	)		(37,692	)		(25,078	)		(41,171	)
INCOME (LOSS) FROM CONTINUING OPERATIONS		(5,894	)		2,619			(7,817	)		3,185
PROVISION (BENEFIT) FOR INCOME TAXES		40			(2,110	)		75			(2,572	)
DISCONTINUED OPERATIONS (NOTE 6):
LOSS FROM CONTINUING OPERATIONS		(14,962	)		(35,582	)		(25,153	)		(38,599	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		(63	)		631			(133	)		(849	)
DISCONTINUED OPERATIONS (NOTE 5):
INCOME TAXES		7			1,408			7			952
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES		(2,361	)		(12,625	)		(95	)		(6,606	)
LOSS FROM DISCONTINUED OPERATIONS		(70	)		(777	)		(140	)		(1,801	)
PROVISION (BENEFIT) FOR INCOME TAXES		162			(1,109	)		194			509
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		—			—			(2,708	)		87,823
LOSS FROM DISCONTINUED OPERATIONS		(2,523	)		(11,516	)		(289	)		(7,115	)
NET INCOME (LOSS)	$	(5,964	)	$	1,842		$	(5,249	)	$	(86,439	)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		—			(3,180	)		2,708			(91,003	)
NET LOSS	$	(17,485	)	$	(50,278	)	$	(22,734	)	$	(136,717	)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
BASIC EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	(0.37	)	$	0.16		$	(0.48	)	$	0.20
BASIC LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	(0.92	)	$	(2.21	)	$	(1.55	)	$	(2.40	)
DISCONTINUED OPERATIONS		(0.0016	)		(0.0571	)		(0.0102	)		(0.1145	)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		—			—(0.20	)		0.17			(5.4766	)
BASIC EARNINGS (LOSS) PER COMMON SHARE	$	(0.37	)	$	0.11		$	(0.32	)	$	(5.38	)
BASIC LOSS PER COMMON SHARE	$	(1.08	)	$	(3.12	)	$	(1.40	)	$	(8.51	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
DILUTED EARNINGS (LOSS) PER COMMON SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	(0.37	)	$	0.16		$	(0.48	)	$	0.19
DILUTED LOSS PER COMMON SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE	$	(0.92	)	$	(2.21	)	$	(1.55	)	$	(2.40	)
DISCONTINUED OPERATIONS		(0.0016	)		(0.0571	)		(0.0102	)		(0.1145	)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE		—			—(0.20	)		0.17			(5.2866	)
DILUTED EARNINGS (LOSS) PER COMMON SHARE	$	(0.37	)	$	0.11		$	(0.32	)	$	(5.20	)
DILUTED LOSS PER COMMON SHARE	$	(1.08	)	$	(3.12	)	$	(1.40	)	$	(8.51	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING		16,233			16,~~080~~091			16,~~224~~227			16,~~065~~074
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING		16,233			16,~~467~~091			16,~~224~~227			16,~~631~~074

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

U S LIQUIDS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

				Six Months Ended June 30,
						Nine Months Ended September 30,
				~~2003~~		2003		~~2002~~		2002
								~~(As Restated,~~		(As Restated,
								see Note 13)
										see Note 12)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss				$	~~(5,249~~	)$	(22,734	$)	~~(86,439~~	)$	(136,717	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Change in accounting principle				~~(2,708~~	)	(2,708	)	~~91,003~~		91,003
	Depreciation and amortization				5,276				7,533
	Asset impairment						12,026				51,050
	Net (gain) loss on sale of property, plant and equipment				53				(123	)
	Depreciation and amortization						6,965				11,040
	Loss on discontinued operations				74				—
	Net (gain) loss on sale of property, plant and equipment						4				(78	)
	Changes in operating assets and liabilities:
	Loss on sale of discontinued operations						1,510				—
		Accounts receivable, net			5,964				3,939
	Changes in operating assets and liabilities:
		Inventories			(248	)			(345	)
			Accounts receivable, net				7,989				3,535
		Prepayments and other current assets			1,661				(697	)
			Inventories				(48	)			9
		Current assets of discontinued operations			442				—
			Prepayments and other current assets				(142	)			(2,134	)
		Intangible assets			(436	)			(523	)
			Current assets of discontinued operations				1,579				—
		Other assets			(1,362	)			229
			Intangible assets				(521	)			(703	)
		Long-term assets of discontinued operations			39				—
			Other assets				(1,746	)			201
		Accounts payable, accrued liabilities and other current liabilities			(5,446	)			(2,146	)
			Long-term assets of discontinued operations				31				—
		Current liabilities of discontinued operations			(1	)			—
			Accounts payable, accrued liabilities and other current liabilities				(9,576	)			(1,926	)
		Closure, remediation and processing reserves			(533	)			(3,982	)
			Current liabilities of discontinued operations				(459	)			—
		Other long-term liabilities			(197	)			(108	)
			Closure, remediation and processing reserves				(542	)			(4,486	)
		Deferred income taxes			—				(2,786	)
			Other long-term liabilities				(184	)			946
Net cash provided by (used in) operating activities					(2,671	)			5,555
			Deferred income taxes				—				(367	)
CASH FLOWS FROM INVESTING ACTIVITIES:
			Long-term liabilities of discontinued operations				(3	)			—
	Purchases of property, plant and equipment				(1,283	)			(3,800	)
	Net cash provided by (used in) operating activities						(8,559	)			11,373
	Proceeds from sale of property, plant and equipment				1				429
CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from sale of businesses				1,280				—
	Purchases of property, plant and equipment						(1,630	)			(5,353	)
	Cash paid for acquisitions, net of subsequent purchase adjustments				(184	)			—
	Proceeds from sale of property, plant and equipment						25				450
	Net cash used in investing activities				(186	)			(3,371	)
	Proceeds from sale of businesses						67,502				43
CASH FLOWS FROM FINANCING ACTIVITIES:
	Cash paid for acquisitions, net of subsequent purchase adjustments						(184	)			—
	Proceeds from issuance of long-term obligations				5,500				3,319
	Net cash provided by (used in) investing activities						65,713				(4,860	)
	Principal payments on long-term obligations				(3,545	)			(6,905	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from exercise of stock options and employee stock purchase plan				48				25
	Proceeds from issuance of long-term obligations						5,500				7,000
	Net cash provided by (used in) financing activities				2,003				(3,561	)
	Principal payments on long-term obligations						(63,981	)			(7,830	)
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS					—				95
	Proceeds from exercise of stock options and employee stock purchase plan						48				32
NET DECREASE IN CASH AND CASH EQUIVALENTS					(854	)			(1,282	)
	Net cash used in financing activities						(58,433	)			(798	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					4,068				1,498
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS							—				34
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	3,214			$	216
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS							(1,279	)			5,749
SUPPLEMENTAL DISCLOSURES:
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD							4,068				1,498
	Cash paid for interest and related financing fees			$	5,841			$	6,192
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$	2,789			$	7,247
	Cash paid for income taxes				20				422
SUPPLEMENTAL DISCLOSURES:
	Cash received for income taxes				289				63
	Cash paid for interest and related financing fees					$	2,610			$	7,850
	Cash paid for income taxes						21				465
	Cash received for income taxes						996				64

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

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

1. BUSINESS AND ORGANIZATION:

U S Liquids Inc. is a ~~leading~~ provider of ~~liquid~~ waste management services, ~~including~~ including collection, processing, recovery and disposal services. The Company operates two ~~four~~ divisions —– the Commercial Wastewater Division, and the Industrial Wastewater Division~~, the Oilfield Waste Division and the Beverage Division~~. The Commercial Wastewater Division provides a variety of environmental services and collects, processes and disposes of various types of nonhazardous liquid waste. The Industrial Wastewater Division collects, processes and disposes of hazardous and nonhazardous liquid waste such as household hazardous wastes~~, industrial~~ ~~wastewater, petroleum fuels~~ and ~~antifreeze~~industrial wastewater. ~~The~~On ~~Beverage~~July 31, ~~Division collects~~2003, ~~processes and disposes of dated beverages and other consumer products~~the ~~containing~~Company ~~alcohol~~sold orits ~~sugar.~~Oilfield ~~The~~Waste ~~Industrial~~Division, ~~and~~its Beverage ~~Divisions~~Division ~~also generate~~and ~~revenue~~its ~~from the sale of by-products recovered from certain waste~~Romic ~~streams,~~Environmental ~~including~~Technologies ~~oils,~~business ~~ethanol,~~to ~~solvents,~~ERP ~~plastics,~~Environmental ~~cardboard~~Services, ~~aluminum, glass,~~Inc. ~~industrial chemicals and recycled antifreeze products~~(“ERP Environmental”). The Oilfield Waste ~~Division disposes waste that is generated in the exploration for~~ and ~~production~~ ofBeverage ~~oil~~Divisions ~~and~~were ~~natural gas primarily from the Gulf of Mexico and~~each ~~land-based~~previously ~~rigs~~reported inas ~~Louisiana,~~separate ~~Texas and northern Mexico~~segments. ~~Prior~~The toRomic ~~January 1,~~Environmental Technologies ~~2003,~~business ~~the~~was ~~Beverage~~previously ~~Division’s results were~~ included in the ~~results~~Industrial ~~of the Commercial~~ Wastewater Division. ~~Effective January 1, 2003, the Beverage~~See ~~Division~~Note ~~was~~5 ~~separated~~for as a ~~fourth~~further ~~division.~~description ~~Prior~~of ~~year information has been reclassified to conform to~~ the ~~current~~sale ~~year~~of ~~presentation.~~businesses ~~See Note 12. On July 31, 2003, the Company sold its Oilfield Waste Division, its Beverage Division and its Romic Environmental Technologies business~~ to ERP ~~Environmental~~ ~~Services, Inc. (“ERP~~ Environmental”). ~~See Note 4 for a further description of~~ ~~the sale.~~

2. BASIS OF PRESENTATION:

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

Certain prior year ~~segment~~ information has been ~~reclassified~~restated to conform to the ~~current~~ current year presentation of discontinued operations. See Note 5.

The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2002, as filed with the SEC on July 3, 2003. Refer to Note 1312 for the restatement information relating to the three and ~~six~~nine months ended ~~June~~September 30, 2002.

3. LIQUIDITY AND OUTLOOK:

The Company’s capital requirements for continuing operations consist of ~~general~~ general working capital needs, scheduled principal and interest payments on its debt obligations and capital leases, funding of the Company’s finite risk bonding program, certain contractual commitments and planned capital expenditures. The Company’s capital resources consist of cash reserves, cash generated from operations, cash proceeds from planned asset sales and funds available under its revolving ~~credit~~ ~~facility. On July 31, 2003, the Company received a short-term extension of the~~ credit facility ~~to provide for its near-term working capital needs and allow additional time to secure new financing~~. ~~The facility, which matures on~~ ~~August 29, 2003, had an outstanding balance of~~ ~~$79.8 million at June 30, 2003.~~

~~The~~As of September 30, 2003 and December 10, 2003, the Company ~~continues~~had outstanding toborrowings ~~review~~of ~~all~~$19.8 million and $13.1 million, respectively, under the credit facility. Letters of ~~its~~credit ~~alternatives~~under tothe ~~reduce~~facility ortotaled ~~refinance~~$6.7 million ~~its~~as ~~indebtedness~~of September 30, 2003 and December 10, 2003. ~~These~~Advances ~~alternatives~~under ~~include~~the ~~sales~~credit facility currently bear interest at the prime rate plus 4.0%. As of ~~assets~~September 30, or2003 ~~operating~~and December 10, 2003, amounts outstanding under the credit facility ~~divisions~~were oraccruing ~~issuance~~interest ofat ~~common~~approximately ~~stock~~8.0%, orexcluding ~~other~~amortization ~~securities~~of financing costs. ~~The~~As ~~proceeds~~of December 10, 2003 the unused portion of ~~any~~the credit ~~such~~facility ~~transactions~~was ~~would~~$1.4 million, benone ~~used~~of towhich ~~reduce~~was oravailable ~~replace~~without the prior consent of the Company’s ~~outstanding debt~~lenders. ~~There can be~~

During the first quarter of 2003, the terms of the Company’s credit facility were amended to change

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

nocertain ~~assurance~~financial covenants, ~~however~~add additional weekly and monthly financial covenants, ~~that~~and ~~any~~make ~~such~~various ~~transaction~~enhancements ~~will~~to bethe ~~successfully~~collateral documentation ~~consummated~~securing the loans. ~~Any~~The ~~refinancing~~amendment oralso ~~business~~required ~~sale~~that ~~transaction~~the isCompany ~~expected~~take certain steps to reduce its leverage, including the sale of one or more businesses that ~~result~~generated in ~~either~~2002 ~~substantial~~or ~~dilution~~were expected to ~~current~~generate ~~stockholders~~in ~~or further~~2003 ~~reduction~~at least $3.0 million in aggregate earnings before deduction for interest, taxes, depreciation and amortization. In exchange, the ~~size~~maturity date of the ~~Company~~credit facility was extended to July 31, 2003, previously scheduled loan commitment reductions were eliminated, and, subject to weekly restrictions, availability under the credit facility was increased by approximately $3.5 million during the months of April through July 2003.

OnIn July ~~31,~~ 2003, the ~~Company~~terms ~~sold~~of ~~three~~the ofcredit ~~its~~facility ~~businesses~~were ~~(see~~further ~~Note~~amended 4)to ~~for~~(1) ~~total~~extend ~~proceeds~~the ofmaturity ~~$68.0 million.~~date ~~From~~of ~~these~~the ~~proceeds,~~credit ~~and~~facility ~~with~~to ~~the~~August 29, ~~approval~~2003, of(2) renew ~~its~~until ~~senior lenders~~December 31, 2003 approximately $598.70 million ~~was~~of ~~used~~letters toof ~~reduce~~credit issued on the Company’s ~~debt balance~~behalf, ~~$1.9~~and (3) ~~million~~defer ~~was~~until ~~used~~the toearlier ~~pay~~of ~~deferred~~August 29, ~~interest~~2003 ~~and~~or the ~~fees~~date ~~due~~of onsale ~~its credit~~of ~~facility,~~various operations a $20.16 million ~~was~~interest ~~used~~payment scheduled tofor ~~pay~~payment ~~various~~on ~~transaction~~June 30, ~~expenses and $2~~2003.~~3 million~~ ~~was~~In ~~used~~return, tothe ~~establish~~Company aagreed ~~fund~~to ~~for~~cash collateralize ~~future~~all ~~severance~~obligations ofunder ~~employees as~~ the ~~Company~~letters isof ~~restructured.~~credit Indescribed ~~addition,~~above anon ~~escrow~~or before ofthe ~~$2.0 million~~termination ~~was established~~of ~~from~~ the ~~proceeds~~credit ~~pending~~facility ~~the~~and ~~determination~~pay ofa ~~the~~$200,000 ~~final~~amendment ~~purchase~~fee. ~~price~~In addition, ~~which~~the isCompany ~~subject~~agreed tothat ~~adjustment~~it ~~based~~would ~~upon~~not ~~the~~borrow ~~net~~any ~~worth~~additional offunds under the ~~acquired businesses~~credit onfacility without the ~~closing~~prior ~~date~~consent of its lenders.

~~The~~In ~~Company’s~~August ~~recent performance has caused it to violate various financial covenants of its credit facility. Previously~~2003, the ~~Company’s~~terms ~~lenders had been issuing short-term waivers. However, as~~ of the ~~date of this filing, the Company is not in compliance with certain financial covenants set forth in the~~ credit ~~agreement.~~facility ~~Noncompliance~~were ~~with~~further ~~these~~amended ~~provisions permits the lenders~~ to, ~~among~~(1) extend ~~other things, accelerate~~ the ~~debt~~maturity ~~under~~date ~~the credit facility and foreclose on the collateral provided. The Company’s lenders have not declared an event~~ of ~~default as a result of its noncompliance; however, they have retained~~ the ~~right~~ ~~to do so. The Company is in discussions with its lenders regarding amending the~~ credit facility to, ~~among other things~~November 30, ~~further extend the maturity date of the facility~~2003, ~~provide for the Company’s liquidity needs and~~(2) ~~bring~~modify ~~the Company into compliance with the various financial covenants contained therein. The Company is also attempting to re-negotiate the payment terms of~~ certain non-essential unsecured contractual obligations. There can be no assurance that the Company will be successful in obtaining an extension of the maturity date of the credit facility or amendments to any of the financial covenants, orand ~~terms~~(3) reduce ~~contained therein or will be successful in re-negotiating~~ the ~~payment~~commitment ~~terms of any unsecured contractual obligation~~amount.

~~The~~In ~~report~~November ~~issued~~2003, by the ~~Company’s~~terms ~~auditors~~of on the ~~Company’s~~credit ~~December 31,~~facility ~~2002 financial~~were ~~statements~~further ~~stated~~amended ~~that the working capital deficit caused by the~~to ~~close~~(1) extend ~~proximity of~~ the maturity date of the ~~revolving~~ credit facility to February 2, ~~and~~2004, ~~the~~(2) ~~recent~~renew ~~lack~~until ofMarch 31, ~~compliance~~2004 ~~with~~approximately ~~the~~$6.7 million ~~credit~~of ~~facility,~~letters ~~raise~~of ~~substantial doubt~~credit ~~about~~issued on the Company’s ~~ability~~behalf, to(3) modify ~~continue~~certain asfinancial acovenants, ~~going~~(4) reduce ~~concern. If~~ the ~~Company~~commitment ~~is unable to successfully restructure its indebtedness~~amount, itand ~~may~~(5) approve becertain ~~required~~asset ~~to seek protection under the bankruptcy laws~~sales.

~~During~~In ~~the~~December ~~first quarter of~~ 2003, the terms of the credit facility were further amended to modify ~~change~~ certain financial covenants, ~~add additional weekly~~ and ~~monthly~~ ~~financial~~approve ~~covenants, and make various enhancements to the collateral documentation securing the loans. The amendment also required that the Company take~~ certain ~~steps~~asset ~~to reduce its leverage, including the sale of one or more businesses that generated in 2002 or are expected to generate in 2003 at least $3~~sales.~~0 million in aggregate earnings before deduction for interest, taxes,~~ ~~depreciation and amortization. In exchange, the maturity date of the credit~~ facility was extended to July 31, 2003, previously scheduled loan commitment reductions were eliminated, and, subject to weekly restrictions, availability under the credit facility was increased by approximately $3.5 million during the months of April through July 2003. As the Company sells certain businesses per the amendment above, the sale of such assets could result in an impairment below the current carrying value.

InThe ~~July~~debt ~~2003,~~outstanding ~~the~~under ~~terms of~~ the credit facility ~~were~~may ~~further~~be ~~amended~~accelerated toby ~~(1)~~the ~~extend~~lenders ~~the maturity date of the credit facility to August 29~~if, ~~2003,~~among ~~(2) renew until~~other ~~December 31~~things, ~~2003~~a ~~approximately~~change ~~$8.0 million~~in control of ~~letters~~the ofCompany ~~credit~~occurs ~~issued~~or oncertain ~~the~~individuals ~~Company’s~~cease ~~behalf,~~to ~~and~~serve ~~(3) defer~~as ~~until~~an ~~the~~executive ~~earlier~~officer of ~~August 29,~~the ~~2003~~Company orand ~~the~~are ~~date~~not ofreplaced ~~sale~~within ofsixty ~~various~~days ~~operations~~by ~~the~~an ~~$0.6 million~~individual ~~interest~~reasonably ~~payment~~satisfactory to ~~scheduled~~the ~~for~~lenders. ~~payment~~On ~~on June~~July 3031, 2003~~. In return~~, ~~the~~Cary ~~Company~~Grossman ~~agreed~~resigned tohis ~~cash collateralize~~position ~~all~~as ~~obligations under~~ the Company’s ~~letters~~Chief ofFinancial ~~credit~~Officer ~~described~~to ~~above~~assume ~~on or before~~ the ~~termination~~position of ~~the~~Chief ~~credit~~Executive Officer ~~facility~~of ~~and~~ERP ~~pay~~Environmental a(see ~~$200,000~~Note ~~amendment~~5). ~~fee~~Mr. In Grossman’s ~~addition,~~departure ~~the~~will result ~~Company~~in ~~agreed~~an ~~that~~event itof ~~would~~default ~~not~~unless ~~borrow~~he ~~any~~is ~~additional~~replaced ~~funds under~~on ~~the~~or ~~credit~~before ~~facility~~February 2, 2004 ~~without~~by ~~the~~an ~~prior~~individual ~~consent~~reasonably ofsatisfactory ~~its~~to the lenders.

~~The~~To ~~debt~~address ~~outstanding~~its ~~under~~liquidity ~~the~~problems, ~~credit~~during ~~facility~~the ~~may~~second behalf ~~accelerated~~of by2002, the ~~lenders~~Company ifengaged a financial advisor to focus on financial restructuring plans, implemented ~~among~~cost ~~other~~cutting ~~things~~measures such as reductions in workforce, asold substantially ~~change~~all of the Texas operations in the Commercial Wastewater Division ~~control~~and used a substantial portion of the ~~Company~~proceeds ~~occurs~~therefrom to reduce outstanding debt, and identified for sale or ~~certain~~closure ~~individuals~~several ~~cease~~additional tounderperforming businesses. ~~serve~~During asthe anfirst six months of 2003, management continued to ~~executive~~evaluate ~~officer~~the Company’s mix of business units, and the Company sold the Northeast operations in the Commercial Wastewater Division and ~~are~~used ~~not~~the proceeds ~~replaced~~therefrom ~~within~~to ~~sixty~~reduce ~~days~~debt byand anpay transaction expenses. During the ~~individual~~third ~~reasonably~~quarter ~~satisfactory~~of to2003, the ~~lenders.~~Company ~~The~~sold ~~lenders~~its ~~have~~Waste Stream Environmental business.

On July 31, 2003, the Company sold its Oilfield Waste Division, its Beverage Division and its Romic Environmental Technologies business (see Note 5) for total proceeds of $68.0 million and agreed to provide transition services to the businesses sold for a six-month period following the closing for $2.0 million. From the sales proceeds, and with the approval of its senior lenders, $59.7 million was used to reduce the Company’s debt balance, $1.9 million was used to pay deferred interest and fees due on its credit facility, $2.1 million was used to pay various transaction expenses and $2.3 million was used to establish a fund for severance of employees as the Company is restructured. In addition, an escrow of $2.0 million was established from the proceeds pending the determination of the final purchase price, which was subject to adjustment based upon the net worth of the sold

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

~~waived~~businesses ~~through~~on ~~July 31,~~the ~~2003~~closing andate. ~~event~~As ofa ~~default~~result ~~arising~~of ~~from~~ the ~~resignation~~determination of ~~Michael~~ ~~P. Lawlor,~~ the ~~Company’s~~net ~~former~~worth ~~Chief~~of ~~Executive Officer. On August 29,~~the ~~2002,~~businesses ~~William DeArman~~sold, the ~~Chairman~~purchase ofprice ~~the~~was ~~Board~~reduced ofby ~~Directors~~$3.5 million. Accordingly, the ~~was~~escrowed ~~appointed interim~~funds ~~Chief~~were ~~Executive~~returned ~~Officer.~~to OnERP ~~October 31~~Environmental, ~~2002,~~ the ~~Board of Directors~~ ~~made~~Company ~~his~~sold ~~position~~certain ~~permanent.~~software ~~The~~to ~~lenders~~ERP ~~have~~Environmental ~~not~~for ~~approved Mr~~$0.3 ~~DeArman’s appointment. On July 31~~million, ~~2003, Cary Grossman resigned his position as~~ the Company’s ~~Chief~~recorded ~~Financial~~a ~~Officer~~note payable to ~~assume the position of Chief Executive Officer of~~ ERP Environmental ~~(see~~of ~~Note 4)~~$1. ~~Mr.~~2 ~~Grossman’s~~million ~~departure will result in an~~and ~~additional~~recognized ~~event~~a loss of ~~default~~$1.6 million ~~unless~~on hethe issale. ~~replaced~~In onaddition, orthe ~~before September 29,~~Company ~~2003~~received bypayment anfor ~~individual~~the ~~reasonably~~remaining ~~satisfactory~~amounts todue ~~the~~for ~~lenders~~transition services.

