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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the Fiscal Year Ended: DECEMBER 31, 2001
                           Commission File No. 1-13852



                        CET ENVIRONMENTAL SERVICES, INC.
                        --------------------------------
             (Exact Name of Registrant as Specified in its Charter)

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<S>                                                                <C>
                            CALIFORNIA                                            33-0285964
--------------------------------------------------------------     ---------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)     (I.R.S. Employer Identification Number)
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              7032 SOUTH REVERE PARKWAY, ENGLEWOOD, COLORADO 80112
              ----------------------------------------------------
          (Address of Principal Executive Offices, Including Zip Code)



Issuer's telephone number, including area code:  (720) 875-9115
Securities registered pursuant to Section 12(b) of the Act:  COMMON STOCK
Securities registered pursuant to Section 12(g) of the Act:  NONE

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                 Yes [X] No [ ],

As of March 4, 2002, there were 5,757,792 shares of Common Stock outstanding.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on that date was approximately $2,514,415.

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]


                      DOCUMENTS INCORPORATED BY REFERENCE:

The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.

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                                     PART I

ITEM 1. BUSINESS.

The Company

         The Company, incorporated in February 1988, is engaged in environmental
consulting, engineering, remediation, and construction activities. The Company
also has the capability to perform emergency response cleanup services in
certain western states for federal agencies, states, municipalities and
commercial clients. The Company has developed a broad range of expertise in
non-proprietary technology-based environmental remediation. A wholly owned
subsidiary, Cleanwater Contracting, Inc., provides a broad spectrum of services
related to water treatment and wastewater processing for both the public and
private sectors.

         As a full-service provider of environmental solutions, the Company's
capabilities range from turnkey waste management facilities for dealing with
water, soil and air pollution problems to providing emergency response to
accidental spills of hazardous and/or toxic materials. The Company's personnel
have developed expertise in a broad range of remediation techniques such as
bioremediation, bioventing, vapor extraction, gas/air sparging, soil washing,
and groundwater remediation systems. The Company also offers a variety of
services in support of municipal and industrial water and wastewater treatment,
and other operations with significant environmental components. The Company
believes it has gained a solid reputation for promptly providing cost-effective
and innovative remediation and treatment solutions.

         Over the past three years, the EPA has been the Company's largest
single source of revenues, accounting for $12.3 million (87%), $13.1 million
(54%), and $26.0 million (60%) in 2001, 2000, 1999, respectively. The sharp drop
in EPA generated revenues over the past two years largely reflects the notice of
suspension the Company received from the EPA and the responding actions taken by
the Company as more fully described below.

         In August, 1999, the Company received a notice of suspension, pending
further review, from the Environmental Protection Agency ("EPA"). The suspension
resulted from EPA allegations that the Company engaged in intentional misconduct
with respect to billing for services provided under various EPA contracts. Under
the suspension, the Company was prohibited from receiving additional government
contracts under the provisions of 48 C.F.R Subpart 9.4 of the Federal
Acquisitions Regulations. The suspension did, however, allow the Company to
continue performance on existing government contracts.

         Following the receipt of the suspension notice from the EPA, the
Company initiated a restructuring plan to reduce operating costs and gain
efficiencies through sale, downsizing and closure of regional offices.
Restructuring actions included the September, 1999 sale of substantially all the
assets in the Mobile (AL) and Jackson (MS) regions; the October, 1999 closing of
regional offices in New Orleans (LA) and Houston (TX); the February, 2000
closing of the Richmond (CA) office; and the sale of asset and assignment of
certain contracts and liabilities related to the Company's activities in Tustin
(CA), which became effective on April 30, 2000 as more fully described in Note F
to the Consolidated Financial Statements.

         In November 1999, following consideration of certain information
provided by the Company to the EPA, the EPA's suspension was terminated and an
Administrative Agreement ("Administrative Agreement") between the EPA and the
Company was executed. Upon execution of the Administrative Agreement, the
Company became immediately eligible to bid for, receive, and perform any Federal
contract or subcontract, or participate in any assistance, loan or benefit
without restriction. In the


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Administrative Agreement, the Company agreed to cooperate in full with further
investigations into the EPA allegations including access to records,
availability of Company personnel, certain reporting requirements, audit of EPA
billing prior to submission, and certain restrictions of Company assets.

         After review of available information and consultation with its legal
counsel, management believes that the allegations brought against the Company
did not warrant suspension. Meanwhile, management has cooperated fully in the
EPA's investigation and will continue to do so when and if required.

         However, despite the lifting of the suspension order, EPA revenues
under the then existing contract never recovered to prior levels. The EPA
exercised the third year option of the contract in January, 2000, and was
empowered to issue delivery orders for up to $42 million in value; actual EPA
revenues for 2000 were $13.1 million. The fourth and final option year was
exercised in January, 2001, with an empowered value of $44 million. While some
additional EPA revenues will accrue during 2002 to complete outstanding delivery
orders, actual EPA revenues in 2001 were only $12.3 million.

         In view of the diminished level of EPA delivery orders received over
the past three years and with no assurance that delivery orders would increase
even if the Company was successful in obtaining another EPA contract, management
decided to forgo bidding on a new contract. At the billing levels of the last
two years, the overhead costs necessary to perform EPA work make such efforts
marginally profitable, at best. Management believes that water treatment,
wastewater management, and Brownfields reclamation offer a greater opportunity
for success.

         In connection with its commercial business, in August 1999 the Company
entered into a contract to perform work for Remediation Financial, Inc. (RFI) on
a Brownfield development project known as LCRI Investments, Inc. (Hercules) in
Hercules, CA. Work performed under this agreement accounted for approximately 5%
of total revenues for 1999. Subsequently, the Company entered into another
agreement with RFI to perform similar work on a Brownfield project known as
Santa Clarita, L.L.C. (Santa Clarita) in Santa Clarita, CA. The combined
revenues from the two RFI projects accounted for approximately 32% of total
revenues for 2000.

         During the third quarter of 2000, the Company encountered collection
problems with RFI, the severity of which caused the Company to suspend work at
the Santa Clarita site in late September 2000. Shortly thereafter, RFI and
affiliated partnerships presented the Company with termination notices for both
the Santa Clarita and the Hercules projects. The Company has pursued legal
alternatives to collect the receivables arising from work performed on these two
projects, which amounted to $5.3 million at 2001 year-end. In February, 2002,
the Company reached a settlement agreement with respect to the Santa Clarita
project and received $2.1 million. (See Item 3.
Legal Proceedings and Notes G and S to the Consolidated Financial Statements.)

The Environmental Industry

         The remediation segment of the environmental industry consists of three
phases: site assessment, remediation program design, and the actual site
remediation. The first phase is largely investigative and can involve
substantial chemical analysis to understand the nature and extent of the
problem. The design phase involves detailed engineering to develop the optimal
solution for cleaning the site. The third phase is the true implementation of
the site remediation plan and involves various onsite treatment procedures for
contaminated materials or the excavation and containment or offsite
transportation of toxic materials. The Company provides an extensive
full-service offering in all phases of contaminated site remediation.

         Innovative onsite remediation technologies are in high demand to
provide an alternative to offsite disposal of hazardous waste. These
technologies have been provided to various Company clients


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in order to minimize and/or eliminate our clients' cradle-to-grave liability.
Onsite technologies such as bioremediation, bioventing, vapor extraction,
gas/air sparging, low-temperature thermal desorption, chemical fixation, and
soil washing have gained wide-spread regulatory acceptance. The Company strives
to use these remediation techniques more efficiently than its competitors.

         The never-ending need for clean pure water, the aging of the U.S. water
and wastewater treatment facilities, the trend of public municipalities towards
privatization, and recent regulatory pressure has expanded the U.S. water market
to new highs. The Environmental Review, the EPA's first survey of drinking-water
utilities after reauthorization of the Safe Drinking Water Act in 1997,
suggested that communities nationwide will need to spend around $12.1 billion
"in the immediate future" to protect drinking water supplies. The EPA has also
estimated that, over the next two decades, some $137 billion will need to be
spent to build new wastewater-treatment plants or to improve existing ones. And
the Water Environment Federation, a trade group, projects that the roughly
55,000 community water systems in the U.S. will need to spend some $330 billion
over the next two decades to improve their water infrastructure. Public
municipalities are becoming aware that considerable savings can be obtained by
outsourcing the operations, management, and maintenance of their water-treatment
facilities to private water-specialty firms. There remains approximately 24,000
government-owned-and-operated water authorities in the U.S. serving almost 80%
of U.S. citizens.

         Since 1994, increased pressure to create uses for contaminated and idle
properties has driven a rise in industrial redevelopment or "Brownfield" site
remediation programs. The term "Brownfield" comes from an EPA-sponsored program
to study the redevelopment of "abandoned, idled, or underused industrial
facilities where expansion or redevelopment is complicated by real or perceived
environmental contamination" (U.S. EPA). In 2001, the EPA estimated that there
were approximately 450,000 Brownfield sites nationwide. Recently, new
legislation was enacted at the federal level providing for Brownfield
remediation funding of $250 million annually. This coupled state and municipal
initiatives should create an opportunity for full service remediation as well as
financial participation in the redevelopments.

Organization of the Company

         The Company is organized into three primary business lines: industrial
services, which includes water and wastewater treatment, facility cleaning,
operation, maintenance, construction, closures, and emergency response;
environmental remediation; and government programs.

         The Company provides full turnkey environmental services for
remediation of non-hazardous, hazardous, and toxic waste on a planned and
emergency basis, industrial services, and water and wastewater treatment. This
can include assessment and characterization studies, conceptual design, detail
design, construction and installation, decontamination and demolition, and
operation and maintenance. The offering of full turnkey services is believed to
enhance the prospects of success in soliciting new customers, as well as in
obtaining follow-on contracts that may be tangential or unrelated to the
original scope of work.

         Industrial Services. The Company performs a variety of industrial
services, including maintenance and construction work for numerous groundwater
treatment and remediation systems. The Company has also provided clients with a
range of water, wastewater, and industrial wastewater treatment services.
Detailed services include preventive and corrective maintenance, as well as
replacement and emergency maintenance; industrial vacuuming of wet/dry
materials; and construction of full-scale facilities, installation of
off-the-shelf systems, and retrofitting of existing systems.

         The Company provides plant services to industrial clients as an outside
contractor, or by offering full- or part-time onsite personnel on a contract
basis. These services include:


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         o        Tank and sump services

         o        Water and wastewater treatment

         o        Specialty construction

         o        Plant operation and maintenance

         o        Waste management and removals

         o        Regulatory agency coordination and permitting, regulatory
                  management outsourcing, and compliance audits

         o        Waste area construction/closures

         o        Facility closures

         o        Emergency response

         Environmental Remediation Services. The Company provides full-scale
turnkey environmental remediation services that range from Phase I environmental
assessments and remedial investigation/feasibility studies (RI/FSs) to the
design, construction, and operation of remediation systems. The Company does not
promote a single technology but recommends the remediation methods that provide
the most cost-effective and timely mitigation.

         Government Programs. As noted earlier in this document, the Company did
not seek to renew a contract with the EPA. In addition, the Company, in
connection with the sale of certain assets and assignment of contracts, entered
into a non-compete agreement which prohibits it from providing remediation
services to the Department of Defense, with certain limited exceptions, for a
period of four years from April, 2000. (See Note F to the Consolidated Financial
Statements.)

         The Company intends to continue soliciting business with selected
federal agencies, as well as at state, municipal, and special district
governmental bodies. The services offered are similar to those provided the
private sector and include emergency response, remediation, and water-related
services.

Customers

         The Company's customers include federal, state, and local government
agencies, commercial and industrial enterprises.

Business Strategy

         The Company plans to capitalize on the following trends:

         o        The creation of uses for contaminated properties
                  (Brownfields).

         o        The demand for consultation and construction to upgrade
                  existing water and wastewater treatment facilities within the
                  U.S. presents an opportunity for the Company.

         o        The privatization or outsourcing of public municipalities'
                  water and wastewater treatment facilities operation and
                  maintenance offers untapped areas of growth within the
                  industry.

         o        Remediation at active industrial sites under the RCRA
                  corrective action program represents an important private
                  sector segment in an early stage of development.

         o        To meet special requirements and budget constraints,
                  industrial facilities are increasingly outsourcing
                  environmental-related maintenance and construction services.
                  The Company is targeting these facilities to perform this work
                  on a contract basis or offering full- or part-time personnel
                  on site.


                                       4
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         The Company's strategy to capitalize on these trends emphasizes the
following key elements:

         Diversification through Controlled Expansion. The Company seeks
controlled growth and diversification by providing its services to additional
industries and by broadening the mix of related services performed for each
client. Management has identified several areas of interest for expansion
including additional work in the areas of water and wastewater treatment
facilities' construction, operation and maintenance, and in-plant services for
industrial clients.

         Emphasis on Recurring Revenue. The Company seeks to expand its base of
recurring revenue sources to mitigate the cyclical nature of the environmental
remediation services industry. The Company hopes to broaden its inclusion on
approved-contractor lists with large corporate customers whereby the Company is
invited to bid on future environmental engineering/remediation projects.
Inclusion on such lists is a result of the Company having completed prior
contracts to the satisfaction of these customers. The Company also intends to
increase the number of operations and maintenance contracts, both for industrial
services and water/wastewater facilities. These contracts are generally longer
term, providing a more sustainable revenue base.

         Commitment to Quality. Management believes that the long-term success
of the Company depends upon its reputation with customers for performing top
quality turnkey services. The Company must continue to distinguish itself with
private and government sector customers by maintaining competence in various
state-of-the-art, technology-based remediation and treatment alternatives, and
by efficient and effective job site performance.

Marketing

         The Company has a dedicated marketing staff of sales professionals,
proposal writers, technical editors, and project estimators. The Company has
developed ongoing relations with a broad range of customers in various
industries.

         The Company's contracts are primarily obtained through competitive
bidding and through negotiations with long-standing customers. The Company is
typically invited to bid on projects undertaken by recurring customers who
maintain pre-qualified contractor bid lists. Bidding activity, backlog, and
revenue resulting from the award of contracts to the Company vary significantly
from period to period.

