<PAGE>

                         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, 1998
                            Commission File No. 1-13852
                                          
                                          
                                          
                          CET ENVIRONMENTAL SERVICES, INC. 
               (Exact Name of Registrant as Specified in its Charter)


         CALIFORNIA                                  33-0285964
(State or Other Jurisdiction of         (I.R.S. Employer Identification Number)
 Incorporation or Organization)   


            7670 SOUTH VAUGHN COURT, STE. 130, ENGLEWOOD, COLORADO  80112
             (Address of Principal Executive Offices, Including Zip Code)



Issuer's telephone number, including area code:  (303) 708-1360
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 19, 1999, 6.3 million shares of the Registrant's Common Stock 
were outstanding.  The aggregate market value of voting stock held by 
nonaffiliates of the Registrant was approximately $5.0 million.  

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 was incorporated in February 1988 under the name "Thorne 
Environmental, Inc." to conduct business in environmental consulting, 
engineering, remediation, and construction.  The Company's initial growth 
resulted from its successful performance of emergency response cleanup 
services in certain western states and the Trust Territory of the Pacific 
Islands for the U.S. Government.  The Company has since developed a broad 
range of expertise in non-proprietary technology-based environmental 
remediation and water treatment techniques for both the public and private 
sectors throughout North America and the Trust Territory of the Pacific 
Islands.  The Company was purchased by its existing majority shareholders in 
November 1991, and for the last seven years has engaged in a program of 
expansion through internal client development and add-on contracts, the 
acquisition of personnel and assets in desirable geographic locations, and 
the acquisition of smaller companies involved with target growth 
technologies.  The Company has built a backlog in excess of $360 million of 
government work through the award of several multi-year contracts with the 
Environmental Protection Agency, the Department of Defense, and the 
Department of Transportation.  The Company has achieved and maintains a 
balance between its commercial and government sector business through an 
aggressive industrial marketing strategy.  To date, the Company has performed 
remediation services for both public and private sector customers at more 
than 2,000 sites.

     The Company's strategy has been to distinguish itself in the market by 
providing full-service environmental contracting, industrial water and 
wastewater treatment, and emergency response services.  Through several major 
government contracts and a diversified commercial client base, the Company 
provides turnkey waste management for a complete range of water, soil, and 
air pollution issues.  The Company's personnel have developed expertise in a 
broad range of remediation techniques such as bioremediation, bioventing, 
vapor extraction, gas/air sparging, thermal desorption, soil washing, and 
groundwater remediation systems.  The Company also offers a variety of 
services in support of municipal and industrial water and wastewater 
treatment, military base closures, 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.

     In November 1996, the Company relocated its corporate headquarters to 
Englewood, Colorado from Tustin, California to be more centrally located for 
its expanding business.  The Company also maintains offices in Tustin, 
California; Richmond, California; Sacramento, California; Edmonds, 
Washington; Denver, Colorado; Pasadena, Texas; San Antonio, Texas; New 
Orleans, Louisiana; Jackson, Mississippi; and Mobile, Alabama.

     In July 1995, the Company completed an initial public offering of 1.2 
million shares of its Common Stock, and in August 1995, sold an additional 
0.2 million shares pursuant to an overallotment option. The net proceeds to 
the Company from the public offering were approximately $5.8 million.  
Concurrent with the IPO, the Company became listed on the American Stock 
Exchange under the symbol "ENV."

     In December 1996, the Company commenced a Private Placement Offering of 
Common Stock.  This offering was completed in January 1997, and resulted in 
the issuance of 0.7 million shares with net proceeds to the Company totaling 
$2.0 million.  The Common Stock sold via this offering was registered for 
resale in a Form S-3 Registration Statement which became effective January 7, 
1998.  In conjunction 

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with the offering, warrants for an additional 72,925 shares of Common Stock 
were issued as partial compensation for underwriting services. These warrants 
are exercisable at a price of $3.60 per share for five years from the date of 
the offering.

     In August 1997, the Company acquired all of the outstanding stock of 
Water Quality Management Corporation, a Colorado corporation ("WQM"), in a 
cash transaction.  WQM is engaged in the operation and maintenance of 
municipal and industrial water and wastewater treatment facilities.  WQM was 
operated as a wholly owned subsidiary of the Company.

     In January 1998, the Company acquired all of the outstanding stock of 
H2O Construction and Maintenance, Inc. a Colorado corporation ("H2O"), for 
cash and notes.  H2O is engaged in the construction, operation and 
maintenance of water and wastewater treatment, collection and distribution 
facilities.  H2O provides services to both public and private sector clients. 
 As a result of the purchase, H20 was merged with WQM, a wholly owned 
subsidiary of the Company.

     In July 1998, the Company engaged Sanders Morris Mundy of Houston, Texas 
to assist in maximizing shareholder value by exploring acquisition and 
divestiture strategies.

     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 
Stock at the time of conversion with a maximum conversion price of $3.35.  
Three-year warrants to purchase an aggregate of 35,000 shares of the 
Company's Common Stock at a price of $3.00 per share were also issued.  
Through January 1999, a total of 430 shares of the preferred securities were 
converted into 472,803 shares of Common Stock by the holders.  The Common 
Stock issued upon conversion was registered for resale in a Form S-3 
Registration Statement which became effective August 13, 1998.  In January 
1999, the Company negotiated to redeem the remaining 1,570 preferred shares 
for $1.9 million in cash.

     In December 1998, the Company sold all of the outstanding stock of WQM 
and H2O for $12.5 million in cash to AquaSource Services and Technologies, 
Inc.  In addition to the $12.5 million in cash, additional consideration may 
be paid in 1999 based on the final audit of working capital levels. The 
Company received $11.3 million of the consideration at the date of purchase 
with the remaining consideration due ninety days after closing. At December 
31, 1998, $2.6 million is included in accounts receivable as the remaining 
consideration.

THE ENVIRONMENTAL INDUSTRY

     Various analysts have recently estimated that the total United States 
environmental services industry generates revenues of $180-200 billion per 
year. ENVIRONMENTAL BUSINESS JOURNAL has indicated that the remediation 
industry accounted for approximately $6.1 billion of revenue in 1998.  Driven 
largely by legislation passed during the late 1970's and early 1980's in 
response to widespread public concern regarding clean air and water, the 
environmental services business has expanded rapidly during the past decade. 
The Company is involved primarily in the remediation segment of the industry, 
which is focused on cleanup of existing environmental problems.

     Arising in response to the 1980 CERCLA ("Superfund") legislation, the 
remediation services business grew quickly. A study by the Waste Management 
and Education Research and Educational Institute at the University of 
Tennessee, Knoxville, has estimated the total cost of cleaning up America's 
worst hazardous toxic waste sites as high as $750 billion in 1990 dollars. 
This revenue is divided among six major regulation-driven sectors, including 
Superfund (federally funded) programs, state-funded programs, federal 
facilities programs (primarily Department of Energy and Department of 
Defense), UST removals, private remediation programs, and hazardous waste 
management facility corrective actions. Federal facilities cleanup programs 
have become an increasingly important sector of the 

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business as a result of active military base and other facility closures.  

     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).  The exact number of 
Brownfield sites is unclear; however, their existence and a governmental 
effort to facilitate their cleanup have created an opportunity for full 
service remediation as well as financial participation in the redevelopments.

     The remediation business 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 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 are 
gaining wide-spread regulatory acceptance.  The Company strives to use these 
remediation techniques more efficiently than its competitors.

     Responding to emergency spills or leaks of contaminants by petroleum and 
chemical companies, by state or federal agencies, or commercial treaters and 
haulers of hazardous materials is another important segment of the 
environmental remediation services industry.  Emergency situations can 
involve the use of various containment and treatment techniques.  Providers 
of these services must be able to handle these sorts of problems on a 
stand-by basis, due to public concerns and publicity regarding hazardous 
material spills.  The federal government routinely contracts with private 
parties to maintain fast response capabilities to deal with these sorts of 
problems.  The Company has also marketed to transporters, primarily rail 
carriers, in this market. 

     Regulatory pressures are driving industrial firms to construct or 
upgrade wastewater treatment and pre-treatments facilities.  In addition, the 
need for ultrapure water in the power, mining, semiconductor, pharmaceutical, 
food processing, and other industries is expected to double over the next 6 
years. Because design, construction, operation, and compliance reporting for 
water and wastewater treatment systems are complex and not part of their core 
business, more industrial firms are outsourcing for these services.

ORGANIZATION OF THE COMPANY

     The Company is organized into three primary business lines:   industrial 
services, which includes facility cleaning, operation, maintenance, 
construction, closures, and emergency response; environmental remediation; 
and government programs.  This is overlaid with a geographic structure in 
which each office is able to provide manpower and equipment to support 
projects in each of the business lines.

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<PAGE>

     The Company uses the following resources to provide turnkey services to 
its customers:

     -    Registered engineers, geologists, and environmental scientists for
          performing investigations and remediation feasibility studies.
          
     -    In-house laboratory facilities for evaluating water treatment
          techniques, numerous remedial technologies, monitoring ongoing
          projects, and accelerating remediation.
     
     -    Engineers, scientists, and construction managers to design remediation
          and water/wastewater treatment systems from the conceptual stage
          through final design.

     -    Manpower and equipment for performing site preparation such as
          excavation, grading, berming and hauling soil; removal of obstacles,
          (i.e., drums, transformers, USTs, and piping; and dismantling ASTs).
     
     -    Manpower and specialized equipment for erecting or installing
          remediation equipment, support buildings, and enclosures for
          remediation of contaminated soil, water, sludge or sediment.