ToSince ~~address~~September 30, 2003, the Company has sold its Northern A-1, Gateway Terminal Services and National Solvent Exchange businesses for $7.4 million and used the proceeds to reduce debt and pay transaction expenses. As of the date of this report, the Company is in various stages of negotiations to sell substantially all of its remaining business units to reduce the Company’s indebtedness. ~~liquidity~~With ~~problems~~the assistance of its financial advisors, management has continued to evaluate the ~~Board~~viability of ~~Directors~~the Company after each business unit sale. However, to date, management has not been able to develop a business plan that it believes will support the Company’s remaining debt and reduced corporate overhead. As a result, the Company may be forced to liquidate either ~~management~~through ~~have~~bankruptcy ~~taken~~or an orderly wind down of operations. Although the ~~following~~Company is ~~actions:~~in negotiations with third parties for the sale of substantially all remaining business units, there can be no assurance that any further sale transactions will be successfully consummated or that the proceeds will be adequate to satisfy the Company’s indebtedness. Management believes that a complete liquidation of the Company would result in no return to shareholders.

• In ~~engaged~~November a2003, ~~financial~~the ~~advisor,~~American asStock ~~requested~~Exchange by(“Amex” or “Exchange”) notified the Company’s ~~lenders,~~that toit ~~focus~~was onno ~~financial~~longer ~~restructuring~~in ~~plans;~~compliance •with ~~implemented~~the ~~cost~~Exchange’s listing ~~cutting~~standards ~~measures~~due ~~such~~to asthe ~~reductions~~substantial inimpairment ~~workforce~~of ~~and~~the aCompany’s ~~temporary~~financial condition. ~~freeze~~As ona ~~previously~~result, ~~authorized~~the ~~pay~~Amex ~~increases;~~notified •the ~~sold~~Company ~~all~~that ofit ~~the~~intended ~~Beverage~~to proceed ~~and~~with ~~Oilfield~~the ~~Divisions,~~filing ~~the~~of ~~Romic~~an ~~operations~~application inwith the ~~Industrial~~SEC ~~Wastewater~~to ~~Division~~delist and ~~substantially~~deregister the ~~all~~Company’s ofcommon stock from the ~~Texas~~Exchange. ~~and~~The ~~Northeast~~Company ~~operations~~did innot appeal the Exchange’s ~~Commercial~~determination. ~~Wastewater~~The ~~Division,~~Exchange ~~and~~suspended ~~used~~trading ain ~~substantial~~the ~~portion~~Company’s common ofstock ~~the~~on ~~proceeds~~December 10, ~~therefrom~~2003 toand ~~reduce~~is ~~outstanding~~proceeding ~~debt;~~with ~~and~~the •delisting. ~~identified~~The Company’s ~~for~~shares ~~sale~~now ortrade ~~closure~~on ~~several~~the ~~additional~~over-the-counter ~~underperforming~~“Pink ~~businesses~~Sheets.”

~~Management~~ The isreport ~~also:~~issued by the Company’s auditors on the Company’s December 31, 2002 financial statements stated that the working capital deficit caused by the close proximity of the maturity of the revolving credit facility, and the recent lack of compliance with the credit facility, raised substantial doubt about the Company’s ability to continue as a going concern. Notwithstanding this statement, the condensed consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result if the Company’s underlying assumptions prove to be incorrect.

•4. ~~pursuing~~ASSET ~~the~~IMPAIRMENT ~~sale~~AND ofSPECIAL certain additional businesses; • exploring the possibility of selling other operations; • analyzing each of the Company’s operations for opportunities to reduce costs, improve processes and increase efficiencies; • taking steps to substantially reduce the size and the cost of the Company’s corporate staff; and • actively seeking new financing.INCOME:

AsDuring ofthe ~~June 30,~~third ~~2003~~quarter ~~and~~of ~~August 4,~~ 2003, the Company ~~had~~determined ~~outstanding~~that ~~borrowings~~impairment ofindicators ~~$79.8 million~~existed and ~~$20.1 million,~~performed ~~respectively,~~impairment ~~under~~tests ~~the~~on ~~credit~~existing ~~facility.~~goodwill and ~~Letters~~fixed ofassets ~~credit~~(See Note ~~under~~6 ~~the~~for ~~facility~~a ~~totaled~~discussion ~~$8.0 million~~of asthe initial adoption of ~~June 30,~~Statement ~~2003~~of ~~and~~Financial ~~August 4,~~Accounting ~~2003.~~Standard ~~Advances~~(“SFAS”) ~~under~~No. 142). ~~the~~The ~~credit~~impairment ~~facility~~indicators ~~currently~~primarily ~~bear~~arose ~~interest at~~from the ~~prime~~Company’s efforts ~~rate~~to ~~plus~~market ~~4.0%.~~various Asbusiness ofunits ~~June 30,~~and ~~2003~~operating ~~and~~assets ~~August 4,~~in ~~2003,~~order to ~~amounts~~attempt ~~outstanding~~to ~~under~~maintain ~~the~~compliance ~~credit~~with ~~facility~~certain ~~were~~covenants ~~accruing~~contained ~~interest~~in atthe ~~approximately~~Company’s 8credit facility.~~0%,~~ ~~excluding~~As ~~amortization~~a result of ~~financing~~the ~~costs.~~tests, Asthe ofCompany ~~August 4,~~recorded a ~~2003~~charge in the ~~unused~~third ~~portion~~quarter of ~~the~~2003 ~~credit~~of ~~facility was~~ $312.50 million, ~~none~~as ofan ~~which was~~operating ~~available~~expense.

~~The~~During ~~condensed~~the ~~consolidated~~third ~~financial~~quarter ~~statements~~of ~~have~~2002, ~~been~~the ~~prepared~~Company determined that impairment indicators existed and performed an impairment test on aexisting ~~basis~~goodwill. The ~~which~~impairment ~~assumes~~indicators ~~that~~included the ~~Company~~departure ~~will~~of ~~continue~~the asCompany’s Chief aExecutive ~~going~~Officer, ~~concern~~the significant ~~and~~drop ~~which contemplates~~in the ~~realization~~Company’s ofstock ~~assets~~price and the ~~satisfaction~~downward revision of ~~liabilities~~its revenues and earnings guidance, resulting in a failure to maintain compliance ~~commitments~~with certain of the financial covenants contained in the ~~normal~~Company’s ~~course~~credit facility. As a result of ~~business.~~the ~~The~~test, ~~condensed~~the ~~consolidated~~Company recorded a charge in the third ~~financial~~quarter ~~statements~~of do2002 ~~not~~of ~~include~~$51.0 million ~~any~~as ~~adjustments~~an ~~that~~operating ~~might~~expense. ~~result~~Excluding discontinued ifoperations, the ~~Company’s~~ ~~underlying~~third ~~assumptions~~quarter ~~prove~~2002 tocharge bewas ~~incorrect~~$35.4 million.

4. SALE OF BUSINESSES:

On July 31, 2003, the Company sold its Oilfield Waste Division, its Beverage Division and its Romic

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

~~Environmental~~Special ~~Technologies~~Income business to ERP Environmental Services, Inc. (“ERP Environmental”). ERP Environmental paid approximately $68.0 million to the Company for the acquired businesses and has also agreed to pay $2.0 million to the Company for certain transition services to be provided by the Company during the six-month period following the closing. The final purchase price is subject to adjustment based upon the net worth of the acquired businesses on the closing date. The net proceeds of the transaction were used to reduce debt outstanding under the Company’s credit facility, pay transaction expenses, fund employee severance obligations, and for other matters required by the purchase agreement. Excluding these businesses and adjusting for interest expense related to the required repayment of debt with the net proceeds, the Company’s results of operations for the three and six months ended June 30, 2003 ~~would have been as follows:~~

	Three Months Ended			Six Months Ended
	June 30, 2003			June 30, 2003
	(In thousands)
	(Unaudited)
Revenues	$	18,142		$	35,514
Operating expenses		14,348			28,814
Operating margin		3,794			6,700
Depreciation and amortization		1,464			2,976
Selling, general and administrative expenses		7,621			10,966
Special income		(121	)		(425	)
Loss from operations		(5,170	)		(6,817	)
Interest expense		1,373			3,366
Other expense, net		(9	)		(28	)
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle	$	(6,534	)	$	(10,155	)

Reliance Insurance Company (“Reliance”) provided casualty insurance coverage for the Company. In October 2001, Reliance was declared insolvent by the Insurance Commissioner of the State of Pennsylvania. As a result, insurance coverage will not be available for any claims or lawsuits asserted against the Company for which insurance coverage was to be provided by Reliance and that were not resolved prior to Reliance being placed into liquidation. During the fourth quarter of 2001, an initial reserve of $3.5 million was established for any claims or lawsuits that were not resolved prior to Reliance being placed into liquidation. Subsequent adjustments have been made to the reserve based on settled obligations and known claims. As a result of a review of potential claims and related costs, during the nine months ended September 30, 2003, the reserve was reduced by $0.4 million, resulting in special income of a like amount.

~~Under~~Special ~~Statement~~Income ~~of Financial Accounting Standards (“SFAS”) No. 144 (see Note 6~~2002 ~~below), the assets, liabilities and operating results of the businesses sold~~ ~~will be restated and presented separately as discontinued operations in both~~ ~~the Company’s condensed consolidated balance sheet and statement of operations effective the third quarter of 2003.~~

5 The Company submitted an insurance claim for losses incurred as a result of the temporary closing of its Detroit facility in August 1999. ~~SPECIAL~~During ~~INCOME:~~the third quarter of 2002, the Company agreed to accept $2.4 million in complete satisfaction of its claim under this policy. $2.15 million of this amount was paid directly to the Company in September 2002 and the remainder was paid to the attorneys representing the Company in this matter.

~~2003~~ In connection with special charges recorded in December 2000, an accrual was made to cover the cost of disposing of certain waste located at the Company’s former Re-Claim Louisiana facility. Based on an analysis of the remaining liability and the waste left to be processed, it was determined that the Company was overaccrued by approximately $0.1 million, resulting in special income of a like amount for the nine months ended September 30, 2002.

Reliance Insurance Company (“Reliance”) provided casualty insurance coverage for the Company. In October 2001, Reliance was declared insolvent by the Insurance Commissioner of the State of Pennsylvania. As a result, insurance coverage will not be available for any claims or lawsuits asserted against the Company for which insurance coverage was to be provided by Reliance and that were not resolved prior to Reliance being placed into liquidation. During the fourth quarter of 2001, an initial reserve of $3.5 ~~million was established for any claims or lawsuits that were not resolved prior to Reliance being placed into liquidation~~. ~~Subsequent~~DISCONTINUED ~~adjustments~~OPERATIONS ~~have~~AND ~~been~~SALES ~~made~~OF ~~to the~~BUSINESSES: ~~reserve based on settled obligations and known claims. As a result of a review~~ ~~of potential claims and related costs, during the three and six months ended~~ ~~June 30, 2003, the reserve was reduced by $0.1 and $0.4 million, respectively, resulting in special income of a like amount.~~

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

InDuring ~~connection~~the ~~with~~fourth ~~special~~quarter ~~charges~~of ~~recorded~~2002, the Company decided to divest of or suspend certain operations at several non-core and underperforming businesses in ~~December~~the ~~2000,~~Commercial anWastewater ~~accrual~~Division. Some operations were divested of or ~~was~~suspended ~~made~~during tothe ~~cover~~fourth quarter of 2002. During the ~~cost~~first quarter of 2003, the remaining portions of the Company’s Northeast operations were sold. During the third quarter of 2003, the Company sold its Waste Stream Environmental business.

On July 31, 2003, the Company sold its Oilfield Waste Division, its Beverage Division and its Romic Environmental Technologies business to ERP Environmental. At the closing, ERP Environmental paid approximately $68.0 million to the Company for the businesses sold and also agreed to pay $2.0 million to the Company for certain transition services to be provided by the Company during the six-month period following the closing. The net proceeds of the transaction were used to reduce debt outstanding under the Company’s credit facility, pay transaction expenses, fund employee severance obligations, and for other matters required by the purchase agreement. In addition, an escrow

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

~~disposing~~ of $2.0 million ~~certain~~was ~~waste~~established ~~located~~from atthe proceeds pending the determination of the ~~Company’s~~final ~~former~~purchase ~~Re-Claim~~price, ~~Louisiana~~which ~~facility.~~was ~~Based~~subject to adjustment based upon the net worth of the sold businesses on anthe ~~analysis~~closing date. As a result of the ~~remaining~~determination ~~liability~~of ~~and~~the net worth of the ~~waste~~businesses ~~left~~sold, tothe bepurchase ~~processed~~price aswas reduced ofby ~~June~~$3.5 ~~30,~~million. ~~2002~~Accordingly, ~~it was~~the ~~determined~~escrowed ~~that~~funds were returned to ERP Environmental, the Company ~~was~~sold ~~overaccrued~~certain bysoftware ~~approximately~~to ERP Environmental for $0.3 million, the Company recorded a note payable to ERP Environmental of $1.2 million and recognized a loss of $1.6 million, on the sale to ERP Environmental ~~resulting~~which is included in ~~special~~discontinued ~~income~~operations in the condensed consolidated statements of aoperations. ~~like~~In addition, the Company received payment for the remaining amount due for transition services.

6. DISCONTINUED OPERATIONS:

During the fourth quarter of 2002, the Company decided to divest of or suspend certain operations at several non-core and underperforming businesses in the Commercial Wastewater Division. Some operations were divested of or suspended during the fourth quarter of 2002 and the remaining operations are expected to be divested prior to December 31, 2003. During the first quarter of 2003, the remaining portions of the Company’s Northeast operations were sold.

Under SFAS No. 144, the assets, liabilities and operating results of the businesses sold and the divested/suspended operations have been restated and presented separately as discontinued operations in both the Company’s condensed consolidated balance sheet and statement of operations for all periods presented.

Assets and liabilities related to discontinued operations were as follows:

	June 30,		December 31,
	September 30,		December 31,
	2003		2002
	(In thousands)
	(Unaudited)
Accounts receivable, net	$	~~1,817~~752	$	215,~~326~~892
Other current assets		~~421~~349		~~527~~2,002
Current assets of discontinued operations	$	21,~~238~~101	$	217,~~853~~894
Property, plant and equipment, net	$	1,~~235~~247	$	154,~~477~~747
Other long-term assets		46		611,062
Non-current assets of discontinued operations	$	1,~~239~~253	$	165,~~483~~809
Accounts payable	$	1,~~479~~015	$	17,~~517~~733
Other current liabilities		~~596~~602		~~567~~4,314
Current liabilities of discontinued operations	$	21,~~075~~617	$	212,~~084~~047
Closure and remediation reserves	$	424	$	~~424~~6,209
Other noncurrent liabilities		3—		34,110
Non-current liabilities of discontinued operations	$	~~427~~424	$	~~427~~10,319

Revenues, interest expense and pre-tax loss related to discontinued operations were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

	(In thousands)
	(Unaudited)
Revenue	$	8,328		$	28,879		$	52,529		$	88,146
Interest expense		424			1,029			2,969			3,086
Pre-tax loss		(2,361	)		(12,625	)		(95	)		(6,606	)

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

~~Revenues~~Subsequent ~~and~~to ~~pre~~September 30, 2003, the Company sold the Northern A-~~tax~~1, Gateway ~~income~~Terminal ~~(loss)~~Services and National Solvent Exchange businesses in its Commercial Wastewater Division for $7.4 ~~related~~million. The proceeds from these transactions were used to reduce the outstanding indebtedness under the Company’s credit facility and pay transaction expenses. The results of operations and assets and liabilities of these businesses will be reclassified to discontinued operations ~~were~~in asfuture reporting periods. ~~follows:~~

	Three Months Ended June 30,					Six Months Ended June 30,
	2003			2002		2003			2002
				(In thousands)
				(Unaudited)
Revenue	$	2,495		$	10,494	$	5,637		$	20,421
Pre-tax income (loss)		(63	)		631		(133	)		(849	)

6. ADOPTION OF ACCOUNTING PRONOUNCEMENTS:

7. ADOPTION OF ACCOUNTING PRONOUNCEMENTS:

SFAS No. 143

Effective January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” that addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated costs. SFAS No. 143 requires that the discounted fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.

The Company processes and disposes both hazardous and nonhazardous waste ~~as well as waste generated in the exploration for and production of oil and natural gas~~. With respect to the Company’s facilities that process nonhazardous waste, ~~including the facilities of the Beverage Division,~~ an asset retirement obligation was not deemed necessary due to the minimal requirements to close and clean up the facilities; however, for the facilities that process hazardous ~~waste~~ ~~and the landfarms operated by the Oilfield Waste Division~~waste, an asset retirement obligation was established in accordance with SFAS No. 143 due to the costs necessary to close and clean up these facilities. The cost of retiring a hazardous waste facility typically includes the cost of cleaning the facility or dismantling the facility and hauling the debris to a hazardous waste landfill. Sampling and analytical costs would also be incurred. ~~The cost of retiring a landfarm consists of removal of levees and roads, post-closure monitoring, plugging and abandoning injection and monitoring wells and other costs.~~ Historically, the Company recorded the gross ~~estimated~~ estimated retirement costs of its facilities. During the first quarter of 2003, the Company recognized $2.7 million of income as a result of adoption of SFAS No. 143 (this recognition included the Oilfield Division which was sold to ERP Environmental effective July 31, 2003). The income recognized at adoption was reflected as a cumulative effect of change in accounting principle in the first quarter 2003 statement of operations. The Company’s asset retirement obligations are included within the closure ~~and remediation~~ reserves, net of current portion, on the condensed consolidated balance sheet. See the table below for a detail of the Company’s asset retirement obligations (in thousands, unaudited):

Balance at January 1, 2003	$	2,937
Cumulative effect of change in accounting principle		(2,708	)
Long-lived assets		~~214~~67
2003 accretion		2814
Balance at June 30, 2003	$	471
Sale to ERP Environmental		(148	)
Balance at September 30, 2003	$	162

SFAS No. 142

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS No. 142, all goodwill amortization ceased effective January 1, 2002. AsUnder aSFAS ~~result~~No. 142, ~~$13~~an impairment test is required to be performed upon adoption and at least annually thereafter.8 Absent any impairment indicators, the Company performs its ~~million~~impairment tests during the first quarter of ~~goodwill~~each atyear. ~~June~~The impairment test is the result of

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

30, 2003 is no longer subject to amortization. Under SFAS No. 142, an impairment test is required to be performed upon adoption and at least annually thereafter. Absent any impairment indicators, the Company performs its impairment tests during the first quarter of each year. The impairment test is the result of adopting a fair value approach to testing goodwill as compared to the previous method utilized in which evaluations of goodwill impairment were made using the estimated future undiscounted cash flows compared to the carrying amount. Material amounts of recorded goodwill attributable to each of the Company’s reporting units were ~~tested~~ tested for impairment by comparing the fair value of each reporting unit with ~~its~~ its carrying value. Fair value was determined using discounted cash flows, ~~market~~ market sale transaction multiples and comparable market capitalization multiples. Significant estimates used in the methodologies include estimates of ~~future~~ future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units.

Based on the initial impairment tests, the Company recognized a charge in the first quarter of 2002 of $87.8 million to reduce the carrying values of goodwill of the reporting units to their implied fair values. This first quarter 2002 charge was net of a $3.2 million tax benefit. However, as a result of an impairment recognized during the third quarter of 2002, there was no longer an expected tax benefit. Thus, the net charge related to the first quarter impairment was revised to $91.0 million. Under SFAS No. 142, the impairment adjustment recognized upon adoption was reflected as a cumulative effect of change in accounting principle in the first quarter of 2002. Subsequent impairment adjustments will be recognized as operating expenses.

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

SFAS No. 148

In December 2002, the Financial Accounting Standards Board (“FASB”) issued ~~SFAS~~ SFAS No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 “Accounting for Stock Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based methods of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reported results. The Company continues to apply the rules for stock-based compensation contained in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” using the intrinsic value method. The pro forma effect on net ~~income (~~loss) and ~~earnings (~~loss) per share of the fair value based method of accounting for stock-based compensation as required by SFAS No. 123 and SFAS No. 148 is disclosed below:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(In thousands)
		(Unaudited)
Net loss:	As reported	$	(17,485	)	$	(50,278	)	$	(22,734	)	$	(136,717	)
	Deduct: Total stock-based employee compensation expense (1)		20			(78	)		(127	)		(352	)

	Pro forma	$	(17,465	)	$	(50,356	)	$	(22,861	)	$	(137,069	)
Basic and diluted loss per share:	As reported	$	(1.08	)	$	(3.12	)	$	(1.40	)	$	(8.51	)
	Pro forma		(1.08	)		(3.13	)		(1.41	)		(8.53	)

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

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

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2003			2002			2003			2002
					(In thousands)
					(Unaudited)
Net income (loss):	As reported	$	(5,964	)	$	1,842		$	(5,249	)	$	(86,439	)
	Deduct: Total stock-based employee compensation expense(1)		(69	)		(61	)		(147	)		(264	)
	Pro forma	$	(6,033	)	$	1,781		$	(5,396	)	$	(86,703	)
Basic earnings (loss) per share:	As reported	$	(0.37	)	$	0.11		$	(0.32	)	$	(5.38	)
	Pro forma		(0.37	)		0.11			(0.33	)		(5.40	)
Diluted earnings (loss) per share:	As reported	$	(0.37	)	$	0.11		$	(0.32	)	$	(5.20	)
	Pro forma		(0.37	)		0.11			(0.33	)		(5.21	)

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

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

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

FIN No. 45

In November 2002, FASB Interpretation (“FIN”) No. 45, “Guarantor’s ~~Accounting~~ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” was issued to elaborate on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has made. As set forth in the Interpretation, the disclosures required are designed to improve the transparency of the financial statement information about the guarantor’s obligations and liquidity risks related to guarantees. The fair values of guarantees entered into after December 31, 2002 must be recorded as a ~~liability~~ liability of the guarantor in its financial statements. Existing guarantees as of of December 31, 2002 are grandfathered from the recognition provisions, unless they are later modified, but they must still be disclosed. The disclosure requirements are effective for periods ending after December 15, 2002. The Company did not make any new guarantees during the ~~six~~nine months ending ~~June~~ September 30, 2003. The table below sets forth the estimated fair value of the Company’s guarantees as of ~~June~~September 30, 2003 (in thousands, unaudited):

	Less than		1-2		2-3		3-4		4-5
	1 year		years		years		years		years		Thereafter		Total
Guarantee of Subsidiary Obligation	$	~~172~~161	$	6736	$	—	$	—	$	—	$	—	$	~~239~~197
Guarantee of Subsidiary Operating Leases		~~375~~57		~~148~~59		60		62		6364		~~285~~269		~~993~~571
Guarantee of Lease Residual		~~150~~145		—		—		—		—		—		~~150~~145
Total Guarantees	$	~~697~~363	$	~~215~~95	$	60	$	62	$	6364	$	~~285~~269	$	~~1,382~~913

The Company believes the likelihood that it would be required to perform or or otherwise incur any significant losses associated with any of these ~~guarantees~~ guarantees is remote. The fair value of the Company’s guarantees ~~included~~of ~~in the table~~subsidiary ~~above~~obligations are recorded in accrued liabilities. orThe ~~are~~fair ~~reflected~~value inof the ~~Operating~~ ~~Lease~~Company’s ~~Obligations~~guarantees ~~line~~ of subsidiary operating leases and lease residuals are reflected in the Company’s operating lease obligations.