Competition

         The environmental industry in the United States has developed rapidly
since the passage of RCRA in 1976 and is highly competitive. The industry is
going through a rapid transition resulting from several mergers and
consolidations during the last three years. Several key players have emerged but
the industry still has numerous small- and medium-sized companies serving niche
markets according to geography, industry, media (air, water, soil, etc.), and
technological specialization (bioremediation, etc.).

         Because the Company operates in many sectors of the environmental
industry, the Company can adapt to changes in the marketplace by allocating its
resources to the industry sector in which the business opportunities exist.
Management believes that the keys to success in the industry today are service
and capabilities. The Company will continue to focus on the application of new
technology, as well as innovative applications of existing technologies, and
continue providing high quality services to its customers.

         Management believes that the primary factors of competition are price,
technological capabilities, reputation for quality and safety, relevant
experience, availability of machinery and


                                       5
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equipment, financial strength, knowledge of local markets and conditions, and
estimating abilities. Management believes that the Company has competed and will
continue to compete favorably on the basis of the foregoing factors. However,
many of the Company's competitors have financial and capital equipment resources
greater than that of the Company. Additionally, at any time and from time to
time, the Company may face competition from new entrants into the industry. The
Company may also face competition from technologies that may be introduced in
the future, and there can be no assurance that the Company will be successful in
meeting the challenges that will be posed by its competition in the future.

Government Regulation

         The Company is presently regulated by a myriad of federal, state, and
local environmental and transportation regulatory agencies, including but not
limited to the EPA, which regulates the generation and disposal of hazardous
waste; the U.S. Department of Labor, which sets safety and training standards
for workers; the U.S. Department of Transportation, which regulates
transportation of hazardous materials and hazardous waste; and similar state and
local agencies.

         The need for governments and business to comply with the complex scheme
of federal and state regulations governing their operations is the market in
which the Company operates, although the Company itself must operate under and
in conformance with applicable federal and state laws and regulations. The
Company attempts to pass the cost of compliance on to the customer through the
prices paid by customers for the Company's services.

Environmental Laws

         Most environmental laws and regulations are promulgated by the U.S.
Congress and federal departments and agencies. For example, the National
Environmental Policy Act compels federal governmental agencies at all levels to
make decisions with environmental consequences in mind. The EPA and the U.S.
Occupational Safety and Health Administration ("OSHA") are responsible for
protecting and monitoring certain natural resources (such as air, water, and
soil) and working conditions. These laws and regulations establish a
comprehensive regulatory framework consisting of permitting processes, systems
construction, monitoring and reporting procedures, and administrative, civil,
and criminal enforcement mechanisms.

         Many of the federal laws and regulations contemplate enforcement by
state agencies and adoption by the states of similar environmental laws and
regulations that must meet minimum federal requirements. In areas of
environmental law where federal regulation is silent, the states may adopt their
own environmental laws.

         Local governments such as counties and municipalities may also enact
and enforce environmental laws that address local concerns that may be more
stringent than applicable state laws.

         The Company's ability to assist customers to comply with these
environmental laws and regulations forms the basis for the current and future
environmental consulting, engineering, remediation, laboratory, and other
services provided by the Company. Enforcement of such laws and regulations, such
as EPA mandated registration and upgrade of USTs, also leads to business for the
Company.

         The federal laws and regulations described below constitute the major
actions that have caused growth in the environmental and water/wastewater
service industries.


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         Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"). This legislation, as amended by the Superfund Amendments and
Reauthorization Act of 1986, established the Superfund program to identify and
clean up existing contaminated hazardous waste sites and other releases of
hazardous substances into the environment. CERCLA gives the EPA authorization to
compel private parties to undertake the cleanup and enforcement incentives
including the imposition of penalties and punitive damages.

         Resource Conservation and Recovery Act of 1976 ("RCRA"). This
legislation, as amended by the Hazardous and Solid Waste Amendments of 1984
("HSWA"), provides for the regulation of hazardous waste from the time of
generation to its ultimate disposal as well as the regulation of persons engaged
in generation, handling, transportation, treatment, storage, and disposal of
hazardous waste. Hydrocarbon-based hazardous waste as defined by RCRA can
include leaked/spilled crude oil, refined oil, gasoline, kerosene, and
industrial solvents (used, for example, in the transportation and manufacturing
industries). Hazardous waste also includes the by-products of virtually any
business, including the production of plastics, pesticides, fertilizers, soaps,
medicines, explosives, etc. These wastes can contain heavy metals, organic
chemicals, dioxin, PCBs, cyanide, and other toxic substances.

         EPA UST Regulations. The EPA has mandated that USTs that are used to
store gasoline, diesel fuel, fuel oil, waste oil and hazardous materials be
registered with the appropriate state regulatory agency, designed or upgraded to
meet construction and operational standards, and monitored to insure against
groundwater and soil contamination from leaking. Owners and operators are
further required to report leaks and undertake appropriate corrective action,
including testing and monitoring to identify the extent of the contamination,
removal and disposal of contaminated soil, or on-site treatment of contaminated
soil or groundwater. The EPA has delegated the administration of UST regulations
to state agencies. To assist the remediation process when leaking USTs are
identified, many state legislatures have created reimbursement programs funded
by gasoline taxes or other taxes and fees.

         Clean Water Act ("CWA"). The CWA established a system of standards,
permits and enforcement procedures for the discharge of pollutants into
navigable waters from industrial, municipal and other wastewater sources. The
CWA requires, under certain circumstances, pretreatment of industrial wastewater
before discharge into municipal treatment facilities. The EPA and delegated
state agencies are also placing some non-complying municipalities under
enforcement schedules. These regulations are creating the need for the upgrade
or construction of new treatment facilities by both industrial and municipal
entities.

         Safe Drinking Water Act ("SDWA"). Under the SDWA and its subsequent
reauthorization, the EPA is empowered to set drinking water standards for public
water systems in the United States. The SDWA requires that the EPA set maximum
permissible contamination levels for over 80 substances and also requires the
EPA to establish a list every 3 years of contaminants that may cause adverse
health effects and may require regulation. Enforcement responsibility is placed
on the states and includes water supply systems monitoring. The SDWA also
requires that the EPA set criteria for the use of treatment techniques including
when filtration should be used for surface water supplies and when to require
utilities to disinfect their water. The EPA regulations under the SDWA are
expected to result in significant expenditures by public water systems for
evaluation and, ultimately, for upgrading of many facilities.

         Bolstering federal laws are stringent state laws, such as California's
Safe Drinking Water and Toxic Enforcement Act of 1986 ("Prop 65"), which took
full legal effect in 1992. To cite just one facet of Prop 65, California's
drinking water must not have concentrations of more than one part per billion of
benzene. However, one tablespoon of gasoline contains enough benzene to render
50,000 gallons of water undrinkable by California's standards.


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         OSHA and OSHA Reform Act. OSHA has promulgated various regulations
setting forth standards for disclosure of health hazards in the work place and
for response thereto. The Hazard Communication Standard, for example, requires
manufacturers and importers of chemicals to assess the hazards of their products
and disclose the same through material data safety sheets and label warnings. In
1990, in an effort in part to create a self-funding administration, Congress
increased the ceiling for certain OSHA-imposed penalties.

Potential Liability and Insurance

         The Company maintains quality assurance, quality control, and health
and safety programs to reduce the risk of damage to persons and property.
However, in providing environmental remediation services to the Company's
customers, the Company faces substantial potential liability for environmental
damage, personal injury, property damage, economic losses, and fines and costs
imposed by regulatory agencies. Furthermore, it is possible that one or more of
the Company's customers may assert a claim against the Company for negligent
performance of services. The Company's potential environmental liability arises,
in part, because some of its services involve the cleanup of petroleum products
and other hazardous substances for its customers.

         The scope of liability under existing law for environmental damage is
potentially very broad and could apply to the Company in a number of ways. For
example, the Company may be exposed to liability under CERCLA when it conducts a
cleanup operation that results in a release of hazardous substances, or when it
arranges for disposal of such substances. Other liabilities may arise if the
Company creates or exacerbates a contamination problem through errors or
omissions in its cleanup work, potentially giving rise to, among other things,
tort actions for resulting damages and Superfund liability for any resulting
cleanup. Finally, it is possible that one or more of the Company's customers
will assert a claim against the Company for an allegedly incomplete or
inadequate cleanup.

         Many state and federal environmental laws apply to the Company's
activities, and the potential for liability exists depending on the
circumstances and substances involved in each cleanup operation. Moreover, the
law in this area is developing rapidly and is thus subject to considerable
uncertainty.

         The Company maintains comprehensive general liability insurance and
worker's compensation insurance that provide $5 million of coverage each. In
addition, the Company maintains pollution liability and errors and omissions
insurance that provides $2 million of coverage each. Because there are various
exclusions and retentions under the insurance policies described above, not all
liabilities that may be incurred by the Company will necessarily be covered by
insurance. In addition, certain of the policies are "claims made" policies that
only cover claims made during the term of the policy. If a policy terminates and
retroactive coverage is not obtained, a claim subsequently made, even a claim
based on events or acts that occurred during the term of the policy, might not
be covered by the policy. In the event the Company expands its services into a
new market, no assurance can be given that the Company will be able to obtain
insurance coverage for such activities or, if insurance is obtained, that the
dollar amount of any liabilities incurred in connection with the performance of
such services will not exceed policy limits.

         The market for liability insurance has been severely constrained at
times, due in part to high losses experienced by the insurance industry from
environmental impairment liability claims, including claims associated with
hazardous materials and toxic wastes. Consequently, the available insurance
coverage for enterprises such as the Company may be reduced, eliminated entirely
or priced beyond the reach of many companies. To date, the Company has been able
to obtain any insurance required by a customer. However, there can be no
assurance that the Company will be able to maintain adequate liability insurance
in the future.


                                       8
<PAGE>

Bonding Requirements

         Commercial remediation projects, as well as federal, state, and
municipal projects, often require contractors to post both performance and
payment bonds at the execution of a contract. Performance bonds guarantee that
the project will be completed, and payment bonds guarantee that vendors will be
paid for equipment and other purchases. A bond typically costs between 1% and 3%
of the project costs, and contractors without adequate bonding may be ineligible
to bid or negotiate on many projects.

         Although no payments have been made by any bonding company for bonds
issued for the Company, the impact of the EPA suspension in 1999 and the
Company's current financial status have made it increasingly difficult to obtain
bonding. With respect to EPA delivery orders, in lieu of bonding, the Company
developed a job escrow arrangement to meet the EPA's requirements.

Employees

         As of February 2002, the Company employed approximately 21 full-time
employees, including two Company officers, and 3 part-time employees. The
Company's employees are not represented by a labor union or covered by a
collective bargaining agreement, and the Company believes it has good relations
with its employees.

         While all of the Company's projects are performed under the supervision
and direction of the Company's supervisors and foremen, and the Company attempts
to utilize as many of the Company's regular laborers as possible to staff
projects, the location and other factors affecting projects performed away from
the immediate vicinity of the Company's office results in the occasionally
hiring temporary workers on site. The Company carefully reviews the training and
qualifications of all temporary workers hired to assure that all such personnel
are qualified to perform the work in question. However, due to the temporary
nature of such employment, there is no assurance that all such temporary workers
will perform at levels acceptable to the Company and its customers.

         The operations of the Company are substantially dependent upon its
executive officers. The Company has no employment contracts with these persons,
and the loss of their services could have a material adverse effect on the
Company. The Company's further success will also depend significantly on its
ability to attract and retain additional skilled personnel, including highly
trained technical personnel, project managers, and supervisors. The Company
believes it currently has adequate qualified supervisory personnel, but there is
no assurance that experienced and qualified management level personnel will be
available to the Company in the future to fill positions as needed.

ITEM 2. PROPERTIES.

         The Company headquarters and administrative facilities are located at
7032 S. Revere Parkway, Englewood, CO, in approximately 12,027 square feet of
leased office space. The lease expires May 31, 2004. The Company's corporate and
administrative functions are conducted from these facilities.

ITEM 3. LEGAL PROCEEDINGS.

         Except as set forth below, the Company is not a party to any material
legal proceedings which are pending before any court, administrative agency or
other tribunal. Further, the Company is not aware of any material litigation
which is threatened against it in any court, administrative agency, or other
tribunal. Management believes that no pending litigation in which the Company is
named as a defendant is likely to have a material adverse effect on the
Company's financial position or results of operations.


                                       9
<PAGE>

         On December 19, 2000, the Company filed an action in the Superior Court
of the State of California, County of Los Angeles for, among other things,
breach of contract and foreclosure of mechanics' lien/lien release bond against
Santa Clarita, LLC, an affiliated partnership of RFI, in response to non-payment
for services performed by the Company on the Porta Bella project located in
Santa Clarita, CA. In early February, 2002, the Company entered into a
settlement agreement under which it received a total of $2.1 million, which
approximates the value of the receivables related to the project at December 31,
2001 (See Notes G and S to the Consolidated Financial Statements).

         On February 8, 2001, the Company filed an action in the Superior Court
of the State of California, County of Contra Costa for, among other things,
breach of contract, foreclosure of a previously filed mechanics' lien, and
judicial foreclosure of the deed of trust in the amount of $10.1 million against
LCRI Investments, LLC, an affiliated partnership of RFI, in response to
non-payment for services performed by the Company on the Hercules project
located in Hercules, CA. On March 5, 2001, the Company recorded a notice of
default under the subject deed of trust in order to pursue a trustee's sale of
the subject property. The Company and LCRI Investments are engaged in
arbitration proceedings. The Company believes it will prevail and recover most,
if not all, the receivables related to this project, which were valued at $3.3
million on December 31, 2001 (See Notes G and S to the Consolidated Financial
Statements).

         The total value of the receivables related to these two Brownfields
projects at December 31, 2001 was $5.3 million. At September 30, 2001, the
Company reported the value of these receivables at $6.2 million. The lower value
at 2001 year-end stems from adjustments to reflect payments made directly to the
Company's subcontractors by RFI and/or affiliated partnerships and certain
accounting reconciliations, none of which had an adverse impact on the Company's
financial statements.