SERVICES AND PRODUCTS PROVIDED BY THE COMPANY

     The Company provides full turnkey environmental services for remediation 
of non-hazardous, hazardous, and toxic waste on a planned and emergency 
basis, industrial services, 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.  By offering turnkey services, the Company believes it 
enjoys a competitive advantage 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 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:
     
     -    Tank and sump services
     -    Specialty construction
     -    Plant operation and maintenance
     -    Waste management and removals
     -    Regulatory agency coordination and permitting, regulatory management
          outsourcing, and compliance audits
     -    Waste area construction/closures
     -    Facility closures
     -    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.  The Company works with government agencies at all 
levels: federal, state, county, municipal, and special districts.  These 
contracts are performed with the Company as the 

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prime contractor, a teaming partner, or a subcontractor.  The services 
provided to the government are similar to those provided to the private 
sector and include emergency response and remediation services.
     

CUSTOMERS

     The Company's customers include federal, state and local government 
agencies and commercial enterprises including Fortune 500 companies. The 
following is a representative list of the Company's past and present 
customers: 

<TABLE>

    <S>                                    <C>
     PETROLEUM INDUSTRY  
     Coastal Corporation                     Monsanto/Solutia
     Colonial Pipeline                       Nalco Chemical
     ERGON, Inc.                             Paramount Petroleum
     LASMO Oil & Gas, Inc.                   Total Petroleum
     Marathon Refining                       Unocal Corporation

     FINANCIAL/REAL ESTATE
     Canal Insurance                         Principal Financial Group
     Lincoln Property Company                Remediation Financial, Inc.

     MANUFACTURING AND PROCESSING
     Anheuser Busch                          Home Base
     Big 4 Rents                             Raytheon Missile Systems
     CAE Electronics                         Read-Rite Corporation
     Chiquita Melon                          Safety-Kleen
     Coors                                   Schlage Lock
     Fleming Foods                           Samsonite
     Georgia Pacific                    
     
     TRANSPORTATION
     Burlington Northern Santa Fe Railroad   Illinois Central Railroad
     Central Freightlines                    Navajo Express
     CSX Transportation                      Union Pacific Railroad
     Highway Transports                      Yellow Freight
     
     ENGINEERING/CONSTRUCTION FIRMS
     Bechtel                                 Montgomery Watson
     DeSilva Construction                    Parsons Engineering
     Fluor Corporation                       Stone and Webster
     Foster Wheeler                          Tetra Tech
     
     UTILITIES
     Florida Gas Transmission                Pacific Gas & Electric
     Mississippi Power                       Southern Natural Gas
     
     GOVERNMENT (FEDERAL AND STATE)
     U.S. EPA                                Colorado Department of Mines
     U.S. Air Force                          Contra Costa Water District
     U.S. Army Corps of Engineers            Los Angeles County Metropolitan Transportation
</TABLE>

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<TABLE>
    <S>                                     <C>
     U.S. Coast Guard                        Agency
     U. S. Department of Transportation      Port of Oakland
     U.S. Navy                               San Francisco Department of Public Works
     Alameda County Water District           San Francisco Public Utilities Commission
     City and County of Denver               Texas Natural Resource Conservation Commission
     City of Coachella                       Texas Railroad Commission
</TABLE>


     In October 1996 the Company was awarded the McClellan Environmental 
Technologies Remediation Implementation Contract (METRIC).  The contract has 
a 5-year ordering period and a potential program value of $19 million.  The 
METRIC program, sponsored by the United States Air Force, has been developed 
to repair environmental damage at various installations and to prevent 
further environmental degradation at these installations.  Under this 
contract, the Company will perform work primarily at McClellan Air Force 
Base, near Sacramento, California, and its satellite facilities.  To date, 
the Company has been issued 5 delivery orders valued at approximately $2 
million.

     In December 1996, the Company was notified by EPA of its selection as 
the successful bidder for the Emergency Response and Remedial Response 
Services (ERRS) West contract.  This contract includes performing emergency 
response and remediation for oil, petroleum, and hazardous substance releases 
in accordance with the provisions of the federal Clean Water Act ("CWA"), 
RCRA and Superfund legislation.  It covers 15 states and certain U.S. 
territories in EPA Regions VI, VIII and IX, runs for 5 years, and is 
estimated at $292 million.  The Company has received in excess of 145 
delivery orders with an approximate contract amount of $64 million to date 
under this contract.

     In September 1997 the Company was selected as the successful bidder for 
the ERRS contract in Region X which covers four states in the northwest.  
This contract also runs for 5 years and is estimated at $42 million.  To 
date, the Company has received 13 delivery orders with an approximate 
contract amount of $7 million under this contract.
     
     In June 1997 the Company was awarded a 5-year, $25 million Pre-placed 
Remedial Action Contract (PRAC) with the U.S. Army Corps of Engineers, Omaha 
District. Under this contract, the Company is providing remedial actions at 
hazardous waste sites within the District's Midwest region.  To date, the 
Company has been  issued 7 delivery orders valued at approximately $13 
million.
     
     In May 1998 CET was awarded a Worldwide Full-Service Environmental 
Remedial Actions (WFSERA) contract by the Air Force Center for Environmental 
Excellence (AFCEE).  The total contract value between 7 contractors is $475 
million.  This contract has a 5-year ordering period with 3 additional years 
for performance. To date, CET has been awarded 6 delivery orders valued at 
approximately $2 million.
     
     The ERRS contracts, like most of the Company's other government 
contracts, are "basic ordering documents," not binding agreements requiring 
the performance of work by the Company and payment by the government.  This 
occurs only when the government issues delivery orders under the contract.  
Management believes, based on its prior experience with government contracts, 
that the Company  will receive delivery orders for a substantial portion if 
not the full amount of the contract during the life of the contract, or 
extensions thereof.  However, the possibility always exists that the 
government will terminate work under the contract at any time. 

     The Company has Master Service Agreements with approximately 100 
clients. These include ABF Freight, Arco Chemical, Burlington Northern, Santa 
Fe Railroad, CITGO Petroleum, ERGON, Conoco, Georgia Pacific, Monsanto, Nalco 
Chemical, National Response Corporation, Ryder Truck, 

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Safety-Kleen, Southern Natural Gas, U.S. Coast Guard, and Union Pacific 
Railroad.  Master Service Agreements set forth the terms and conditions 
pursuant to which the Company would provide services in the future when 
needed or requested pursuant to a purchase order or request for services. 

BUSINESS STRATEGY

     The Company plans to capitalize on the following trends: 

     -    Onsite remediation is increasing, especially at large sites. Public
          opposition and regulatory resistance to incineration and landfilling
          will enhance the prospects for bioremediation, vapor extraction,
          thermal desorption, and other innovative onsite technologies. 

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

     -    Most government contracts require a defined percentage of the work be
          subcontracted to small business enterprise companies ("SBEs"),
          typically between 20 and 60 percent. The Company qualifies as an SBE
          under Standard Industrial Classification Code 8744, Environmental
          Remediation Services, by having less than 500 employees. 

     -    To meet special requirements and budget constraints, industrial
          facilities are increasingly outsourcing environmental and general
          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.

     -    The U.S. EPA's Brownfields Economic Redevelopment Initiative, various
          state voluntary cleanup programs, and a maturing of the environmental
          marketplace have reduced the risk and uncertainty of selling, buying,
          and financing underutilized or Brownfield sites, creating an
          opportunity to redevelop prime land that was previously "untouchable"
          due to contamination.

     -    A shift in emphasis from investigation to remediation, combined with
          the increasing numbers of military installations being listed for Base
          Realignment and Closure (BRAC), presents an opportunity for
          remediation contractors to capitalize on this allocation of federal
          monies.

     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 base closure services to the U.S. 
Government, in-plant services for industrial clients, mining facility 
decommissioning and reclamation, and redevelopment of Brownfield properties.

     MIXTURE OF PUBLIC AND PRIVATE SECTOR WORK.  The Company seeks to 
maintain a mix of government projects and private sector projects. Government 
projects can offer the advantage of multi-year scope of work, but generally 
have lower gross margins. Private sector projects tend to have shorter time 
frames, but offer opportunities for greater gross margins. Management plans 
to continue developing business opportunities in both sectors and would like 
to keep a reasonable balance between EPA and non-EPA work. (See "Management's 
Discussion and Analysis.")

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     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 is on appropriate 
approved-contractor lists with its major governmental customers and 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's 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 and government 
regulators 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 
jobsite performance.

     PROFESSIONAL MARKETING AND MANAGEMENT.  The Company is committed to 
maintaining a professional marketing and project management staff that 
understands the needs and requirements of its various customers, that can 
accurately evaluate requests for proposals and invitations to bid and that 
responds in a timely manner with high-quality comprehensive formal proposals. 
This includes understanding the intricacies of the detailed and 
time-consuming process associated with bidding and managing projects for the 
federal government. The Company uses non-proprietary specialized software for 
job cost accounting and government contracts to assist with both bidding and 
managing projects.

     STABLE WORK FORCE.  The Company strives to maintain a stable, dedicated 
work force of experienced professionals, managers, administrative personnel, 
and trained operators and laborers.  The Company seeks to attract and retain 
such employees by providing fair compensation, incentives, and a dynamic work 
environment. The Company maintains a comprehensive program for providing 
health and safety training related to hazardous material exposure, in full 
compliance with the highest standards set forth by federal and other 
applicable regulatory agencies. Management believes that the Company's 
experienced work force will continue to contribute to the Company's excellent 
safety record, reducing insurance costs and increasing customer satisfaction. 

     OWNERSHIP OF EQUIPMENT.  The Company attempts to purchase specialized 
emergency response and remediation equipment, thereby providing the Company 
with key business advantages, including reduced operating costs, greater 
flexibility in scheduling the use of resources (equipment, personnel, etc.) 
and greater reliability in meeting contractually defined performance 
timetables and deadlines. The Company typically rents non-specialized 
equipment such as backhoes and excavators. 

MARKETING

     The Company has a dedicated marketing and sales staff of approximately 
10 people, including sales professionals, proposal writers, technical 
editors, and project estimators. A significant portion of new business is 
derived from current customers seeking services for additional sites and new 
needs. The Company has developed ongoing relations with a broad range of 
customers in various industries and geographical sites. 