FIN No. 46

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities- An Interpretation of Accounting Research Bulletin 51”. FIN 46 addresses consolidation by business enterprises of variable interest entities (“VIEs”) and the primary objective is to provide guidance on the identification of, and financial reporting for, entities over which control is achieved through means other than voting rights; such entities are known as VIEs. FIN 46 requires an entity to consolidate a VIE if the entity has a variable interest (or combination of variable interests) that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur or both. The guidance applies immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. However, on October 8, 2003, the FASB decided to grant a broader deferral of the implementation of FIN 46. Pursuant to this deferral, the Company must complete its evaluation of VIEs that existed prior to February 1, 2003, and the consolidation of those for which it is the primary beneficiary for financial statements issued for the first period ending after December 15,2003. Consolidation of previously existing VIEs will be required in the Company’s December 31, 2003 financial statements. The Company is continuing to evaluate the impact, if any, FIN 46 may have on its consolidated financial statements; however, it does not believe that it has any VIEs.

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

Contractual Obligation table set forth in the Liquidity and Capital Resources section of Management’s Discussion and Analysis.

SFAS No. 150

During May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 in the second quarter of 2003 and the adoption had no impact on its operating results or financial position.

87. INVENTORIES:

Inventories are stated at the lower of cost or market and at ~~June~~September 30, 2003 and December 31, 2002, consisted of processed by-products of $0.95 million and $0.8 3 million, respectively, and unprocessed by-products of $0.91 million and $0.7 2 million, respectively. Cost is determined using the first-in, first-out method.

98. DEPRECIATION AND AMORTIZATION EXPENSES:

Depreciation and amortization expenses of continuing operations are aggregated for financial reporting purposes and excluded from operating expenses and selling, general and administrative expenses in the condensed consolidated statements of operations. Had the expenses been allocated, the expenses would have been attributed to each expense category as follows:

Three Months Ended

~~Six~~Nine Months Ended

June 30,

September 30,

2003

2002

2003

2002

(In thousands)

~~(In thousands)~~

(Unaudited)

~~(Unaudited)~~

Operating expenses

21,~~238~~104

21,~~222~~127

43,~~533~~394

43,~~486~~473

Selling, general and administrative expenses

~~345~~206

~~376~~352

~~712~~881

~~735~~1,047

Amortization expenses

157

~~127~~10

3118

~~194~~32

Total depreciation and amortization

21,~~598~~317

21,~~725~~489

54,~~276~~293

54,~~415~~552

109. EARNINGS (LOSS) PER SHARE:

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

		(In thousands, except share data)
		(Unaudited)
Numerator:
	For basic and diluted earnings per share -
	Net loss available to common stockholders	$	(17,485	)	$	(50,278	)	$	(22,734	)	$	(136,717	)

Denominator:
	For basic and diluted earnings per share -
	Weighted average shares		16,233,149			16,091,003			16,227,086			16,073,560

For the periods presented, the weighted average diluted shares outstanding exclude over 2 million stock options and warrants, the majority of which were not in the money, because the Company had a loss for the periods.

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

		Three Months Ended					Six Months Ended
		June 30,					June 30,
		2003			2002		2003			2002
		(In thousands, except share data)
					(Unaudited)
Numerator:
	For basic and diluted earnings per share — Net income (loss) available to common stockholders	$	(5,964	)	$	1,842	$	(5,249	)	$	(86,439	)
Denominator:
	For basic earnings per share — Weighted average shares		16,233,149			16,079,592		16,224,004			16,064,647
Effect of Dilutive Securities:
	Stock options and warrants		—			387,077		—			566,661
	For diluted earnings per share — Weighted average shares and assumed conversions		16,233,149			16,466,669		16,224,004			16,631,308

10. COMMITMENTS AND CONTINGENCIES:

For the periods ended June 30, 2003 and 2002, the weighted average diluted shares outstanding excluded 3,134,541 and 1,054,783 stock options and warrants, respectively, where the exercise prices were less than the closing market price of the Company’s stock because including such shares would have had an antidilutive effect on income (loss) per share.

11. COMMITMENTS AND CONTINGENCIES:

Regulatory Proceedings

In the fourth quarter of 1999, the Environmental Protection Agency (“EPA”) notified the Company of certain alleged violations of the Resource Conservation and Recovery Act of 1976 by the Company’s former Re-Claim Louisiana facility. Among other things, the EPA alleged that the facility accepted waste from Superfund remediation sites under the Comprehensive Environmental Response, Compensation and Liability Act that it was not permitted to accept and then improperly disposed of such waste. In July 2001, the Company entered into a consent agreement with the EPA resolving the EPA’s allegations. Under the terms of the consent agreement, the Company paid a civil penalty of $200,000 to the EPA and made certain improvements to the facility. In May 2002, the Company received a subpoena from the U.S. Attorney’s office in Shreveport, Louisiana seeking various documents relating to the Re-Claim Louisiana facility covering the same time frame and relating to the same activities as the EPA’s allegations described above. Based upon information available to the Company at the time, the Company believed that the U.S. Attorney’s office was conducting a criminal investigation targeting a former employee of the Re-Claim Louisiana facility. In December 2002, the Company received a follow-up subpoena seeking additional documentation. Shortly thereafter, the Company was advised by the U.S. Attorney’s office that the Company has not been ruled out as a subject of this investigation. The Company has cooperated, and will continue to cooperate, with the U.S. Attorney’s office in connection with its investigation. The Company has also been advised by the U.S. Attorney’s office in Fort Worth, Texas that it is considering bringing a civil claim against the Company under the Federal False Claims Act to recover monies paid by the federal government to the Company for processing and disposing of the allegedly unpermitted waste. The Company disputes that there has been any violation of the False Claims Act and intends to defend any such suit vigorously. The Company does not believe that the results of the investigation by the U.S. Attorney’s office in Shreveport or any such civil action by the U.S. Attorney’s office in Fort Worth will have a material adverse effect on its business, results of operations or financial condition.

On April 29, 2003, the Company announced that, due to improper recording of job costs and certain other items at one of its business units, the Company would restate its results of operations for the years (and quarters within) ended December 31, 2002, 2001 and 2000. In connection with this announcement, the Company contacted the SEC which has initiated an informal investigation of the issues leading to the restatement. The investigation is continuing and the Company has cooperated, and will continue to cooperate, with the SEC in this investigation. Refer to Note 12 for amounts relating to the restatement.

Litigation

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

~~investigation~~Southern District byof ~~the~~Texas, UHouston Division. These lawsuits have been consolidated into a single action styled In re: U S Liquids Securities Litigation, Case No. H-99-2785, ~~Attorney~~and the plaintiffs have filed a consolidated complaint alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“Securities Act”) on behalf of purchasers of the Company’s ~~office~~common stock in ~~Shreveport~~the Company’s orMarch ~~any~~1999 public offering and violations of Sections 10(b) and 20(a) ~~such~~of ~~civil~~the ~~action~~Securities byExchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder on behalf of purchasers of the UCompany’s common stock during the period beginning on May 12, 1998 and ending on August 25, 1999.S. ~~Attorney~~The plaintiffs generally allege that the defendants made false and misleading statements and failed to disclose allegedly material information regarding the operations of the Company’s ~~office~~Detroit facility and the Company’s financial condition in ~~Fort~~the ~~Worth~~prospectus ~~will~~relating ~~have~~to the March 1999 stock offering and in certain other public filings and announcements made by the Company. The remedies sought by the plaintiffs include designation of the action as a class ~~material~~action, ~~adverse~~unspecified ~~effect~~damages, onattorneys’ ~~its~~and ~~business~~experts’ fees and costs, ~~results~~rescission to the extent any members of ~~operations~~the class still hold common stock, and such other relief as the court deems proper. In January 2001, the court dismissed the claims asserted by the plaintiffs under Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act and in April 2002 the court dismissed the claims asserted by the plaintiffs under Section 12(a)(2) of the Securities Act. Accordingly, the lawsuit is proceeding only with respect to the claims asserted under Sections 11 and 15 of the Securities Act. In June 2002, the court determined that two individuals designated by the plaintiffs are adequate class representatives for plaintiffs’ claim under Section 11 of the Securities Act. In August 2002, the court entered an order defining the plaintiff class as all persons who purchased or ~~financial~~otherwise acquired Company common stock pursuant or ~~condition~~traceable to the Company’s March 1999 stock offering. As discussed below, further proceedings and discovery in the lawsuit have been suspended pending the resolution of the Company’s litigation with its insurance carrier over whether insurance coverage exists for the claims asserted by the plaintiffs.

~~During~~In ~~October~~addition, ~~and~~one ~~November~~stockholder ~~1999,~~of the ~~California~~Company ~~Department~~has offiled ~~Toxic~~a ~~Substances~~lawsuit against ~~Control~~certain ~~(“DTSC”)~~former ~~inspected~~and current officers and directors of the Company’s ~~processing~~in connection with the operation of its Detroit facility inand ~~East~~the ~~Palo~~securities ~~Alto,~~class action ~~California~~described above. Benn Carmicia v. U S Liquids Inc., ~~and~~et al., was filed in the United ~~Company’s~~States ~~transfer~~District ~~facility~~Court infor ~~Redwood~~the ~~City~~Southern District of Texas, ~~California.~~Houston OnDivision, ~~November~~on September 2915, 1999, and was subsequently consolidated with the claims ~~DTSC~~asserted ~~issued~~in athe ~~summary~~securities ofclass ~~violations~~action ~~identifying~~described above. The plaintiff ~~various~~alleges ~~alleged~~derivative ~~violations~~claims on behalf of ~~California~~the ~~hazardous~~Company ~~waste~~against ~~management~~the ~~laws~~officers and ~~regulations~~directors byfor alleged breaches of fiduciary duty resulting from their oversight of the ~~facilities~~Company’s affairs. The ~~Company~~lawsuit ~~disputed~~names the ~~alleged~~Company ~~violations.~~as a nominal defendant ~~Between~~and ~~December~~seeks ~~1999~~compensatory and ~~December~~punitive ~~2002,~~damages ~~the~~on ~~DTSC~~behalf ~~conducted~~of ~~several~~the ~~more~~Company, interest, ~~inspections~~equitable atand/or ~~the~~injunctive ~~two~~relief, ~~facilities~~costs and ~~noted~~such other ~~violations,~~relief ~~which~~as the ~~Company~~court ~~also~~deems ~~disputed~~proper. InThe ~~June 2003, the~~ Company ~~received~~believes ~~notice~~that ~~from~~ the ~~DTSC~~stockholder ofderivative ~~its~~action was ~~intention~~not toproperly ~~commence~~brought ~~enforcement~~and ~~action~~has ~~with~~filed ~~regard~~a motion to ~~these~~dismiss ~~violations~~this action. As aof the ~~result~~date of this report, no ruling has been made by the ~~sale~~court ofon ~~Romic~~the motion to dismiss. ~~ERP~~Since ~~Environmental~~this ~~(see~~lawsuit ~~Note~~has ~~4),~~been consolidated with the ~~Company~~securities class ~~should~~action, further proceedings in this lawsuit have nobeen ~~further~~suspended ~~responsibility~~pending ~~for~~the resolution ~~this~~of ~~matter~~the Company’s litigation with its insurance carrier.

~~The~~After ~~Company acquired Romic Environmental Technologies Corporation (“Romic”) in January 1999. Prior to its acquisition by~~ the ~~Company,~~filing ~~Romic~~of ~~had entered into an administrative consent order with~~ the ~~EPA~~securities ~~relating~~class toaction ~~the~~lawsuits ~~cleanup~~and ~~of soil~~the ~~and~~shareholder ~~groundwater~~derivative ~~contamination~~action atdescribed ~~its facility in East Palo Alto~~above, ~~California. A remedial investigation of~~ the ~~facility~~Company ~~was~~made ~~completed~~demand byon ~~Romic and forwarded to~~its ~~the~~insurance ~~EPA.~~carrier, ~~The~~National ~~EPA~~Union ~~authorized~~Fire ~~Romic~~Insurance toCompany ~~conduct~~of aPittsburgh, ~~pilot~~PA, ~~study utilizing in-situ enhanced bio-remediation~~ to ~~determine whether that method would be an effective~~ ~~corrective~~defend ~~measure. Preliminary results from~~ the ~~pilot~~Company ~~study were encouraging~~ and ~~the~~its ~~study~~named ~~has been expanded~~representatives. IfNational ~~the~~Union ~~study~~declined ~~is determined~~ to ~~be successful,~~ ~~the~~defend ~~EPA may approve this method or a combination of methods for final site remediation. Prior to its acquisition by~~ the Company, ~~Romic~~and ~~had~~its ~~also~~named ~~been notified~~representatives ~~by the EPA~~ and ~~the~~filed ~~DTSC that it was~~ a ~~potentially~~declaratory ~~responsible party~~action ~~under~~in ~~applicable~~the ~~environmental~~United ~~legislation~~States ~~with~~District ~~respect~~Court tofor the ~~Bay~~Southern ~~Area~~District ~~Drum Superfund~~of ~~Site in San Francisco~~Texas, ~~California, the Lorentz Barrel and Drum~~Houston ~~Superfund~~Division ~~Site~~to indetermine ~~San~~its ~~Jose,~~legal ~~California~~rights ~~and~~under the ~~Casmalia~~Company’s ~~Resources~~insurance ~~Hazardous~~policy. ~~Waste~~The ~~Management~~Company ~~Facility~~and ~~located~~National ~~near~~Union ~~Santa~~subsequently ~~Barbara,~~filed ~~California,~~motions ~~each~~for ofsummary ~~which~~judgment ~~was~~to adetermine ~~drum~~whether ~~reconditioning~~coverage oris ~~disposal~~available ~~site~~under ~~previously~~the ~~used~~insurance ~~by Romic~~policy. ~~With~~During ~~respect~~the tosecond ~~each~~quarter of ~~these drum reconditioning or disposal sites~~2003, ~~Romic and a number of other potentially responsible parties have entered into administrative consent orders and/or agreements allocating each party’s respective share of~~ the ~~cost~~court ofgranted ~~remediating~~National ~~the sites. Romic~~Union’s ~~share~~motion ~~under~~for ~~these~~summary ~~consent~~judgment ~~orders~~that ~~and/or~~it ~~agreements~~ is asnot ~~follows:~~obligated ~~Bay~~to ~~Area~~defend —or ~~6.872%, Lorentz~~indemnify —the ~~5.62%~~Company ~~and Casmalia Resources — 0.29%. Remediation is either~~or ~~underway~~its ornamed ~~substantially~~representatives ~~complete~~in atthe ~~all~~consolidated ~~three sites~~action. ~~Based~~The ~~upon the information currently available, the~~ Company has ~~continued to maintain a~~appealed ~~reserve~~the ~~to cover Romic~~court’s ~~estimated~~ruling. ~~costs~~All toparties ~~remediate~~have ~~the~~filed ~~East~~briefs ~~Palo~~in ~~Alto facility and~~ the ~~three~~appeal ~~drum~~and ~~reconditioning~~oral argument oris ~~disposal~~currently ~~sites.~~scheduled Asfor ~~of June~~January 305, ~~2003,~~ ~~the balance of this reserve was $2~~2004.~~5 million,~~ ofAs ~~which~~noted ~~$0.3 million is~~above, ~~classified~~proceedings ~~as short-term and is expected to be paid~~ in the ~~next~~consolidated ~~twelve~~action ~~months. The~~will ~~Company~~continue ~~believes that this reserve is sufficient~~ to ~~satisfy~~be ~~Romic’s obligations~~suspended ~~under the consent orders and agreements; however, due to the~~pending ~~complex, ongoing and evolving process of investigating and remediating these sites, Romic’s actual costs may exceed~~ the ~~amount~~outcome ~~reserved. As a result~~ of the ~~sale~~ ~~of Romic to ERP Environmental (see Note 4), the~~ Company’s ~~should have no further responsibility under the consent orders or decrees~~appeal.

OnIn ~~April 29,~~December 2003, the Company ~~announced~~agreed ~~that, due~~ to ~~improper~~settle ~~recording of job costs and certain other items at one of its business units,~~ the ~~Company~~various ~~would restate~~claims ~~its results of operations for the years (and quarters within) ended~~asserted ~~December 31,~~in ~~2002, 2001 and 2000. In connection with this announcement,~~ the ~~Company~~ ~~contacted~~lawsuit ~~the~~that ~~SEC~~Parallel ~~which~~Products ~~has~~filed ~~initiated~~against ~~an informal investigation of~~ the ~~issues~~ ~~leading~~Company toin ~~the restatement~~2000. The ~~investigation is continuing and the~~ ~~Company~~settlement ~~has~~will ~~cooperated,~~not ~~and~~have ~~will~~a ~~continue~~material toadverse ~~cooperate,~~effect ~~with~~on the ~~SEC~~Company’s ~~in this~~business, ~~investigation.~~results ~~Refer~~of tooperations ~~Note~~or 13financial ~~for amounts relating to the restatement~~condition.

Litigation

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

~~re:~~ From USeptember 4, S1998 ~~Liquids~~through ~~Securities~~September 3, ~~Litigation~~2000, ~~Case~~Reliance ~~No.~~Insurance ~~H-99-2785,~~Company ~~and~~or ~~the~~one ~~plaintiffs~~of ~~have~~its ~~filed~~affiliated acompanies ~~consolidated~~(“Reliance”) ~~complaint~~provided ~~alleging~~casualty ~~violations~~insurance ofcoverage ~~Sections 11,~~for ~~12(a)(2)~~the Company and 15its ofsubsidiaries. ~~the~~In ~~Securities~~addition, ~~Act~~Reliance provided ofsimilar ~~1933 (“Securities~~coverage, ~~Act”)~~for onpre-acquisition ~~behalf~~periods, offor ~~purchasers~~several ofcompanies that the Company’s ~~common~~acquired ~~stock~~between in1997 ~~the Company’s March 1999 public offering~~ and ~~violations~~2000. ofDuring ~~Sections 10(b)~~the ~~and~~Reliance ~~20(a)~~coverage ofperiods, ~~the~~various ~~Securities~~incidents ~~Exchange~~occurred ~~Act~~that ofresulted ~~1934~~in ~~(“Exchange~~claims ~~Act”)~~being ~~and~~made ~~Rule 10b-5~~against ~~promulgated~~the ~~thereunder~~Company onfor ~~behalf~~which ofinsurance ~~purchasers~~coverage ofwas ~~the~~to ~~Company’s~~be ~~common~~provided ~~stock~~by Reliance. In ~~during~~some cases, the ~~period~~claim ~~beginning~~resulted onin ~~May 12,~~a ~~1998~~lawsuit ~~and~~being ~~ending~~filed onagainst ~~August 25,~~the ~~1999~~Company. ~~The~~ ~~plaintiffs~~Reliance ~~generally~~had ~~allege~~been ~~that~~adjusting ~~the~~and/or ~~defendants~~defending ~~made~~these ~~false~~claims; ~~and~~however, ~~misleading~~in October ~~statements~~2001, ~~and~~Reliance ~~failed~~was todeclared ~~disclose~~insolvent ~~allegedly~~by ~~material~~the ~~information~~Insurance ~~regarding~~Commissioner of the ~~operations~~State of ~~the~~Pennsylvania ~~Company’s~~and ~~Detroit~~placed ~~facility~~into ~~and~~liquidation. ~~the~~As ~~Company’s~~a ~~financial~~result, insurance ~~condition~~coverage inis ~~the~~not ~~prospectus~~available ~~relating~~for toany ~~the~~claims ~~March~~or ~~1999~~lawsuits ~~stock~~that ~~offering~~were ~~and~~not inresolved ~~certain~~prior ~~other~~to ~~public~~Reliance ~~filings~~being ~~and~~placed ~~announcements~~into ~~made~~liquidation. byTo the ~~Company.~~extent ~~The~~that insurance ~~remedies~~coverage ~~sought~~is bynot available ~~the~~to ~~plaintiffs~~cover ~~include~~settlement ~~designation~~ of a claim asserted against the ~~action~~Company asor a ~~class~~ ~~action,~~judgment ~~unspecified~~entered ~~damages~~against the Company, ~~attorneys’~~the ~~and~~settlement ~~experts’~~or ~~fees~~judgment ~~and~~would ~~costs,~~have ~~rescission~~ to be ~~the~~paid ~~extent~~by ~~any members of~~ the ~~class~~Company. ~~still~~Many ~~hold~~states ~~common~~have ~~stock,~~established ~~and~~insurance ~~such~~guarantee ~~other~~funds ~~relief~~to aspay ~~the~~claims ~~court~~insured ~~deems~~by ~~proper.~~insolvent Ininsurance ~~January~~companies; ~~2001~~however, the ~~court~~amount available ~~dismissed~~from ~~the claims~~such ~~asserted~~funds byfor ~~the~~a ~~plaintiffs~~single ~~under~~claim ~~Sections 10(b)~~is ~~and~~generally ~~20(a)~~limited ~~and~~to ~~Rule 10b-5~~the lesser of the ~~Exchange~~amount ~~Act~~of ~~and~~the ininsured’s ~~April~~coverage ~~2002~~and ~~the~~a ~~court~~dollar ~~dismissed~~amount ~~the~~specified ~~claims asserted~~ by statute. During the ~~plaintiffs~~fourth ~~under~~quarter ~~Section 12(a)(2)~~ of 2001, the ~~Securities~~Company ~~Act.~~established ~~Accordingly,~~a reserve to cover the ~~lawsuit~~estimated iscosts ~~proceeding~~to ~~only~~satisfy its obligations with respect to ~~the~~all such claims ~~asserted~~that ~~under Sections 11~~were ~~and~~not 15resolved ofprior ~~the~~to ~~Securities~~Reliance ~~Act.~~being Inplaced ~~June 2002~~into liquidation, net of the ~~court~~amounts ~~determined that~~expected ~~two~~to ~~individuals~~be ~~designated~~received by the ~~plaintiffs~~Company ~~are adequate class~~from ~~representatives~~state ~~for~~insurance ~~plaintiffs’~~guarantee ~~claim~~funds. ~~under~~Certain ~~Section 11~~ of ~~the~~these ~~Securities~~claims ~~Act. In~~have ~~August~~been ~~2002,~~resolved and the ~~court~~Company ~~entered~~made anpayments ~~order~~totaling ~~defining~~$0.8 million during the ~~plaintiff~~nine ~~class~~months ~~as all~~ended ~~persons~~September 30, ~~who~~2003. ~~purchased~~The orCompany ~~otherwise~~has ~~acquired~~committed ~~Company~~to ~~common~~making ~~stock~~additional ~~pursuant~~payments orof ~~traceable~~$0.2 million toduring the ~~Company’s~~remainder ~~March~~of ~~1999~~2003 ~~stock~~and ~~offering~~$0.7 million Asin ~~discussed~~2004. ~~below,~~After ~~further~~reviewing ~~proceedings~~the remaining known claims and ~~discovery~~considering inthe payments made, the reserve ~~lawsuit~~was ~~have~~$2.7 million ~~been~~at ~~suspended~~September 30, ~~pending the~~2003 ~~resolution~~(see ofNote ~~the~~4). The Company’s believes ~~litigation~~that ~~with~~the reserve is sufficient to satisfy its ~~insurance~~obligations ~~carrier~~with ~~over~~respect ~~whether~~to all known claims for which insurance coverage ~~exists~~was ~~for~~to be provided by Reliance; however, there can be no assurance that the ~~claims~~Company’s ~~asserted~~actual bycosts will not exceed the ~~plaintiffs~~amount reserved.