         The Company, LCRI Investments, and RFI are parties to a Commercial
Insurance Premium Finance and Security Agreement which guaranteed a $10.1
million Bond to Secure Financial Obligation for the Hercules, CA project. The
bond secures a note that requires quarterly principal payments of $542,278 which
are made by LCRI Investments, LLC. As of December 31, 2001, LCRI Investment, LLC
was in default on their 2001 quarterly payments. On July 11, 2001, a letter was
issued to LCRI Investments, LLC, RFI, and the Company calling for the immediate
payment of remaining principal and interest of $7.2 million. Currently, there
has been no legal action taken against the Company for the default. Management
believes the Company is entitled to be indemnified to the extent it is
ultimately obligated to make any payments under any of these arrangements.

         Since early 1998, the Company has been the subject of an investigation
by the Office of the Inspector General (OIG) of the Environmental Protection
Agency (EPA). While initially broad in scope, the focus of the investigation
appears to involve labor billing-rates to the EPA beginning in the 1992-1994
period and selected subsequent years. The Company has cooperated fully in all
OIG inquiries and will continue to do so when and if required. To date, no
claims have been made against the Company. In addition, independent audits by
the Defense Contract Audit Agency (DCAA), subsequent to initiation of the OIG
investigation, have not been adverse nor have resulted in claims against the
Company.


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

         No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 2001.


                                       10
<PAGE>

                                     PART II


ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         (a)      Principal Market or Markets. Since July 18, 1995, the
                  Company's Common Stock has been listed on the American Stock
                  Exchange ("AMEX") under the symbol "ENV". The following table
                  sets forth the high and low sale prices for the Company's
                  Common Stock as reported on the AMEX for the periods
                  indicated:

<Table>
<Caption>
  QUARTER ENDED               HIGH         LOW
  -------------               -----       -----
<S>                           <C>         <C>
March 31, 2000                $2.37       $1.44
June 30, 2000                  1.50        0.75
September 30, 2000             1.44        0.69
December 31, 2000              0.94        0.31
March 31, 2001                 0.94        0.43
June 30, 2001                  0.65        0.37
September 30, 2001             0.58        0.36
December 31, 2001             $0.75       $0.36
</Table>

         (b)      Approximate Number of Holders of Common Stock. The number of
                  record holders of the Company's common stock at February 20,
                  2002 was 43. This does not include approximately 1,100
                  shareholders that hold their shares in street name.

         (c)      Dividends. The Board of Directors does not anticipate paying
                  cash dividends on the Company's Common Stock in the
                  foreseeable future as it intends to retain future earnings to
                  finance the growth of the business. The payment of future cash
                  dividends will depend on such factors as earnings levels,
                  anticipated capital requirements, the operating and financial
                  conditions of the Company, and other factors deemed relevant
                  by the Board of Directors. The California Corporations Code
                  provides that a corporation may not pay dividends if the
                  corporation is, or as a result of the distribution would
                  likely be, unable to meet its liabilities as they mature.

         (d)      Sales of Unregistered Securities. None


                                       11
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA.

SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000.

<Table>
<Caption>
                                                                    Fiscal Quarter
$ in thousands, except per share amounts    March 31      June 30     September 30   December 31      Total
                                            --------      --------    ------------   -----------    --------
<S>                                         <C>           <C>           <C>           <C>           <C>
2000:
Revenues                                    $  3,453      $  6,682      $  7,731      $  6,576      $ 24,442
Project costs                                  3,150         5,753         6,968         5,838        21,709
                                            --------      --------      --------      --------      --------
     Gross profit                                303           929           763           738         2,733
                                            --------      --------      --------      --------      --------

Selling                                          148            94            78            60           380
General and administrative                       732           580           548           551         2,411
Restructuring                                    144            82            24            97           347
Other (income) loss, net                          63        (1,331)         (149)          (29)       (1,446)
                                            --------      --------      --------      --------      --------
     Income (loss) before income tax            (784)        1,504           262            59         1,041
                                            --------      --------      --------      --------      --------

Income tax                                        --            --            --            --            --
                                            --------      --------      --------      --------      --------
     Net income                             $   (784)     $  1,504      $    262      $     59      $  1,041
                                            ========      ========      ========      ========      ========

Basic earning per common share              $  (0.12)     $   0.24      $   0.04      $   0.01      $   0.17
Diluted earning per common share            $  (0.12)     $   0.24      $   0.04      $   0.01      $   0.17

2001:
Revenues                                    $  4,066      $  2,509      $  4,044      $  3,585      $ 14,204
Project costs                                  3,512         1,978         3,366         2,861        11,717
                                            --------      --------      --------      --------      --------
     Gross profit                                554           531           678           724         2,487
                                            --------      --------      --------      --------      --------

Selling                                           39            55            41            53           188
General and administrative                       530           480           451           643         2,104
Restructuring                                     --            --            --            --            --
Other (income) loss, net                         (27)          (20)          (26)           49           (24)
                                            --------      --------      --------      --------      --------
     Income (loss) before income tax              12            16           212           (21)          219
                                            --------      --------      --------      --------      --------

Income tax                                        --            --            --            --            --
                                            --------      --------      --------      --------      --------
     Net income                             $     12      $     16      $    212      $    (21)     $    219
                                            ========      ========      ========      ========      ========

Basic earning per common share              $   0.00      $   0.00      $   0.04      $   0.00      $   0.04
Diluted earning per common share            $   0.00      $   0.00      $   0.04      $   0.00      $   0.04
</Table>


                                       12
<PAGE>

         The following selected financial information for the years ended
December 31, 2001, 2000, 1999, 1998, and 1997 is derived from financial
statements of the Company audited by Grant Thornton LLP, independent certified
public accountants.

Balance Sheet Data (in thousands):

<Table>
<Caption>
                                            AT DECEMBER 31,
                         -------------------------------------------------------
                          2001        2000        1999        1998        1997
                         -------     -------     -------     -------     -------
<S>                      <C>         <C>         <C>         <C>         <C>
CURRENT ASSETS           $ 9,907     $12,627     $11,132     $26,670     $25,089
TOTAL ASSETS              10,836      13,959      13,805      30,202      29,883
CURRENT LIABILITIES        3,734       6,912       7,619      18,835      12,970
WORKING CAPITAL            6,173       5,715       3,513       7,835      12,119
LONG TERM DEBT                --          40         179         251       8,204
TOTAL LIABILITIES          3,734       6,952       7,798      19,086      21,174
SHAREHOLDERS' EQUITY     $ 7,101     $ 7,007     $ 6,007     $11,116     $ 8,709
</Table>

Statement of Operations Data (in thousands, except earnings per share data):

<Table>
<Caption>
                                                   FOR THE YEARS ENDED DECEMBER 31,
                                ----------------------------------------------------------------------------
                                   2001            2000             1999            1998            1997
                                -----------     -----------     -----------      -----------     -----------
<S>                             <C>             <C>             <C>              <C>             <C>
REVENUES                        $    14,204     $    24,442     $    43,189      $    66,497     $    54,170
OPERATING EXPENSES                   14,009          24,847          45,920           74,727          54,047
NET INCOME (LOSS)
  FROM CONTINUING
  OPERATIONS                            219           1,041          (3,177)             538            (347)
NET INCOME (LOSS) FROM
  CONTINUING OPERATIONS PER
  COMMON SHARE                  $      0.04     $      0.17     $     (0.51)     $      0.09     $     (0.06)
WEIGHTED AVERAGE SHARES           6,076,872       6,275,051       6,282,346        5,828,537       5,785,264
CASH DIVIDENDS PER
  COMMON SHARE                          -0-             -0-             -0-              -0-             -0-
</Table>

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

         This Annual Report on Form 10-K contains forward-looking statements (as
such term is defined in the private Securities Litigation Reform Act of 1995),
and information relating to the Company that is based on beliefs of management
of the Company, as well as assumptions made by and information currently
available to management of the Company. When used in this Report, the words
"estimate," "project," "believe," "anticipate," "intend," "expect," and similar
expressions are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events based on
currently available information and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company does not undertake any obligation to release publicly any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.

General

         The Company provides comprehensive environmental remediation services
of hazardous and toxic waste on a planned and emergency basis to both government
and private sector customers. It also provides water and wastewater treatment
facilities and services to municipal and industrial clients. The Company
provides these services from its offices in Denver, CO.


                                       13
<PAGE>

Business Strategy

         The Company is focused on basic strategies that should lead to improved
profitability, specifically on the completion of more profitable contracts,
overall direct and indirect cost reductions, and administrative efficiencies.
The Company continues to develop business relationships where it can assure high
quality and operate profitably. Cost reduction efforts will continue to focus on
improved program management, field consolidation, reduction of corporate
expenses, and assessment of field location efficiencies. Delivery of quality
service has been and will continue to be closely monitored. While management
believes that implementation of this strategy will improve operating
performance, no assurances can be given as to its ultimate success.

         Future strategic alternatives currently being considered by the Company
include, among others, (i) the pursuit of opportunities in environmental
remediation of Brownfield properties; (ii) water and wastewater treatment
construction and operation and maintenance through direct investment or
acquisitions; and (iii) continued focus on the improvement of contract
profitability.

Results of Operations

         The following table presents, for the periods indicated, the percentage
relationship which certain items of the Company's statements of income bear to
project revenue and the percentage increase or (decrease) in the dollar amount
of such items:

<Table>
<Caption>
                                             PERCENTAGE RELATIONSHIP TO
                                                   PROJECT REVENUE                PERIOD TO PERIOD
                                                      YEAR ENDED                       CHANGE
                                           -------------------------------       -------------------
                                                                                  2001         2000
                                                                                   VS.          VS.
                                            2001        2000         1999         2000         1999
                                           ------      ------       ------       ------       ------
<S>                                        <C>         <C>          <C>          <C>          <C>
Project Revenue                             100.0%      100.0%       100.0%       (41.9)%      (43.4)%

Project Costs:
    Direct                                   73.7        81.4         78.5        (47.4)       (41.3)
    Indirect                                  8.8         7.4         14.4        (30.8)       (71.0)
                                           ------      ------       ------       ------       ------
 Gross profit                                17.5        11.2          7.1         (9.0)       (10.7)

 Other operating expense (income):
    Selling                                   1.3         1.6          3.2        (50.6)       (72.9)
    General and administrative expense       14.8         9.9          8.2        (12.8)       (31.7)
                                           ------      ------       ------       ------       ------

 Operating income (loss)                      1.4        (1.7)        (6.3)       148.1         85.2
 Other income (expense)                       0.2         5.9         (1.0)       (98.4)       421.2
                                           ------      ------       ------       ------       ------
 Income (loss) before income taxes            1.5         4.3         (7.4)       (79.0)       132.8
 Income tax (benefit)                          --          --           --           --           --
                                           ------      ------       ------       ------       ------
 Net income (loss)                            1.5%        4.3%        (7.4)%      (79.0)       132.8%
                                           ------      ------       ------       ------       ------
</Table>


                                       14
<PAGE>

2001 COMPARED TO 2000

         PROJECT REVENUE. Project revenues were $14.2 million, down $10.2
million or 42% from the $24.4 million in the year-earlier period. The decline
largely reflects the absence of commercial revenues from Brownfields projects
that were terminated in October 2000 and accounted for $7.8 million of revenues
in 2000 (see Liquidity and Capital Resources). Also, the prior year included
some $1.3 million in revenues from the Tustin, California operations prior to
the sale of these assets in April, 2000. EPA revenues decreased $0.8 million to
$12.3 million from $13.1 million in year earlier period, primarily as a result
of lower level work order releases on the part of the EPA. In August 2000, a
contract with the State of California provided other governmental revenues of
$0.7 million with no corresponding revenues in the current period. Providing a
partial offset to the declines in the current period, water/wastewater revenues
increased $0.5 million to $1.4 million from $0.9 million in the year earlier
period.

The Following table sets forth the percentages of the Company's revenues
attributable to the EPA vs. non-EPA public and private sector customers:

<Table>
<Caption>
                                                Year Ended December 31,
             ---------------------------------------------------------------------------------------------
                         2001                             2000                            1999
             ---------------------------      ---------------------------      ---------------------------
<S>          <C>             <C>              <C>             <C>              <C>             <C>
Non-EPA      $ 1,872,938            13.2%     $11,330,144            46.3%     $17,231,604            39.9%
EPA           12,330,644            86.8%      13,111,527            53.7%      25,957,715            60.1%
             -----------     -----------      -----------     -----------      -----------     -----------
Total        $14,203,582           100.0%     $24,441,671           100.0%     $43,189,319           100.0%
             ===========     ===========      ===========     ===========      ===========     ===========
</Table>

         DIRECT COSTS. Direct costs were $10.5 million in the current period,
down $9.4 million or 47% from $19.9 million in the year-earlier period. The
decrease in direct costs arises from a combination of lower project revenues and
a change in the mix of project revenues. Direct costs were equal to 74% of
project revenues for 2001 as compared to 81% of project revenues for 2000. The
slightly more favorable ratio of direct costs to project revenues during the
current period reflects a change in utilization of personnel and equipment.

         INDIRECT COSTS. Indirect project costs were $1.2 million for the
current period, down $0.6 million or 31% from $1.8 million in the year earlier
period. Indirect costs were equal to 9% of project revenues for 2001 as compared
to 7% of project revenues for 2000. The slight increase in the ratio of indirect
costs to project revenues during the current period reflects retaining certain
employees whose labor cost were not chargeable to direct projects during the
winding down of EPA jobs and closing the Seattle office.

         SELLING EXPENSE. Sales and marketing expenses were $188,000 for the
current period, down $192,000 or 51% from $380,000 in the year earlier period.
This decrease is primarily the result of the sale of the Tustin, CA operations
in April 2000, and the full year benefit for the restructuring program
implemented in late 1999.