     The Company has segregated its marketing efforts for the public and 
private sectors. The public sector proposal effort is managed on a 
centralized basis. The Company pursues federal contracts that range from $5.0 
million to $70.0 million annually.  On larger opportunities, the Company may 
establish teaming agreements with large engineering/construction firms to 
enhance the chances for award.

                                       8
<PAGE>

     Individual contracts with customers typically have an award value of 
$25,000 to $100,000 for the performance of specific tasks, and from $125,000 
to $7,000,000 for comprehensive turnkey services. Geographically, the Company 
provides services to customers throughout the western and southeastern United 
States and the Trust Territory of the Pacific Islands.

     The marketing organization for the commercial business is primarily 
decentralized. Sales leads and customer relationships are developed on a 
regional basis by the Regional Manager, Project Managers, or the Business 
Development Manager. 

     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 
today is highly fragmented, with 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 to solve complex problems.  The Company also plans to 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 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 resources and facilities 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 

                                       9
<PAGE>

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. 

     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.  While federal funds 
of approximately $8.5 billion exist to pay for the cleanup, 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. 

                                       10
<PAGE>

     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. 

     RCRA mandated that by December 31, 1998, every single-walled UST in the 
United States be removed and replaced with a double-walled tank. Any 
environmental danger to the soil or water caused by leakage of a UST must 
also be remediated.  The Company's UST-related business opportunities were 
substantial in 1998.  A significant number of UST owners did not meet the 
deadline, providing further opportunities for several years.   Management 
believes that the Company is well positioned in the niche market of removing 
and replacing USTs and performing remediation and construction services 
required in conjunction with UST replacement. 

     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. 

     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. 

                                       11
<PAGE>

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 $10 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. 

BONDING REQUIREMENTS

     Commercial remediation projects, as well as federal, state, and 
municipal projects, often require 

                                       12
<PAGE>

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. Contractors without adequate bonding may be ineligible to bid or 
negotiate on many projects. The Company has frequently been required to 
obtain such bonds and it should be assumed that the Company will continue to 
be required to obtain such bonds in the future.  The Company obtains required 
bonds on a case-by-case basis as needed and has not experienced any problems 
in obtaining necessary bonds. The Company could experience such difficulties 
in the future if its total amount of bonds outstanding exceeds the limits 
imposed by bonding companies based on the financial condition of the Company 
at any given time. Bonds typically cost between 1% and 3% of the cost of a 
project. To date, no payments have been made by any bonding company for bonds 
issued for the Company.

EMPLOYEES

     As of March 1999, the Company employed approximately 198 employees' full 
time and 237 part time at its 10 offices, including five Company officers.  
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 permanent offices result in 
the Company 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's headquarters and administrative facilities are located at
7670 S. Vaughn Court, Ste. 130, Englewood, Colorado, in approximately 4,600
square feet of leased office space. The lease expires in May 1999. The Company's
corporate and administrative functions are conducted from these facilities.  The
Company plans to consolidate its Denver, Colorado locations.  Both the Company's
headquarters and the Denver Field Office will relocate to 7032 S. Revere
Parkway, Englewood, Colorado on May 31, 1999.

                                       13
<PAGE>

     The Company's services are conducted from the following spaces: 

<TABLE>
<CAPTION>
                                                                                                      CURRENT
                                                                                    LEASE             MONTHLY 
                                                                 SQ. FT          EXPIRATION             RENT
          ----------------------------------------------------- ---------- ------------------------ ---------------
         <S>                                                     <C>       <C>                       <C>
          14761 BENTLEY CIRCLE
          TUSTIN, CALIFORNIA                                       18,490   April 14, 1999             $ 10,169.50
          ----------------------------------------------------- ---------- ------------------------ ---------------
          170 WEST DAYTON, STE. 106A
          EDMONDS, WASHINGTON
          (OFFICE)                                                  6,920   March 31, 2001*               9,008.13
          ----------------------------------------------------- ---------- ------------------------ ---------------
          170 WEST DAYTON, STE. 106 B-D
          EDMONDS, WASHINGTON
          (WAREHOUSE)                                               5,568   March 31, 2001*               3,763.45
          ----------------------------------------------------- ---------- ------------------------ ---------------
          3033 RICHMOND PARKWAY, STE. 300
          RICHMOND, CALIFORNIA                                      7,664   April 30, 2001                7,353.61
          ----------------------------------------------------- ---------- ------------------------ ---------------
          12570 E. 39TH AVENUE
          DENVER, COLORADO                                          5,021   May 31, 1999                  5,330.00
          ----------------------------------------------------- ---------- ------------------------ ---------------
          7670 S. VAUGHN COURT, STE. 130
          ENGLEWOOD, COLORADO                                       4,600   May 31, 1999                  5,084.20
          ----------------------------------------------------- ---------- ------------------------ ---------------
          7032 S. REVERE PARKWAY
          ENGLEWOOD, COLORADO                                      12,027   May 31, 2004**               11,024.75
          ----------------------------------------------------- ---------- ------------------------ ---------------
          150 NOEL STREET
          MOBILE, ALABAMA                                          20,000   April 30, 2000                3,275.00
          ----------------------------------------------------- ---------- ------------------------ ---------------
          13120 CARRIERE COURT
          NEW ORLEANS, LOUISIANA                                   13,520   April 14, 2001*               3,771.21
          ----------------------------------------------------- ---------- ------------------------ ---------------
          3222 PASADENA FREEWAY
          PASADENA,  TEXAS                                          2,755   May 31, 2001                  4,375.00
          ----------------------------------------------------- ---------- ------------------------ ---------------
          3437 MYRTLEAVENUE, STE. 375
          NORTH HIGHLANDS, CALIFORNIA                               1,150   Month to Month                  736.00
          ----------------------------------------------------- ---------- ------------------------ ---------------
          100 N. E. LOOP 410, STE. 1200
          SAN ANTONIO, TEXAS                                          150  Month to Month                   414.00
          ----------------------------------------------------- ---------- ------------------------ ---------------
          275-A INDUSTRIAL DRIVE
          JACKSON, MISSISSIPPI                                     11,325  August 31, 2003                3,958.44
          ---------------------------------------------------------------------------------------------------------
</TABLE>

                              *CONTAINS AN OPTION TO RENEW OR EXTEND THE LEASE.
                                     **NEW LEASE COMMENCES JUNE 1, 1999.


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. 

                                       14
<PAGE>

     On February 13, 1998, the Company filed suit in the United States 
District Court for the District of Oregon against Road Runner Oil, Inc. and  
Bernard J. Roscoe, alleging breach of contract for non-payment of services 
performed by the Company at an oil field in Utah.  The amount of unpaid 
invoices, including interest and collection costs, is approximately $2.1 
million.  In August 1998 the Oregon court determined that the venue for the 
United States District Court action should be in Utah, and venue for the 
action was changed accordingly. Road Runner also filed a claim in this action 
against the Company for breach of contract seeking unspecified damages.  The 
Company has also filed mechanic's liens on certain equipment at the site and 
against Road Runner's rights in the oil field.  Separate actions have also 
been filed by the Company in Utah state court and Tribal Court to foreclose 
these liens.  Road Runner has failed to respond timely to these two actions, 
and the Company is presently seeking a default remedy.  The Company has 
written off this account receivable.

     The Company performed an emergency response in 1997 for Aqua-Pak, Inc.  
The Company has initiated a lawsuit in the U.S. District Court for the 
Southern District of Texas - Houston Division against PTS Properties, Inc., 
the building owner, Allchem Industries, Inc. and Fertilizers and Chemicals, 
Ltd., the chemical owners, and Aqua-Pak, Inc. for collection of the 
outstanding receivable of $400,000.  The Company has written off this account 
receivable.

     Environmental Chemical Corporation (ECC) has filed for arbitration 
against the Company for various claims related to a Subcontractor Agreement 
for Environmental Protection Agency-related work.  The Company has booked, in 
its opinion, sufficient reserves for ECC's claims.

     The Company is currently under investigation by the Office of the 
Inspector General (OIG) of the Environmental Protection Agency due to a past 
suspended audit.  To date no claims have been made against the Company 
arising from this investigation, and subsequent independent audits by the 
Defense Contract Audit Agency (DCAA) have not been adverse and have not 
resulted in claims against the Company.  The Company is cooperating with the 
OIG to complete its investigation.

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, 1998.     
                                          
                                       15
<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, 1997                       $7.875     $ 5.00
   -------------------------------- ----------- ----------
   June 30, 1997                         5.625       4.25
   -------------------------------- ----------- ----------
   September 30, 1997                   6.9375      5.125
   -------------------------------- ----------- ----------
   December 31, 1997                    7.8125       6.00
   -------------------------------- ----------- ----------
   March 31, 1998                         7.25     5.4375
   -------------------------------- ----------- ----------
   June 30, 1998                        $6.375       2.50
   -------------------------------- ----------- ----------
   September 30, 1998                   2.8125       1.50
   -------------------------------- ----------- ----------
   December 31, 1998                    2.0625        .50

</TABLE>

     (b)  APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK.  The number of 
record holders of the Company's common stock at March 19, 1999 was 69.  This 
does not include approximately 800 shareholders who 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

                                       16
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA.