InAs ~~addition~~previously announced, ~~one~~during ~~stockholder of~~ the ~~Company~~third ~~has~~quarter ~~filed~~of a2003, ~~lawsuit~~Earl ~~against~~Blackwell, ~~certain~~the former ~~and~~Chief ~~current~~Financial ~~officers~~Officer ~~and directors~~ of the Company, inobtained ~~connection~~a $1.1 million ~~with~~arbitration ~~the~~award ~~operation~~against ~~of its Detroit facility and~~ the ~~securities class action described above~~Company. ~~Benn~~After ~~Carmicia~~attempts v.to Uvacate ~~S Liquids Inc., et al., was filed in~~ the ~~United~~arbitrator’s ~~States~~award ~~District~~were ~~Court for the Southern District of Texas~~unsuccessful, ~~Houston Division,~~in onOctober ~~September 15~~2003, ~~1999 and was subsequently consolidated with~~ the ~~claims~~ ~~asserted in the securities class action described above. The plaintiff alleges derivative claims on behalf of the~~ Company ~~against~~entered ~~the officers and~~into ~~directors~~a ~~for~~settlement ~~alleged~~agreement ~~breaches~~with ~~of fiduciary duty resulting from their oversight of the Company’s affairs~~Mr. Blackwell. ~~The~~Under ~~lawsuit names~~ the ~~Company~~terms ~~as a nominal defendant and seeks compensatory and punitive damages on behalf~~ of the ~~Company, interest,~~settlement ~~equitable and/or injunctive relief~~agreement, ~~costs and such other relief as~~ the ~~court deems proper. The~~ Company ~~believes~~made ~~that~~payments ~~the stockholder derivative action was not properly brought and has filed a motion~~ to ~~dismiss this action~~Mr. Blackwell Astotaling of$650,000 in the fourth ~~date~~quarter of ~~this~~2003 ~~report, no~~and ~~ruling~~ has ~~been~~committed ~~made by the court on the motion~~ to ~~dismiss.~~a ~~Since~~final ~~this lawsuit has been consolidated with the securities class action~~$100,000 ~~further proceedings~~payment in ~~this~~January 2004. ~~lawsuit~~This ~~have~~settlement ~~been~~was ~~suspended~~accrued ~~pending~~in the ~~resolution~~second quarter of ~~the Company’s litigation with its insurance carrier~~2003.

~~After~~The ~~the~~Company’s ~~filing~~business ofis ~~the~~subject ~~securities~~to ~~class~~numerous ~~action~~federal, ~~lawsuits~~state and ~~the~~local ~~shareholder~~laws, ~~derivative~~regulations ~~action~~and ~~described~~policies ~~above,~~that ~~the~~govern ~~Company~~environmental ~~made~~protection, ~~demand~~zoning ~~on its~~and ~~insurance~~other ~~carrier,~~matters. ~~National~~During ~~Union~~the ~~Fire~~ordinary ~~Insurance~~course ~~Company~~ of ~~Pittsburgh~~business, ~~PA,~~the toCompany has become ~~defend~~involved ~~the~~in ~~Company~~a ~~and~~variety ~~its~~of ~~named~~legal ~~representatives.~~and ~~National~~administrative ~~Union~~proceedings ~~declined~~relating to land ~~defend~~use ~~the Company~~ and ~~its~~environmental ~~named~~laws ~~representatives~~ and ~~filed~~regulations, aincluding ~~declaratory~~actions ~~action~~or proceedings inbrought ~~the~~by ~~United~~governmental ~~States~~agencies, ~~District~~adjacent ~~Court~~landowners, ~~for~~or ~~the~~citizens’ ~~Southern~~groups. ~~District~~In the majority of ~~Texas,~~the ~~Houston Division~~situations towhere ~~determine~~proceedings ~~its~~are ~~legal~~commenced ~~rights~~by ~~under~~governmental agencies, the ~~Company’s~~matters ~~insurance~~involved ~~policy. The~~relate ~~Company~~to ~~and~~alleged ~~National~~technical ~~Union~~violations ~~subsequently~~of licenses ~~filed~~or ~~motions~~permits ~~for~~pursuant ~~summary judgment~~ to ~~determine~~which ~~whether~~the ~~coverage~~Company isoperates ~~available~~or ~~under~~is ~~the~~seeking ~~insurance~~to operate, ~~policy.~~or ~~During the~~laws ~~second~~or ~~quarter~~regulations ofto ~~2003,~~which ~~the~~its ~~court~~operations ~~granted~~are ~~National~~subject ~~Union’s~~or ~~motion~~are ~~for~~the ~~summary~~result ~~judgment~~of ~~that~~different itinterpretations isof ~~not~~applicable ~~obligated~~requirements. toFrom ~~defend~~time orto time, ~~indemnify~~ the Company ~~or its~~pays ~~named~~fines ~~representatives~~or penalties in ~~the~~governmental ~~consolidated~~proceedings ~~action~~relating to its operations. The Company ~~has~~believes ~~appealed~~that these matters will not have a ~~the~~material ~~court’s~~adverse ~~ruling~~effect ~~and~~on isits ~~awaiting~~business or consolidated financial statements. However, the ~~decision~~outcome of ~~the~~any ~~appeals~~particular ~~court.~~proceeding cannot be predicted with Ascertainty, ~~noted~~and ~~above~~the possibility remains that technological, ~~proceedings~~regulatory inor enforcement ~~the~~developments, ~~consolidated~~results ~~action~~of ~~will~~environmental ~~continue~~studies, toor beother factors ~~suspended~~could ~~pending~~materially ~~the~~alter ~~outcome~~this ofexpectation ~~the~~at ~~Company’s~~any ~~appeal~~time.

OnIt ~~April 21,~~is ~~1998,~~not ~~the~~possible ~~Company~~at ~~acquired~~this ~~substantially~~time ~~all~~to ofpredict the ~~assets~~impact ~~of Parallel~~the ~~Products~~above lawsuits, proceedings, ainvestigations ~~California~~and ~~limited~~inquiries ~~partnership~~may ~~(“Parallel”).~~have Inon ~~addition~~the Company, nor is it possible to ~~the~~predict ~~consideration~~whether ~~paid~~any atother ~~closing,~~suits ~~the~~or ~~Company~~claims ~~agreed~~may ~~that~~arise out of these matters in the future. However, ifit is reasonably possible that the ~~earnings~~outcome of ~~before~~any ~~interest~~present or future litigation, ~~taxes~~proceedings, ~~depreciation~~investigations ~~and~~or ~~amortization~~inquiries ~~(“EBITDA”)~~may have ofa ~~the businesses~~material ~~acquired~~adverse ~~from~~impact ~~Parallel~~on the Company’s consolidated

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

~~exceeded~~financial astatements ~~specified amount~~ in ~~any~~one ~~four consecutive~~or ~~quarters~~more ~~during~~future ~~the three year period after the closing of the acquisition, the Company would pay to Parallel an additional $2~~periods.~~1 million~~ ~~in cash~~The ~~and an additional $2.1 million in the~~ Company~~’s common stock. During the~~ ~~third~~intends ~~quarter~~to ofdefend ~~2000,~~itself ~~Parallel~~vigorously filed suit against the Company alleging that the acquired businesses achieved the specified EBITDA amount for the four quarters ended December 31, 1999 and for the four quarters ended March 31, 2000. Parallel is seeking a declaratory judgment that the EBITDA amount specified in ~~the~~all ~~acquisition agreement was achieved and that it is entitled to receive~~ the ~~contingent cash and stock payments described~~ above. ~~Parallel also alleges that it is entitled to recover compensatory damages of $4~~matters.~~2 million,~~ ~~punitive damages, interest, attorneys’ fees and costs, and such other relief as~~ the court deems proper. The Company has denied that it has any liability to Parallel and has filed a counterclaim against Parallel alleging that Parallel breached certain of the representations and warranties made in the acquisition agreement. The trial in this case has been rescheduled for January 2004. The transaction described in Note 4 did not affect the Company’s responsibility with respect to this matter.

~~From~~The ~~September 4, 1998 through September 3, 2000, Reliance Insurance~~ Company ~~or one~~is ofinvolved ~~its~~in affiliated companies (“Reliance”) provided casualty insurance coverage for the Company and its subsidiaries. In addition, Reliance provided similar coverage, for pre-acquisition periods, for several companies that the Company acquired between 1997 and 2000. During the Reliance coverage periods, various ~~incidents~~other ~~occurred~~legal ~~that~~actions ~~resulted~~arising in ~~claims being made against~~ the ~~Company~~ordinary ~~for~~course which insurance coverage was to be provided by Reliance. In some cases, the claim resulted in a lawsuit being filed against the Company. Reliance had been adjusting and/or defending these claims; however, in October 2001, Reliance was declared insolvent by the Insurance Commissioner of ~~the State of Pennsylvania and placed into liquidation~~business. AsManagement adoes ~~result, insurance coverage is~~ not ~~available~~believe ~~for any claims or lawsuits~~ that ~~were not resolved prior to Reliance being placed into liquidation. To~~ the ~~extent~~outcome ~~that insurance coverage is not available to cover settlement~~ of ~~a claim asserted against the~~ ~~Company~~such orlegal aactions ~~judgment~~will ~~entered against the Company, the settlement or judgment would~~ have ~~to be paid by the Company. Many states have established insurance guarantee funds to pay claims insured by insolvent insurance companies; however, the amount available from such funds for~~ a ~~single~~material ~~claim~~adverse iseffect ~~generally limited~~on to the ~~lesser of the amount of the insured’s coverage and a dollar amount specified by statute. During the fourth quarter of 2001, the~~ Company established a reserve to cover the estimated costs to satisfy its obligations with respect to all such claims that were not resolved prior to Reliance being placed into liquidation, net of the amounts expected to be received by the Company from state insurance guarantee funds. Certain of these claims have been resolved and the Company made payments totaling $0.5 million during the six months ended June 30, 2003. The Company has committed to making additional payments of $0.5 million during the remainder of 2003 and $0.7 million in 2004. After reviewing the remaining known claims, the reserve was adjusted to $2.9 million during the quarter ended June 30, 2003 (see Note 5). The Company believes that the reserve is sufficient to satisfy its obligations with respect to all known claims for which insurance coverage was to be provided by Reliance; however, there can be no assurance that the Company’s ~~actual costs~~ ~~will~~consolidated ~~not~~financial ~~exceed the amount reserved~~statements.

~~In February 1998, the Company entered into an employment agreement with its former chief financial officer, Earl J~~11. ~~Blackwell.~~SEGMENT ~~The employment agreement~~INFORMATION: ~~provided, among other things, that (i) if the agreement was terminated by Mr.~~ ~~Blackwell without cause, Mr. Blackwell would not be entitled to receive any~~ further compensation or benefits under the agreement, and (ii) if the agreement was terminated by Mr. Blackwell with cause, Mr. Blackwell would be entitled to continue to receive his annual salary of $220,000 and employee benefits for the remainder of the term of the agreement. On July 31, 2002, Mr. Blackwell terminated his employment with the Company alleging that it breached the terms of his employment agreement by usurping his duties and responsibilities as chief financial officer. On October 2, 2002, Mr. Blackwell initiated an arbitration proceeding against the Company seeking to recover approximately $1.1 million in damages, interest, attorneys’ fees and costs. The Company has denied that it has any liability to Mr. Blackwell. The arbitration hearing took place on May 7 and 8, 2003. During the third quarter of 2003, the arbitrator found in favor of Mr. Blackwell and awarded him approximately $1.1 million. Thereafter, the Company filed a motion to vacate and reconsider with the arbitrator and also filed a lawsuit in the 164th Judicial District of Harris County, Texas, asking the court to vacate the arbitrator’s

The Company’s reporting is organized into two divisions – the Commercial Wastewater Division and the Industrial Wastewater Division. See Note 1 for a description of the operations of each division. The Company’s corporate division consists primarily of overhead, such as salaries, benefits, professional fees and interest expense. On July 31, 2003, the Company sold its Oilfield Waste Division, its Beverage Division and its Romic Environmental Technologies business, which was previously included in the Industrial Wastewater Division, to ERP Environmental. See Note 5 for a further description of the sale. The following is a summary of key business segment information:


			Three Months Ended						Nine Months Ended
			September 30,						September 30,

			2003			2002			2003			2002

						(In thousands)
						(Unaudited)
Revenues-
	Industrial Wastewater		$	7,325		$	6,233		$	20,848		$	18,841
	Commercial Wastewater			10,363			13,334			32,353			37,103

		Total	$	17,688		$	19,567		$	53,201		$	55,944

Loss from continuing operations before income taxes and cumulative effect of change in accounting principle -
	Industrial Wastewater		$	(5,270	)	$	(14,166	)	$	(4,499	)	$	(13,748	)
	Commercial Wastewater			(5,214	)		(16,715	)		(4,419	)		(14,508	)
	Corporate			(4,438	)		(6,811	)		(16,160	)		(12,915	)

		Total	$	(14,922	)	$	(37,692	)	$	(25,078	)	$	(41,171	)

Depreciation and amortization expense-
	Industrial Wastewater		$	442		$	417		$	1,356		$	1,258
	Commercial Wastewater			685			739			2,101			2,309
	Corporate			190			333			836			985

		Total	$	1,317		$	1,489		$	4,293		$	4,552

Capital expenditures-
	Industrial Wastewater		$	190		$	308		$	449		$	387
	Commercial Wastewater			38			511			147			1,257
	Corporate			3			44			28			554
	Discontinued Operations			116			690			1,006			3,155

		Total	$	347		$	1,553		$	1,630		$	5,353

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

award. On August 1, 2003, the Company was informed that the arbitrator had denied the motion to vacate and reconsider. The Company intends to prosecute the state court litigation vigorously.


			September 30,		December 31,
			2003		2002

			(In thousands)
			(Unaudited)
Identifiable Assets-
	Industrial Wastewater		$	17,143	$	22,523
	Commercial Wastewater			18,913		40,081
	Corporate			7,673		6,704
	Discontinued Operations			2,354		83,703

		Total	$	46,083	$	153,011

~~Shortly~~The ~~after~~following ~~Mr. Blackwell~~should ~~made~~be ~~his~~noted ~~initial~~in ~~demand~~comparing ~~for arbitration,~~ the ~~Company~~ ~~placed~~segment ~~its~~data ~~employment~~set ~~practices~~forth ~~liability carrier on notice of the~~above: ~~claim. During the third quarter of 2003, the Company received notice from its~~ ~~insurance carrier denying coverage. The Company intends to pursue the coverage issue with its carrier.~~

On• ~~September 9,~~During ~~2002,~~the ~~Allan~~third ~~Rosen~~quarter of 2003, athe ~~former~~Company ~~employee~~recognized an asset impairment charge of ~~the~~$12.0 ~~Company,~~million. ~~filed~~$5.9 ~~suit in~~million ~~the~~was ~~Superior~~a ~~Court~~charge ofto ~~Los~~the ~~Angeles~~Industrial ~~County~~Wastewater Division, ~~California~~$5.7 ~~against~~million was a charge to the ~~Company~~Commercial Wastewater Division and ~~certain~~ of$0.4 ~~its~~million ~~current~~was ~~and~~a ~~former~~charge ~~officers.~~to MrCorporate. ~~Rosen~~ ~~alleges,~~See ~~among~~Note ~~other things,~~4. ~~that~~• During the ~~Company~~third ~~breached~~quarter ~~various~~of ~~oral~~2002, ~~agreements~~the ~~relating~~Company torecognized ~~the compensation~~an toasset beimpairment ~~paid~~charge toof Mr$35. ~~Rosen~~4 ~~for~~million. ~~his~~$16.6 ~~services~~million ~~and~~was ~~that~~a hecharge ~~was wrongfully~~to ~~terminated~~the inIndustrial ~~October~~Wastewater ~~2001~~Division ~~because,~~and ~~among~~$18.8 ~~other~~million ~~things,~~was ~~he complained~~a ~~about~~charge to the ~~operational~~Commercial ~~and~~Wastewater ~~accounting~~Division. ~~systems~~• ofDuring ~~certain~~the second quarter of 2003, the Company’s ~~subsidiaries~~wrote ~~and~~off ~~because~~$2.6 hemillion ~~refused~~of topreviously ~~certify,~~deferred ~~for~~financing ~~internal purposes,~~costs ~~various~~incurred ~~financial~~in ~~information~~connection ~~and~~with ~~reports~~its ~~relating~~financing toefforts. ~~the~~This ~~operations of~~charge ~~such~~was ~~subsidiaries.~~a Mrcorporate expense. ~~Rosen~~ is• ~~seeking~~During ~~unspecified~~the ~~compensatory~~nine ~~and punitive~~months ~~damages~~ended September 30, ~~interest~~2003, ~~attorneys’~~the ~~fees~~Company ~~and~~recorded ~~costs~~$2.4 ~~Mr. Rosen~~million isof ~~also seeking~~severance as a ~~declaratory~~corporate ~~judgment~~expense ~~that~~compared ato ~~noncompete~~$1.0 ~~provision~~million ~~contained~~ in ~~his employment~~the ~~agreement~~prior isyear ~~not enforceable~~period. ~~During~~• In the ~~second~~third quarter of ~~2003~~2002, ~~the Company~~$2.15 ~~settled~~million ~~this~~was ~~matter~~received ~~and~~in ~~all~~connection ~~claims associated~~ with ~~Mr. Rosen~~the Company’s ~~employment.~~ ~~The~~ settlement ~~did~~of ~~not~~an ~~have~~insurance aclaim ~~material~~as ~~adverse~~a ~~effect~~result onof the ~~Company’s~~ ~~business,~~temporary ~~results~~closing of ~~operations~~its orDetroit ~~its~~facility ~~financial~~in ~~condition~~August 1999. This receipt was income to the Industrial Wastewater Division. See Note 4.

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

ItOn isApril 29, ~~not~~2003, ~~possible~~the atCompany ~~this~~announced ~~time~~that, due to ~~predict~~improper ~~the~~recording of ~~impact~~job ~~the~~costs ~~above~~and ~~lawsuits, proceedings,~~certain ~~investigations~~other ~~and~~items ~~inquiries~~at ~~may~~one ~~have~~of onits ~~the~~business ~~Company~~units, ~~nor~~the ~~is it~~Company ~~possible~~would torestate ~~predict~~its ~~whether~~results ~~any~~of ~~other~~operations ~~suits~~for orthe ~~claims~~years ~~may~~ended ~~arise~~December 31, ~~out~~2002, 2001 ofand ~~these matters~~2000. inRefer ~~the~~to ~~future.~~Note ~~However,~~23 itin isthe ~~reasonably~~Company’s ~~possible~~Form 10-K/A ~~that~~for ~~the~~a ~~outcome~~detail of ~~any~~the ~~present~~restatement orfor ~~future~~the ~~litigation,~~respective ~~proceedings,~~years. ~~investigations~~See ortable ~~inquiries~~below ~~may have~~for a ~~material~~detail ~~adverse~~of ~~impact on~~ the ~~Company’s consolidated financial~~ ~~statements~~restatement inof ~~one~~continuing oroperations ~~more~~for ~~future~~the ~~periods.~~three ~~The~~and ~~Company~~nine ~~intends~~months ~~to defend itself~~ended ~~vigorously~~September 30, ~~in all the above matters.~~2002:

The Company is involved in various other legal actions arising in the ordinary course of business. Management does not believe that the outcome of such legal actions will have a material adverse effect on the Company’s consolidated financial statements.

12. SEGMENT INFORMATION:

As of January 1, 2003, the Company’s reporting was re-organized into four divisions — the Commercial Wastewater Division, the Industrial Wastewater Division, the Oilfield Waste Division and the Beverage Division. See Note 1 for a description of the operations of each division. The Company’s corporate division consists primarily of overhead, such as salaries, benefits, professional fees and interest expense. The results of the Beverage Division were previously included in the results of the Commercial Wastewater Division. Prior year information has been reclassified to conform to the current year presentation. On July 31, 2003, the Company sold its Oilfield Waste Division, its

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

Beverage Division and its Romic Environmental Technologies business to ERP Environmental Services, Inc. (“ERP Environmental”). See Note 4 for a further description of the sale. The following is a summary of key business segment information:


	For the Three Months Ended September 30, 2002

	As			Less			Adjustments
	Previously			Discontinued			for
	Reported			Operations			Restatement			As Restated

	(In thousands)
	(Unaudited)
Revenues	$	48,368		$	28,879		$	78		$	19,567
Operating expenses		36,914			20,460			29			16,483

Operating margin		11,454			8,419			49			3,084
Depreciation and amortization		3,507			2,018			—			1,489
Selling, general and administrative expenses		6,859			2,044			—			4,815
Asset impairment		51,050			15,663			—			35,387
Special expense (income)		(1,840	)		310			—			(2,150	)

Income (loss) from operations		(48,122	)		(11,616	)		49			(36,457	)
Interest expense		2,255			1,029			—			1,226
Other expense (income), net		(11	)		(20	)		—			9

Income (loss) from continuing operations before cumulative effect of change in accounting principle and income taxes		(50,366	)		(12,625	)		49			(37,692	)
Provision (benefit) for income taxes		(3,893	)		(1,109	)		674			(2,110	)

Loss from continuing operations		(46,473	)		(11,516	)		(625	)		(35,582	)

Loss from discontinued operations before income taxes		—			12,625			—			(12,625	)
Provision (benefit) for income taxes		—			1,109			—			(1,109	)

Loss from discontinued operations		—			11,516			—			(11,516	)

Cumulative effect of change in accounting principle		(3,774	)		—			(594	)		(3,180	)

Net loss	$	(50,247	)	$	—		$	(31	)	$	(50,278	)

Basic and diluted loss per common share:
Basic and diluted loss per common share from continuing operations before cumulative effect of change in accounting principle	$	(2.89	)							$	(2.21	)
Discontinued operations		—									(0.71	)
Cumulative effect of change in accounting principle		(0.23	)								(0.20	)

Basic and diluted loss per share	$	(3.12	)							$	(3.12	)

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2003			2002			2003			2002
						(In thousands)
						(Unaudited)
Revenues—
	Industrial Wastewater		$	16,033		$	16,251		$	30,784		$	30,140
	Commercial Wastewater			11,010			12,182			21,991			23,769
	Oilfield Waste			5,316			5,754			11,013			11,164
	Beverage			4,888			5,124			10,289			10,149
		Total	$	37,247		$	39,311		$	74,077		$	75,222
Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle—
	Industrial Wastewater		$	1,452		$	2,104		$	2,683		$	2,112
	Commercial Wastewater			687			1,438			796			2,208
	Oilfield Waste			986			3,933			2,574			6,899
	Beverage			—			(266	)		458			280
	Corporate			(9,004	)		(4,450	)		(14,268	)		(8,110	)
		Total	$	(5,879	)	$	2,759		$	(7,757	)	$	3,389
Depreciation and amortization expense—
	Industrial Wastewater		$	767		$	727		$	1,539		$	1,455
	Commercial Wastewater			692			753			1,408			1,571
	Oilfield Waste			574			639			1,175			1,197
	Beverage			254			271			508			540
	Corporate			311			335			646			652
		Total	$	2,598		$	2,725		$	5,276		$	5,415
Capital expenditures—
	Industrial Wastewater		$	285		$	327		$	321		$	453
	Commercial Wastewater			143			613			267			1,279
	Oilfield Waste			188			678			365			1,088
	Beverage			224			485			304			470
	Corporate			16			201			26			510
		Total	$	856		$	2,304		$	1,283		$	3,800

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

				June 30,				December 31,
		For the Nine Months Ended September 30, 2002
				2003				2002
		As				Less				Adjustments
				(In thousands)
		Previously				Discontinued				for
				(Unaudited)
		Reported				Operations				Restatement			As Restated
Identifiable Assets—
		(In thousands)
	Industrial Wastewater			$	49,507			$	48,347
		(Unaudited)
	Commercial Wastewater				36,200				42,685
Revenues		$	143,952			$	88,146			$	138		$	55,944
	Oilfield Waste				38,099				39,415
Operating expenses			104,166				60,799				323			43,690
	Beverage				12,476				16,347
Operating margin			39,786				27,347				(185	)		12,254
	Corporate				4,623				6,217
Depreciation and amortization			11,040				6,488				—			4,552
		Total		$	140,905			$	153,011
Selling, general and administrative expenses			20,423				7,616				—			12,807
Asset impairment			51,050				15,663				—			35,387
Special income			(1,178	)			1,082				—			(2,260	)
Loss from operations			(41,549	)			(3,502	)			(185	)		(38,232	)
Interest expense			6,187				3,086				—			3,101
Other expense (income), net			(44	)			18				(100	)		(162	)
Loss from continuing operations before cumulative effect of change in accounting principle and income taxes			(47,692	)			(6,606	)			(85	)		(41,171	)
Provision (benefit) for income taxes			(2,690	)			509				627			(2,572	)
Loss from continuing operations			(45,002	)			(7,115	)			(712	)		(38,599	)
Loss from discontinued operations before income taxes			—				6,606				—			(6,606	)
Provision (benefit) for income taxes			—				(509	)			—			509
Loss from discontinued operations			—				7,115				—			(7,115	)
Cumulative effect of change in accounting principle			(91,003	)			—				—			(91,003	)
Net loss		$	(136,005	)		$	—			$	(712	)	$	(136,717	)
Basic and diluted loss per common share:
Basic and diluted loss per common share from continuing operations before cumulative effect of change in accounting principle		$	(2.80	)									$	(2.40	)
Discontinued operations			—											(0.45	)
Cumulative effect of change in accounting principle			(5.66	)										(5.66	)
Basic and diluted loss per share		$	(8.46	)									$	(8.51	)

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

	•		During the second quarter of 2003, the Company wrote off $2.6 million of previously deferred financing costs incurred in connection with its financing efforts. This charge was a corporate expense.
	•		During the second quarter of 2003, the Company recorded approximately $1.5 million of severance as a corporate expense.