         GENERAL & ADMINISTRATIVE EXPENSE. General and administrative expenses
were $2.1 million for the current period, down $0.3 million or 12.8% from $2.4
million in the year earlier period. While lower expenses in this category
reflect the absence of the Tustin, CA operations and the benefits of
restructuring, a reduction in administrative personnel in anticipation of the
January 8, 2002 EPA contract expiration was also a contributing factor.

         RESTRUCTURING EXPENSE. There were no restructuring expenses in the
current period. In 2000, the Company incurred an additional $347,257 of
restructuring expenses, not previously identified in the


                                       15
<PAGE>

1999 restructuring accrual, for the closing of the Mobile, Jackson, New Orleans,
Houston, and Richmond offices.

          OTHER INCOME (EXPENSE). Other income, net of other expenses, amounted
to $24,000 for the current period, the bulk of which arose from interest income.
In the year-earlier period, a $1.3 million gain on the sale of the Tustin, CA
operations and a $212,000 gain on the sale of property held for investment
resulted, after other expenses, in other income of $1.4 million.

         NET INCOME. Net income of $218,586 was recorded during the current
period compared to the net income of $1,040,576 for the year earlier period. The
net income for 2000 was primarily the result of the $1.3 million gain on the
sale of the Tustin, CA operations recorded in April 2000.


2000 COMPARED TO 1999

         PROJECT REVENUE. Project revenues were $24.4 million in 2000, down
$18.7 million or 43% from $43.2 million in 1999. The decrease results from
several factors including but not limited to (i) the EPA suspension enacted in
August 1999 which disrupted the normal flow of business, reducing EPA revenues
by approximately $12.9 million from $26.0 million in 1999 to $13.1 million in
2000; (ii) as a result of the EPA suspension, the Company implemented a
restructuring plan in the third and fourth quarter of 1999 during which the
Company sold the Mobile and Jackson regions and closed its regional offices
located in New Orleans, Houston and Richmond. Revenues from these regions
approximated $6.0 million in commercial revenues for 1999 with no corresponding
commercial revenues in 2000; (iii) the completion of a large commercial project
in early 1999 which contributed approximately $1.5 million with no corresponding
revenues in 2000; and (iv) the sale of the Tustin, CA operations reduced
commercial and other governmental agency revenues by $2.9 million from $4.2
million for 1999 to $1.3 million for 2000. These revenue decreases were
partially off-set by an increase in commercial revenues of $2.1 million and $2.5
million for the Hercules and Santa Clarita, CA and various water/wastewater
projects during 2000.

The Following table sets forth the percentages of the Company's revenues
attributable to the EPA vs. non-EPA public and private sector customers:

<Table>
<Caption>
                                                Year Ended December 31,
             ---------------------------------------------------------------------------------------------
                        2000                              1999                             1998
             ---------------------------      ---------------------------      ---------------------------
<S>          <C>             <C>              <C>             <C>              <C>             <C>
Non-EPA      $11,330,144            46.3%     $17,231,604            39.9%     $33,569,412            50.5%
EPA           13,111,527            53.7%      25,957,715            60.1%      32,927,870            49.5%
             -----------     -----------      -----------     -----------      -----------     -----------
Total        $24,441,671           100.0%     $43,189,319           100.0%     $66,497,282           100.0%
             ===========     ===========      ===========     ===========      ===========     ===========
</Table>

         DIRECT COSTS. Direct costs were $19.9 million in 2000, down $14.0
million or 41% from $33.9 million 1999. Direct costs were equal to 81% of
project revenues in 2000, as compared to 79% of project revenues in 1999. The
decrease in total dollars is commensurate with the decrease in projects revenues
noted above. The increase in direct costs as a percentage of revenues in 2000
results primarily from the loss of higher margin projects which were sold in the
sale of the Tustin, CA operations.

         INDIRECT COSTS. Indirect project costs were $1.8 million in 2000, down
$4.4 million or 71% from $6.2 million in 1999. Indirect costs were equal to 7%
of project revenues in 2000, as compared to 14% of project revenues in 1999. The
decrease in total dollars and the decrease as a percentage of revenue is
primarily the result of the Restructuring Plan implemented in late 1999 and the
sale of the Tustin, CA operations, but is also commensurate with the overall
decrease in revenues noted above. However, these decreases were offset by
retaining certain key project managers/employees whose labor costs where not


                                       16
<PAGE>

chargeable to direct projects during the disruption of business from the EPA
suspension in the first quarter of 2000.

         SELLING EXPENSE. Sales and marketing expenses were $0.4 million in
2000, down $1.0 million or 73% from $1.4 million in 1999. The decrease in total
dollars is primarily the result of costs savings from the Restructuring Plan
implemented in late 1999 and the sale of the Tustin, CA operations effective
April 30, 2000.

         GENERAL & ADMINISTRATIVE EXPENSE. General and administrative expenses
were $2.4 million in 2000, down $1.1 million or 32% from $3.5 million in 1999.
The decrease in total dollars is primarily the result of cost savings from the
Restructuring Plan implemented in late 1999 and the sale of the Tustin, CA
operations effective April 30, 2000.

         RESTRUCTURING EXPENSE. Following the EPA suspension in August 1999, the
Company initiated a Restructuring Plan to reduce operating costs and gain
efficiencies through sale, downsizing, and closure of regional offices. In the
fourth quarter of 1999, the Company recorded a total restructuring charge of
approximately $0.9 million, including a $0.3 million non-cash charge for loss on
the sale of the regional offices. In 2000, the Company incurred an additional
$347,257 of restructuring expenses not previously identified for the closing of
the Mobile, Jackson, New Orleans, Houston, and Richmond offices.

          OTHER INCOME (EXPENSE). Other income, net of other expenses, was $1.4
million in 2000, up $1.9 million from a net expense of $0.4 million in 1999. The
increase results primarily from the $1.3 million gain on the sale of the Tustin,
CA operations and the $.2 million gain on the sale of investment property.
Interest expense decreased due to lower average debt balances in 2000 compared
to 1999.

         NET INCOME (LOSS). Net income for the year ended December 31, 2000 was
$1.0 million compared to a net loss of $3.2 million in 1999. As discussed above,
net income resulted primarily due to the cost saving from the implementation of
the Restructuring Plan and the $1.3 million gain on the sale of the Tustin, CA
operations.

Liquidity and Capital Resources

         The Company's sources of liquidity and capital resources historically
have been net cash provided by operating activities, funds available under its
financing arrangements, and proceeds from offerings of equity securities. In the
past, these sources have been sufficient to meet its needs and finance the
Company's business. The Company can give no assurance that the historical
sources of liquidity and capital resources will be available for future
development and acquisitions, and it may be required to seek alternative
financing sources not necessarily favorable to the Company.

         During the third quarter of 2000, the Company experienced problems
collecting on receivables from RFI and affiliated partnerships for work
performed at Brownfields projects located at Santa Clarita and Hercules, CA. The
severity of the problems caused the Company to suspend work on the Santa
Clarita, CA project. Subsequently, the Company was presented with termination
notices for both the projects, with the Santa Clarita termination effective
October 6, 2000 and the Hercules termination effective October 31, 2000. At
December 31, 2001 receivables from the Santa Clarita project were approximately
$2 million while those arising from the Hercules project were $3.3 million for a
total of $5.3 million or 74% of total accounts receivable.

         In February, 2002, the Company reached a settlement agreement with
respect to the Santa Clarita project and received $2.1 million. The Company
continues to pursue recovery efforts with respect to Hercules receivables (See
Item 3. Legal Proceedings and Notes G and S to the Consolidated Financial


                                       17
<PAGE>

Statements). The delay in collecting the aforementioned receivables on a timely
basis has adversely effected the Company's cash flow.

         In 2001, the Company elected not to bid on a new contract with the EPA.
Under terms of the prior contract, the fourth and final option year expired on
January 8, 2002. The Company will complete the EPA work-orders awarded up to the
date of expiration. Management believes it will require an additional six months
to finish those work-orders and to complete final administrative procedures.
Personnel levels will be reduced in conjunction with the completion of
work-orders. The Seattle operations were closed in December 2001 with related
assets disposed. For the year ended December 31, 2001, EPA revenues were
approximately $12.3 million or 87% of total revenues.

         Management will attempt to replace EPA activities by focusing on
water/wastewater projects, Brownfields developments, and other environmental
activities. The Company has signed a pre-development agreement with a Colorado
municipality to redevelop a commercial real-estate project. The project would
entail purchasing subject property, demolition and environmental remediation,
and construction of new affordable housing units and other related structures.
The completed project is estimated at $10 million to $20 million. Upon approval
of final project plans and financing sources, the project could start as early
as April or May 2002. At this time, no estimate can be made as to the amount and
timing of revenues that may be afforded to the Company from this project. There
can be no assurance that final redevelopment project plans or financing will be
approved. In addition, there can be no assurance that this redevelopment project
or any other effort will be successful in offsetting the loss of EPA revenues.

         Management believes that potential future cash flows from operations,
the collection of receivables related to the Hercules project, and funds
available under the $1.0 million line of credit with Compass Bank will be
sufficient to fund the Company's immediate needs for working capital. In
addition, management believes that it will be successful in renewing the line of
credit with Compass Bank in June 2002. However, there can be no assurance that
the line of credit with Compass Bank will be renewed. In the event the line of
credit is not renewed and alternate financing sources cannot be found, the
Company's financial position, operating activities, and liquidity could be
adversely affected.

         The Company's working capital increased to $6.2 million as of December
31, 2001, up $0.5 million from $5.7 million as of December 31, 2000. The change
in working capital is the net result of a decrease in current assets of $2.7
million and a decrease in current liabilities of $3.2 million. The decrease in
current assets results from collections of combined receivables of $2.3 million
and a decrease in cash of $0.5 million. The decrease in current liabilities
results primarily from payment of accounts payable and accrued liabilities of
$3.1 million and short-term debt of $0.1 million.

         The Company's cash and cash equivalents decreased approximately $0.5
million to $0.5 million at December 31, 2001 from $1.0 million at December 31,
2000. The decrease in cash and cash equivalents results from cash used in
operating activities of $0.1 million as a result of net income of $0.2 million,
a decrease in combined receivables of $2.0 million, $0.4 million of depreciation
adjustments to net income, and a decrease in accounts payable and accrued
expenses of $3.0 million. Cash used in investing activities of $0.2 million
results primarily from cash paid for land under development. Cash used in
financing activities of $0.2 million results primarily from payments of notes,
payments related to capital leases, and the repurchase of the Company's common
stock.

                  DEBT FINANCING. In December 2001, the Company renewed a $1
million revolving line of credit with Compass Bank secured by the assets of the
Company. Compass Bank must approve any borrowings on the line of credit.
Interest only payments beginning January 9, 2002 and continuing at monthly time
intervals thereafter. A final payment of the unpaid principal balance plus
accrued interest is due and payable on June 9, 2002. The interest rate is the
prime rate as published in the Wall Street


                                       18
<PAGE>

Journal plus 1%. The line of credit requires the Company to maintain certain net
worth and financial ratios. At December 31, 2001, there were no principal or
interest amounts due under the line of credit and the Company was in compliance
with all covenants. In addition, as of December 31, 2001, there were no
outstanding amounts due under capital leases; nor does the Company have any
liability or related risk with any "off-balance sheet financing arrangements".

         In July 2001, the Company financed its insurance premiums over the next
year by issuing a subordinated note, with monthly payments of approximately
$25,000 through March 2002. The note bears interest at 9.0% and matures in March
2002.

         EQUITY FINANCING. In August 1998, the Company completed a private
financing, raising $1.9 million of net proceeds in a placement of convertible
preferred stock and warrants. The preferred shares could be converted into
shares of the Company's common stock at a 15 percent discount to the price of
the common shares at the time of conversion with a maximum conversion price of
$3.35. An aggregate of three-year warrants to purchase 35,000 shares of the
Company's common stock at a price of $3.00 per share was also issued. A total of
430 shares of the preferred securities were converted into 472,803 shares of
common stock by the holders. In January 1999, the Company redeemed the remaining
1,570 preferred shares for $1.9 million in cash. The warrants expired on
December 31, 2001.

         In December 1998, the Company sold all of the outstanding stock of WQM
for $12.5 million to AquaSource Services and Technologies, Inc. On the date of
closing, $11.3 million was paid in cash, $1.3 million was received in January
1999 and another $0.5 million was received as part of the Settlement Agreement
in March 2000.

         CAPITAL COMMITMENTS. The Company has a lease for its existing facility
with such lease expiring in May, 2004. Monthly rentals currently are
approximately $14,129 in the aggregate. Management anticipates some capital
expenditures in 2002 which may be funded from working capital, term loans and/or
equipment leases.

         COMMONS STOCK DIVIDEND POLICY. Since the capitalization of the Company
in 1995, the Company has not paid, and does not currently intend to pay in the
foreseeable future, cash dividends on its Common Stock. Future earnings, if any,
are expected to be retained for the development of the business of the Company.

        STOCK REPURCHASE PLAN. In December 2000, the Company implemented a Stock
Repurchase Plan, allowing for the repurchase of up to 100,000 shares of the
Company's outstanding common stock. Repurchases were made from time to time in
the open market or through negotiated transactions depending on market
conditions. Such repurchases were made only through brokers and were subject to
volume, price, and other limitations in order to comply with applicable
Securities and Exchange Commission provisions regarding stock repurchases. All
common shares repurchased were retired. As of December 31, 2000, the Company had
repurchased 7,200 shares of the Company's common stock at a weighted average
price of $0.51 per share which includes associated broker fees and commissions.
During 2001, the Company repurchased 92,800 shares of the Company's common stock
at a weighted average price of $0.53 per share which includes associated broker
fees and commissions, thereby completing the terms of the Stock Repurchase Plan.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not Applicable.


                                       19
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Please see pages F-1 through F-26.

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

         None.


                                       20
<PAGE>

                                    PART III


ITEM 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by these Items is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held June 7, 2002.