     The following selected financial information for the years ended 
December 31, 1998, 1997, 1996, 1995, and 1994 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,
   ---------------------------------------- -----------------------------------------------------------------------
                                                1998          1997           1996           1995          1994
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
<S>                                        <C>            <C>             <C>           <C>            <C>
   CURRENT ASSETS                               $ 26,670       $ 25,089       $ 18,424      $ 21,245       $ 6,479
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
   TOTAL ASSETS                                   30,202         29,883         23,795        25,708         7,592
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
   CURRENT LIABILITIES                            18,835         12,970         15,121        12,921         3,462
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
   WORKING CAPITAL                                 7,835         12,119          3,303         8,324         3,017
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
   LONG TERM DEBT                                    251          8,204          1,700         2,077           381
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
   TOTAL LIABILITIES                              19,086         21,174         16,821        14,998         4,180
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------
   SHAREHOLDERS' EQUITY                           11,116          8,709          6,974        10,710         3,412
   ---------------------------------------- ------------- -------------- -------------- ------------- -------------

</TABLE>

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

<TABLE>
<CAPTION>

   ----------------------------------------- ------------------------------------------------------------------------
                                                                FOR THE YEARS ENDED DECEMBER 31,
   ----------------------------------------- ------------------------------------------------------------------------
                                                  1998           1997          1996          1995          1994
   ----------------------------------------- --------------- ------------- ------------- ------------- --------------
<S>                                        <C>               <C>           <C>           <C>            <C>
   REVENUES                                        $ 66,497      $ 54,170      $ 54,919      $ 47,872       $ 23,506
   ----------------------------------------- --------------- ------------- ------------- ------------- --------------
   OPERATING EXPENSES                                74,727        54,047        58,096        44,858         21,717
   ----------------------------------------- --------------- ------------- ------------- ------------- --------------
   NET INCOME (LOSS)
     FROM CONTINUING
     OPERATIONS                                         538         (347)       (3,756)         2,035          1,624
   ----------------------------------------- --------------- ------------- ------------- ------------- --------------
   NET INCOME (LOSS) FROM
     CONTINUING OPERATIONS PER
     COMMON SHARE                                   $  0.09     $  (0.06)     $  (0.74)       $  0.49        $  0.44
   ----------------------------------------- --------------- ------------- ------------- ------------- --------------
   WEIGHTED AVERAGE SHARES                        5,828,537     5,785,264     5,066,537     4,113,725      3,676,830
   ----------------------------------------- --------------- ------------- ------------- ------------- --------------
   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.

                                       17
<PAGE>

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, Colorado; Houston, 
Texas; San Antonio, Texas; Jackson, Mississippi; Mobile, Alabama; New 
Orleans, Louisiana; Sacramento, California; Richmond, California; Seattle, 
Washington; and Tustin, California.  In late 1996, the corporate offices of 
the Company were moved to Englewood, Colorado from Tustin, California.

BUSINESS STRATEGY

     The Company is focused on basic strategies that should lead to improved 
profitability, specifically to focus on the completion of more profitable 
contracts, overall direct and indirect cost reductions, and administrative 
efficiencies.  The Company continues to focus on 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.

     Completion of the sale of WQM and H20 in December of 1998 permits 
management of the Company to focus on operations and strategic alternatives 
for the Company and to enable the Company to realize its potential in the 
market for environmental remediation services.  In addition, other events 
that impacted the Company in 1998 or which may impact the Company in the 
future include a $8.4 million reduction of debt in 1998 thereby reducing 
future interest expense. Future strategic alternatives currently being 
considered by the Company include, among others, (i) the pursuit of 
opportunities in its core environmental remediation business, including 
acquisition of other companies in its core business or in businesses 
complimentary to the Company's core business; (ii) expansion of services 
provided by the Company; and (iii) continued focus on the improvement of 
contract profitability.

                                       18
<PAGE>

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
                                                ----------------------------------------    ----------------------------
                                                                                                1998            1997
                                                                                                 VS.             VS.
                                                   1998           1997          1996            1997            1996
                                                ------------    ----------   -----------    -------------    -----------
<S>                                             <C>             <C>          <C>            <C>              <C>
   Project Revenue                                   100.0%        100.0%        100.0%            22.8%        (1.4)%

   Project Costs:
       Direct                                         87.7          79.9          79.5             34.7         (0.9)
       Indirect                                       10.4          10.4          14.9             22.3        (30.9)
   --------------------------------------------------------------------------------------------------------------------

    Gross profit                                       1.9           9.7           5.6            (75.3)        69.9

    Other operating expense (income):
       Selling                                         3.0           3.8           5.6             (3.9)       (33.2)
       General and administrative expense             11.3           5.6           5.8            147.6         (3.6)
   --------------------------------------------------------------------------------------------------------------------

    Operating income (loss)                          (12.4)          0.3          (5.8)        (6,790.2)       103.9
    Other income (expense)                            13.5          (1.1)         (1.7)         1,632.7         36.5
   --------------------------------------------------------------------------------------------------------------------

    Income (loss) before income taxes                  1.1          (0.8)         (7.5)           256.6         88.8
    Income tax (benefit)                               0.3          (0.2)         (0.7)          (260.5)       (66.7)
   --------------------------------------------------------------------------------------------------------------------

    Net income (loss)                                  0.8%         (0.6)%        (6.8)%          255.3%        90.8%
   --------------------------------------------------------------------------------------------------------------------

</TABLE>

1998 COMPARED TO 1997

     PROJECT REVENUE.  Project revenues increased 22.8% from $54.2 million in 
1997 to $66.5 million in 1998.  The increase is due primarily to (i) an 
increase of $11.9 million in revenue provided by EPA contracts (see table 
below); (ii) an increase of $2.0 million in revenue provided by WQM; and 
(iii) an increase resulting from the acquisition of H20 in January 1998 
providing for revenues of approximately $1.5 million in 1998.  See also, Item 
1. Business -"THE COMPANY" and Note C to Company's Consolidated Financial 
Statements.  The Company's goal is to maintain a relatively equal 
distribution of revenues from government contracts and commercial contracts 
to produce continuity of revenues, while optimizing margins.

                                       19
<PAGE>

     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,
                        -------------------------------------------------------------------------------------------
                                   1998                            1997                            1996
                        ----------------------------    ----------------------------    ---------------------------
<S>                     <C>             <C>             <C>              <C>            <C>             <C>
   Non-EPA              33,569,412            50.5%     $33,125,032           61.2%     $44,065,990          80.2%
   EPA                  32,927,870            49.5%     $21,044,721           38.8%     $10,852,530          19.8%
                        ----------------------------    ----------------------------    ---------------------------
   Total                66,497,282           100.0%     $54,169,753          100.0%     $54,918,520         100.0%
                        ----------------------------    ----------------------------    ---------------------------
                        ----------------------------    ----------------------------    ---------------------------

</TABLE>

     DIRECT COSTS.  Direct costs increased from 79.9% of revenue in 1997 to 
87.7% of revenue in 1998.  The increase is due primarily to cost overruns 
incurred on the following projects:  (i) State of Washington resulting in a 
negative margin of  $0.9 million or 1.3% of revenue in 1998 compared to a 
negative margin of $0.1 million or 0.1% of revenue in 1997;  (ii) Monfort of 
Colorado, Inc. resulting in a negative margin of $1.3 million or 2.0% of 
revenue in 1998 compared to a margin of $0.7 million or 1.3% of revenue in 
1997; (iii) various revenue adjustments related to closure of certain branch 
offices resulting in a negative margin of $0.8 million or 1.3% of revenue in 
1998 compared to no adjustment in 1997; and (iv) other low margin projects 
finalized in 1998.

     INDIRECT COSTS.  Indirect costs increased $1.3 million from $5.6 million 
in 1997 to $6.9 million in 1998.  Indirect costs as a percentage of revenue 
remained constant at 10.4% in 1997 and 1998.  Therefore the increase in 
indirect costs is directly attributable to the increase in revenue described 
above.  

     GROSS PROFIT.  Gross profit decreased $3.9 million from $5.2 million or 
a gross margin of 9.7% in 1997 to $1.3 million or a gross margin percentage 
of 1.9% in 1998.  The decrease in gross margin results primarily from the 
increase in direct costs attributable to a decline in contract profitability.

     SELLING EXPENSE.   Selling expense remained relatively constant from 
1997 to 1998, while revenue increased 22.8%.  Selling expense decreased to 
3.0% of revenue 1998 from 3.8% of revenue in 1997.
     
     GENERAL AND ADMINISTRATIVE EXPENSE.   General and administrative expense 
increased $4.5 million from $3.0 million in 1997 to $7.5 million in 1998. The 
increase is due primarily to a non-recurring adjustment of $2.4 million to 
write off amounts due under contracts.  See also Item 3. Legal Proceedings. 
Additionally, non-recurring adjustments of $1.3 million were recorded in 1998 
to provide allowances for accounts receivable, contracts in process, and
disallowance of cost incurred on government contracts.
     
     OPERATING INCOME (LOSS).  Operating income decreased $8.3 million from 
an operating income of $0.1 million in 1997 to an operating loss of $8.2 
million in 1998.  The decrease in operating income can be attributed 
primarily to the decrease of $3.9 million gross profit and the increase of 
$4.5 million in general and administrative expense discussed above.
     
     OTHER INCOME (EXPENSE).  Other income increased $9.5 million from $0.6 
million other expense in 1997 to $8.9 million other income in 1998.  The 
increase is due primarily to a non-recurring gain of $10.2 million on the 
sale of WQM in December 1998.  See also  Item 1. Business - "THE COMPANY" and 
Note C to Company's Consolidated Financial Statements.
     
                                       20
<PAGE>

     INCOME TAX EXPENSE (BENEFIT).   During 1998 the Company recorded income 
tax expense of $0.2 million compared to an income tax benefit of $0.1 million 
in 1997.  The 1998 income tax expense is related to the gain on sale of WQM.  
The 1997 benefit was based on an estimate of 1995 carryback benefits 
available. 

     NET INCOME (LOSS).  Net income for the year ended December 31, 1998 was 
$0.5 million compared to a net loss of $0.3 million in the year ended 
December 31, 1997.  As discussed above, the improvement in net income is due 
primarily to the non-recurring gain on sale of business of $10.2 million 
offset by a decrease in gross profit of $3.9 million and increase in general 
and administrative expense of $4.5 million.