13. RESTATEMENT OF FINANCIAL STATEMENTS:

On April 29, 2003, the Company announced that, due to improper recording of job costs and certain other items at one of its business units, the Company would restate its results of operations for the years ended December 31, 2002, 2001 and 2000. Refer to Note 23 in the Company’s Form 10-K/A for a detail of the restatement for the respective years. See table below for a detail of the restatement for the three and six months ended June 30, 2002:

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

	For the Quarter Ended						For the Six Months Ended
	June 30, 2002						June 30, 2002
	As Previously						As Previously
	Reported			As Restated			Reported			As Restated
				(In thousands)
				(Unaudited)
Revenues	$	39,311		$	39,311		$	75,162		$	75,222
Operating expenses		25,796			26,024			50,906			51,200
Operating margin		13,515			13,287			24,256			24,022
Depreciation and amortization		2,725			2,725			5,415			5,415
Selling, general and administrative expenses		5,684			5,684			11,599			11,599
Special income		(110	)		(110	)		(110	)		(110	)
Income from operations		5,216			4,988			7,352			7,118
Interest expense		2,269			2,269			3,931			3,931
Other income, net		(40	)		(40	)		(102	)		(202	)
Income from continuing operations before cumulative effect of change in accounting principle and income taxes		2,987			2,759			3,523			3,389
Provision for income taxes		220			140			251			204
Income from continuing operations	$	2,767		$	2,619		$	3,272		$	3,185
Basic earnings per share	$	0.17		$	0.16		$	0.20		$	0.20
Diluted earnings per share	$	0.17		$	0.16		$	0.20		$	0.19


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

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

As discussed in Note 1312 to the unaudited condensed consolidated financial statements, the Company’s financial statements for the three and ~~six~~nine months ended ~~June~~September 30, 2002 have been restated. The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to that restatement.

Overview

AsWe are a provider of ~~January 1~~waste management services, ~~2003~~including collection, ~~our~~processing, ~~reporting~~recovery ~~was~~and ~~re-organized~~disposal ~~into~~services. ~~four~~We operate two divisions —– the Commercial Wastewater Division, and the Industrial Wastewater ~~Division, the~~ ~~Oilfield Waste~~ Division ~~and the Beverage Division~~. The Commercial Wastewater Division provides a variety of environmental services and collects, processes and disposes of various types of nonhazardous liquid waste. The Industrial Wastewater Division collects, processes and disposes of hazardous and nonhazardous liquid waste ~~and~~such ~~recovers saleable by-products from certain waste~~as ~~streams.~~household ~~The~~hazardous ~~Oilfield~~wastes ~~Waste Division processes~~ and ~~disposes~~industrial ~~of waste generated in oil and gas exploration and production~~wastewater. ~~The Beverage Division collects,~~ ~~processes and disposes of dated beverages and other consumer products~~ containing alcohol or sugar and also generates revenue from the sale of by-products. The Beverage Division was previously included in the Commercial Wastewater Division. Prior year information has been reclassified to conform to the current year presentation.

On July 31, 2003, we sold our Oilfield Waste Division, our Beverage ~~Division~~ Division and our Romic Environmental Technologies business to ERP Environmental Services, Inc. (“ERP Environmental”). ~~ERP~~for ~~Environmental~~total ~~paid~~proceeds usof ~~approximately~~ $68.0 million. ~~for~~From these proceeds, and with the ~~acquired~~approval ~~businesses~~of ~~and~~our ~~also~~senior ~~agreed~~lenders, $59.7 million was used to reduce our debt balance, $1.9 million was used to pay deferred interest and fees due on our credit facility, $2.01 million was used to pay various ~~for~~transaction ~~certain~~expenses ~~transition~~and ~~services~~$2.3 million was used to beestablish ~~provided~~a byfund for severance of employees as the Company ~~during~~is ~~the~~restructured. In addition, an escrow ~~six-month~~of ~~period~~$2.0 million ~~following~~was established from the ~~closing.~~proceeds ~~The~~pending the determination of the final purchase price, iswhich was subject to adjustment based upon the net worth of the ~~acquired~~sold businesses on the closing date. ~~The~~As a result of the determination of the net ~~proceeds~~worth of the ~~transaction~~businesses sold, the purchase price was reduced by $3.5 million. Accordingly, the escrowed funds were ~~used~~returned to ~~reduce~~ERP Environmental, ~~debt~~we ~~outstanding under~~sold ~~our~~certain ~~credit~~software ~~facility,~~to ~~pay~~ERP ~~transaction~~Environmental ~~expenses~~for $0.3 million, we ~~fund~~recorded ~~employee~~a ~~severance~~note payable to ERP Environmental of $1.2 million and recognized ~~obligations~~a loss of $1.6 million on the sale. In addition, ~~and~~we received payment for ~~other~~the remaining ~~matters~~amounts ~~required~~due byfor transition services. We also sold our Waste Stream Environmental business in the ~~purchase~~third ~~agreement~~quarter of 2003 and the remaining portions of our Northeast operations in the first quarter of 2003.

On November 6, 2002, we completed the sale of substantially all of our ~~Texas~~ Texas businesses in the Commercial Wastewater Division. The transaction, ~~structured~~ structured as an asset sale, included businesses principally involved in the ~~collection~~ collection and processing of grease and grit trap waste, commercial wastewater ~~treatment~~ treatment and field services in Houston, Dallas and San Antonio, Texas. During ~~the~~ the fourth quarter of 2002, the Company decided to divest of or suspend certain operations at several non-core and underperforming businesses in the Commercial Wastewater Division. Some operations were divested of or suspended during the fourth quarter of 2002 ~~and the remaining operations are expected to be divested prior to December 31, 2003~~. ~~During the first quarter of 2003, the remaining portions of our Northeast operations were sold.~~ Under Statement of Financial Accounting Standards (“SFAS”) No. 144, the assets, liabilities and operating results of the businesses sold and the divested/suspended operations have been restated and presented separately as discontinued operations in both the ~~condensed~~ condensed consolidated balance sheet and statement of operations for all ~~periods~~ periods presented.

The Commercial Wastewater Division generated $1110.04 million, or 2958.6%, of ~~our~~ our revenues from continuing operations for the quarter ended ~~June~~September 30, 2003. This Division derives revenues from fees received for collecting, processing and disposing of nonhazardous liquid waste and providing other ~~environmental~~ environmental services. Collection and processing fees charged to customers vary according to the constituents of the waste, expenses associated with processing the waste and competitive factors.

The Industrial Wastewater Division generated $167.03 million, or 4341.04%, of ~~our~~ our revenues from continuing operations for the quarter ended ~~June~~September 30, 2003. This Division derives revenues from fees charged to customers for collecting, processing and disposing of hazardous and nonhazardous liquid waste such as ~~household~~ ~~hazardous wastes, plating solutions, acids, flammable and reactive~~household ~~wastes, and industrial wastewater. Certain sludges and solid~~

2120

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

The Oilfield Waste Division generated $5.3 million, or 14.3%, of our revenues from continuing operations for the quarter ended June 30, 2003. This Division derives revenues from fees charged to customers for processing and disposing of oil and gas exploration and production waste, and cleaning tanks, barges and other vessels and containers used in the storage and transportation of oilfield waste. In order to match revenues with their related costs, when waste is unloaded at one of our sites, we recognize the related revenue and record a reserve for the estimated expenses to be incurred to process and dispose of the waste. As processing occurs, generally over nine to twelve months, the reserve is depleted as expenses are incurred.

The Beverage Division generated $4.9 million, or 13.1%, of our revenues from continuing operations for the quarter ended June 30, 2003. This Division derives revenues from the collection, processing and disposal of dated beverages and other consumer products containing alcohol or sugar and from the sale of by-products, such as ethanol, solvents, plastics, cardboard, aluminum and glass. Collection and processing fees charged to customers vary per gallon depending on the sugar and alcohol content of the product, the type of packaging, expenses associated with processing the product and competitive factors. By-products are commodities and their prices fluctuate based on market conditions.

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

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

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

Depreciation and amortization expenses relate to our depreciable or amortizable assets. These assets are expensed over periods ranging from three to 39 years.

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

Critical Accounting Policies

In response to the ~~SEC~~Securities and Exchange Commission’s ~~Release~~(“SEC”) Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have identified the accounting principles which we believe are most critical to our reported financial status by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting policies to be those related to revenue recognition, processing expenses, closure ~~and remediation~~ reserves, assessment of goodwill impairment, allowance for doubtful accounts, income taxes ~~and~~ and self-insurance.

22 Revenue Recognition. In accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition,” we recognize revenue from processing services when material is unloaded at one of our facilities, if delivered by the customer, or at the time of waste acceptance at the customer’s facility, if we collect the materials from the customer’s facility. We recognize revenue at the time our facility accepts the waste because the customer has passed the legal and regulatory responsibility and associated risk of disposing the waste to us.

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

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

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

~~Since~~Closure ~~revenue~~and ~~has~~Remediation ~~been~~Reserves. ~~recognized~~Our atclosure ~~the~~reserves ~~time~~represent accruals for the ~~service~~total toestimated costs associated with the ~~customer~~ultimate closure of our ~~was~~hazardous ~~completed~~waste facilities, weincluding ~~accrue~~costs ~~the~~of ~~associated~~decommissioning, ~~future~~statutory monitoring ~~expenses~~costs asand aincremental ~~processing~~direct ~~reserve~~administrative costs required during tothe ~~establish~~closure aand ~~proper~~subsequent ~~matching~~postclosure ofperiods. ~~revenues~~Effective ~~and~~January 1, ~~all~~2003, ~~associated~~we adopted ~~expenses~~SFAS No. 143, ~~Since the~~“Accounting ~~facilities~~for ~~have~~Asset ~~been~~Retirement ~~operated~~Obligations,” which addresses the ~~same~~financial ~~way~~accounting ~~for~~and ~~several~~reporting ~~years,~~for weobligations ~~know what~~associated with the ~~treatment~~retirement ~~process~~of ~~costs~~tangible uslong-lived onassets aand ~~per~~associated ~~unit~~costs. ~~basis~~SFAS No. 143 ~~Thus,~~requires ~~for~~that ~~every~~the ~~unit~~discounted fair value of a liability for an asset ~~waste~~retirement ~~that~~obligation isbe ~~offloaded~~recognized ~~into~~in the ~~facility,~~period wein ~~accrue~~which anit ~~amount~~is toincurred ~~reflect~~if a reasonable estimate of the fair value can be made. The associated asset ~~processing~~retirement costs toare becapitalized ~~incurred~~as ~~subsequent~~part toof the ~~initial~~carrying ~~processing~~amount ~~associated~~of the ~~with~~long-lived ~~that unit~~asset. AsIn the ~~treatment~~first ~~process~~quarter ~~concludes~~of each year, wethe fair value of the liability for the asset retirement obligation will ~~apply~~be ~~those~~analyzed ~~actual~~and reviewed for ~~costs~~reasonableness ~~incurred~~based ~~against~~on the ~~processing~~estimated ~~reserve~~lives of the respective facility, risk-free interest rate and inflation factors.

~~Closure and Remediation Reserves. Our closure and remediation reserves~~21 ~~represent accruals for the total estimated costs associated with the ultimate~~ closure of our land farm facilities and certain other facilities, including costs of decommissioning, statutory monitoring costs and incremental direct administrative costs required during the closure and subsequent postclosure periods. The closure and remediation reserves include both our open and closed facilities, as well as all third party sites for which we have been determined to be a potentially responsible party and which require remediation. The reserves required could be affected by changes in regulations, project progress, technology changes or improvements, identification of changed contamination levels, settlement of liability claims or other factors. The reserves are then adjusted based on management’s updated knowledge of the applicable items above. We review the status of the reserves for each facility and monitor all activity.

Effective January 1, 2003, we adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated costs. SFAS No. 143 requires that the discounted fair value of a liability for an asset retirement obligation be recognized in the period is which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. In the first quarter of each year, the fair value of the liability for the asset retirement obligation will be analyzed and reviewed for reasonableness based on the estimated lives of the respective facility, risk-free interest rate and inflation factors.

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

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

accounts may be required. We perform on-going credit analyses of the accounts of our customers and provide allowances as deemed necessary.

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

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

Results of Operations

Three Months Ended ~~June~~September 30, 2003 and 2002

Revenues. Revenues for the quarter ended ~~June~~September 30, 2003 decreased $2.1.9 million, or 59.36%, from $3919.36 million for the quarter ended ~~June~~September 30, 2002 to $3717.2 7 million for the quarter ended ~~June~~September 30, 2003.

The Commercial Wastewater Division contributed $1110.04 million, or 2958.6%, of ~~second~~third quarter 2003 revenues and $1213.23 million, or 3168.01%, of ~~second~~third quarter ~~2002~~ 2002 revenues. The decrease was primarily a result of decreased revenues of $12.1 million at ~~one of~~ our ~~Michigan~~Northern ~~locations~~A-1 location due to a large government project in in the prior year quarter and overall decreased volumes.

The Industrial Wastewater Division contributed $167.03 million, or 4341.04%, of ~~second~~third quarter 2003 revenues and $166.2 million, or 4131.49%, of ~~second~~third quarter ~~2002~~ 2002 revenues. The Industrial Wastewater Division’s revenues ~~decreased~~increased $01.21 million, or 117.35%, primarily due to ~~slight~~increased ~~declines~~revenues at our ~~Detroit~~Florida and ~~California~~Georgia facilities ~~offset~~as ~~by improvement at our Florida facility. The decreases were~~ a result of ~~decreased volumes while the Florida increase was primarily due to a~~ new customer ~~contract which generated revenues of $0~~contracts.5 ~~million in the current year quarter. Collection and processing fees generated~~ $14.8 million, or 92.5%, and $14.8 million, or 91.4%, of the Industrial Wastewater Division’s revenues for the quarters ended June 30, 2003 and 2002, respectively. By-product sales generated the remaining $1.2 million, or 7.5%, and $1.4 million, or 8.6%, of the Industrial Wastewater Division’s revenues for quarters ended June 30, 2003 and 2002, respectively.

~~The~~Operating ~~Oilfield~~Expenses. ~~Waste~~Operating ~~Division~~expenses ~~contributed~~decreased $52.3 million, or 14.31%, ~~of second~~ ~~quarter~~from ~~2003 revenues and~~ $516.85 million, orfor ~~14.6%,~~the ofquarter ~~second~~ended ~~quarter~~September 30, 2002 ~~revenues.~~ ~~The~~to ~~Oilfield~~$14.2 million for ~~Waste~~the ~~Division’s~~quarter ~~revenues~~ended ~~decreased~~September 30, ~~approximately $0~~2003.~~4 million,~~ orAs ~~7.6%.~~a ~~The~~percentage ~~Newpark~~of ~~Resources~~revenues, operating ~~agreement~~expenses ~~generated~~decreased ~~approximately~~from $284.~~3 million~~2% in ~~revenues during~~ the ~~second~~third quarter of 2002. Onto a80.0% ~~comparable basis,~~in ~~excluding~~ the ~~prior~~third ~~year~~quarter ~~Newpark business, revenues increased by $1~~2003.~~9 million compared~~ toThe ~~the~~decrease ~~prior~~was ~~year~~primarily ~~quarter~~a ~~due~~result ~~to the effect~~ of ~~improving market~~operating ~~conditions,~~improvements ~~the~~in ~~construction~~our ofIndustrial ~~additional~~Wastewater ~~waste~~Division, ~~cells~~primarily ~~and~~at our ~~acquisition of~~Detroit ~~six~~facility, ~~oilfield~~partially ~~waste~~offset ~~transfer~~by ~~stations~~increased ~~from~~margins ~~Trinity~~in ~~Storage~~our ~~Services~~Commercial LWastewater Division.P.

~~The~~Depreciation ~~Beverage~~and ~~Division contributed $4~~Amortization.~~9 million,~~ orDepreciation ~~13.1%, of second quarter 2003 revenues~~ and ~~$5.1 million,~~amortization ~~or 13.0%, of second quarter 2002 revenues. The~~expenses ~~Beverage Division’s revenues~~ decreased $0.2 million, or 411.6%, ~~primarily~~from ~~due to decreased volumes~~$1.5 million ~~Collection~~for ~~and~~the ~~processing~~quarter ~~fees generated $2.1~~ended September ~~million~~30, ~~or 42.9%,~~2002 ~~and~~to $21.23 million, ~~or 43.1%, of the Beverage Division’s revenues~~ for the ~~quarters~~ quarter ended ~~June~~September 30, 2003 ~~and 2002, respectively~~. ~~By-product sales~~ ~~generated~~As ~~the~~a ~~remaining~~percentage ~~$2.8 million,~~of ~~or 57.1%~~revenues, depreciation and ~~$2.9 million,~~amortization orexpenses 56decreased from 7.96%, of in the ~~Beverage~~third ~~Division’s~~quarter ~~revenues~~2002 ~~for~~to ~~quarters~~7.4% ~~ended~~in ~~June 30,~~the ~~2003~~third ~~and~~quarter ~~2002, respectively~~2003.

~~Operating~~22 ~~Expenses. Operating expenses increased $2.5 million, or 9.7%, from~~ $26.0 million for the quarter ended June 30, 2002 to $28.6 million for the quarter ended June 30, 2003. As a percentage of revenues, operating expenses increased from 66.2% in the second quarter 2002 to 76.7% in the second quarter 2003. The increase was primarily a result of the non-renewal of our agreement with Newpark Resources and the acquisition of the Trinity transfer stations in our Oilfield Waste Division. The operating margins generated by the Trinity transfer

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $0.9 million, or 18.6%, from $4.8 million for the quarter ended September 30, 2002 to $3.9 million for the quarter ended September 30, 2003. The decrease was primarily a result of decreased salaries, benefits and professional fees. As a percentage of revenues, selling, general and administrative expenses decreased from 24.6% in the third quarter 2002 to 22.2% in the third quarter 2003.

~~stations~~ Asset ~~are~~Impairment. ~~not~~During asthe ~~great~~third asquarter ~~the~~of ~~margins~~2003, ~~attributable~~impairment indicators arose prompting us to perform the ~~Newpark~~impairment test on our long-term assets as ~~Resources~~dictated ~~agreement.~~by InSFAS ~~addition,~~No. 144. ~~operating~~As ~~margins~~a inresult of our ~~Commercial~~ ~~and~~review, ~~Industrial~~we ~~Wastewater~~recorded ~~Divisions~~a ~~were~~charge ~~for~~of $12.0 million ~~the~~as ~~most~~of ~~part~~September 30, ~~lower~~2003. in During the ~~second~~third quarter of ~~2003~~2002, several ~~compared~~goodwill impairment indicators arose prompting us to perform the impairment ~~comparable~~test ~~period~~dictated ~~last~~by ~~year~~SFAS No. 142. Based on the results of our review, we recorded a charge of $35.4 million as of September 30, 2002.

~~Depreciation and~~Special ~~Amortization~~Income. ~~Depreciation~~Special ~~and~~income ~~amortization~~in ~~expenses~~the ~~decreased $0.1 million,~~third orquarter ~~4.7%,~~of ~~from~~2002 ~~$2.7 million~~was ~~for~~recorded in ~~the~~connection ~~quarter~~with ~~ended~~insurance ~~June 30,~~proceeds ~~2002~~of to $2.61 million ~~for~~received ~~the~~from ~~quarter~~a ~~ended~~claim filed ~~June 30,~~as ~~2003. As~~ a ~~percentage~~result of ~~revenues, depreciation~~the ~~and~~temporary ~~amortization~~closing ~~expenses~~of ~~increased~~our ~~from~~Detroit ~~6.9%~~facility in ~~the second~~August ~~quarter 2002 to 7~~1999.~~0% in the second quarter 2003.~~

~~Selling, General~~Interest ~~and~~Expense ~~Administrative Expenses. Selling, general~~ and ~~administrative~~ ~~expenses~~Other ~~increased $3.8 million~~Income, ~~or 67~~net.~~2%,~~ ~~from~~Interest ~~$5.7 million~~expense ~~for the~~and ~~quarter ended June 30~~other income, ~~2002~~net towas $91.52 million for the ~~quarter~~quarters ended ~~June~~September 30, 2003. ~~The increase was a result of the write-off of $2.6 million of professional fees incurred in connection with our efforts to refinance the Company~~ and ~~severance expense of $1~~ 2002.~~5 million~~ ~~primarily~~Lower ~~relating~~debt tolevels ~~the~~resulted ~~amount awarded to our former Chief Financial Officer~~ in ~~his~~decreased ~~arbitration~~interest ~~proceeding. As~~expense athat ~~percentage~~was ~~of revenues, selling, general and administrative expenses~~offset by increased ~~from~~interest 14rates.~~5% in the second quarter 2002 to 25.5% in the second quarter~~ ~~2003.~~

~~Special~~ Income Taxes. ~~Special~~The provision for income intaxes for the ~~second~~ quarter ofended September 30, 2003 was a$40,000 ~~result of~~compared ~~an adjustment made~~ to ~~our~~a ~~Reliance~~benefit ~~liquidation~~of ~~reserve~~$2.1 million ~~Reliance Insurance Company provided casualty insurance coverage~~ for the quarter ~~Company.~~ended ~~In October 2001~~September 30, ~~Reliance~~ ~~was~~2002. ~~declared~~The ~~insolvent~~significant bybenefit ~~the~~in ~~Insurance Commissioner of~~ the ~~State~~prior ofyear ~~Pennsylvania. During the fourth~~ quarter ofwas ~~2001,~~primarily ana ~~initial~~result ~~reserve~~ of ~~$3.5 million was established for any claims or lawsuits asserted against~~ the ~~Company for~~release ~~which~~of ~~insurance~~valuation ~~coverage~~allowance ~~was~~on ~~not to be provided by Reliance and that were~~net ~~not~~operating ~~resolved~~losses ~~prior~~due to ~~Reliance~~tax ~~being~~law ~~placed~~changes, ~~into~~resulting ~~liquidation.~~in ~~Subsequent adjustments are made to~~ the ~~reserve~~recognition ~~based on certain settled obligations and known claims. During the second quarter~~ of ~~2003, as~~ a ~~result of a review of~~ ~~potential~~benefit ~~claims~~carryback ~~and~~claim ~~related~~filed ~~costs,~~by the ~~reserve was reduced by $0~~Company.~~1 million~~ ~~resulting in special income of a like amount.~~

~~Special~~ Nine ~~income~~Months inEnded the second quarter of 2002 was recorded in connection with special charges recorded in December 2000 for an accrual to cover the cost of disposing of certain waste located at our former Re-Claim Louisiana facility. Based on an analysis of the remaining liability and the waste left to be processed as of JuneSeptember 30, ~~2002,~~2003 itand ~~was determined that we were overaccrued~~2002 ~~by approximately $0.1 million, resulting in special income of a like amount.~~

~~Interest~~Revenues. ~~Expense~~Revenues ~~and~~for ~~Other~~the ~~Income,~~nine ~~net.~~months ~~Interest~~ended ~~expense and other income~~September 30, ~~net~~2003 ~~increased~~decreased ~~approximately~~ $02.47 million, or 154.9%, from $255.29 million for the ~~quarter~~ ~~ended~~nine ~~June~~months ended September 30, 2002 to $253.62 million for the ~~quarter~~nine months ended ~~June~~September 30, 2003. ~~The increase was a result of increased interest expense.~~

~~Income Taxes.~~ The ~~provision~~Commercial ~~for~~Wastewater ~~income~~Division ~~taxes~~contributed ~~decreased~~$32.4 million, ~~approximately~~or 60.8%, and $037.1 million, ~~from~~or ~~$140~~66.3%,~~000~~ of revenues for the ~~quarter~~nine months ended ~~June~~ September 30, 2003 and 2002, torespectively. The decrease was primarily a result of decreased revenues of $~~15,000~~3.7 million ~~for~~at our Northern A-1 location due to a large government project in the prior year and overall decreased volumes. In ~~quarter~~addition, ~~ended~~revenues ~~June~~decreased approximately $1.0 ~~30,~~million ~~2003~~due to the transfer of assets from the Commercial Wastewater Division to the Industrial Wastewater Division (note corresponding increase below).