                                       21
<PAGE>

                                     PART IV

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

         (a)      1.       The following financial statements are filed
                           herewith:

<Table>
<Caption>
                                                                    PAGES
                                                                  ----------
<S>                                                               <C>
Report of Independent Certified Public Accountants                F-1 -  F-2
Consolidated Balance Sheets                                       F-3 -  F-4
Consolidated Statements of Operations                                    F-5
Consolidated Statements of Stockholders' Equity                          F-6
Consolidated Statements of Cash Flows                             F-7 -  F-8
Notes to Consolidated Financial Statements                        F-9 - F-28
</Table>

                  2.       Schedules have been omitted because they are not
                           applicable, are not required or the information
                           required to be set forth therein is included in the
                           Consolidated Financial Statements or notes thereto.

                  3.       Exhibits. The following exhibits are filed herewith:

<Table>
<Caption>
    EXHIBIT
    NUMBER                           DESCRIPTION                                         LOCATION
    -------                          -----------                                         --------
<S>              <C>                                                   <C>
      3.1        Amended and Restated Articles of Incorporation        Incorporated by reference to Exhibit 3.1 to
                                                                       the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

      3.2        Bylaws                                                Incorporated by reference to Exhibit 3.2 to
                                                                       the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

     10.1        Incentive Stock Option Plan                           Incorporated by reference to Exhibit 10.1
                                                                       to the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

     10.2        Form of Incentive Stock Option Agreement              Incorporated by reference to Exhibit 10.2
                                                                       to the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

     10.3        Stock Purchase Agreement with AquaSource Services     Incorporated by reference to Exhibit 10.1
                 and Technologies, Inc.                                to the Company's report on Form 8K dated
                                                                       December 17, 1998.

     10.4        Administrative Agreement between United States        Incorporated by reference to Exhibit 10.1
                 Environmental Protection Agency and the Registrant    to Company's Form 10-Q for the nine months
                                                                       ended September 30, 1999.

     10.5        Asset Purchase and Assignment Agreement by and        Incorporated by reference to Exhibit 10.16
                 between the Company and CAPE Environmental            to the Company's Annual Report on Form 10-K
                 Management, Inc.                                      for the year ended December 31, 1999.
</Table>


                                       22
<PAGE>

<Table>
<Caption>
    EXHIBIT
    NUMBER                           DESCRIPTION                                         LOCATION
    -------                          -----------                                         --------
<S>              <C>                                                   <C>
     10.6        Lease Agreement by and between the Company and Sky     Incorporated by reference to Exhibit 10.17
                 Harbor Associates Limited Partnership                  to the Company's Annual Report on Form 10-K
                                                                        for the year ended December 31, 1999.

     10.7        Line of Credit with Compass Bank                       Filed herewith electronically

      21         Subsidiaries of the Registrant                         Filed herewith electronically

      23         Consent of Grant Thornton LLP                          Filed herewith electronically
</Table>


         (b)      Reports on Form 8-K.

                  None.


                                       23
<PAGE>

                                   SIGNATURES

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

                                       CET ENVIRONMENTAL SERVICES, INC.


Dated:  April 9, 2002                  By  /s/ Steven H. Davis
                                           -------------------------------------
                                           Steven H. Davis
                                           President and Chief Executive Officer

         Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.

<Table>
<Caption>
           Signature                                Capacity                       Date
           ---------                                --------                       ----
<S>                                         <C>                                <C>
/s/ Steven H. Davis                         President,                         April 9, 2002
---------------------------------           Chief Executive Officer,
Steven H. Davis                             Secretary and Director


/s/ Craig C. Barto                          Director                           April 9, 2002
---------------------------------
Craig C. Barto


/s/ John D. Hendrick                        Director                           April 9, 2002
---------------------------------
John D. Hendrick


/s/ George Pratt                            Director                           April 9, 2002
---------------------------------
George Pratt


/s/ Dale W. Bleck                           Chief Financial Officer            April 9, 2002
---------------------------------           and Assistant Secretary
Dale W. Bleck
</Table>


                                       24
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.


FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS



December 31, 2001 and 2000


                                      F-1
<PAGE>

                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
CET Environmental Services, Inc.

We have audited the accompanying consolidated balance sheets of CET
Environmental Services, Inc. as of December 31, 2001, 2000, and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of CET Environmental
Services, Inc. as of December 31, 2001, 2000, and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America.


GRANT THORNTON LLP




Denver, Colorado
January  18,  2002  (except for note T, as
                     to which the date is
                     February 20, 2002)


                                      F-2
<PAGE>
                        CET Environmental Services, Inc.

                           CONSOLIDATED BALANCE SHEETS


                           ASSETS

<Table>
<Caption>
                                                              December 31,      December 31,
                                                                  2001              2000
                                                              ------------      ------------
<S>                                                           <C>               <C>
CURRENT ASSETS:
     Cash                                                     $    469,939      $    953,641
     Accounts receivable, less allowance for
         doubtful accounts; $63,753 in 2001, and
         $164,403 in 2000                                        7,171,579         7,572,729
     Contracts in process less allowance for doubtful
         accounts of $38,944 in 2001, and $56,705 in 2000        1,751,874         3,355,603
     Retention receivable                                           65,288           268,471
     Other receivables                                              19,233           154,524
     Inventories                                                    15,838            15,317
     Land under development                                        185,350                --
     Prepaid expenses                                              228,260           306,339
                                                              ------------      ------------

                 Total current assets                            9,907,361        12,626,624
                                                              ------------      ------------

EQUIPMENT AND IMPROVEMENTS:
     Field equipment                                             1,210,037         1,432,070
     Vehicles                                                      316,494           500,447
     Furniture & fixtures                                           75,378            75,377
     Office equipment                                              421,205           537,038
     Leasehold improvements                                         49,862            49,862
                                                              ------------      ------------
                                                                 2,072,976         2,594,794
     Less allowance for depreciation and amortization           (1,267,959)       (1,301,217)
                                                              ------------      ------------

                 Equipment and improvements - net                  805,017         1,293,577

DEPOSITS                                                           123,368            38,922
                                                              ------------      ------------

                                                              $ 10,835,746      $ 13,959,123
                                                              ============      ============
</Table>

        The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>

                        CET Environmental Services, Inc.

                          CONSOLIDATED BALANCE SHEETS

         LIABILITIES AND STOCKHOLDERS' EQUITY

<Table>
<Caption>
                                                                               December 31,      December 31,
                                                                                   2001              2000
                                                                               ------------      ------------
<S>                                                                            <C>               <C>
CURRENT LIABILITIES:
     Accounts payable                                                          $  3,341,708      $  6,237,119
     Accrued expenses                                                               143,520           271,393
     Accrued contract costs                                                          49,570             8,800
     Accrued payroll and benefits                                                   101,124           227,413
     Current obligations under capital leases                                            --            51,446
     Notes payable - current                                                         98,466           116,283
                                                                               ------------      ------------

                 Total current liabilities                                        3,734,388         6,912,454


OBLIGATIONS UNDER CAPITAL LEASES                                                         --            40,149

COMMITMENTS AND CONTINGENT LIABILITIES

STOCKHOLDERS' EQUITY:
     Common stock (no par value) - authorized 20,000,000 shares; 5,976,549
         shares and 6,258,803 shares issued and outstanding
             in 2001 and 2000, respectively                                       8,506,007         8,629,755
     Paid-in capital                                                                104,786           104,786
     Accumulated deficit                                                         (1,509,435)       (1,728,021)
                                                                               ------------      ------------

                 Total stockholders' equity                                       7,101,358         7,006,520
                                                                               ------------      ------------

                                                                               $ 10,835,746      $ 13,959,123
                                                                               ============      ============
</Table>


        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                        CET Environmental Services, Inc.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<Table>
<Caption>
                                                                       Year Ended December 31,
                                                           ------------------------------------------------
                                                               2001              2000              1999
                                                           ------------      ------------      ------------
<S>                                                        <C>               <C>               <C>
PROJECT REVENUE                                            $ 14,203,582      $ 24,441,671      $ 43,189,319

PROJECT COSTS:
     Direct                                                  10,469,510        19,904,402        33,909,701
     Indirect                                                 1,247,512         1,804,044         6,219,975
                                                           ------------      ------------      ------------
                                                             11,717,022        21,708,446        40,129,676
                                                           ------------      ------------      ------------

             Gross profit                                     2,486,560         2,733,225         3,059,643
                                                           ------------      ------------      ------------

OTHER OPERATING EXPENSES:
     Selling                                                    187,688           379,653         1,403,149
     General and administrative                               2,103,809         2,411,447         3,529,675
     Restructuring charge                                            --           347,257           857,469
                                                           ------------      ------------      ------------
                                                              2,291,497         3,138,357         5,790,293
                                                           ------------      ------------      ------------

             Operating income (loss)                            195,063          (405,132)       (2,730,650)
                                                           ------------      ------------      ------------

OTHER INCOME (EXPENSE):
     Loss on sales of equipment                                 (27,897)         (114,444)          (89,167)
     Gain on sale of Tustin, CA Operations                           --         1,341,449                --
     Gain on sale of property held for investment                    --           226,730                --
     Interest income (expense), net                              23,063           (18,159)         (475,504)
     Other income, net                                           28,357            10,132           118,564
                                                           ------------      ------------      ------------
                                                                 23,523         1,445,708          (446,107)
                                                           ------------      ------------      ------------

             Income (loss) before taxes on income               218,586         1,040,576        (3,176,757)
             Taxes on income                                         --                --                --
                                                           ------------      ------------      ------------
                     NET INCOME (LOSS)                     $    218,586      $  1,040,576      $ (3,176,757)
                                                           ============      ============      ============


Earnings (loss) per common share                           $       0.04      $       0.17      $      (0.51)
                                                           ============      ============      ============

Weighted average number of common shares                      6,076,872         6,275,051         6,282,346
                                                           ============      ============      ============

Earnings (loss) per common share - assuming dilution       $       0.04      $       0.17      $      (0.51)
                                                           ============      ============      ============

Weighted average number of fully diluted common shares        6,089,941         6,278,062         6,282,346
                                                           ============      ============      ============
</Table>


        The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>
                        CET Environmental Services, Inc.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 2001, 2000 and 1999

<Table>
<Caption>
                                                Common stock                        Preferred stock
                                        ------------------------------      ------------------------------
                                           Shares            Amount            Shares            Amount
                                        ------------      ------------      ------------      ------------
<S>                                     <C>               <C>               <C>               <C>
Balance at December 31, 1998               6,129,271      $  8,539,716             1,710      $  1,589,102


Conversion of preferred stock                155,017           131,545              (140)         (131,545)

Redemption of preferred stock                     --                --            (1,570)       (1,457,557)

Dividends on preferred stock                      --                --                --                --

Net loss for the year                             --                --                --                --

                                        ------------      ------------      ------------      ------------
Balance at December 31, 1999               6,284,288         8,671,261                --                --


Repurchase & retirement of
     common stock through
     Company Stock Repurchase Plan            (7,200)           (3,673)               --                --

Exchanged of shareholder receivable
     for common stock                        (18,285)          (37,833)

Net income for the year

                                        ------------      ------------      ------------      ------------
Balance at December 31, 2000               6,258,803         8,629,755                --                --
                                        ------------      ------------      ------------      ------------

Repurchase & retirement of
     common stock through
     Company Stock Repurchase Plan           (92,800)          (48,748)               --                --

Repurchase & retirement of
     common stock from former
     Director of the Company                (189,454)          (75,000)               --                --
Net income for the year

                                        ------------      ------------      ------------      ------------
Balance at December 31, 2001               5,976,549      $  8,506,007                --      $         --
                                        ============      ============      ============      ============

<Caption>
                                                               Retained
                                                               earnings           Total
                                             Paid-in         (accumulated     stockholders'
                                             capital           deficit)           equity
                                           ------------      ------------     -------------
<S>                                        <C>               <C>              <C>
Balance at December 31, 1998               $    574,629      $    413,033      $ 11,116,480


Conversion of preferred stock                        --                --                --

Redemption of preferred stock                  (469,843)               --        (1,927,400)

Dividends on preferred stock                         --            (4,873)           (4,873)

Net loss for the year                                --        (3,176,757)       (3,176,757)

                                           ------------      ------------      ------------
Balance at December 31, 1999                    104,786        (2,768,597)        6,007,450


Repurchase & retirement of
     common stock through
     Company Stock Repurchase Plan                   --                --            (3,673)

Exchanged of shareholder receivable
     for common stock                                                               (37,833)

Net income for the year                                         1,040,576         1,040,576

                                           ------------      ------------      ------------
Balance at December 31, 2000                    104,786        (1,728,021)        7,006,520
                                           ------------      ------------      ------------

Repurchase & retirement of
     common stock through
     Company Stock Repurchase Plan                   --                --           (48,748)

Repurchase & retirement of
     common stock from former
     Director of the Company                         --                --           (75,000)
Net income for the year
                                                                  218,586           218,586
                                           ------------      ------------      ------------
Balance at December 31, 2001               $    104,786      $ (1,509,435)     $  7,101,358
                                           ============      ============      ============
</Table>


        The accompanying notes are an integral part of these statements.