1997 COMPARED TO 1996

     PROJECT REVENUE.  The Company experienced a slight decrease in revenues 
of 1.4% from $54.9 million in 1996 to $54.2 million in 1997.  As expected 
with the award of the EPA ERRS contracts, the proportion of non-EPA work was 
reduced in 1997 from 80.2% to 61.2% of total revenue (see table above).  The 
Company's goal continues to be the maintenance of a relatively equal 
distribution of revenues from government contracts and commercial contracts 
to produce a solid continuity of revenues, while optimizing margins.

     DIRECT COSTS.  Direct costs decreased slightly from $43.7 million in 
1996 to $43.3 million in 1997.  Direct costs as a percentage of revenues 
remained relatively constant at 79.9% compared to 79.5% in 1996 therefore the 
decrease in direct costs is primarily the result of the change in revenue 
described above.  

     INDIRECT COSTS.  Indirect expenses decreased significantly from $8.2 
million or 14.9% of revenues in 1996 to $5.6 million or 10.4% of revenues in 
1997.  This decrease in indirect operating costs caused gross profit to 
increase from 5.6% of revenues in 1996 to 9.7% in 1997.  The decrease in 
indirect operating costs were a result of the Company taking the following 
corrective actions:

        -  Closed unprofitable offices in Portland and Phoenix.

        -  Reduced staff and realigned personnel classifications to better 
           control indirect labor costs.

        -  Restructured employee benefit programs to reduce cost.

        -  Hired new key financial management staff.

        -  Implemented revised processes and controls for contract 
           administration, revenue recognition, billing and collection, and 
           accounts payable.

     SELLING EXPENSES.  Selling expenses decreased 33.2% from $3.1 million in 
1996 to $2.1 million in 1997.  This decrease is the result of some reduction 
of the sales and proposal staff, and the refocusing of commercial sales 
efforts out to the regional offices.  The Company also implemented a sales 
commission program, reducing the fixed salary component of sales costs.  The 
changes have not impacted the Company's ability to continue to win new work 
in both the government and commercial sectors.

                                       21
<PAGE>

     GENERAL AND ADMINISTRATIVE EXPENSE.   General and administrative expense 
decreased 3.6% from $3.2 million in 1996 to $3.0 million in 1997.  This 
decrease was due primarily to lower insurance costs.

     OPERATING INCOME (LOSS).   Operating income increased from an operating 
loss of $3.2 million in 1996 to an operating income of $0.1 million in 1997.  
As described above, the improvement can be attributed primarily to the 
increase of $2.2 million gross profit and decrease in selling expenses.  

     INCOME TAX (BENEFIT).   In 1996, the Company was able to carryback 
losses equivalent to 1995 profits for federal tax purposes, resulting in a 
federal tax benefit of $0.3 million for 1996 and $0.1 million in 1997. 

     NET INCOME (LOSS).  Net loss for the year ended December 31, 1997 was 
$0.3 million compared to a net loss of $3.8 million in the year ended 
December 31, 1996.  As discussed above, the change in net income is due 
primarily to the $2.2 million improvement in gross profit and the $1.0 
million decrease in selling expense.

BONDING

     The amount of bonding capacity offered by sureties is a function of the 
financial health of the company requesting the bond.  At March 1999, the 
bonding capacity for the Company was in excess of $25.0 million.
     
LIQUIDITY AND CAPITAL RESOURCES

     The Company's financial position improved from 1997 to 1998.  The 
Company's debt to equity ratio improved to 1.71 in 1998 from 2.43 in 1997.  
Related to this, the turnover ratio of the combination of accounts receivable 
and contracts in process improved to 120 days in 1998 from 157 days in 1997.

     The Company's cash and cash equivalents decreased from $0.3 million at 
December 31, 1997 to $0.03 million at December 31, 1998.  The decrease in 
cash and cash equivalents is due to cash used by operating activities of $6.2 
million, cash provided by investing activities of $9.1 million and cash used 
in financing activities of $3.2 million.  Cash used by operating activities 
of $6.2 million is due primarily to an increase in accounts receivable and a 
reduction of current liabilities.  Cash provided by investing activities of 
$9.1 million resulted primarily from the sale of WQM.  Cash used in 
financing activities of $3.2 million resulted primarily from repayment of 
short-term borrowings.

     Capital resources are used primarily to fund the acquisition of capital 
equipment and provide working capital needed to support continued expansion 
of the Company's operations.  Historically, the Company has been 
under-capitalized, attempting to meet cash requirements through funds 
generated from operations, together with funds borrowed under revolving and 
term loans.

     DEBT.  Since January 1995, the Company has borrowed funds from related 
parties.  As of January 1999, all funds have been repaid and the Company does 
not anticipate borrowing from these sources in the future.

     On May 30, 1997 the Company entered into a new financing agreement with 
National Bank of Canada.  This agreement is comprised of a line of credit of 
$9.0 million based upon a percentage (80%) of qualifying receivables, and an 
equipment term loan of $1.0 million.  The $9.0 million line provides that up 
to $1.0 million can be used for capital expenditures.  Interest is payable 
monthly at the Bank's 

                                       22
<PAGE>

Reference Rate plus .25%.  This rate may be adjusted up or down an additional 
 .25% depending upon the Company's profitability.  The Company used proceeds 
from the sale of WQM to repay the line of credit, then subsequently borrowed 
an additional $1.0 million as of December 31, 1998.  In January 1999, the 
Company reduced the maximum available under this financing agreement to $7.5 
million.

     The Company has also financed vehicles and equipment using long term 
capital leases from various entities.  As of December 31, 1998, the combined 
balance due on these leases was $0.6 million.
     
     In December, 1996, the Company commenced a Private Placement Offering of 
Common Stock.  This offering was completed in January 1997, and resulted in 
the issuance of 0.7 million shares with net proceeds to the Company totaling 
$2.0 million.  The shares issued pursuant to this offering were classified as 
"restricted securities" as such term is defined in Rule 144 of the Securities 
Act of 1933.  The Company completed an S-3 registration of these shares for 
resale which was effective January 7, 1998.  In conjunction with the 
offering, warrants for an additional 72,925 shares of Common Stock were 
issued as partial compensation for underwriting services.  These warrants are 
exercisable at a price of $3.60 per share for five years from the date of the 
offering.

     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 
negotiated to redeem the remaining 1,570 preferred shares for $1.9 million in 
cash.

     In December 1998, the Company sold all of the outstanding stock of WQM 
for $12.5 million in cash to AquaSource Services and Technologies, Inc.  In 
addition to the $12.5 million in cash, additional consideration may be paid 
in 1999 based on the final audit of working capital levels.

     Management believes that funds provided by operations, funds available 
under the Company's line of credit and available funds from equity financing 
discussed above will be sufficient to fund the Company's immediate needs for 
working capital.
     
     CAPITAL COMMITMENTS.  The Company has entered into leases for its 
existing facilities with such leases expiring at various dates through 2004.  
Monthly rentals currently are approximately $57,300 in the aggregate.  
Management anticipates that capital expenditures will increase in 1999 and 
will be funded from working capital, term loans and equipment leases.

YEAR 2000 COMPLIANCE

     The Company has assessed the Year 2000 compliance problem and has 
determined that it has potential for exposure regarding Year 2000 compliance 
in three areas of its internal and external business activities.  These areas 
include (1) its own internal hardware, software systems, and the 
telecommunications systems which are utilized to process and provide the 
Company's accounting, operational information, and communications, (2) the 
vulnerability of the Company to the failure of other companies to be Year 
2000 compliant, and (3) the Year 2000 Compliance efforts of the Environmental 
Protection Agency (EPA), a significant client of the Company, on its daily 
tracking & billing system.  The following discusses management's assessment 
and solutions of those risks and the 

                                       23
<PAGE>

steps that are being taken to minimize them.

     INTERNAL HARDWARE, SOFTWARE AND TELECOMMUNICATIONS.  During the past 9 
months, the Company has been and is replacing or adding new equipment to its 
inventory of network and systems computers.  The Company has committed 
approximately $350,000 for this hardware/software replacement, which has been 
financed with its cash resources and with lease financing.  The hardware 
includes the Company's organization-wide network systems and servers, 
telephone systems, and personal computer equipment.  The Company will test 
Year 2000 compliance on this new hardware/software as it is accepted.  In 
addition, the Company has contracted for the replacement of its 
organization-wide accounting, costing, and management information computer 
software.  This new software will operate the Company's accounting and 
operational information systems and will be functional for use by all of its 
regional locations.  The Vendor has warranted that the software is Year 2000 
compliant.  Customization of the software is scheduled, and the staff 
training will begin 2nd quarter 1999.  It is estimated that the system will 
be installed and functional in the 3rd quarter 1999.  The cost of this system 
is expected to be approximately $250,000 including software, hardware and 
implementation, and training expenses.  The primary purpose of acquiring this 
system is to provide improved functionality in the area of consolidated 
financial reporting, financial project controls, Year 2000 compliance, timely 
cost capturing, and management reporting.  In addition, the Company has 
reviewed its telecommunications systems, analyzed various options, and 
purchased a new central telecommunication system that will provide increased 
functionality associated with multiple office communication requirements.  
The new system is Year 2000 compliant, and installation is scheduled to be 
complete by June 1, 1999.  The estimated costs associated with a new 
telecommunications system are $33,000.

     In addition to the above activities, the Company is in the final process 
of completing a full inventory and assessment of its computer hardware, 
software, and equipment with embedded devices.  It is anticipated that this 
process will be completed by September 1999.  Management intends to identify 
any remaining remedial efforts that may be required to ensure its internal 
hardware and software systems are Year 2000 complaint.