~~Six~~The ~~Months~~Industrial ~~Ended~~Wastewater ~~June~~Division contributed $20.8 million, or 39.2%, and $18.8 million, or 33.7%, of revenues for the nine months ended September 30, 2003 and 2002, respectively. The Industrial Wastewater Division’s revenues increased $2.0 million, or 10.7%, primarily due to increased revenues at our Florida facility and a new customer contract which generated $1.7 million in revenues. There was also an increase as a result of the transfer of certain assets previously accounted for in the Commercial Wastewater Division. These increases were offset by a slight decrease at our Detroit facility.

~~Revenues~~Operating Expenses. Operating expenses decreased $0.7 million, or 1.6%, ~~Revenues~~from $43.7 million for the ~~six~~nine months ended ~~June~~September 30, ~~2003~~2002 ~~decreased~~to $143.10 million, orfor 1the nine months ended September 30, 2003.5% As a percentage of revenues, operating expenses increased from ~~$75~~78.~~2 million~~1% for the ~~six~~nine months ended ~~June~~ September 30, 2002 to ~~$74~~ 80.~~1 million~~8% for the ~~six~~nine months ~~ending~~ended ~~June~~September 30, 2003. Operating margins in both our Commercial Wastewater Division and our Industrial Wastewater Division were lower as a result of deteriorating market conditions and operating costs not declining in relation to our revenue decrease.

~~The~~Depreciation ~~Commercial~~and ~~Wastewater~~Amortization. ~~Division~~Depreciation ~~contributed~~and amortization expenses decreased $~~22.~~0.3 million, or 295.7%, ~~and~~ from $234.86 million, ~~or 31.6%, of revenues~~ for the ~~six~~nine months ended ~~June~~ September 30, ~~2003 and~~ 2002, ~~respectively.~~to ~~The decrease was primarily a result of decreased revenues of~~ $14.63 million atfor ~~one~~the ofnine ~~our~~months ~~Michigan~~ended ~~locations~~September 30, 2003. ~~due~~As to a ~~large~~percentage ~~government project~~of inrevenues, ~~the~~depreciation ~~prior year period~~ and ~~decreased~~amortization ~~volumes.~~remained ~~In addition, revenues~~the ~~decreased~~same ~~slightly~~at ~~due~~8.1% tofor the ~~transfer~~nine ofmonths ~~assets~~ended ~~from~~September 30, ~~the~~2003 ~~Commercial~~and ~~Wastewater Division to the Industrial Wastewater Division (note corresponding increase below)~~2002.

~~The Industrial Wastewater Division contributed $30.8 million, or 41.5%, and~~23 ~~$30.1 million, or 40.1%, of revenues for the six months ended June 30, 2003 and~~ 2002, respectively. The Industrial Wastewater Division’s revenues increased $0.7 million, or 2.1%, primarily due to increased revenues at our Florida facility and a new customer contract which generated $0.9 million in revenues. There was also a slight increase as a result of the transfer of certain assets previously accounted for in the Commercial Wastewater Division. These increases and an increase at our Arizona facility were partially offset by decreased volumes at our Detroit and California facilities. Collection and processing fees generated $28.3 million, or 91.9%, and $27.2 million, or 90.4%, of the Industrial Wastewater Division’s revenues for the six months ended June 30, 2003 and 2002, respectively. By-product sales generated the

25 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $2.1 million, or 16.2%, from $12.8 million for the nine months ended September 30, 2002 to $14.9 million for the nine months ended September 30, 2003. The increase was a result of the write-off of $2.6 million of professional fees incurred in connection with our efforts to refinance the Company and an increase in severance expense of $1.4 million primarily relating to the amount awarded to our former Chief Financial Officer in his arbitration proceeding and severance associated with the downsizing of our corporate office. These increases were offset by decreased salaries and benefits of $0.7 million and decreased bad debt expense of approximately $0.5 million. As a percentage of revenues, selling, general and administrative expenses increased from 22.9% for the nine months ended September 30, 2002 to 28.0% for the nine months ended September 30, 2003.

~~remaining~~ Special $2Income.5 Special income in the nine months ended September ~~million~~30, 2003 orwas 8a result of an adjustment made to our Reliance liquidation reserve.1% Reliance Insurance Company provided casualty insurance coverage for the Company. In October 2001, ~~and~~Reliance was declared insolvent by the Insurance Commissioner of the State of Pennsylvania. During the fourth quarter of 2001, an initial reserve of $23.95 million, was established for any claims or lawsuits 9asserted against the Company for which insurance coverage was to be provided by Reliance and that were not resolved prior to Reliance being placed into liquidation.~~6%,~~ ofSubsequent adjustments are made to the ~~Industrial~~reserve ~~Wastewater~~based on ~~Division’s~~certain ~~revenues~~settled ~~for~~obligations and known claims. During the ~~six~~nine months ended ~~June~~ September 30, 2003, as a result of a review of potential claims and ~~2002~~related costs, the reserve was reduced by $0.4 million resulting in special income of a ~~respectively~~like amount.

~~The~~Special ~~Oilfield~~income ~~Waste~~during ~~Division~~the ~~contributed~~nine ~~$11.0 million,~~months orended ~~14.9%~~September 30, ~~and~~2002 ~~$11.2~~was ~~million,~~recorded orin ~~14.8%,~~connection ofwith ~~revenues~~special ~~for~~charges ~~the~~recorded ~~six~~in ~~months~~December ~~ended~~2000 ~~June 30,~~for ~~2003~~an accrual ~~and~~to ~~2002, respectively.~~cover ~~The~~the ~~Oilfield~~cost ~~Waste~~of ~~Division’s~~disposing ~~revenues~~of ~~decreased~~certain ~~approximately~~waste located at our former ~~$0.2 million,~~Re-Claim orLouisiana 1facility.~~4%.~~ ~~The~~Based ~~Newpark~~on ~~Resources~~an ~~agreement~~analysis ~~generated~~of ~~approximately~~the remaining liability ~~$4.7 million~~and inthe ~~revenues~~waste ~~for~~left ~~the~~to ~~six~~be ~~months~~processed ~~ended~~as of June 30, 2002~~. On a comparable basis~~, ~~excluding~~it ~~the~~was ~~prior~~determined ~~year~~that we ~~Newpark~~were ~~business,~~overaccrued ~~revenues increased~~ by approximately $40.51 million, ~~compared~~resulting toin ~~the~~special ~~prior~~income of ~~year~~a ~~period~~like ~~due~~amount. toIn addition, special income in the ~~effect~~third quarter of 2002 was ~~improving~~recorded ~~market~~in ~~conditions,~~connection ~~the~~with ~~construction~~insurance ofproceeds ~~additional~~received ~~waste~~of ~~cells~~$2.1 million ~~and~~from ~~our~~a ~~acquisition~~claim filed as a result of ~~six~~the ~~oilfield~~temporary ~~waste~~closing ~~transfer~~of ~~stations~~our ~~from~~Detroit ~~Trinity~~facility ~~Storage~~in ~~Services~~August L1999.P.

~~The~~Interest ~~Beverage~~Expense ~~Division~~and ~~contributed~~Other ~~$10.3 million~~Income, ~~or 13~~net.~~9%,~~ ~~and~~Interest ~~$10.1 million, or~~expense ~~13.5%, of revenues for the six months ended June 30, 2003~~ and ~~2002,~~other ~~respectively.~~income, ~~The~~net ~~Beverage Division’s revenues~~ increased $0.1.5 million, or 1 48.4%, ~~primarily~~from ~~due to increased volumes~~$3.1 million ~~Collection~~for ~~and~~the ~~processing fees~~nine ~~generated~~months ~~$4.5~~ended September ~~million~~30, or2002 ~~43.7%,~~to ~~and~~ $4.16 million, ~~or 40.6%, of the Beverage Division’s revenues~~ for the ~~six~~nine months ended ~~June~~ September 30, 2003 ~~and 2002, respectively~~. ~~By-product~~This ~~sales~~increase ~~generated~~resulted ~~the~~from ~~remaining~~higher ~~$5.8 million,~~interest orrates ~~56.3%,~~ and related ~~$6.0 million,~~financial orfees ~~59.4%,~~on of the ~~Beverage Division~~Company’s ~~revenues~~credit ~~for six months ended June 30, 2003 and 2002, respectively~~facility.

~~Operating Expenses~~Income Taxes. ~~Operating~~The ~~expenses~~provision ~~increased~~for ~~$5.3 million,~~income ortaxes ~~10.3%, from $51.2 million~~ for the ~~six~~nine months ended ~~June~~ September 30, ~~2002~~2003 towas $~~56.5 million for the six months ended June 30~~75,000 ~~2003.~~compared Asto a ~~percentage~~benefit of ~~revenues, operating expenses increased from 68~~$2.1%6 million for the nine ~~six~~ months ended ~~June~~September 30, 2002 ~~to 76~~.~~3% for~~ ~~the~~The ~~six~~significant ~~months~~benefit ~~ended~~in ~~June 30,~~the ~~2003.~~prior year ~~The increase~~ was primarily a result of ~~the~~ ~~non-renewal of our agreement with Newpark Resources and~~ the ~~acquisition~~release of ~~the~~ ~~Trinity~~valuation ~~transfer~~allowance ~~stations~~on ~~for our Oilfield Waste Division. The operating~~net ~~margins~~operating ~~generated~~losses bydue ~~the Trinity transfer stations are not as great as the margins attributable~~ to ~~the~~tax ~~Newpark~~law ~~Resources agreement. In addition~~changes, ~~operating~~ ~~margins~~resulting in ~~our~~the ~~Commercial~~recognition ~~and~~of ~~Industrial Wastewater Divisions also~~a ~~were~~benefit ~~for~~carryback ~~the~~claim ~~most~~filed ~~part~~by ~~lower in~~ the ~~six months ended June 30, 2003 compared to the comparable period last year~~Company.

Depreciation and Amortization. Depreciation and amortization expenses decreased $0.1 million, or 2.6%, from $5.4 million for the six months ended June 30, 2002 to $5.3 million for the six months ended June 30, 2003. As a percentage of revenues, depreciation and amortization expenses decreased from 7.2% for the six months ended June 30, 2002 to 7.1% for the six months ended June 30, 2003.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $3.0 million, or 26.3%, from $11.6 million for the six months ended June 30, 2002 to $14.6 million for the six months ended June 30, 2003. The increase was a result of the write-off of $2.6 million of professional fees incurred in connection with our efforts to refinance the Company and severance expense of $1.5 million primarily relating to the amount awarded to our former Chief Financial Officer in his arbitration proceeding.These increases were offset by decreased salaries and benefits. As a percentage of revenues, selling, general and administrative expenses increased from 15.4% for the six months ended June 30, 2002 to 19.8% for the six months ended June 30, 2003.

Special Income. Special income in the six months ended June 30, 2003 was a result of an adjustment made to our Reliance liquidation reserve. Reliance Insurance Company provided casualty insurance coverage for the Company. In October 2001, Reliance was declared insolvent by the Insurance Commissioner of the State of Pennsylvania. During the fourth quarter of 2001, an initial reserve of $3.5 million was established for any claims or lawsuits asserted against the Company for which insurance coverage was to be provided by Reliance and that were not resolved prior to Reliance being placed into liquidation. Subsequent adjustments are made to the reserve based on certain settled obligations and known claims. During the six months ended June 30, 2003, as a result of a review of potential claims and related costs, the reserve was reduced by $0.4 million resulting in special income of a like amount.

Special income during the six months ended June 30, 2002 was recorded in connection with special charges recorded in December 2000 for an accrual to cover the cost of disposing of certain waste located at our former Re-Claim Louisiana facility. Based on an analysis of the remaining liability and the waste left to be processed as of June 30, 2002, it was determined that we were overaccrued by approximately $0.1 million, resulting in special income of a like amount.

Interest Expense and Other Income, net. Interest expense and other income, net increased $2.1 million, or 56.9%, from $3.7 million for the six months ended June 30,

2002 to $5.8 million for the six months ended June 30, 2003. This increase resulted from higher interest rates and related financial fees on the Company’s credit facility.

Income Taxes. The provision for income taxes decreased approximately $0.1 million from $204,000 for the six months ended June 30, 2002 to $60,000 for the six months ended June 30, 2003.

Liquidity and Capital Resources

General

Our capital requirements for continuing operations consist of our general working capital needs, scheduled principal payments on our debt obligations and capital leases, funding of our finite risk bonding program, certain contractual commitments and planned capital expenditures. Our capital resources consist of of cash reserves, cash generated from operations, cash proceeds from planned ~~asset~~ asset sales and funds available under our revolving credit facility. ~~On July 31,~~ ~~2003, we received a short-term extension of the credit facility to provide for~~ ~~our near-term working capital needs and allow additional time to secure new financing. The facility, which matures on August 29, 2003, had an outstanding balance of $79.8 million at June 30, 2003.~~

WeAs ~~continue~~of toSeptember 30, ~~review~~2003 ~~all~~and ofDecember 10, ~~our~~2003, ~~alternatives~~we tohad ~~reduce~~outstanding borrowings orof ~~refinance~~$19.8 million and $13.1 million, respectively, under our ~~indebtedness~~revolving credit facility. ~~These~~Letters ~~alternatives~~of ~~include~~credit ~~sales~~under ofthe ~~assets~~credit orfacility ~~operating~~totaled ~~divisions~~$6.7 million oras ~~issuance~~ of ~~common~~September 30, ~~stock~~2003 orand ~~other~~December 10, ~~securities~~2003. ~~The~~Advances ~~proceeds of any~~under ~~such~~the ~~transactions~~credit ~~would~~facility becurrently ~~used~~bear tointerest ~~reduce~~at orthe ~~replace~~prime ~~our~~rate ~~outstanding~~plus ~~debt~~4. ~~There~~0%. ~~can~~As beof September 30, no2003 ~~assurance~~and December 10, ~~however~~2003, ~~that~~amounts ~~any~~outstanding ~~such~~under ~~transaction~~the ~~will be~~credit ~~successfully~~facility ~~consummated.~~were ~~Any~~accruing ~~refinancing~~interest orat ~~business~~approximately ~~sale~~8.0%, ~~transaction~~excluding isamortization ~~expected~~of tofinancing ~~result~~costs. inAs ~~either~~of ~~substantial~~December 10, ~~dilution~~2003, tothe ~~current~~unused ~~stockholders~~portion orof the credit ~~further~~facility ~~reduction~~was in$1.4 million, none of which was available without the ~~size~~prior consent of ~~the~~our ~~Company~~lenders.

~~On July 31, 2003, we sold three of our businesses (see Note 4 to our unaudited~~24 ~~condensed consolidated financial statements) for total proceeds of $68.0~~ million. From these proceeds, and with the approval of our senior lenders, $59.7 million was used to reduce our debt balance, $1.9 million was used to pay deferred interest and fees due on our credit facility, $2.1 million was used to pay various transaction expenses and $2.3 million was used to establish a fund for future severance of employees as the Company is restructured. In addition, an escrow of $2.0 million was established from the proceeds pending the determination of the final purchase price, which is subject to adjustment based upon the net worth of the acquired businesses on the closing date.

~~Our~~During ~~recent~~the ~~performance~~first ~~has~~quarter ~~caused~~of us2003, tothe ~~violate~~terms ~~various financial covenants~~ of our credit facility. ~~Previously, our lenders had been issuing short-term~~were ~~waivers.~~amended ~~However,~~to aschange ofcertain ~~the~~financial ~~date of this filing~~covenants, weadd ~~are~~additional ~~not~~weekly ~~in compliance with~~and ~~certain~~monthly financial covenants, ~~set~~and ~~forth~~to inmake ~~the~~various ~~credit~~enhancements ~~agreement.~~to ~~Noncompliance with these provisions permits~~ the ~~lenders to, among other things, accelerate~~collateral ~~the~~documentation ~~debt~~securing ~~under~~ the ~~credit~~loans. ~~facility~~The ~~and~~amendment ~~foreclose~~also onrequired ~~the~~that ~~collateral~~we ~~provided.~~take ~~Our~~certain ~~lenders~~steps ~~have~~to ~~not~~reduce ~~declared an event of default as a result of~~ our ~~noncompliance;~~ ~~however~~leverage, ~~they~~including ~~have retained~~ the ~~right~~sale toof doone ~~so.~~or Wemore businesses ~~are~~that generated in ~~discussions~~ ~~with~~2002 ~~our~~or ~~lenders~~were ~~regarding~~expected ~~amending~~to ~~the~~generate ~~credit~~in ~~facility~~2003 ~~to,~~at ~~among~~least ~~other~~$3.0 million ~~things,~~in ~~further~~aggregate ~~extend~~earnings ~~the~~before ~~maturity~~deduction ~~date~~ of ~~the facility~~interest, ~~provide for our~~taxes, ~~liquidity~~depreciation ~~needs~~ and ~~bring us into compliance with the various financial covenants contained therein~~amortization. WeIn ~~are~~exchange, ~~also attempting to re-negotiate~~ the ~~payment~~maturity ~~terms~~date of ~~certain~~the ~~non-essential unsecured contractual~~credit ~~obligations.~~facility ~~There~~was ~~can~~extended beto noJuly 31, ~~assurance~~2003, ~~that~~previously wescheduled ~~will~~loan becommitment ~~successful~~reductions inwere ~~obtaining~~eliminated, anand, ~~extension~~subject ofto ~~the~~weekly ~~maturity~~restrictions, ~~date~~availability under of the credit facility orwas ~~amendments~~increased toby ~~any~~approximately of$3.5 million ~~the financial covenants or terms contained~~during ~~therein or will be successful in re-negotiating~~ the ~~payment~~months ~~terms~~ of ~~any~~ ~~unsecured~~April ~~contractual~~through ~~obligation~~July 2003.

The report issued by our auditors on our December 31, 2002 financial statements stated that the working capital deficit caused by the close proximity of the maturity of our revolving credit facility, and the recent lack of compliance with our credit facility, raise substantial doubt about our ability to continue as a going concern. If we are unable to successfully restructure our indebtedness, we may be required to seek protection under the bankruptcy laws.

During the first quarter of 2003, the terms of the credit facility were amended to change certain financial covenants, add additional weekly and monthly financial covenants, and to make various enhancements to the collateral documentation securing the loans. The amendment also required that we take certain steps to reduce our leverage, including the sale of one or more businesses that generated in 2002 or are expected to generate in 2003 at least $3.0 million in aggregate earnings before deduction of interest, taxes, depreciation and amortization. In exchange, the maturity date of the credit facility was extended to July 31, 2003, previously scheduled loan commitment reductions were eliminated, and, subject to weekly restrictions, availability under the credit facility was

increased by approximately $3.5 million during the months of April through July 2003. As we sell certain businesses per the amendment above, the sale of such assets could result in an impairment below the current carrying value.

In July 2003, the terms of the credit facility were further amended to (1) extend the maturity date of the credit facility to August 29, 2003, (2) renew until December 31, 2003 approximately $8.0 million of letters of credit issued on our behalf, and (3) defer until the earlier of August 29, 2003 or the date of sale of various operations the $0.6 million interest payment scheduled for payment on June 30, 2003. In return, we agreed to cash collateralize all obligations under the letters of credit described above on or before the termination of the credit facility and pay a $200,000 amendment fee. In addition, we agreed that we would not borrow any additional funds under the credit facility without the prior consent of our lenders.

~~The~~In ~~debt~~August ~~outstanding under the credit facility may be accelerated by the lenders if~~2003, ~~among other things, a change in control of~~ the ~~Company~~terms ~~occurs or certain individuals cease to serve as an executive officer~~ of the ~~Company~~credit ~~and are~~facility ~~not~~were ~~replaced~~further ~~within~~amended ~~sixty days by an individual reasonably satisfactory~~ to ~~the lenders. The lenders have waived through July~~(1) ~~31,~~extend ~~2003 an event of default arising from~~ the ~~resignation~~maturity ofdate ~~Michael P. Lawlor, our former Chief Executive Officer. On August 29, 2002, William DeArman, the Chairman~~ of the ~~Board~~credit ~~of Directors,~~facility ~~was~~to ~~appointed interim Chief Executive Officer. On October~~November 3130, ~~2002~~2003, ~~the~~ ~~Board of Directors made his position permanent. The lenders have not~~(2) ~~approved~~modify ~~Mr. DeArman’s~~certain ~~appointment.~~financial ~~On July 31~~covenants, ~~2003,~~and ~~Cary Grossman resigned his position as our Chief Financial Officer to assume the position of Chief Executive Officer of ERP Environmental~~ (~~see Note 4 to our unaudited condensed consolidated financial statements~~3)~~. Mr.~~ ~~Grossman’s~~reduce ~~departure will result in an additional event of default unless he is replaced on or before September 29, 2003 by an individual reasonably satisfactory to~~ the ~~lenders~~commitment amount.

ToIn ~~address~~November ~~our~~2003, ~~liquidity~~the ~~problems~~terms of the credit facility were further amended to (1) extend the maturity date of the credit facility to February 2, ~~our~~2004, ~~Board~~(2) renew until March 31, 2004 approximately $6.7 million of ~~Directors~~letters ~~and~~of ~~management~~credit issued ~~have~~on ~~taken~~our behalf, (3) modify certain financial covenants, (4) reduce the commitment ~~following~~amount, ~~actions:~~and (5) approve certain asset sales.

• In ~~engaged~~December ~~a financial advisor~~2003, as requested by our lenders, to focus on financial restructuring plans; • implemented cost cutting measures such as reductions in workforce and a temporary freeze on previously authorized pay increases; • sold all of the ~~Beverage~~terms ~~and Oilfield Divisions, the Romic operations in the Industrial Wastewater Division and substantially all~~ of the ~~Texas~~credit ~~and~~facility ~~Northeast~~were ~~operations~~further inamended ~~our Commercial Wastewater Division, and used a substantial portion of the proceeds therefrom~~ to modify ~~reduce~~certain ~~outstanding~~financial ~~debt;~~covenants and •approve ~~identified~~certain ~~for~~asset ~~sale or closure several additional underperforming businesses; and~~sales.