                                      F-6
<PAGE>

                        CET Environmental Services, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                             Years ended December 31,
                                                                    ---------------------------------------------
                                                                        2001             2000             1999
                                                                    -----------      -----------      -----------
<S>                                                                 <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income (loss)                                             $   218,586      $ 1,040,576      $(3,176,757)
      Adjustments to reconcile net income to net cash (used in)
          provided by operating activities:
              Depreciation and amortization                             391,751          642,120          989,732
              Restructuring charge                                           --               --          390,324
              Provision for bad debts                                        --         (257,447)        (527,430)
              Loss on disposal of equipment                              27,897          114,444           89,167
              Gain on sale of Tustin, CA operations                          --       (1,341,449)              --
              Gain on sale of property held for investment                   --         (226,730)              --
              Changes in operating assets and liabilities:
                 Decrease (increase) in accounts receivable             401,150       (1,261,959)       6,057,335
                 Decrease (increase) in contracts in process          1,603,729       (1,522,447)       8,548,768
                 Decrease (increase) in income tax, retention
                      and other receivables                             338,474        1,599,392        1,040,654
                 Decrease (increase) in prepaid expenses                 78,079          253,476          347,112
                 Decrease (increase) in inventory and deposits          (84,967)          43,032           88,159
                 Increase (decrease) in accounts payable             (2,895,411)       1,277,386       (6,423,376)
                 Increase (decrease) in accrued expenses
                    and income taxes                                   (213,392)        (736,256)      (1,858,944)
                                                                    -----------      -----------      -----------
                        Net cash provided by (used in)
                           operating activities                        (134,104)        (375,862)       5,564,744
                                                                    -----------      -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of equipment                                             (14,865)         (28,475)      (1,190,209)
      Purchase of property held for investment                               --         (665,414)              --
      Purchase of land held for development                            (185,350)              --               --
      Proceeds from sale of equipment                                    29,500           62,494          251,649
      Proceeds from sale of property held for investment                     --          892,144               --
      Proceeds from the sale of Tustin, CA operations, net                   --        1,948,072               --
      Proceeds from sale of subsidiary                                       --               --        1,250,000
                                                                    -----------      -----------      -----------
                        Net cash provided by (used in)
                             investing activities                      (170,715)       2,208,821          311,440
                                                                    -----------      -----------      -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Bank overdraft                                                         --         (118,348)      (1,818,393)
      Net (payments) on notes                                           (17,817)        (327,826)      (1,178,005)
      Payments on capital leases                                        (37,318)        (152,666)        (266,349)
      Net (payments) proceeds from credit line loan                          --         (818,152)        (221,773)
      Payments on repurchase of common stock                           (123,748)          (3,673)              --
      Payment of dividends on preferred stock                                --               --           (4,873)
      Net payments from related party                                        --           36,764           20,000
      Preferred stock redemption                                             --               --       (1,927,400)
                                                                    -----------      -----------      -----------
                        Net cash used in
                        financing activities                           (178,883)      (1,383,901)      (5,396,793)
                                                                    -----------      -----------      -----------
</Table>


        The accompanying notes are an integral part of these statements.


                                      F-7
<PAGE>
                        CET Environmental Services, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                          Years ended December 31,
                                                                    --------------------------------------
                                                                       2001           2000          1999
                                                                    ---------      ---------     ---------
<S>                                                                 <C>            <C>           <C>
                        INCREASE (DECREASE) IN CASH                  (483,702)       449,058       479,391

Cash at beginning of year                                             953,641        504,583        25,192
                                                                    ---------      ---------     ---------

Cash at end of year                                                 $ 469,939      $ 953,641     $ 504,583
                                                                    =========      =========     =========

Supplemental disclosures of cash flow information:
      Cash paid during the year
          Interest                                                  $  15,072      $  55,307     $ 482,707

Noncash investing and financing activities:
      Issuance of note payable for financing of
          insurance premiums                                        $ 228,001      $ 256,469     $ 635,709
                                                                    =========      =========     =========

      Conversion of preferred stock to common                       $      --      $      --     $ 131,546
                                                                    =========      =========     =========

      Related party receivable exchanged for common stock           $      --      $  37,833     $      --
                                                                    =========      =========     =========

      Fixed asset additions (returns) under capital leases, net     $  54,277      $ 129,606     $(215,820)
                                                                    =========      =========     =========
</Table>


        The accompanying notes are an integral part of these statements.


                                      F-8
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A -- ORGANIZATION AND DESCRIPTION OF COMPANY

          CET Environmental Services, Inc. (the Company) was incorporated on
          February 9, 1988 under the laws of the State of California. On
          November 29, 1991, Environmental Operations, Inc., purchased 100% of
          the Company's outstanding stock from Consolidated Environmental
          Technologies, Inc. In August 1992, Environmental Operations, Inc. was
          merged into CET Environmental Services, Inc. The Company has two
          wholly-owned subsidiaries, Cleanwater Contracting, Inc., a California
          corporation, and Community Builders, Inc., a Colorado corporation.

          The Company provides a variety of consulting, technical and
          redevelopment services to resolve environmental and health risk
          problems in the air, water and soil. The Company has developed a broad
          range of expertise in non-proprietary technology-based environmental
          remediation and water treatment techniques for both the public and
          private sectors.


NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Consolidation

          The consolidated financial statements include the accounts of CET
          Environmental Services, Inc., and its wholly-owned subsidiaries. All
          significant inter-company transactions have been eliminated.

          Cash

          For purposes of the statement of cash flows, the Company considers all
          highly liquid cash investments with an original maturity of three
          months or less to be cash.

          Contracts

          A majority of the Company's revenue has been generated from
          time-and-material contracts with the EPA (see Note C), whereby the
          Company provides services, as prescribed under the various contracts,
          for a specified fixed hourly rate for each type of labor hour and
          receives reimbursement, and sometimes a small mark-up, for material,
          inventories and subcontractor costs. In addition, many of the time and
          material contracts have a stated maximum contract price, which cannot
          be exceeded without an authorized change order. Revenue is recorded on
          time and materials contracts based upon the labor costs incurred as a
          percentage to estimated total labor costs on the percentage of
          completion method. Revenue on fixed price contracts is recorded as
          costs are incurred as a percentage of estimated total costs. Due to
          uncertainties in the estimation process, actual results could


                                      F-9
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         differ from estimates used. Provision for losses on uncompleted
         contracts are made in the period in which such losses are determined.
         Recoveries are recorded to revenue when received. Awards applicable to
         performance on contracts are recorded when there is sufficient
         information to determine an award is probable.

         Contracts in process consist of the accumulated unbilled labor at
         contracted rates, material, subcontractor costs and other direct and
         indirect job costs and award fees related to projects in process.

         Inventories

         Inventories consist of various supplies and materials used in the
         performance of the services related to the Company's projects and are
         stated at the lower of cost or market.

         Land under development

         Land under development consists of contaminated or other real-estate
         acquired at cost, including demolition, remediation, grading and other
         costs. It is the Company's intention to purchase and develop the above
         and other contaminated real estate as part of its operations. It is not
         possible to determine the amount of real estate, if any, that will be
         sold in the next year.

         Equipment and Improvements

         Equipment and improvements are recorded at cost. Depreciation and
         amortization are provided on a straight-line method over the following
         estimated useful lives. Leasehold improvements are amortized over the
         lives of the respective leases or the service lives of the
         improvements, whichever is shorter.

<Table>
<Caption>
                           Description                      Depreciable life
                           -----------                      ----------------
<S>                                                         <C>
                           Field equipment                  7 years
                           Vehicles                         5 years
                           Furniture & fixtures             5 years
                           Office equipment                 5 years
</Table>

         Income Taxes

         The Company accounts for income taxes on the liability method, which
         requires that deferred tax assets and liabilities be recorded for
         expense and income items that are recognized in different periods for
         financial and income tax reporting purposes.


                                      F-10
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Estimated Fair Value Information

         Statement of Financial Accounting Standards ("SFAS") No. 107,
         Disclosure about Fair Value of Financial Instruments, requires
         disclosure of the estimated fair value of an entity's financial
         instrument assets and liabilities, as defined, regardless of whether
         recognized in the financial statements of the reporting entity. The
         fair value information does not purport to represent the aggregate net
         fair value of the Company.

         The following methods and assumptions were used to estimate the fair
         value of each class of financial instruments for which it is
         practicable to estimate that value:

         Cash and other receivables: The carrying amount approximates fair value
         due to the short-term maturity.

         Note Payable: The carrying value approximates fair value as the
         interest rate at December 31, 2001 and 2000 is considered to
         approximate the market rate.

         Obligations Under Capital Leases: The carrying value approximates fair
         value as the interest rate at December 31, 2000 is considered to
         approximate the market rate.

         Use of Estimates

         In preparing financial statements in conformity with accounting
         principles, generally accepted in the United States of America,
         management is required to make estimates and assumptions that affect
         the reported amounts of assets and liabilities, the disclosure of
         contingent assets and liabilities at the date of the financial
         statements, and the reported amounts of revenue and expenses during the
         reporting period. Actual results could differ from those estimates.

         Impairment of Long-lived Assets

         Financial Accounting Standards Board Statement of Financial Accounting
         Standards 121, Accounting for the Impairment of Long-lived Assets and
         for Long-lived Assets to be Disposed of (SFAS 121), requires that
         long-lived assets and certain identifiable intangibles held and used by
         an entity be reviewed for impairment whenever events or changes in
         circumstances indicate that the carrying amount of an asset may not be
         recoverable. If the sum of the expected future cash flows (undiscounted
         and without interest) is less than the carrying amount of the asset, an
         impairment loss is recognized. Measurement of that loss would be based
         on the fair value of the asset. SFAS 121 also generally requires that
         long-lived assets and certain identifiable intangibles to be disposed
         of be reported at the lower of the carrying amount or the fair value,
         less cost to sell. Any impairment provisions recognized in accordance
         with SFAS 121 are permanent and may not be restored in the


                                      F-11
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         future. No impairment expense was recognized in the years ended
         December 31, 2001, 2000 and 1999.

         Earnings per Share

         The Financial Accounting Standards Board Statement of Financial
         Accounting Standards No. 128, Earnings Per Share (SFAS 128) requires
         the presentation of basic earnings per share (EPS) and, for companies
         with potentially dilutive securities such as convertible debt, options
         and warrants, diluted EPS. In 1999, all options and warrants
         outstanding were excluded from the computation of potential common
         shares as the option/warrant price exceeded the average market price
         during the period and the Company incurred a net loss. Similarly,
         options of 59,600 were excluded in 2001 and 2000, and warrants of
         72,925 and 107,925 were excluded in 2001 and 2000.


                                      F-12
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         The following table sets forth the computation of basic and diluted
         earnings per share (in thousands, except per share data):

<Table>
<Caption>
                                                       2001        2000        1999
                                                     -------     -------     -------
<S>                                                  <C>         <C>         <C>
Numerator
    Net income (loss)                                $   219     $ 1,041     $(3,177)
    Preferred stock dividends                             --          --          (5)
                                                     -------     -------     -------
    Numerator for basic earnings per share -
      income available to common stockholders            219       1,041      (3,182)

Effect of dilutive securities:
    Preferred stock dividends                             --          --          --
                                                     -------     -------     -------
    Numerator for diluted earnings per share -
      income available to common stockholders
      after assumed conversions                      $   219     $ 1,041     $(3,182)
                                                     =======     =======     =======

Denominator:
    Denominator for basic earnings per share -
      weighted average shares outstanding              6,077       6,275       6,282

    Effect of dilutive securities:
       Warrants                                           --          --          --
       Stock options                                      13           3          --
                                                     -------     -------     -------
       Dilutive potential common shares                   13           3          --

    Denominator for diluted earnings per share -
      adjusted weighted average share and
      assumed conversion                               6,090       6,278       6,282
                                                     =======     =======     =======
Basic earnings (loss) per share                      $  0.04     $  0.17     $ (0.51)
                                                     =======     =======     =======
Diluted earnings (loss) per share                    $  0.04     $  0.17     $ (0.51)
                                                     =======     =======     =======
</Table>

         In 1999, basic earnings per share data was computed by dividing net
         loss, by weighted average number of common shares outstanding during
         the period. Diluted earnings per share computations do not give effect
         to potentially dilutive securities including stock options and warrants
         as their effect would have been anti-dilutive.

         In 2001 and 2000, basic earnings per share data was computed by
         dividing net income by the weighted average number of common shares
         outstanding during the period. Diluted


                                      F-13
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         earnings per share were adjusted for the assumed conversion of
         potentially dilutive securities including stock options and warrants to
         purchase common stock.

         Recent Accounting Pronouncements

         There have been no recent accounting pronouncements that have had or
         are expected to have a material effect on the Company's financial
         position or results of operations.


NOTE C -- EPA SUSPENSION, LIFTING OF SUSPENSION AND CONTRACT EXPIRATION

         On August 10, 1999, the Company received a notice of suspension from
         the Environmental Protection Agency ("EPA"). The suspension resulted
         from EPA allegations that the Company engaged in intentional misconduct
         with respect to billing for services provided under various EPA
         contracts. Under the suspension, the Company was prohibited from
         receiving additional government contracts under the provisions of 48
         C.F.R Subpart 9.4 of the Federal Acquisitions Regulations. The
         suspension did however allow the Company to continue performance on
         existing government contracts.

         In November 1999, following consideration of certain information
         provided by the Company to the EPA, the EPA's suspension was terminated
         and an Administrative Agreement ("Administrative Agreement") between
         the EPA and the Company was executed. Upon execution of the
         Administrative Agreement, the Company became immediately eligible to
         bid for, receive, and perform any federal contract or subcontract, or
         participate in any assistance, loan or benefit without restriction. In
         the Administrative Agreement, the Company agreed to cooperate in full
         with further investigations into the EPA allegations including access
         to records, availability of Company personnel, certain reporting
         requirements, audit of EPA billing prior to submission, and certain
         restrictions of Company assets without notification to the EPA.

         Following the notice of suspension, the Company initiated a
         Restructuring Plan which downsized its operations as a decline in
         revenues occurred. The Restructuring Plan included the sale,
         downsizing, and closure of certain regional offices. See Note D below
         on discussion of the Restructuring Plan.

         After review of available information and consultation with its legal
         counsel, management believes that the allegations brought against the
         Company did not warrant suspension. The Company has cooperated fully in
         all EPA inquiries and will continue to do so if and when required.

         The fourth and final option period under the existing EPA contract
         expired on January 8, 2002. The Company has elected not to pursue a new
         contract with the EPA. The Company


                                      F-14
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         will complete the EPA work-orders awarded up to the date of expiration.
         Management believes it will require an additional six months to finish
         those work-orders and to complete final administrative procedures. The
         Company's EPA operations located in Seattle were closed in December
         2001 with related assets being disposed. Additional personnel levels
         will be reduced in conjunction with the completion of work-orders.

         EPA revenues represented approximately 87%, 54%, and 60%, respectively,
         of the Company's revenue for the years ended December 31, 2001, 2000,
         and 1999.