     YEAR 2000 COMPLIANCE OF OTHER COMPANIES.  Although the Company expects 
its internal systems to be Year 2000 compliant, the failure of any of its 
significant vendors or clients to correct a material Year 2000 problem could 
result in an interruption in certain normal business activities and 
operations. To date, the Company has received various inquires from its 
clients and significant vendors to provide information on Year 2000 
compliance or to inform the Company of their Year 2000 compliance.  The 
Company has been responding to these requests and notices.  Management is not 
aware of any claims by any client to provide remedial services under any 
warranty agreement (stated or implied) for systems it may have provided, nor 
is it aware of any system that may have been provided that may be in 
violation of any Year 2000 compliance.   To the extent any such claims may be 
made, the Company intends to address these issues on a case by case basis.

     The Year 2000 problem is not limited to computer hardware and software.  
It can affect a multitude of other day-to-day business activities.  Any type 
of equipment with a microchip that stores and processes dates can be 
affected.  The company is diligently identifying and addressing these issues 
so that its ability to conduct business as usual is not compromised as it 
moves into the 21st century.  The Company is identifying mission-critical 
business functions that rely upon date-sensitive equipment, software, or 
hardware.  The Company is requesting Year 2000 verification in these areas by 
performance testing or certifications that use various types of testing for 
compliance, i.e., century byte, hardware clock rollover, hardware clock leap 
year, BIOS rollover, BIOS leap year, power-on rollover, and power-on leap 
year.  Due to the general uncertainty inherent in the Year 2000 problem, the 
Company at this time is unable to completely determine if any adverse impact 
will be experienced by the Company from 

                                       24
<PAGE>

other companies' Year 2000 failures.

     EPA YEAR 2000 COMPLIANCE.  The Company has been working with the EPA on 
their efforts to bring their daily tracking & billing system (RCMS) to Year 
2000 compliance.  The EPA has been developing a windows-based RCMS, Year 2000 
Compliant system to be issued to its Contractors by July 1999.  Their efforts 
are currently in the design testing stage.  The Company expects some amount 
of problems that are inherent to conforming to a new windows-based system.  
Given the current assurances from the EPA of their compliance, the Company is 
only anticipating the normal conversion problems. (i.e., DOS-based vs. 
Windows-based interaction).

     While the Company may be vulnerable to other companies' Year 2000 
compliance failures, the Company is well positioned to minimize the Y2K 
impact. The Company believes that with the implementation of its new 
hardware, software, up-grades to our office equipment, and completion of its 
assessment of vendors and clients, the possibility of significant 
interruptions of normal operations has been greatly reduced.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
          
     Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Please see pages F-1 through F-22.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  
FINANCIAL DISCLOSURE.
     
     None.
     


                                      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 8, 1999.
     
                                       25
<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
                 ------------------------------------------------------------- ---------------
                 Consolidated Balance Sheets                                      F-2  -  F-3
                 ------------------------------------------------------------- ---------------
                 Consolidated Statements of Operations                                    F-4
                 ------------------------------------------------------------- ---------------
                 Consolidated Statements of Stockholders' Equity                          F-5
                 ------------------------------------------------------------- ---------------
                 Consolidated Statements of Cash Flows                            F-6  -  F-7
                 ------------------------------------------------------------- ---------------
                 Notes to Consolidated Financial Statements                      F-8  -  F-22
                 ------------------------------------------------------------- ---------------
</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           Incorporated by reference to
                                     Incorporation                              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           Loan Documents Between National Bank of    Incorporated by reference to
                                     Canada  and the Company                    Exhibit 10.3 to the Company's
                                                                                Annual Report on Form 10-K
                                                                                for the year ended December 31, 1997.

</TABLE>

                                       26
<PAGE>

<TABLE>
<CAPTION>
                    EXHIBIT
                     NUMBER                         DESCRIPTION                              LOCATION
             ----------------------- ------------------------------------------ ------------------------------------
             <S>                     <C>                                        <C>
                      10.4           Amendment to Loan and Security Agreement   Filed herewith electronically
                                     and Loan Documents between National Bank
                                     of Canada
                                     and the Registrant

                      10.5           Second Amendment to Loan and Security      Filed herewith electronically
                                     Agreement and Loan Documents between
                                     National Bank of Canada and the
                                     Registrant

                      10.6           Third Amendment to Loan and Security       Filed herewith electronically
                                     Agreement and Loan Documents between
                                     National Bank of Canada and the
                                     Registrant

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

                       21            Subsidiaries of the Registrant             None.

                       23            Consent of Grant Thornton LLP              Filed herewith electronically

                       27            Financial Data Schedule                    Filed herewith electronically

</TABLE>


     (b)  REPORTS ON FORM 8-K.     The Company filed a Report on Form 8-K 
dated December 17, 1998 reporting information under Items 2 and 7 of that 
form concerning the sale of the Company's WQM subsidiary.

                                       27
<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 15, 1999                       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 (principal financial
----------------------------------------------------    and accounting officer), Chief           April 15, 1999
Steven H. Davis                                         Executive Officer, Secretary and          
                                                        Director



/s/ Craig C. Barto                                      Director                                 April 15, 1999
----------------------------------------------------
Craig C. Barto



/s/ Douglas W. Cotton                                   Executive Vice President,
----------------------------------------------------    Chief Operating Officer and             April 15, 1999
Douglas W. Cotton                                       Director



/s/ George Pratt                                        Director                                April 15, 1999
----------------------------------------------------
George Pratt



/s/ Robert A. Taylor                                    Director                                April 15, 1999
----------------------------------------------------
Robert A. Taylor

</TABLE>

                                       28
<PAGE>

                        CET ENVIRONMENTAL SERVICES, INC.

                            FINANCIAL STATEMENTS AND
                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS

                           December 31, 1998 and 1997


<PAGE>

                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
CET Environmental Services, Inc.


We have audited the accompanying consolidated balance sheets of CET 
Environmental Services, Inc. as of December 31, 1998 and 1997, 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 generally accepted auditing 
standards. 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, 1998 and 1997, 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 generally accepted 
accounting principles.


GRANT THORNTON LLP

Denver, Colorado
March 25, 1999

                                       F-1

<PAGE>

                           CET Environmental Services

                                 BALANCE SHEETS

                                  December 31,

<TABLE>
<CAPTION>
                             ASSETS
                                                                    1998            1997
                                                                ------------    ------------
<S>                                                             <C>             <C>         
CURRENT ASSETS
       Cash                                                     $     25,192    $    343,878
       Accounts receivable, less allowance for
            doubtful accounts; $721,857 in 1998 and
            $642,097 in 1997                                      11,781,212      10,042,516
       Contracts in process less allowance for doubtful
            accounts of $284,128 in 1998 and $-0- in 1997         10,154,501      13,344,219
       Retention receivable                                          663,998         268,949
       Income tax receivable                                            --            20,342
       Due from related party                                        124,036         100,010
       Other receivables                                           3,371,828         154,838
       Inventories                                                   267,491         248,417
       Prepaid expenses                                              281,935         566,084
                                                                ------------    ------------

                       Total current assets                       26,670,193      25,089,253
                                                                ------------    ------------

EQUIPMENT AND IMPROVEMENTS
       Field equipment and vehicles                                5,761,481       5,931,499
       Office furniture, equipment and leasehold improvements        601,843       1,795,996
                                                                ------------    ------------
                                                                   6,363,324       7,727,495
       Less allowance for depreciation and amortization           (2,883,021)     (3,921,131)
                                                                ------------    ------------

                       Equipment and improvements - net            3,480,303       3,806,364

GOODWILL, net of accumulated amortization
       of $57,684 in 1997                                               --           509,228

DEPOSITS                                                              51,318         477,966
                                                                ------------    ------------
                                                                $ 30,201,814    $ 29,882,811
                                                                ------------    ------------
                                                                ------------    ------------

</TABLE>

       The accompanying notes are an integral part of these statements.

                                       F-2

<PAGE>

                     LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                        1998           1997
                                                                     -----------   ------------
<S>                                                                  <C>           <C>       
CURRENT LIABILITIES
       Cash overdraft                                                $ 1,936,741   $       --
       Accounts payable                                               11,383,109      8,974,502
       Accrued expenses                                                3,249,019      3,054,740
       Current obligations under capital leases                          316,798        293,957
       Income taxes payable                                              158,958           --
       Current portion of long-term debt                                 750,000        647,194
       Line of credit                                                  1,039,925           --
                                                                     -----------   ------------

                       Total current liabilities                      18,834,550     12,970,393


OBLIGATIONS UNDER CAPITAL LEASES                                          250,784        583,270

LINE OF CREDIT                                                              --        6,198,631

NOTES PAYABLE TO RELATED PARTIES                                            --          671,800

LONG-TERM DEBT                                                              --          750,000

COMMITMENTS AND CONTINGENT LIABILITIES                                      --             --

STOCKHOLDERS' EQUITY
       Common stock (no par value) - authorized 20,000,000 shares;
            6,129,271 and 5,805,485 shares issued and outstanding
               at December 31, 1998 and 1997, respectively             8,539,716      8,235,589
       4% convertible preferred stock (no par value) -
            authorized 5,000,000 shares; 1,710 and -0-
               shares issued and outstanding at December 31,
               1998 and 1997, respectively                             1,589,102           --
       Paid-in capital                                                   574,629        567,953
       Retained earnings (accumulated deficit)                           413,033        (94,825)
                                                                     -----------   ------------

                       Total stockholders' equity                     11,116,480      8,708,717
                                                                     -----------   ------------

                                                                     $30,201,814   $ 29,882,811
                                                                     -----------   ------------
                                                                     -----------   ------------

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-3

<PAGE>

                           CET Environmental Services

                            STATEMENT OF OPERATIONS

                            Years ended December 31,

<TABLE>
<CAPTION>
                                                            1998            1997            1996
                                                        ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>         
PROJECT REVENUE                                         $ 66,497,282    $ 54,169,753    $ 54,918,520

PROJECT COSTS
       Direct                                             58,298,144      43,286,506      43,660,435
       Indirect                                            6,902,927       5,645,781       8,175,951
                                                        ------------    ------------    ------------
                                                          65,201,071      48,932,287      51,836,386
                                                        ------------    ------------    ------------