~~Management~~ The debt outstanding under the credit facility may be accelerated by the lenders if, among other things, a change in control of the Company occurs or certain individuals cease to serve as an executive officer of the Company and are not replaced within sixty days by an individual reasonably satisfactory to the lenders. On July 31, 2003, Cary Grossman resigned his position as our Chief Financial Officer to assume the position of Chief Executive Officer of ERP Environmental (see Note 5 to our unaudited condensed consolidated financial statements). Mr. Grossman’s departure will result in an event of default unless he is ~~also:~~replaced on or before February 2, 2004 by an individual reasonably satisfactory to the lenders.

• To ~~pursuing~~address our liquidity problems, during the ~~sale~~second half of ~~certain~~2002, ~~additional~~we engaged ~~businesses;~~a •financial ~~exploring~~advisor ~~the~~to ~~possibility~~focus ofon ~~selling~~financial ~~other~~restructuring ~~operations;~~plans, implemented •cost ~~analyzing~~cutting ~~each~~measures such as reductions in workforce, sold substantially all of the ~~Company’s~~Texas operations ~~for~~in ~~opportunities~~the Commercial Wastewater Division and used a substantial portion of the proceeds therefrom to reduce ~~costs~~outstanding debt, ~~improve~~and ~~processes~~identified ~~and~~for ~~increase~~sale ~~efficiencies;~~or •closure ~~taking~~several ~~steps~~additional underperforming businesses. During the first six months of 2003, we continued to ~~substantially~~evaluate ~~reduce~~our mix of business units, and we sold the ~~size~~Northeast operations in the Commercial Wastewater Division and used the ~~cost~~proceeds oftherefrom ~~our~~to ~~corporate~~reduce ~~staff;~~debt and •pay transaction ~~actively~~expenses. ~~seeking~~During ~~new~~the ~~financing~~third quarter of 2003, we sold our Waste Stream Environmental business.

AsOn ~~of June~~July 3031, 2003, ~~and~~we ~~August 4,~~sold ~~2003~~our Oilfield Waste Division, weour ~~had~~Beverage Division ~~outstanding~~and ~~borrowings~~our Romic Environmental Technologies business (see Note 5) for total proceeds of $7968.8 0 million. From these proceeds, and with the approval of our senior lenders, $2059.17 million, ~~respectively,~~was ~~under~~used to reduce our ~~revolving~~debt ~~credit~~balance, ~~facility~~$1.9 ~~Letters~~million ofwas ~~credit~~used ~~under~~to ~~the~~pay ~~credit~~deferred ~~facility~~interest ~~totaled~~and fees due on our credit facility, $82.01 million aswas ofused ~~June 30,~~to ~~2003~~pay various transaction expenses and ~~August~~$2.3 4,million ~~2003.~~was used ~~Advances~~to ~~under~~establish ~~the~~a ~~credit~~fund ~~facility~~for ~~currently~~severance ~~bear interest~~of atemployees as the ~~prime~~Company ~~rate~~is restructured. ~~plus~~In ~~4.0%.~~addition, Asan escrow of ~~June~~$2.0 ~~30,~~million ~~2003~~was ~~and~~established ~~August 4,~~from the ~~2003,~~proceeds ~~amounts~~pending ~~outstanding~~the ~~under~~determination of the ~~credit~~final ~~facility~~purchase ~~were~~price, ~~accruing~~which ~~interest at~~was ~~approximately~~subject ~~8.0%,~~to ~~excluding~~adjustment ~~amortization~~based upon the net worth of ~~financing~~the ~~costs~~sold businesses on the closing date. As a result of ~~August 4, 2003,~~the determination of the ~~unused~~net ~~portion~~worth of the businesses ~~credit~~sold, ~~facility~~the purchase price was reduced by $3.5 million. Accordingly, the ~~none~~escrowed offunds ~~which~~were returned to ERP Environmental, we sold certain software ~~was~~to ~~available~~ERP Environmental for $0.3 million, we recorded a note payable to ERP Environmental of $1.2 million and recognized a

2825

loss of $1.6 million on the sale. In addition, we received payment for the remaining amounts due for transition services.

Since September 30, 2003, we have sold our Northern A-1, Gateway Terminal Services and National Solvent Exchange businesses for $7.4 million and used the proceeds to reduce debt and pay transaction expenses. As of the date of this report, we are in various stages of negotiations to sell substantially all of our remaining business units to reduce our indebtedness. With the assistance of our financial advisors, we have continued to evaluate the viability of the Company after each business unit sale. However, to date, we have not been able to develop a business plan that we believe will support our remaining debt and reduced corporate overhead. As a result, we may be forced to liquidate the Company either through bankruptcy or an orderly wind down of operations. Although we are in negotiations with third parties for the sale of substantially all remaining business units, there can be no assurance that any further sale transactions will be successfully consummated or that the proceeds will be adequate to satisfy our indebtedness. We believe that a complete liquidation of the Company would result in no return to shareholders.

In November 2003, the American Stock Exchange (“Amex” or “Exchange”) notified us that the Company was no longer in compliance with the Exchange’s listing standards due to the substantial impairment of our financial condition. As a result, the Amex notified us that it intended to proceed with the filing of an application with the SEC to delist and deregister our common stock from the Exchange. We did not appeal the Exchange’s determination. The Exchange suspended trading in our common stock on December 10, 2003 and is proceeding with the delisting. Our shares now trade on the over-the-counter “Pink Sheets.”

The report issued by our auditors on our December 31, 2002 financial statements stated that the working capital deficit caused by the close proximity of the maturity of the revolving credit facility, and the recent lack of compliance with the credit facility, raised substantial doubt about our ability to continue as a going concern. Notwithstanding this statement, the condensed consolidated financial statements have been prepared on a basis which assumes that we will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result if our underlying assumptions prove to be incorrect.

Operating Cash Flows

Cash flows from ~~operations~~operating activities were a use of cash of $28.76 million and a provision of cash of $511.64 million for the ~~six~~nine months ended ~~June~~ September 30, 2003 and 2002, respectively. Cash flows from ~~operations~~operating activities for the nine ~~six~~ months ended ~~June~~September 30, 2003 were negatively impacted by costs related to our ~~re-financing~~refinancing efforts and the $2.57 million expended for our finite risk -bonding program. We had negative net working capital of $8225.26 million at ~~June~~ September 30, 2003, compared to negative net working capital of $75.9 million at December 31, 2002. This ~~decrease~~improvement in net working capital was primarily due to ~~decreased~~the ~~accounts~~pay-down ~~receivable~~of ~~and decreased~~debt ~~cash on hand offset by decreased accounts payable and accrued liabilities~~ as ~~well~~a asresult of the ~~investment~~sale inof ~~our~~businesses ~~finite~~to ~~risk bonding program~~ERP Environmental.

At ~~June~~September 30, 2003, we had a $0.63 million reserve to provide for the cost of future closures of facilities. The amount of this unfunded reserve is ~~primarily~~ primarily based on the estimated total cost to close the facilities as calculated in accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations.” We adopted SFAS No. 143 in January 2003. This standard addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated costs. SFAS No. 143 requires that the discounted fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Historically, we had recorded the gross estimated retirement obligation. During the first quarter, we recognized $2.7 million of income as a result of adoption of SFAS No. 143.

In addition, regulatory agencies require us to post financial assurance to assure that when a facility is closed, all waste at the facility will be treated and the facility will be closed appropriately. As of ~~June~~September 30, 2003, we had in place a total of $122.46 million of financial assurance in the form of letters of credit and bonds to provide for the cost of future closings of ~~facilities. As~~ of ~~June 30, 2003, we also had a $2~~facilities.~~5 million unfunded reserve~~ ~~to provide for the costs to remediate soil and groundwater contamination at our~~ facility in East Palo Alto, California, and our share of the costs to remediate drum reconditioning or disposal sites previously used by our subsidiaries. In the next 12 months, we expect to pay approximately $0.3 million of these remediation reserves.

~~At June 30, 2003, we also had a $2.9 million unfunded reserve for the payment~~26 ~~of insurance claims that will not be covered by Reliance Insurance Company, our~~ former insurance carrier that was placed into liquidation. Certain of these insurance claims have been resolved and we have committed to making payments of $0.5 million during the remainder of 2003 and $0.7 million in 2004. Additional payments above these commitments may be required but are unknown at this time.

InAt ~~October~~September 30, ~~2002~~2003, Uwe Salso ~~Liquids~~had ofa ~~Detroit, Inc~~$2.,7 million ~~one~~unfunded ofreserve ~~our~~for ~~subsidiaries, entered~~the ~~into~~payment anof ~~agreement~~insurance ~~with~~claims ~~the~~that ~~U.S.~~will ~~Attorney~~not inbe ~~Detroit~~covered ~~resolving~~by ~~the~~Reliance ~~investigation~~Insurance ofCompany, our ~~Detroit~~former ~~facility~~insurance carrier that was ~~commenced~~placed byinto ~~the Environmental Protection~~liquidation. ~~Agency~~Certain ~~(“EPA”) and the Federal Bureau~~ of ~~Investigation~~these ininsurance ~~August~~claims ~~1999. Payments~~have ofbeen ~~penalties~~resolved and ~~other~~we ~~charges~~have ~~assessed~~committed ~~by the government totaling~~to ~~$5.5 million~~making ~~will~~payments beof ~~required over five years.~~ $1.0.3 million ~~is required to be paid~~ during the ~~third~~remainder ~~quarter~~ of 2003. ~~Future~~and ~~payments consist of~~ $1.0.7 million in ~~each of~~ 2004~~, 2005 and 2006, and $1~~.~~1 million~~ inAdditional ~~2007.~~payments Inabove ~~2001, we recorded a $5.0 million unfunded reserve for~~ these ~~payments.~~commitments ~~After~~may ~~considering~~be ~~the~~required ~~net present~~but ~~value of the total obligation, this reserve was reduced to $4.1 million~~are ~~during~~unknown ~~the fourth quarter of 2002. As of June 30, 2003, the remaining net present value of the reserve was $3.9 million. The U.S. District Court will determine~~ at ~~the~~this ~~end of the five-year payment period whether and to what extent interest must be paid on the deferred payments~~time. ~~An additional charge may be~~ ~~required if interest is imposed.~~

~~Many~~In ofOctober ~~our~~2002, ~~customers~~U ~~require~~S usLiquids toof ~~post~~Detroit, ~~performance~~Inc., ~~bonds~~one toof ~~secure~~ our subsidiaries, ~~performance~~entered ~~under~~into ~~the~~an ~~terms~~agreement ofwith athe ~~contract and to guarantee that we will pay subcontractors and vendors~~U.S. WeAttorney ~~are~~in ~~also~~Detroit ~~required~~resolving ~~to provide financial~~the ~~assurance~~investigation inof ~~order~~our toDetroit ~~obtain~~facility ~~or renew operating permits and to guarantee~~ that ~~our~~ ~~permitted~~was ~~facilities~~commenced ~~will~~by bethe ~~closed in accordance with applicable law. We~~Environmental ~~establish~~Protection ~~financial~~Agency ~~assurance~~(“EPA”) ~~for~~and ~~these matters in different ways, depending on~~ the ~~jurisdiction,~~Federal ~~including~~Bureau ~~letters~~ of ~~credit,~~Investigation ~~surety~~in ~~bonds, trust agreements~~August ~~and traditional insurance~~1999. ~~The~~Under ~~market~~the ~~for~~terms ~~financial~~of ~~assurance~~the isagreement, ~~tightening and due to our current financial condition there can be no assurance that~~ we ~~will~~ beagreed ~~able~~ to ~~continue~~pay topenalties ~~obtain~~and ~~financial assurance on commercially~~other ~~reasonable~~charges ~~terms~~totaling ~~without~~$5.5 million ~~providing~~over ~~additional~~five ~~collateral, which collateral may not be available~~years. ~~Continued~~$500,000 ~~availability~~was ofpaid ~~such~~in ~~financial~~the ~~assurance in~~third ~~sufficient~~quarter ~~amounts at acceptable rates is a vital aspect~~ of ~~our~~2003 ~~ongoing operations,~~ and ~~our~~$250,000 ~~failure~~was topaid ~~obtain~~in ~~any~~each ~~such financial assurance would have a material adverse effect on our business, results~~ of ~~operations~~October and ~~financial condition.~~November ~~In January~~ 2003~~, we made the initial payment on a ten-year finite~~. ~~risk bonding program which provides up to $18~~

29 Many of our customers require us to post performance bonds to secure our performance under the terms of a contract and to guarantee that we will pay subcontractors and vendors. We are also required to provide financial assurance in order to obtain or renew operating permits and to guarantee that our permitted facilities will be closed in accordance with applicable law. We establish financial assurance for these matters in different ways, depending on the jurisdiction, including letters of credit, surety bonds, trust agreements and traditional insurance. The market for financial assurance is tightening and due to our current financial condition there can be no assurance that we will be able to continue to obtain financial assurance on commercially reasonable terms without providing additional collateral, which collateral may not be available. Continued availability of such financial assurance in sufficient amounts at acceptable rates is a vital aspect of our ongoing operations, and our failure to obtain any such financial assurance would have a material adverse effect on our business, results of operations and financial condition. In 2003, we obtained and have made the initial payments on a ten-year finite risk bonding program which provides up to $3.7 million toward potential closure obligations at our facilities, as well as up to $11.3 million of performance and permit bonding capacity. Management believes that this program will satisfy all of our bonding needs for the foreseeable future but there can be no assurance that it will be sufficient to satisfy all of our future bonding needs.

~~million~~ Operating ~~toward~~cash ~~potential~~flows ~~closure~~for the remainder of 2003 are expected to be ~~obligations~~negative. atWe expect to fund most of the shortfall with our ~~facilities~~cash reserves, asbut we ~~well~~will asalso upneed to ~~$12.4 million~~sell ofoperating ~~performance~~assets ~~bonding~~and/or borrow additional amounts on ~~capacity.~~our ~~Management~~credit ~~believes~~facility, ~~that~~neither of which can be assured. At this ~~program~~time, ~~will~~we ~~satisfy~~cannot borrow ~~all~~any ofadditional funds under our ~~bonding~~ ~~needs~~credit ~~for~~facility or retain the ~~foreseeable~~proceeds from ~~future~~asset ~~but~~sales ~~there~~without ~~can~~the beconsent noof ~~assurance~~our ~~that~~lenders. itIn addition, management ~~will~~is betaking ~~sufficient~~steps to ~~satisfy~~reduce ~~all~~corporate ofstaff ~~our~~in ~~future~~order ~~bonding~~to ~~needs~~improve operating cash flows.

Operating cash flows for the remainder of 2003 are expected to be negative. We expect to fund most of the shortfall with cash reserves, but we will also need to sell operating assets and/or borrow additional amounts on our credit facility, neither of which can be assured. At this time, we cannot borrow any additional funds under our credit facility without the consent of our lenders. We are in discussions with our lenders regarding amending the credit facility to, among other things, further extend the maturity date of the facility, provide for our liquidity needs and bring us into compliance with the various financial covenants contained therein. In addition, management is taking steps to reduce corporate staff and thus improve operating cash flows.

Investing Activities

Capital expenditures during the ~~six~~nine months ended ~~June~~September 30, 2003 were $1.3 6 million and for the remainder of the year are expected to be approximately $0.7 4 million. The majority of the capital expenditures were in our Oilfield ~~Waste~~ Waste Division for operating equipment and in our Beverage Division for plant improvements prior to the sale at July 31, 2003. The majority of the capital expenditures for the remainder of the year are for environmental compliance and plant improvements in our Industrial Wastewater Division.

Financing Activities

At ~~June~~September 30, 2003, approximately $8021.73 million of principal payments on debt obligations were payable during the next twelve months. These payments ~~are~~ are expected to be funded from asset sale proceeds ~~and from borrowings against our revolving credit facility, if the facility is extended~~.

~~Our future contractual obligations include:~~27

	Less than
Contractual Obligations:	1 year		1-2 years		2-3 years		3-4 years		4-5 years		Thereafter		Total
Debt and Capital Lease Obligations	$	80,679	$	585	$	431	$	424	$	991	$	—	$	83,110
Operating Lease Obligations		3,039		2,269		1,744		1,522		1,091		8,096		17,761
Finite Risk Bonding Program		2,290		500		500		500		400		1,600		5,790
Closure and Remediation Reserves		262		300		325		300		150		2,763		4,100
Detroit Settlement Agreement		832		605		684		773		974		—		3,868
Reliance Insolvency Obligations		774		242		—		—		—		—		1,016
Severance Obligations		2,284		560		112		—		—		—		2,956
Totals	$	90,160	$	5,061	$	3,796	$	3,519	$	3,606	$	12,459	$	118,601

Our future contractual obligations, including discontinued operations, are as follows:


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

Debt and Capital Lease Obligations		$	21,278	$	435	$	408	$	—	$	—	$	1,223	$	23,344
Operating Lease Obligations			1,291		1,105		954		746		419		1,337		5,852
Finite Risk Bonding Program			413		103		103		103		72		144		938
Detroit Settlement Agreement			1,500		—		—		—		—		—		1,500
Reliance Insolvency Obligations			574		242		—		—		—		—		816
Severance Obligations			3,164		434		—		—		—		—		3,598

	Totals	$	28,220	$	2,319	$	1,465	$	849	$	491	$	2,704	$	36,048

Our other commercial commitments expire as follows:

		Less than
Other Commercial			Less than
Other Commercial Commitments:		1 year			1-2 years			2-3 years			3-4 years			4-5 years			Thereafter			Total
Commitments:			1 year			1 –2 years			2 –3 years			3 –4 years			4 –5 years			Thereafter			Total
Standby Letters of Credit		$	~~8,006~~$	6,742	$	—$	—	$	—$	—	$	~~253~~$	253	$	—$	—	$	—$	—	$	~~8,259~~$	6,995
Performance Bonds(1)			12,723			79			2			—			—			—			12,804
Performance Bonds (1)				7,063			2			—			—			—			—			7,065
~~Totals~~	Totals	$	~~20,729~~$	13,805	$	79$	2	$	2$	—	$	~~253~~$	253	$	—$	—	$	—$	—	$	~~21,063~~$	14,060

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

New Accounting Pronouncements

~~During~~In ~~May~~January 2003, the ~~Financial~~FASB ~~Accounting Standards Board~~ issued ~~SFAS~~FIN No. ~~150~~46, “Consolidation of Variable Interest Entities- An Interpretation of Accounting ~~for~~Research ~~Certain~~Bulletin ~~Financial~~51”. ~~Instruments~~FIN 46 ~~with~~addresses ~~Characteristics~~consolidation by business enterprises of ~~both~~variable interest ~~Liabilities~~entities (“VIEs”) and ~~Equity.”~~the ~~SFAS~~primary ~~No. 150~~objective ~~clarifies~~is to provide guidance on the identification ~~accounting~~of, and financial reporting for, ~~certain~~entities over which control is ~~financial~~achieved ~~instruments~~through ~~with~~means ~~characteristics~~other ofthan ~~both~~voting ~~liabilities~~rights; ~~and~~such ~~equity~~entities ~~and~~are known as VIEs. FIN 46 requires ~~that~~an ~~those~~entity ~~instruments~~to beconsolidate ~~classified~~a asVIE ~~liabilities~~if inthe ~~statements~~entity ofhas a ~~financial~~variable ~~position.~~interest ~~Previously,~~(or ~~many~~combination of ~~those~~variable ~~financial~~interests) ~~instruments~~that ~~were~~will absorb a ~~classified~~majority asof ~~equity.~~the ~~SFAS~~entity’s ~~No. 150~~expected islosses ~~effective~~if ~~for~~they ~~financial~~occur, ~~instruments~~receive a majority of ~~entered~~the ~~into~~entity’s expected residual returns if they occur or ~~modified~~both. The guidance applies immediately to VIEs created after ~~May~~January 31, 2003, and ~~otherwise~~to isVIEs ~~effective~~in which atan enterprise obtains an interest after that date. However, on October 8, 2003, the FASB decided to grant a broader deferral of the implementation of FIN ~~beginning~~46. Pursuant to this deferral, we must complete our evaluation of VIEs that existed prior to February 1, 2003, and the ~~first~~consolidation ~~interim~~of those for which we are the primary beneficiary for financial statements issued for the first period ~~beginning~~ending after ~~June~~December 15, 2003. WeConsolidation of previously existing VIEs ~~adopted~~will ~~SFAS~~be ~~No.~~required in our December ~~150~~31, ~~during~~2003 financial statements. We are continuing to evaluate the ~~second~~impact, ~~quarter~~if ~~and~~any, ~~adoption~~FIN ~~did~~46 ~~not~~may have ~~an impact~~ on our ~~operating~~consolidated financial ~~results~~statements; orhowever, ~~financial~~we ~~position~~do not believe that we have any VIEs.

During May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial

instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 during the second quarter of 2003 and adoption did not have an impact on our operating results or financial position.

Forward Looking Statements

Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below and in “Factors Influencing Future Results and Accuracy of Forward Looking Statements” included in Part I, Item 1, of our Annual Report on Form 10-K/A for the year ended December 31, 2002. Certain statements and information set forth herein, as well as other written or oral statements made from time to time by the Company or its authorized executive officers, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. It should be noted that our forward-looking statements speak only as of the date of this report or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following:

• our ability to extend the term of our credit facility or obtain an alternative source of financing by ~~August~~February 292, ~~2003~~2004; • our ability to continue to fund our operations from borrowings permitted under our credit facility, asset sales and operating cash flows; • current defaults and possible future defaults under our credit facility if cash flows are less than we expect or we are unable to comply with the various covenants set forth in the credit agreement, and the possibility that we cannot obtain additional capital on acceptable terms if needed; • our general lack of liquidity; • the impact of any increase in interest rates under our credit facility either as a result of increases in the prime rate or as a result of changes in the facility, and the cost of alternative financing we may obtain, if available; • ~~the dilution in ownership that may occur if we obtain new financing; •~~ uncertainties caused by our inability to comply with the terms of our credit facility; • the outcome of pending litigation and administrative proceedings involving the Company, including the securities class action lawsuit and ~~stockholder~~shareholder derivative action described herein; • our Detroit subsidiary’s ability to comply with the terms of the probation that was ordered as part of its plea agreement with the U.S. Attorney; • our ability to obtain or maintain governmental permits and approvals necessary for the operation of our facilities; • our ability to obtain performance bonds, letters of credit and other financial assurances required by our customers or regulatory authorities; • our ability to improve the profitability and increase the revenues of those businesses remaining after our recent sales of businesses;

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• our ~~Detroit subsidiary’s~~ ability to comply with the terms of the probation that was ordered as part of its plea agreement with the U.S. Attorney; • our ability to obtain or maintain governmental permits and approvals necessary for the operation of our facilities; • our ability to obtain performance bonds, letters of credit and other financial assurances required by our customers or regulatory authorities; • our ability to improve the profitability and increase the revenues of those businesses remaining after our recent sale of businesses to ERP Environmental; • our ability to retain the services of key personnel at the businesses remaining after our recent ~~sale~~sales of businesses ~~to ERP Environmental~~ and at our Corporate Division; • changes in existing laws and regulations governing environmental protection, zoning and other matters affecting our operations; • existing regulations affecting disposal of hazardous and nonhazardous waste being rescinded or relaxed, governmental authorities failing to enforce these regulations or other industry participants being able to avoid or delay compliance with these regulations; • potential liabilities associated with the disposal of hazardous and nonhazardous wastes; • possible changes in our estimate of the impact of the insolvency of Reliance Insurance Company, one of our former insurance carriers; • possible changes in our estimate of site remediation requirements, final closure and post-closure obligations, compliance and other audit and regulatory developments; • the sufficiency of our insurance coverage generally and the ability of our insurers to fully and timely meet their contractual commitments; • the impact that our financial condition may have on our relations with customers, suppliers and employees; • future technological change and innovation, which could result in reduced amounts of waste being generated or alternative methods of disposal being developed; and • the effects of general economic conditions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, accounts receivable, commutation balance of our finite risk bonding program, accounts payable, notes and capital leases payable, and debt obligations. The book value of cash and cash equivalents, accounts receivable, accounts payable and short-term notes payable are considered to be representative of fair value because of the short maturity of these instruments. We estimate that the fair value of all of our debt obligations approximated $8220.98 million as of ~~June~~ September 30, 2003.