NOTE D -- RESTRUCTURING

         In August 1999, following the EPA suspension discussed in Note C, the
         Company initiated a Restructuring Plan to reduce operating costs and
         gain efficiencies through sale, downsizing, and closure of regional
         offices. Under the Restructuring Plan, the Company sold substantially
         all its assets in the Mobile and Jackson regions, and closed its
         regional offices located in New Orleans, Houston, and Richmond. The
         Company recorded a restructuring charge of $857,469 in September 1999
         consisting of facility reduction and asset disposals of $390,324, costs
         of $226,599 to fulfill and buy out existing lease commitments, and
         personnel reduction costs of $240,546.

         During 2000, the Company incurred $347,257 of additional and
         previously-unidentified restructuring expenses related to the
         Restructuring Plan.


NOTE E -- SALE OF SUBSIDIARY

         On December 1, 1998, the Company sold all of the outstanding shares of
         its subsidiary, Water Quality Management Corporation ("WQM"), to
         AquaSource for a sales price of $12.5 million plus an adjustment for
         net working capital of WQM at November 30, 1998. The Company recorded a
         gain on the sale of $10.2 million in 1998. The Company received $11.3
         million at the date of sale and in the first quarter of 1999 received
         an additional $1.25 million. At December 31, 1999, the Company included
         in other receivables approximately $1.5 million remaining from amounts
         due on the sale of WQM.

         On February 22, 2000, AquaSource and the Company signed a Settlement
         and Mutual Release Agreement. The Settlement Agreement instructed
         AquaSource to pay the Company approximately $500,000 and release all
         claims it has against the approximately $698,000 of retention related
         to a certain project that was completed by the Company. The Company has
         agreed to indemnify AquaSource on certain projects that have been
         completed by the Company, which were transferred to AquaSource as part
         of the sale of WQM. In addition, the Company retained $219,000 for
         certain amounts collected on behalf of WQM.


                                      F-15
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE F -- SALE OF TUSTIN, CA OPERATIONS

         On April 30, 2000, the Company entered into an Asset Purchase Agreement
         with Cape Environmental Management, Inc. ("CEM") to sell certain assets
         and assign certain contracts and liabilities associated with its
         Tustin, CA operations for $2,100,000. The net book value of the assets
         sold and liabilities assumed were $606,623. The Company recorded a gain
         of $1,341,449 with net cash proceeds of $1,948,072 on the sale. In
         connection with the sale of assets, the Company entered into a
         non-compete agreement which prohibits it from providing remediation
         services to the Department of Defense, with certain limited exceptions,
         for a period of four years from April, 2000.


NOTE G -- SIGNIFICANT CUSTOMERS

         A significant portion of the Company's business was from contracts with
         the EPA. As of December 31, 2001 and 2000, the balance of accounts
         receivable from the EPA was $1,737,993 and $1,880,077, respectively.
         Revenue from the EPA in 2001, 2000, and 1999 amounted to approximately
         $12 million, $13 million, and $26 million, or 87%, 54%, and 60% of
         annual gross revenues, respectively. The Company elected not to pursue
         a new EPA contract and the existing contract expired on January 8, 2002
         (see Note C and S).

         Contracts in process consist of the following at December 31:

<Table>
<Caption>
                                  2001           2000
                               ----------     ----------
<S>                            <C>            <C>
Government - EPA contracts     $1,440,179     $3,137,450
Non-EPA contracts                 311,695        218,153
                               ----------     ----------

         Total                 $1,751,874     $3,355,603
                               ==========     ==========
</Table>

         The EPA may award the Company an annual award fee based on the specific
         job and overall EPA contract management performance ratings. The amount
         of the award is based on a ratings percentage multiplied by the pool of
         funds legislatively approved for award disbursements. All companies
         performing work under an EPA contract compete for these award fees
         based on their performance ratings from the EPA.

         The Company performed work for two Brownfield projects located in
         Hercules and Santa Clarita, CA. Revenues from these projects in 2000
         and 1999 amounted to approximately


                                      F-16
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         $7.8 million and $2.2 million, or 32% and 5% of annual gross revenues.
         During the third quarter of 2000, the Company experienced problems
         collecting on receivables from Remediation Financial, Inc. ("RFI"), and
         its affiliated partnerships Santa Clarita, LLC and LCRI Investments,
         LLC the developers of the two Brownfield projects. The severity of the
         problems was of such sufficiency to cause the Company to suspend work
         on the Santa Clarita, CA project. Subsequently, the Company was
         presented with termination notices for both projects with the Santa
         Clarita termination effective October 6, 2000 and the Hercules
         termination effective October 31, 2000. At December 31, 2000, the
         Company had receivables of $2,061,362 for the Santa Clarita project and
         $3,668,329 for the Hercules project. These amounts represent $5,729,691
         for 76% of accounts receivable at December 31, 2000. At December 31,
         2001, the Company had receivables of $2,021,164 for the Santa Clarita
         project and $3,313,575 for the Hercules project. These amounts
         represent $5,334,739 or 74% of accounts receivable at December 31,
         2001. In February, 2002, the Company entered into a settlement
         agreement with respect to the Santa Clarita project and received $2.1
         million. The Company has a secured lien on the Hercules property and
         management believes it will recover most, if not all, of the related
         receivables. However, failure to collect this receivable will have a
         material adverse effect on the financial position and operations of the
         Company. Additionally, the continued delay in collecting the receivable
         has an adverse effect on the cash flow of the Company. See Note S
         regarding legal actions that have been taken in response to non-payment
         by RFI and affiliated partners of the above-mentioned receivable
         balance.

         The total value of the receivables related to these two Brownfields
         projects at December 31, 2001 was $5.3 million. At September 30, 2001,
         the Company reported the value of these receivables at $6.2 million.
         The lower value at 2001 year-end stems from non-cash adjustments to
         reflect payments made directly to the Company's subcontractors by RFI
         and/or affiliated partnerships, none of which had an adverse impact on
         the Company's financial statements.

NOTE H -- OTHER EQUIPMENT DISPOSALS

         During 1999, other equipment dispositions and write-offs, not related
         to the Restructuring Plan noted in Note D above, consisted of $23,810
         of net equipment disposals for cash proceeds of $2,254. The Company
         recorded a loss of $21,556 on the disposals plus an additional loss of
         $67,611 for other equipment write-offs.

         During 2000, other equipment dispositions and write-offs consisted of
         $149,811 of net equipment disposals for cash proceeds of $62,494 and
         $162,543 of leased equipment returns. The Company recorded a loss of
         $87,317 on the disposals plus an additional loss of $27,127 for leased
         equipment returns and other equipment write-offs.

         During 2001, equipment dispositions and write-offs consisted of $55,142
         of net equipment disposals for cash proceeds of $29,500 and $54,273 of
         leased equipment returns. The


                                      F-17
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Company recorded a loss of $25,642 on the disposals plus an additional
         loss of $2,255 for leased equipment returns.


NOTE I -- CAPITAL LEASES

         Vehicles and equipment recorded under capital leases consist of the
         following at December 31:

<Table>
<Caption>
                                      2001          2000
                                  -----------     ---------
<S>                               <C>             <C>
Vehicles                          $        --     $ 148,052
Equipment                                  --        32,736
                                  -----------     ---------
                                           --       180,788
Less accumulated depreciation              --       (86,061)
                                  -----------     ---------
        Total                     $        --     $  94,727
                                  ===========     =========
</Table>


NOTE J -- RELATED PARTY TRANSACTIONS

         In 1997, the Company made advances to a former officer, director, and
         shareholder of the Company. The balance due was $104,036 consisting of
         principal and interest at December 31, 1999. In March 2000, a $36,764
         cash payment was received and applied against the outstanding principal
         on the loan. On July 1, 2000, 18,285 shares of the Company's common
         stock were received in settlement of the remaining principal of
         $37,833. As part of the settlement, the Company wrote off $29,440 of
         interest related to the loan. The company has retired the shares of
         common stock.


NOTE K -- LINE OF CREDIT AND NOTES PAYABLE

         In May 1997, the Company entered into a financing agreement ("the
         Agreement") with the National Bank of Canada. The Agreement provided a
         line of credit up to $9 million, including a $500,000 stand-by letter
         of credit to the Company based upon a percentage (80%) of eligible
         receivables (as defined in the loan agreement). In addition, the
         Company borrowed $1 million from the Bank under a term loan.
         Originally, interest under the Agreement and the term loan was payable
         monthly at the Bank's Reference Rate plus .25%.

         As of December 31, 1999, the Company's remaining debt under its
         Agreement with National Bank of Canada consisted of $818,152
         outstanding under its line of credit.

         On January 27, 2000 the Company completed the terms of repayment under
         the Agreement and all security interests in the Company's assets were
         released.


                                      F-18
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         In December 2001, the Company renewed a $1 million revolving line of
         credit with Compass Bank secured by the assets of the Company. Compass
         Bank must approve any borrowings on the line of credit. Interest only
         payments beginning January 9, 2002 and continuing at monthly time
         intervals thereafter. A final payment of the unpaid principal balance
         plus accrued interest is due and payable on June 9, 2002. The interest
         rate is the prime rate as published in the Wall Street Journal plus 1%.
         The line of credit requires the Company to maintain certain net worth
         and financial ratios. At December 31, 2001, there were no principal or
         interest amounts due under the line of credit and the Company was in
         compliance with all covenants.

         Notes payable consists of the following at December 31:

<Table>
<Caption>
                                                          2001         2000
                                                        --------     --------
<S>                                                     <C>          <C>
Note payable for annual insurance premium, interest
at 9.70%, with monthly payments of approximately
$29,000, due March 31, 2001                             $     --     $116,283

Note payable for annual insurance premium, interest
at 9.0%, with monthly payments of approximately
$25,088, due March 2002                                 $ 98,466     $     --
                                                        --------     --------
                                                          98,466      116,283
Less current portion                                      98,466      116,283
                                                        --------     --------
                                                        $     --     $     --
                                                        ========     ========

</Table>


NOTE L -- STOCKHOLDERS' EQUITY

         In July 1998, the Company completed a private placement of 2,000 shares
         of 4% convertible preferred stock (the "Preferred Stock"). The net
         proceeds were approximately $1,879,000. The Preferred Stock was
         convertible into shares of common stock based on the stated value of
         $1,000 per share of Preferred Stock divided by conversion price on the
         conversion date. The conversion price was equal to 85% of the lowest
         closing price of the common stock during the six days immediately
         preceding the conversion date, not to exceed $3.35. A total of 290
         shares of the Preferred Stock were converted into 317,786 shares of
         common stock during 1998 and a total of 140 shares of Preferred Stock
         were converted into 155,017 shares of common stock in 1999.

         The holders of 4% convertible preferred stock received dividends, paid
         quarterly, from September 30, 1998 through March 31, 1999.


                                      F-19
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         In connection with this offering, the Company issued warrants to the
         representatives of the underwriters in this offering to purchase up to
         35,000 shares of the Company's common stock at $3.00 per share. The
         warrants expired on December 31, 2001.

         In January 1999, the Company redeemed the remaining shares of Preferred
         Stock for $1,927,400 plus $4,873 of unpaid dividends through the date
         of redemption.

         On July 1, 2000, a former officer and shareholder of the Company,
         exchanged 18,285 shares of the Company's common stock in settlement of
         $37,833 of loan principal. The Company has retired these shares.

         On May 2, 2001, the Company reached an agreement to purchase 631,514
         shares of the Company's common stock from a former Director and
         Executive Vice President of the Company for a maximum of $250,000 or
         approximately $0.395 per share. Initially, the Company purchased
         189,454 shares for $75,000. The remaining 442,060 shares will be
         purchased for a maximum of $175,000, the payment of which is contingent
         upon receipt of the $5.3 million of past due receivables from RFI.
         Under the terms of the agreement, 5% of the proceeds from RFI as
         collected, up to the maximum of $175,000, will be applied to the
         purchase of the stock (See Note T).

NOTE M -- STOCK REPURCHASE PLAN

         In December 2000, the Company implemented a Stock Repurchase Plan,
         allowing for the repurchase of up to 100,000 shares of the Company's
         outstanding common stock. Repurchases were made from time to time in
         the open market or through negotiated transactions depending on market
         conditions. Such repurchases were made only through brokers and were
         subject to volume, price and other limitations in order to comply with
         applicable Securities and Exchange Commission provisions regarding
         stock repurchases. All common shares repurchased were retired. At
         December 31, 2000, the Company had repurchased 7,200 shares of the
         Company's common stock at a weighted average price of $0.51 per share
         which includes associated broker fees and commissions. During 2001, the
         Company repurchased 92,800 shares of the Company's common stock at a
         weighted average price of $0.53 per share which includes associated
         broker fees and commissions, thereby completing the terms of the Stock
         Repurchase Plan.


NOTE N -- PROFIT SHARING AND 401(K) PLAN

         The Company maintains a Profit Sharing and a 401(k) Plan covering
         certain qualified employees, which includes employer participation in
         accordance with the provisions of Section 401(k) of the Internal
         Revenue Code. The Plan allows participants to make pretax contributions
         and the Company is required to match 25% of the first 6% of all
         elective


                                      F-20
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         deferrals. The profit sharing portion of the Plan is discretionary and
         noncontributory. All amounts contributed to the plan are deposited into
         a trust fund administered by an independent trustee.

         The Company's matching 401(k) contributions required by the 401(k) plan
         were $13,925, $30,625, and $79,289 for the years ended December 31,
         2001, 2000, and 1999, respectively. The Company has not made any
         discretionary contributions under the profit sharing portion of the
         Plan.


NOTE O -- STOCK OPTIONS

         On March 1, 1995, the Company adopted an Incentive Stock Option Plan
         (the Plan) for key personnel. A total of 550,000 shares of the
         Company's common stock are reserved for issuance pursuant to the
         exercise of stock options (the Options) which may be granted to
         full-time employees, including officers and directors who are also
         employees of the Company. The Plan is administered by the Board of
         Directors. In addition to determining who will be granted Options, the
         Board of Directors has the authority and discretion to determine when
         Options will be granted and the number of Options to be granted. The
         Board of Directors may grant Options intended to qualify for special
         treatment under the Internal Revenue Code of 1986, as amended
         (Incentive Stock Options) and may determine when each Option becomes
         exercisable, the duration of the exercise period for Options, and the
         form of the instruments evidencing Options granted under the Plan.