                 Gross profit                              1,296,211       5,237,466       3,082,134
                                                        ------------    ------------    ------------

OTHER OPERATING EXPENSES (INCOME)
       Selling                                             1,989,584       2,070,130       3,101,197
       General and administrative                          7,535,966       3,044,045       3,158,707
                                                        ------------    ------------    ------------

                                                           9,525,550       5,114,175       6,259,904
                                                        ------------    ------------    ------------

                 Operating income (loss)                  (8,229,339)        123,291      (3,177,770)
                                                        ------------    ------------    ------------

OTHER INCOME (EXPENSE)
       Gain on sale of subsidiary                         10,154,028            --              --
       Interest expense, net                                (892,213)       (704,575)       (627,537)
       Other income (expense)                               (310,722)        120,446        (292,998)
                                                        ------------    ------------    ------------
                                                           8,951,093        (584,129)       (920,535)
                                                        ------------    ------------    ------------

                 Income (loss) before taxes on income        721,754        (460,838)     (4,098,305)
                 (Benefit) taxes on income                   183,276        (113,547)       (341,855)
                                                        ------------    ------------    ------------
                            NET INCOME (LOSS)           $    538,478    $   (347,291)   $ (3,756,450)
                                                        ------------    ------------    ------------
                                                        ------------    ------------    ------------

Weighted average number of
       shares outstanding                                  5,828,537       5,785,264       5,066,537

Earnings (loss) per common share                        $       0.09    $      (0.06)   $      (0.74)
                                                        ------------    ------------    ------------
                                                        ------------    ------------    ------------
Earnings (loss) per common share--
       assuming dilution                                $       0.09    $      (0.06)   $      (0.74)
                                                        ------------    ------------    ------------
                                                        ------------    ------------    ------------

</TABLE>

      The accompanying notes are an integral part of these statements.

                                       F-4

<PAGE>

                        CET Environmental Services, Inc.

                       STATEMENTS OF STOCKHOLDER'S EQUITY

                 Years ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                                                      Retained
                                            Common stock          Preferred stock                     earnings         Total
                                     -----------------------  -----------------------    Paid-in    (accumulated   stockholders'
                                       Shares       Amount      Shares       Amount      capital       deficit)        equity
                                     ---------   -----------  ---------   -----------   ---------   ------------   -------------
<S>                                  <C>         <C>          <C>         <C>           <C>         <C>            <C>
Balance at January 1, 1996           5,066,537   $ 6,165,977          -   $         -   $ 535,175   $  4,008,916   $ 10,710,068


Issuance of stock options
     at exercise price below
     market value                            -             -          -             -      20,355              -         20,355

Net (loss) for the year                      -             -          -             -           -     (3,756,450)    (3,756,450)
                                     ---------   -----------  ---------   -----------   ---------   ------------   ------------
Balance at December 31, 1996         5,066,537     6,165,977          -             -     555,530        252,466      6,973,973

Shares issued in private
     placement                         729,248     2,035,662          -             -           -              -      2,035,662

Exercise of stock options                9,700        33,950          -             -           -              -         33,950

Issuance of stock options
     at exercise price below
     market value                            -             -          -             -      12,423              -         12,423

Net (loss) for the year                      -             -          -             -           -       (347,291)      (347,291)
                                     ---------   -----------  ---------   -----------   ---------   ------------   ------------
Balance at December 31, 1997         5,805,485     8,235,589          -             -     567,953        (94,825)     8,708,717


Exercise of stock options
     and other                           6,000        14,000          -             -       6,676              -         20,676

Issuance of preferred stock                  -             -      2,000     1,879,229           -              -      1,879,229

Conversion of preferred stock          317,786       290,127       (290)     (290,127)          -              -              -
Dividends on preferred stock                 -             -          -             -           -        (30,620)       (30,620)

Net income for the year                      -             -          -             -           -        538,478        538,478
                                     ---------   -----------  ---------   -----------   ---------   ------------   ------------
Balance at December 31, 1998         6,129,271   $ 8,539,716      1,710   $ 1,589,102   $ 574,629   $    413,033   $ 11,116,480
                                     ---------   -----------  ---------   -----------   ---------   ------------   ------------
                                     ---------   -----------  ---------   -----------   ---------   ------------   ------------

</TABLE>

      The accompanying notes are an integral part of these statements.

                                       F-5

<PAGE>

                        CET Environmental Services, Inc.

                            STATEMENTS OF CASH FLOWS

                            Years ended December 31,

<TABLE>
<CAPTION>
                                                                            1998           1997           1996
                                                                       ------------    -----------    -----------
<S>                                                                    <C>             <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net income (loss)                                               $    538,478    $  (347,291)   $(3,756,450)
       Adjustments to reconcile net income to net cash (used in)
            provided by operating activities:
                 Depreciation and amortization                            1,453,900      1,573,085      1,252,781
                 Gain on sale of subsidiary                             (10,154,028)          --             --
                 Provision for bad debts                                    333,268        104,010        402,683
                 Deferred income taxes                                         --             --          252,048
                 Loss on sale of equipment                                  216,007           --           13,304
                 Employee stock option plan                                   6,676         12,423         20,355
                 Changes in operating assets and liabilities:
                       (Increase) decrease in accounts receivable        (3,348,937)    (2,692,133)     5,499,747
                       Decrease (increase) in contracts in process        2,905,590     (6,687,357)      (443,372)
                       Decrease (increase) in income tax
                            and other receivables                        (1,942,137)     1,037,665     (1,335,263)
                       Decrease (increase) in prepaid expenses             (370,848)        47,686       (107,530)
                       (Increase) decrease in inventory and deposits        403,074       (421,828)        50,210
                       Increase (decrease) in accounts payable            3,152,811      1,215,834        (99,156)
                       Increase (decrease) in accrued expenses
                          and income taxes                                  619,832      2,199,847       (533,861)
                                                                       ------------    -----------    -----------
                               Net cash (used in) provided by
                                  operating activities                   (6,186,314)    (3,958,059)     1,215,496
                                                                       ------------    -----------    -----------

INVESTING ACTIVITIES:
       Purchase of equipment                                             (1,381,135)      (462,947)    (1,523,418)
       Proceeds from sale of equipment                                         --             --           65,641
       Proceeds from sale of subsidiary                                  11,250,000           --             --
       Net purchase of subsidiary                                          (803,845)      (186,798)          --
                                                                       ------------    -----------    -----------
                               Net cash provided by (used in)
                                    investing activities                  9,065,020       (649,745)    (1,457,777)
                                                                       ------------    -----------    -----------

FINANCING ACTIVITIES:
       Bank overdraft                                                     1,936,741           --             --
       Proceeds from issuance of long-term debt                                --        1,286,476        766,751
       Payments on long-term debt                                          (754,877)    (1,475,158)      (917,592)
       Payments on capital leases                                          (411,359)      (327,230)      (348,711)
       Net (payments) proceeds from credit line loan                     (5,158,706)     1,997,981      1,775,814
       Borrowings from related party trust fund                                --             --          200,000
       Payment of dividends on preferred stock                              (30,620)          --             --
       Proceeds from issuance of preferred stock                          1,879,229      2,035,662           --
       Proceeds from exercise of stock options                               14,000         33,950           --
       Proceeds from loans from shareholders                                500,000           --          545,000
       Payments on loans from shareholders                                 (500,000)      (545,000)          --
       Net payments from related party                                         --           58,000       (158,010)

</TABLE>


        The accompanying notes are an integral part of these statements.

                                       F-6

<PAGE>

                        CET Environmental Services, Inc.

                            STATEMENTS OF CASH FLOWS

                            Years ended December 31,

<TABLE>
<CAPTION>
                                                                    1998           1997           1996
                                                                -----------    -----------    -----------
<S>                                                             <C>            <C>            <C>
       Payments on subordinated notes payable                   $  (671,800)   $      --      $  (210,625)
                                                                -----------    -----------    -----------
                               Net cash (used in) provided by
                               financing activities              (3,197,392)     3,064,681      1,652,627
                                                                -----------    -----------    -----------

                               (DECREASE) INCREASE IN CASH         (318,686)    (1,543,123)     1,410,346

Cash at beginning of year                                           343,878      1,887,001        476,655
                                                                -----------    -----------    -----------

Cash at end of year                                             $    25,192    $   343,878    $ 1,887,001
                                                                -----------    -----------    -----------
                                                                -----------    -----------    -----------
Supplemental disclosures of cash flow information:
       Cash paid during the year
            Interest                                            $ 1,060,211    $   717,980    $   485,951
            Income taxes                                               --             --          656,900

Noncash investing and financing activities:
       Capital lease and financing obligations
            incurred for equipment                              $      --      $      --      $   683,223
                                                                -----------    -----------    -----------
                                                                -----------    -----------    -----------
       Issuance of note payable for financing of
            insurance premiums                                  $   485,818    $   301,965    $   412,296
                                                                -----------    -----------    -----------
                                                                -----------    -----------    -----------
       Conversion of preferred stock to common                  $   290,127    $      --      $      --
                                                                -----------    -----------    -----------
                                                                -----------    -----------    -----------
      Transfer of CIP from deposits to fixed assets             $   368,452    $      --      $      --
                                                                -----------    -----------    -----------
                                                                -----------    -----------    -----------

</TABLE>

      The accompanying notes are an integral part of these statements.

                                       F-7

<PAGE>

                        CET Environmental Services, Inc.

                          NOTES TO FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996


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. In August 1997, the Company acquired all of
       the outstanding stock of Water Quality Management Corporation (WQM). WQM
       was operated as a wholly-owned subsidiary of the Company. WQM was sold in
       December 1998 (Note C).

       The Company provides a variety of consulting and technical 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 throughout
       North America and the Trust Territory of the Pacific Islands.