We do not utilize financial instruments for trading purposes and we do not ~~hold~~ hold any derivative financial instruments that could expose us to significant ~~market~~ market risk. Our exposure to market risk for changes in interest rates relates primarily to our obligations under our revolving credit facility. As of ~~August~~ 4December 10, 2003, $2013.1 million had been borrowed under the revolving credit facility. As of ~~August~~December 410, 2003, amounts outstanding under the revolving credit facility were accruing interest at approximately 8.0% per year, excluding amortization of financing costs. A ten percent increase in short-term interest rates on the variable rate debts outstanding as of ~~August 4~~December 10, 2003 would approximate 40 basis points. Such an increase in interest rates would increase our quarterly interest expense by approximately $2013,000 assuming the amount of debt outstanding remains constant.

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

considered. If it were possible to quantify this impact, the results could well be different than the sensitivity effects shown above.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedure:

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management evaluated, with the participation of our ~~Chief~~ Chief Executive Officer and Chief Accounting Officer, the effectiveness of the ~~design~~ design and operation of our disclosure controls and procedures (as defined in ~~Rule~~ Rule 13a-15(e) of the Exchange Act) as of the end of the quarter ended ~~June~~ September 30, 2003. Based upon their evaluation of these ~~disclosure controls and procedures,~~ ~~our Chief Executive Officer and Chief Accounting Officer concluded that the~~ disclosure controls and procedures were effective as of the end of the quarter ended June 30, 2003 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this report was being prepared.

disclosure controls and procedures, our Chief Executive Officer and Chief Accounting Officer concluded that the disclosure controls and procedures were effective as of the end of the quarter ended September 30, 2003 to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this report was being prepared.

(b) Changes in internal controls:

~~Except~~There ~~as described in the following paragraph, there~~ was no change in our internal control over financial reporting that occurred during the quarter ended ~~June~~September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

OnPART ~~April 29,~~II ~~2003,~~– weOTHER ~~announced that, due to improper recording of job costs~~INFORMATION ~~and certain other items at one of our business units, we would restate our~~ ~~results of operations for the years ended December 31, 2002, 2001 and 2000.~~ Following the conclusion of an independent investigation of this business unit, we changed our operating and accounting procedures to, among other things, provide more detailed reviews of jobs in process, require more frequent physical inventories and establish additional review and oversight control procedures. In addition, we implemented a procedure requiring that a regional controller who is independent of the daily operations of this business unit review the financial statements and results of operations of the business unit. We also made personnel changes at the business unit including, without limitation, replacement of key accounting personnel of the business unit.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Regulatory Proceedings

In the fourth quarter of 1999, the Environmental and Protection Agency (“EPA”) notified us of certain alleged violations of the Resource Conservation and Recovery Act of 1976 by our former Re-Claim Louisiana facility. Among other things, the EPA alleged that the facility accepted waste from Superfund remediation sites under the Comprehensive Environmental Response, Compensation and Liability Act that it was not permitted to accept and then improperly disposed of such waste. In July 2001, we entered into a consent agreement with the EPA resolving the EPA’s allegations. Under the terms of the consent agreement, we paid a civil penalty of $200,000 to the EPA and made certain improvements to the facility. In May 2002, we received a subpoena from the U.S. Attorney’s office in Shreveport, Louisiana seeking various documents relating to the Re-Claim Louisiana facility covering the same time frame and relating to the same activities as the EPA’s allegations described above. Based upon information available to us at the time, we believed that the U.S. Attorney’s office was conducting a criminal investigation targeting a former employee of the Re-Claim Louisiana facility. In December 2002, we received a follow-up subpoena seeking additional documentation. Shortly thereafter, we were advised by the U.S. Attorney’s office that the Company has not been ruled out as a subject of this investigation. We have cooperated, and will continue to cooperate, with the U.S. Attorney’s office in connection with its investigation. We have also been advised by the U.S. Attorney’s office in Fort Worth, Texas that it is considering bringing a civil claim against the Company under the Federal False Claims Act to remove monies paid by the federal government to the Company for processing and disposing of the allegedly unpermitted waste. We dispute that there has been any violation of the False Claims Act and intend to defend any such suit vigorously. We do not believe that the results of the investigation by the U.S. Attorney’s office in Shreveport or any such civil action by the U.S. Attorney’s office in Fort Worth ~~will~~ will have a material adverse effect on our business, results of operations or financial condition.

33 On April 29, 2003, we announced that, due to improper recording of job costs and certain other items at one of its business units, we would restate our results of operations for the years (and quarters within) ended December 31, 2002, 2001 and 2000. In connection with this announcement, we contacted the SEC, which has initiated an informal investigation of the issues leading to the restatement. The investigation is continuing and we have cooperated, and will continue to cooperate, with the SEC in this investigation.

During October and November 1999, the California Department of Toxic Substances Control (“DTSC”) inspected our processing facility in East Palo Alto, California, and our transfer facility in Redwood City, California. On November 29, 1999, the DTSC issued a summary of violations identifying various alleged violations of California hazardous waste management laws and regulations by the facilities. We disputed the alleged violations. Between December 1999 and December 2002, the DTSC conducted several more inspections at the two facilities and noted other violations, which we also disputed. In June 2003, the Company received notice from the DTSC of its intention to commence enforcement action with regard to these violations. As a result of the sale of Romic to ERP Environmental (see Note 4 to our unaudited condensed consolidated financial statements), we should have no further responsibility for this matter.

We acquired Romic Environmental Technologies Corporation (“Romic”) in January 1999. Prior to its acquisition by the Company, Romic had entered into an administrative consent order with the EPA relating to the cleanup of soil and groundwater contamination at its facility in East Palo Alto, California. A remedial investigation of the facility was completed by Romic and forwarded to the EPA. The EPA authorized Romic to conduct a pilot study utilizing in-situ enhanced bio-remediation to determine whether that method will be an effective corrective measure. Preliminary results from the pilot study were encouraging and the study has been expanded. If the study is determined to be successful, the EPA may approve this method or a combination of methods for final site remediation. Prior to its acquisition by the Company, Romic had also been notified by the EPA and the DTSC that it was a potentially responsible party under applicable environmental legislation with respect to the Bay Area Drum Superfund Site in San Francisco, California, the Lorentz Barrel and Drum Superfund Site in San Jose, California and the Casmalia Resources Hazardous Waste Management Facility located near Santa Barbara, California, each of which was a drum reconditioning or disposal site previously used by Romic. With respect to each of these drum reconditioning or disposal sites, Romic and a number of other potentially responsible parties have entered into administrative consent orders and/or agreements allocating each party’s respective share of the cost of remediating the sites. Romic’s share under these consent orders and/or agreements is as follows: Bay Area — 6.872%; Lorentz — 5.62% and Casmalia Resources — 0.29%. Remediation is either underway or substantially completed at all three sites. Based upon the information available, we have continued to maintain a reserve to cover Romic’s estimated costs to remediate the East Palo Alto facility and the three drum reconditioning or disposal sites. As of June 30, 2003, the balance of this reserve was $2.5 million, of which $0.3 million is classified as short-term and expected to be paid in the next twelve months. Management believes that this reserve is sufficient to satisfy Romic’s obligations under the consent orders and agreements; however, due to the complex, ongoing and evolving process of investigating and remediating these sites, Romic’s actual costs may exceed the amount reserved. As a result of the sale of Romic to ERP Environmental (see Note 4 to our unaudited condensed consolidated financial statements), we should have no further responsibility under the consent order or decrees.

On April 29, 2003, management announced that, due to improper recording of job costs and certain other items at one of its business units, we would restate our results of operations for the years (and quarters within) ended December 31, 2002, 2001 and 2000. In connection with this announcement, we contacted the SEC which has initiated an informal investigation of the issues leading to the restatement. The investigation is continuing and we have cooperated, and will continue to cooperate, with the SEC in this investigation.

Litigation

During the third quarter of 1999, six purported securities class action lawsuits were filed against the Company and certain of its current and former officers and directors in the United States District Court for the Southern District of Texas, Houston Division. These lawsuits were consolidated into a single action styled In re: U S Liquids Securities Litigation, Case No. H-99-2785, and the plaintiffs filed a consolidated complaint alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (“Securities Act”) on behalf of purchasers of the Company’s common stock in our March 1999 public offering and violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder on behalf of purchasers of the Company’s common stock during the period beginning on May 12, 1998 and ending on August 25, 1999. The plaintiffs generally allege that the defendants made false and misleading statements and failed to disclose allegedly material information regarding the operations of our Detroit facility and the Company’s financial ~~condition in the prospectus relating to our March 1999 stock offering and in~~ ~~certain other public filings and announcements made by~~

3431

condition in the prospectus relating to our March 1999 stock offering and in certain other public filings and announcements made by the Company. The remedies sought by the plaintiffs include designation of the action as a class action, ~~unspecified~~ unspecified damages, attorneys’ and experts’ fees and costs, rescission to the ~~extent~~ extent any members of the class still hold common stock, and such other relief as the court deems proper. In January 2001, the court dismissed the claims ~~asserted~~ asserted by the plaintiffs under Sections 10(b) and 20(a) and Rule 10b-5 of the ~~Exchange~~ Exchange Act and in April 2002 the court dismissed the claims asserted by the ~~plaintiffs~~ plaintiffs under Section 12(a)(2) of the Securities Act. Accordingly, the lawsuit is proceeding only with respect to the claims asserted under Sections 11 and 15 of the Securities Act. In June 2002, the court determined that two ~~individuals~~ individuals designated by the plaintiffs are adequate class representatives for plaintiffs’ claim under Section 11 of the Securities Act. In August 2002, the ~~court~~ court entered an order defining the plaintiff class as all persons who purchased or otherwise acquired Company common stock pursuant or traceable to our March 1999 stock offering. As discussed below, further proceedings and discovery of the lawsuit have been suspended pending the resolution of our litigation with our insurance carrier over whether insurance coverage exists for the claims asserted by the plaintiffs.

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

After the filing of the securities class action lawsuits and the shareholder derivative action described above, we made demand on our insurance carrier, National Union Fire Insurance Company of Pittsburgh, PA, to defend the Company and our named representatives. National Union declined to defend the Company and our named representatives and filed a declaratory action in the United States District Court for the Southern District of Texas, Houston Division to determine its legal rights under our insurance policy. The Company and National Union subsequently filed motions for summary judgment to determine whether coverage is available under the insurance policy. During the second quarter of 2003, the court granted National Union’s motion for summary judgment that it is not obligated to defend or indemnify the Company or our named representatives in the consolidated action. We have appealed the court’s ruling. ~~and~~All ~~are~~parties ~~awaiting~~have ~~the~~filed ~~decision~~briefs ofin the ~~appeals~~appeal ~~court~~and oral argument is currently scheduled for January 5, 2004. As noted above, proceedings in the consolidated action will continue to be suspended pending the outcome of our appeal.

~~On April 21, 1998, we acquired substantially all of the assets of Parallel Products, a California limited partnership (“Parallel”).~~ In ~~addition~~December ~~to the consideration paid at closing~~2003, we agreed ~~that,~~to ifsettle the ~~earnings~~various ~~before~~claims ~~interest, taxes,~~asserted ~~depreciation and amortization (“EBITDA”) of the businesses acquired from Parallel exceeded a specified amount~~ in ~~any four consecutive quarters during~~ the ~~three year period after the closing of the acquisition, we would pay to~~ ~~Parallel~~lawsuit anthat ~~additional $2.1 million in cash and an additional $2.1 million in Company common stock. During the third quarter of 2000,~~ Parallel Products filed ~~suit~~ against the Company ~~alleging~~in ~~that the acquired businesses achieved the specified EBITDA amount for the four quarters ended December 31, 1999 and for the four quarters ended March 31,~~ 2000. ~~Parallel is seeking a declaratory~~The ~~judgment~~settlement ~~that~~will ~~the~~not EBITDA amount specified in the acquisition agreement has been achieved and that it is entitled to receive the contingent cash and stock payments described above. Parallel also alleges that it is entitled to recover compensatory damages of $4.2 million, punitive damages, interest, attorneys’ fees and costs, and such other relief as the court deems proper. We have ~~denied~~ ~~that we have any liability to Parallel and have filed~~ a ~~counterclaim against~~material ~~Parallel~~adverse ~~alleging~~effect ~~that~~on ~~Parallel~~our ~~breached~~business, ~~certain of~~results ~~the representations and warranties made to us in the acquisition~~of ~~agreement.~~operations ~~The~~or ~~trial in this case has been rescheduled for January 2004. The transaction described in Note 4 to the to the unaudited condensed consolidated~~ financial ~~statements did not affect our responsibility with respect to this matter~~condition.

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

~~From September 4, 1998 through September 3, 2000, Reliance Insurance~~32 ~~Company or one of its affiliated companies provided casualty insurance coverage~~ for the Company and its subsidiaries. In addition, Reliance provided similar coverage, for pre-acquisition periods, for several companies that we acquired between 1997 and 2000. During the Reliance coverage periods, various incidents occurred that resulted in claims being made against the Company for which insurance coverage was to be provided by Reliance. In some cases, the claim resulted in a lawsuit being filed against the Company. Reliance had been adjusting and/or defending these claims; however, in October 2001, Reliance was declared insolvent by the Insurance Commissioner of the State of Pennsylvania and placed into liquidation. As a result, insurance coverage is not available for any claims or lawsuits that were not resolved prior to Reliance being placed into liquidation. To the extent that insurance coverage is not available to cover settlement of a claim asserted against the Company or a judgment entered against the Company, the settlement or judgment would have to be paid by the Company. Many states have established insurance guarantee funds to pay claims insured by insolvent insurance companies; however, the amount available from such funds for a single claim is generally limited to the lesser of the amount of the insured’s coverage and a dollar amount specified by statute. During the fourth quarter of 2001, we established a reserve to cover the estimated costs to satisfy our obligations with respect to all such claims that were not resolved prior to Reliance being placed into liquidation, net of the amounts expected to be received by the Company from state insurance guarantee funds. Certain of these claims have been resolved and we made payments totaling $0.5 million during the six months ended June 30, 2003. We have committed to making additional payments of $0.5 million during the remainder of 2003 and $0.7 million in 2004. After reviewing the remaining known claims, the reserve was adjusted to $2.9 million during the quarter ended June 30, 2003. Management believes that the reserve is sufficient to satisfy our obligations with respect to all known claims for which insurance coverage was to be provided by Reliance; however, there can be no assurance that our actual costs will not exceed the amount reserved.

Insingle ~~February~~claim ~~1998,~~is wegenerally ~~entered~~limited ~~into~~to anthe ~~employment~~lesser ~~agreement~~of ~~with~~the amount ~~our~~of ~~former~~the ~~chief financial~~insured’s ~~officer,~~coverage ~~Earl~~and J.a ~~Blackwell.~~dollar ~~The~~amount ~~employment~~specified ~~agreement~~by ~~provided, among~~statute. ~~other~~During ~~things, that (i) if~~ the ~~agreement~~fourth ~~was~~quarter ~~terminated~~of ~~by Mr. Blackwell without cause~~2001, ~~Mr. Blackwell~~we ~~would~~established ~~not~~a bereserve ~~entitled~~ to ~~receive~~cover ~~any further compensation~~the orestimated ~~benefits~~costs ~~under~~to ~~the~~satisfy ~~agreement,~~our ~~and~~obligations with ~~(ii) if~~respect ~~the~~to ~~agreement~~all ~~was~~such ~~terminated~~claims ~~by Mr. Blackwell~~that ~~with~~were ~~cause,~~not ~~Mr. Blackwell~~resolved ~~would~~prior ~~be entitled~~ to ~~continue to~~Reliance ~~receive~~being ~~his~~placed ~~annual~~into ~~salary of $220~~liquidation,~~000~~ ~~and~~net ~~employee benefits for the remainder~~ of the ~~term~~amounts ofexpected ~~the~~to ~~agreement.~~be Onreceived ~~July 31, 2002, Mr. Blackwell terminated his~~by ~~employment~~the ~~with~~Company usfrom ~~alleging~~state ~~that~~insurance weguarantee ~~breached~~funds. ~~the~~Certain ~~terms~~ of ~~his~~these ~~employment~~claims have ~~agreement~~been byresolved ~~usurping his duties~~ and ~~responsibilities~~we ashave ~~chief~~made ~~financial officer.~~payments Ontotaling ~~October 2, 2002, Mr~~$0.8 ~~Blackwell~~million ~~initiated~~during anthe ~~arbitration proceeding~~nine ~~against~~months usended ~~seeking to recover approximately $1.1~~September ~~million in damages~~30, ~~interest, attorneys’ fees and costs~~2003. We ~~deny that we~~ have ~~any~~committed ~~liability~~ to ~~Mr.~~making additional ~~Blackwell.~~payments ~~The~~of ~~arbitration~~$0.2 million ~~hearing~~during ~~took~~the ~~place~~remainder onof ~~May~~2003 7 and ~~8, 2003~~$0.7 million ~~During~~in ~~the~~2004. ~~third~~After ~~quarter~~reviewing ~~of 2003,~~ the ~~arbitrator~~remaining ~~found~~known inclaims ~~favor~~and ofconsidering ~~Mr. Blackwell~~the ~~and~~payments made, ~~awarded~~the ~~him~~reserve ~~approximately~~was $12.17 million. ~~Thereafter~~at September 30, we2003. ~~filed~~Management abelieves ~~motion to~~that ~~vacate~~the ~~and~~reserve ~~reconsider~~is ~~with~~sufficient ~~the~~to ~~arbitrator~~satisfy ~~and~~our ~~also~~obligations ~~filed~~with arespect ~~lawsuit~~to inall ~~the 164th~~known ~~Judicial~~claims ~~District~~for ofwhich ~~Harris~~insurance ~~County,~~coverage ~~Texas,~~was ~~asking the court~~ to ~~vacate~~be ~~the arbitrator’s~~provided ~~award.~~by OnReliance; ~~August 1~~however, there ~~2003,~~can webe ~~were~~no ~~informed~~assurance that ~~the~~our ~~arbitrator had~~actual ~~denied~~costs ~~the~~will ~~motion~~not toexceed ~~vacate and reconsider. We intend to prosecute~~ the ~~state~~ ~~court litigation vigorously~~amount reserved.

~~Shortly~~As ~~after~~previously ~~Mr. Blackwell~~announced, ~~made~~during ~~his~~the ~~initial~~third ~~demand~~quarter ~~for~~of ~~arbitration~~2003, weEarl ~~placed~~Blackwell, our ~~employment~~former ~~practices~~Chief ~~liability~~Financial ~~carrier~~Officer, onobtained ~~notice~~a of$1.1 million arbitration award against the ~~claim~~Company. ~~During~~After attempts to vacate the arbitrator’s award were ~~third~~unsuccessful, ~~quarter~~in ofOctober 2003, we ~~received~~entered ~~notice~~into ~~from~~a ~~our~~settlement ~~insurance~~agreement ~~carrier~~with ~~denying~~Mr. ~~coverage~~Blackwell. WeUnder ~~intend~~the terms of the settlement agreement, we made payments to Mr. Blackwell ~~pursue~~totaling $650,000 in the ~~coverage~~fourth ~~issue~~quarter ~~with~~of ~~our~~2003 ~~carrier~~and have committed to a final $100,000 payment in January 2004. This settlement was accrued in the second quarter of 2003.

On September 9, 2002, Allan Rosen, a former employee of the Company, filed suit in the Superior Court of Los Angeles County, California against us and certain of our current and former officers. Mr. Rosen alleges, among other things, that we breached various oral agreements relating to the compensation to be paid to Mr. Rosen for his services and that he was wrongfully terminated in October 2001 because, among other things, he complained about the operational and accounting systems of certain of our subsidiaries and because he refused to certify, for internal purposes, various financial information and reports relating to the operations of such subsidiaries. Mr. Rosen is seeking unspecified compensatory and punitive damages, interest, attorneys’ fees and costs. Mr. Rosen is also seeking a declaratory judgment that a noncompete provision contained in his employment agreement is not enforceable. During the second quarter of 2003, we settled this matter and all claims associated with Mr. Rosen’s employment. The settlement did not have a material adverse effect on our business, results of operations or our financial condition.

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

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

We are involved in various other legal actions arising in the ordinary course of business. Management does not believe that the outcome of such legal actions will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

~~See Note 3 to the unaudited condensed consolidated financial statements~~None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits

	4.20		Sixteenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
4.21		Seventeenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
	31.1		Chief Executive Officer Certification
4.22		Eighteenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
	31.2		Chief Accounting Officer Certification
4.23		Nineteenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
	32		Certification of Principal Executive and Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.1		Chief Executive Officer Certification
31.2		Chief Accounting Officer Certification
32		Certification of Principal Executive and Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	(b)		Reports on Form 8-K
			On July 3, 2003, we furnished a Form 8-K stating, among other things, that on July 3, 2003 the Company had reported its earnings for the quarter ended March 31, 2003.
			On December 15, 2003, we filed a Form 8-K reporting that our common stock had begun trading on the over-the-counter “pink sheets” under the symbol “USLQ.”
			On July 23, 2003, we filed a Form 8-K announcing that we had agreed to sell our Oilfield Waste Division, our Beverage Division and our Romic Environmental business to ERP Environmental Services, Inc.
			On December 5, 2003, we filed a Form 8-K reporting, among other things, the extension of our credit facility and a notice of delisting from the American Stock Exchange.
			On November 18, 2003, we filed a Form 8-K reporting, among other things, an update on business unit sales.
			On August 14, 2003, we filed a Form 8-K reporting, among other things, financial results for the quarter ended June 30, 2003.
			On August 7, 2003, we filed a Form 8-K announcing that we had completed the sale of our Oilfield Waste Division, our Beverage Division and our Romic Environmental business to ERP Environmental Services, Inc. On October 10, 2003, we filed an amendment to this Form 8-K.

3734

On August 7, 2003, we filed a Form 8-K announcing that we had completed the sale of our Oilfield Waste Division, our Beverage Division and our Romic Environmental business to ERP Environmental Services, Inc.

SIGNATURES

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

	U S LIQUIDS INC.
Date: August 13, 2003	By:	/s/ William M. DeArman
Date: January 6, 2004	By:	/s/William M. DeArman
		William M. DeArman Chief Executive Officer
		William M. DeArman
Date: August 13, 2003	By:	/s/ James C. Jackson
		Chief Executive Officer
		James C. Jackson Chief Accounting Officer
Date: January 6, 2004	By:	/s/James C. Jackson
		James C. Jackson
		Chief Accounting Officer

3935

~~Exhibit~~EXHIBIT ~~Index~~INDEX

	ExhibitNumber		Description
Exhibit No.		Description
	4.20		Sixteenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
4.21		Seventeenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
	31.1		Chief Executive Officer Certification
4.22		Eighteenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
	31.2		Chief Accounting Officer Certification
4.23		Nineteenth Amendment to Second Amended and Restated Credit Agreement among U S Liquids Inc., various financial institutions and Bank of America National Trust and Savings Association, as Agent.
	32		Certification of Principal Executive and Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
31.1		Chief Executive Officer Certification
31.2		Chief Accounting Officer Certification
32		Certification of Principal Executive and Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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