         The maximum aggregate fair market value (determined as of the date of
         grant) of the shares as to which the Incentive Stock Options become
         exercisable for the first time during any calendar year may not exceed
         $100,000. The Plan provides that the purchase price per share for each
         Incentive Stock Option on the date of grant may not be less than 100
         percent of the fair market value of the Company's common stock on the
         date of grant. However, any Option granted under the Plan to a person
         owning more than 10 percent of the Company's common stock shall be at a
         price of at least 110 percent of such fair market value.

         The Plan is accounted for under APB Opinion 25 and related
         interpretations. The Options generally have a term of 10 years when
         issued and vest over three to five years. Had compensation cost for the
         Plan been determined based on the fair value of the Options at the
         grant date consistent with the method of Statement of Financial
         Accounting Standards 123, Accounting for Stock-Based Compensation, the
         Company's net income (loss) and earnings (loss) per common share would
         have been:


                                      F-21
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<Table>
<Caption>
                                          2001              2000              1999
                                     -------------     -------------     -------------
<S>                                  <C>               <C>               <C>
Net income (loss)
As reported                          $     218,586     $   1,040,576     $  (3,176,757)
Pro forma                            $     166,308     $     974,693     $  (3,236,694)

Earnings (loss) per common share
As reported                          $         .04     $         .17     $        (.51)
Pro forma                            $         .03     $         .16     $        (.52)
</Table>

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes options-pricing model with the following
         weighted-average assumptions for grants used in 2000 and 1999: no
         expected dividends; expected volatility of 100% and 84.1%,
         respectively; risk-free interest rate of 6.625% and 6.0%, respectively;
         and expected lives of 7 and 10 years, respectively. There were no
         grants of stock options in 2001.

         A summary of the status of the Plan follows:

<Table>
<Caption>
                                                                Weighted
                                                             average exercise
                                            Shares           price per share
                                           --------          ----------------
<S>                                        <C>               <C>
Outstanding at December 31, 1998            112,100               5.08
                                           --------             ------

Total exercisable at December 31, 1998       51,950             $ 4.75
                                           ========             ======

Outstanding at January 1, 1999              112,100             $ 5.08
Granted                                     220,500               1.64
Exercised                                        --                 --
Canceled                                   (138,000)              4.41
                                           --------             ------

Outstanding at December 31, 1999            194,600               1.98
                                           --------             ------

Total exercisable at December 31, 1999       56,800             $ 2.46
                                           ========             ======

Outstanding at January 1, 2000              194,600             $ 1.98
Granted                                      65,000                .44
Exercised                                        --                 --
Canceled                                   (135,000)              1.73
                                           --------             ------

Outstanding at December 31, 2000            124,600              1 .43
                                           --------             ------

Total exercisable at December 31, 2000       51,600             $ 2.27
                                           ========             ======
</Table>


                                      F-22
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                                Weighted
                                                            average exercise
                                            Shares          price per share
                                           -------          ----------------
<S>                                        <C>              <C>
Outstanding at January 1, 2001             124,600               $  1.43
Granted                                         --                    --

Exercised                                       --                    --
Canceled                                        --                    --
                                           -------               -------
Outstanding at December 31, 2001           124,600                  1.43
                                           -------               -------

Total exercisable at December 31, 2001      73,400               $  1.93
                                           =======               =======
</Table>

         Weighted average fair value of options granted during the year ended
         December 31, 2000 and 1999 is $0.37 and $1.42 per share, respectively.
         There were no options granted in 2001.

         The following information applies to options outstanding at December
         31, 2001:

<Table>
<Caption>
                                      Options Outstanding                           Options Exercisable
                       -----------------------------------------------        ------------------------------
                                           Weighted
                                            average         Weighted                              Weighted
                                           remaining        average                                average
                         Number           contractual       exercise            Number            exercise
                       outstanding        life (years)        price           exercisable           price
                       -----------        ------------     -----------        -----------        -----------
Range of
exercise prices
---------------
<S>                    <C>                <C>              <C>                <C>                <C>
$0.44 - $0.66               65,000              8.9        $      0.44             26,000        $      0.44
$1.30 - $1.95               30,500             7.22        $      1.57             18,300        $      1.57
$3.00 - $4.50               29,100             3.82        $      3.50             29,100        $      3.50
                       -----------                                            -----------

                           124,600                                                 73,400
                       ===========                                            ===========
</Table>


                                      F-23
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE P -- TAXES ON INCOME

       The provision (benefit) for taxes on income includes the following for
the year ended December 31:

<Table>
<Caption>
                          2001                  2000                  1999
                    --------------        --------------        --------------
<S>                 <C>                   <C>                   <C>
CURRENT
     Federal        $           --        $           --        $           --
     State                      --                    --                    --
                    --------------        --------------        --------------
                                --                    --                    --
                    --------------        --------------        --------------

DEFERRED
     Federal        $           --        $           --        $           --
     State                      --                    --                    --
                    --------------        --------------        --------------
                                --                    --                    --
                    --------------        --------------        --------------
Total               $           --        $           --        $           --
                    ==============        ==============        ==============
</Table>

         A reconciliation between the expected federal income tax expense
         computed by applying the Federal statutory rate to income before income
         taxes and the actual provision (benefit) for taxes on income for the
         year ended December 31, is as follows:

<Table>
<Caption>
                                         2001                2000                1999
                                      -----------         -----------         -----------
<S>                                   <C>                 <C>                 <C>
Provision (benefit) for income
   taxes at statutory rate            $    74,300         $   356,300         $(1,112,000)
Change in valuation reserve                16,400             (15,900)            764,000
Use of operating loss carry
   forwards                               (46,800)           (359,500)                 --
Stock options                                  --                  --               1,000
Other                                      13,200              19,900              26,000
Change in prior year estimate             (57,100)               (800)            321,000
                                      -----------         -----------         -----------
                                      $        --         $        --         $        --
                                      ===========         ===========         ===========
</Table>


                                      F-24
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Deferred tax assets and liabilities consist of the following at
         December 31:

<Table>
<Caption>
                                           2001                2000
                                       -----------         -----------
<S>                                    <C>                 <C>
Alternative minimum tax credit         $   127,400         $        --
Allowance for doubtful accounts             39,000              84,000
Other reserves                              12,300              31,000
NOL carryforward                           871,500           1,169,600
Other                                     (123,400)           (374,000)
                                       -----------         -----------
                                           926,800             910,600
Valuation reserve                         (926,800)           (910,600)
                                       -----------         -----------
                                       $        --         $        --
                                       ===========         ===========
</Table>

         Realization of the deferred tax asset depends on achieving future
         taxable income. The Company incurred losses in recent years and does
         not consider it likely that the Company will realize the benefit of the
         deferred tax asset and, accordingly, has recorded a valuation allowance
         equal to the deferred tax asset.


NOTE Q -- LEASE COMMITMENTS

         The Company is obligated under certain operating leases for its
         facilities. The leases expire at various dates through 2004, with
         appropriate rentals as set forth below. Some leases also provide for
         payments of taxes and certain common area costs and expenses.

         The following is a summary at December 31, 2001, of the future minimum
         rents due under noncancelable operating leases:

<Table>
<Caption>
Year ending December 31,
------------------------
<S>                                    <C>
         2002                          $   169,557
         2003                              170,104
         2004                               50,200
         2005                                   --
         2006                                   --
                                        ----------
         Total                          $  389,861
                                        ==========
</Table>


                                      F-25
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Total rent expense under operating leases for the years ended December
         31, 2001, 2000, and 1999 was approximately $217,573, $359,385, and
         $670,179, respectively.


NOTE R-- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         All of the Company's financial instruments are held for purposes other
         than trading. The carrying amounts in the table below are the amounts
         at which the financial instruments are reported in the financial
         statements.

         The estimated fair values of the Company's financial instruments at
         December 31, 2001 and 2000 are as follows:

<Table>
<Caption>
           2001                  Carrying amount   Estimated fair value
           ----                  ---------------   --------------------
<S>                              <C>               <C>
Cash                                 $469,939           $469,939
Other receivables                      19,233             19,233
Note payable                           98,466             98,466
Capitalized lease obligations              --                 --
</Table>

<Table>
<Caption>
           2000                  Carrying amount   Estimated fair value
           ----                  ---------------   --------------------
<S>                              <C>               <C>
Cash                                 $953,641           $953,641
Other receivables                     154,524            154,524
Note payable                          116,283            116,283
Capitalized lease obligations          91,595             91,595
</Table>


NOTE S -- CONTINGENCIES

         On December 19, 2000, the Company filed an action in the Superior Court
         of the State of California, County of Los Angeles for, among other
         things, breach of contract and foreclosure of a previously filed
         mechanics' lien/lien release bond against Santa Clarita, LLC, an
         affiliated partnership of RFI, in response to non-payment for services
         performed by the Company on the Porta Bella project located in Santa
         Clarita, CA. In February, 2002, the Company entered into a settlement
         agreement under which it received $2.1 million (See Note G).

         On February 8, 2001, the Company filed an action in the Superior Court
         of the State of California, County of Contra Costa for, among other
         things, breach of contract, foreclosure of a previously filed
         mechanics' lien, and judicial foreclosure of the deed of trust in the


                                      F-26
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         amount of $10.1 million against LCRI Investments, LLC, an affiliated
         partnership of RFI, in response to non-payment for services performed
         by the Company on the Hercules project located in Hercules, CA. On
         March 5, 2001, the Company recorded a notice of default under the
         subject deed of trust in order to pursue a trustee's sale of the
         subject property. The Company and LCRI Investments are engaged in
         arbitration proceedings. The amount of unpaid invoices is approximately
         $3.3 million. Based on the secured deed of trust, the Company believes
         it will prevail in this action and will recover most, if not all,
         amounts due the Company (Also, see Note G).

         The Company, LCRI Investments, and RFI are parties to a Commercial
         Insurance Premium Finance and Security Agreement under which the
         Company guaranteed a $10.1 million Bond to Secure Financial Obligation
         for the Hercules, CA project. The bond secures a note that requires
         quarterly principal payments of $542,278 which are made by LCRI
         Investments, LLC. As of December 31, 2001, LCRI Investment, LLC was in
         default on their 2001 quarterly payments. On July 11, 2001, a letter
         was issued to LCRI Investments, LLC, RFI, and the Company calling for
         the immediate payment of remaining principal and interest of $7.2
         million. There has been no legal action taken against the Company for
         the default. Management believes the Company is entitled to be
         indemnified to the extent it is ultimately obligated to make any
         payments under any of these arrangements. Based on the secured deed of
         trust mentioned above, management believes that any amounts paid as a
         result of the guarantee will be recovered.

         Since early 1998, the Company has been the subject of an investigation
         by the Office of the Inspector General (OIG) of the Environmental
         Protection Agency (EPA). While initially broad in scope, the focus of
         the investigation appears to involve labor billing-rates to the EPA
         beginning in the 1992-1994 period and selected subsequent years. The
         Company has cooperated fully in all OIG inquiries and will continue to
         do so when and if required. To date, no claims have been made against
         the Company. In addition, independent audits by the Defense Contract
         Audit Agency (DCAA), subsequent to initiation of the OIG investigation,
         have not been adverse nor have resulted in claims against the Company.
         No loss provision has been made at December 31, 2001 as a result of the
         investigation as the probable outcome is unknown.

         The Company is party to various legal actions arising out of the normal
         course of its business. Management believes that the ultimate
         resolution of such actions, except as previously disclosed, will not
         have a material adverse effect on the Company's financial position,
         results of operations, and liquidity of the Company.


                                      F-27
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE T -- SUBSEQUENT EVENTS

         In February, 2002, the Company and RFI and its affiliated partnerships
         entered into a settlement agreement with respect to the Santa Clarita
         project and received $2.1 million (See Notes G and S).

         In February, 2002, as a result of the Santa Clarita settlement with RFI
         and its affiliated partnerships, the Company purchased 218,757 shares
         of common stock from a former Director and Executive Vice President for
         $86,600 or $0.395 per share (See Note L).


                                      F-28
<PAGE>

                               INDEX TO EXHIBITS


<Table>
<Caption>
    EXHIBIT
    NUMBER                           DESCRIPTION                                         LOCATION
    -------                          -----------                                         --------
<S>              <C>                                                   <C>
      3.1        Amended and Restated Articles of Incorporation        Incorporated by reference to Exhibit 3.1 to
                                                                       the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

      3.2        Bylaws                                                Incorporated by reference to Exhibit 3.2 to
                                                                       the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

     10.1        Incentive Stock Option Plan                           Incorporated by reference to Exhibit 10.1
                                                                       to the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

     10.2        Form of Incentive Stock Option Agreement              Incorporated by reference to Exhibit 10.2
                                                                       to the Company's Form SB-2 Registration
                                                                       Statement No. 33-91602

     10.3        Stock Purchase Agreement with AquaSource Services     Incorporated by reference to Exhibit 10.1
                 and Technologies, Inc.                                to the Company's report on Form 8K dated
                                                                       December 17, 1998.

     10.4        Administrative Agreement between United States        Incorporated by reference to Exhibit 10.1
                 Environmental Protection Agency and the Registrant    to Company's Form 10-Q for the nine months
                                                                       ended September 30, 1999.

     10.5        Asset Purchase and Assignment Agreement by and        Incorporated by reference to Exhibit 10.16
                 between the Company and CAPE Environmental            to the Company's Annual Report on Form 10-K
                 Management, Inc.                                      for the year ended December 31, 1999.

     10.6        Lease Agreement by and between the Company and Sky     Incorporated by reference to Exhibit 10.17
                 Harbor Associates Limited Partnership                  to the Company's Annual Report on Form 10-K
                                                                        for the year ended December 31, 1999.

     10.7        Line of Credit with Compass Bank                       Filed herewith electronically

      21         Subsidiaries of the Registrant                         Filed herewith electronically

      23         Consent of Grant Thornton LLP                          Filed herewith electronically
</Table>