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       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 is generated from time-and-material
       contracts 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 for material, inventories and
       subcontractor costs. Many of the contracts also have a fixed mark-up to
       be applied to material, inventories and subcontract costs. In addition,
       many of the time and material contracts have a stated maximum contract
       price, which can not be exceeded without an authorized change order.
       Revenue is recorded on contracts based upon the labor hours and costs
       incurred. Provision for losses on uncompleted contracts are made in the
       period in which such losses are determined. Claims are recorded in
       revenue when received.

       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.

                                       F-8
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

       EQUIPMENT AND IMPROVEMENTS

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

       GOODWILL

       Goodwill is the excess of cost over the fair value of net assets
       acquired, and is being amortized over a fifteen-year period using the
       straight-line method. The Company evaluates its goodwill annually to
       determine potential impairment by comparing the carrying value to the
       undiscounted estimated expected future cash flows of the related assets.

       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.

       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.

       DUE FROM RELATED PARTY: The carrying amount approximates the fair value
       because it is due on demand.

       NOTE PAYABLE - LINE OF CREDIT: The carrying amount approximates fair
       value as the line of credit has a variable interest rate which is
       considered to approximate the market rate.

       LONG-TERM DEBT / OBLIGATIONS UNDER CAPITAL LEASES: The carrying value
       approximates fair value as the interest rate at December 31, 1998 and
       1997 is considered to approximate the market rate.

                                       F-9

<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

       NOTES PAYABLE TO RELATED PARTIES: The carrying value approximates fair
       value as the interest rate at December 31, 1998 and 1997 is considered to
       approximate the market rate.

       USE OF ESTIMATES

       In preparing financial statements in conformity with generally accepted
       accounting principles, 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

       In March 1995, the Financial Accounting Standards Board issued 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).
       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. SFAS 121 is
       effective for the Company's 1997 fiscal year-end. Any impairment
       provisions recognized in accordance with SFAS 121 are permanent and may
       not be restored in the future. No impairment expense was recognized in
       the years ended December 31, 1998 and 1997.

       EARNINGS PER SHARE

       The Financial Accounting Standards Board recently issued Statement of
       Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS 128).
       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.

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

                                       F-10

<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

<TABLE>
<CAPTION>
                                                      1998       1997       1996
                                                    -------    -------    -------
<S>                                                 <C>        <C>        <C>     
Numerator
     Net income (loss)                              $   539    $  (347)   $(3,756)
     Preferred stock dividends                          (31)      --         --
                                                    -------    -------    -------

     Numerator for basic earnings per share -
          income available to common stockholders       508       (347)    (3,756)

Effect of dilutive securities:
     Preferred stock dividends                         --         --         --
                                                    -------    -------    -------

     Numerator for diluted earnings per share -
          income available to common stockholders
          after assumed conversions                 $   508    $  (347)   $(3,756)
                                                    -------    -------    -------
                                                    -------    -------    -------

Denominator:
     Denominator for basic earnings per share -
          weighted average shares outstanding       $ 5,829    $ 5,785    $ 5,067

     Effect of dilutive securities:
          Warrants                                       24       --         --
          Convertible preferred stock                  --         --         --
          Stock options                                  22       --         --
                                                    -------    -------    -------
                Dilutive potential common shares         46       --         --

     Denominator for diluted earnings per share -
          adjusted weighted average share and
          assumed conversion                        $ 5,875    $ 5,785    $ 5,067
                                                    -------    -------    -------
                                                    -------    -------    -------
Basic earnings per share                            $  0.09    $  0.06    $  0.74
                                                    -------    -------    -------
                                                    -------    -------    -------
Diluted earnings per share                          $  0.09    $  0.06    $  0.74
                                                    -------    -------    -------
                                                    -------    -------    -------

</TABLE>

                                       F-11

<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

       In 1998, basic earnings per share data was computed by dividing net
       income, less preferred stock dividends, by the weighted average number of
       common shares outstanding during the period. Diluted earnings per share
       were adjusted for the assumed conversion of potentially dilutive
       securities including stock options and warrants to purchase common stock.
       However, dilutive earnings per share computation does not give effect to
       the assumed conversion of convertible preferred stock as its effect would
       have been anti-dilutive.

       In 1997 and 1996, 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.

       Certain financial statement reclassifications have been made in 1996 and 
       1997 to conform with presentations used in 1998.

NOTE C -- SALE OF SUBSIDIARY

       Effective December 1, 1998, the Company sold all of the outstanding
       shares of its subsidiary, Water Quality Management Corporation (WQM) for
       a purchase price of $12,500,000 adjusted for the net working capital of
       WQM at November 30, 1998. The Company received $11,250,000 at the date of
       purchase with the remaining consideration due ninety days after closing.
       At December 31, 1998, $2,598,918 has been included in other receivables
       as the remaining consideration.

NOTE D -- CONTRACTS IN PROCESS

       Contracts in process consist of the following at December 31:

<TABLE>
<CAPTION>
                                        1998          1997
                                    -----------   -----------
       <S>                          <C>           <C>        
       Government - EPA contracts   $ 1,971,002   $ 3,801,853
       Non-EPA contracts              8,183,499     9,542,366
                                    -----------   -----------
                Total               $10,154,501   $13,344,219
                                    -----------   -----------
                                    -----------   -----------

</TABLE>

       The Environmental Protection Agency (EPA) awards the Company an award fee
       for work performed based upon a percentage of sub-contract and material
       costs incurred plus a percentage of program management fees billed.

                                       F-12

<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE E -- SIGNIFICANT CUSTOMERS

       A significant portion of the Company's business is from contracts with
       the EPA. A new contract was awarded by the EPA in December 1996, with
       estimated maximum revenue of $292,000,000 over five years. As of December
       31, 1998 and 1997, the net balance of accounts receivable from the EPA
       was $8,359,389 and $3,943,761, respectively. Revenue from the EPA in
       1998, 1997, and 1996 amounted to approximately $30 million, $21 million,
       and $10.9 million, respectively.

       The Company also performs work for the U.S. Army Corps of Engineers
       that accounted for 10%, 7% and 1% of revenue in 1998, 1997 and 1996,
       respectively.

NOTE F -- RELATED PARTY TRANSACTIONS

       In order to meet short-term operating needs, the Company, from time to
       time borrows funds on a short-term basis from affiliates of the Company
       or from a trust fund of a relative of the President. The Company borrowed
       $671,800, which includes subordinated notes of $671,800 (see notes H and
       I), from relatives of Steven H. Davis, President, pursuant to one-year
       notes, which bear interest at the rate of 10% per annum. The Company
       repaid these notes in December 1998. Interest expense attributable to
       these related party borrowings amounted to $95,761, $73,544, and $55,898
       for 1998, 1997, and 1996, respectively.

       A director and 11.5% owner of the Company is a 50% owner in Signal Hill
       Petroleum, Inc., Paramount Petroleum Corp. and Fletcher Oil. The Company
       provided services to these companies during the years ended December 31,
       1998, 1997, and 1996 for fees amounting to approximately $273,000,
       $835,000, and $340,000, respectively.

       The Company has made advances to a former officer and director of the
       Company. The balance due was $124,036 and $100,010 at December 31, 1998
       and 1997, respectively. Interest is payable monthly at 10% per annum, and
       principal is due on demand.

NOTE G -- CAPITAL LEASES

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

<TABLE>
<CAPTION>
                                    1998           1997
                                -----------    -----------
<S>                             <C>            <C>        
Vehicles                        $ 1,363,960    $ 1,497,407
Equipment                           202,123        272,679
                                -----------    -----------
                                  1,566,083      1,770,086
Less accumulated depreciation      (751,693)      (806,148)
                                -----------    -----------
         Total                  $   814,390    $   963,938
                                -----------    -----------
                                -----------    -----------
</TABLE>

                                       F-13

<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996


NOTE G -- CAPITAL LEASES (CONTINUED)

       The following is a schedule by year of the future minimum lease payments
       under capital leases together with the present value of the net minimum
       lease payments as of December 31, 1998:

<TABLE>
<S>                                                             <C>
                1999                                            $ 382,041
                2000                                              265,031
                2001                                               33,161
                                                                ---------
                Total minimum lease payments                      680,233
                    Less amounts representing estimated
                        executory costs (taxes)                   (40,310)
                                                                ---------
                Net minimum lease payments                        639,923
                Less amount representing interest                 (72,341)
                                                                ---------
                Present value of net minimum lease payments     $ 567,582
                                                                ---------
                                                                ---------
                Current portion                                 $ 316,798
                Noncurrent portion                                250,784
                                                                ---------
                                                                $ 567,582
                                                                ---------
                                                                ---------

</TABLE>

NOTE H -- LINE OF CREDIT AND LONG-TERM DEBT

       The Company has a line of credit facility with National Bank of Canada
       (the "Bank") which provides up to $9,000,000 of available credit,
       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). Interest is payable monthly at the Bank's Reference Rate plus
       .25% (9% at December 31, 1998). The line of credit facility has an
       expiration date of May 30, 1999. At December 31, 1998, $1,039,925 was
       outstanding under the agreement. In addition, the Company borrowed
       $1,000,000 from the Bank under a term loan. Interest is payable monthly
       at the Bank's Reference Rate plus .25% (9% at December 31, 1998). In
       January 1999, the Company reduced the maximum available under this
       financing agreement to $7.5 million comprised of a line of credit of
       $6.75 million and an equipment term loan of $750,000.

       Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                                      1998        1997     
                                                                                    --------    --------
       <S>                                                                          <C>         <C>     
       Note payable to bank, collateralized by equipment, payable in 36 monthly
       installments of $2,378 including interest at
       9%, beginning December 30, 1995                                                $   -     $ 24,007

       Note payable to bank, collateralized by equipment, payable in 36 monthly
       installments of $11,267 including interest
       at 9%, beginning January 30, 1996                                                  -      118,840

       Note payable for annual insurance premium, interest at
       5.73%, with monthly payments of $43,531, due June 30, 1998                         -      304,347

</TABLE>

                                       F-14
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996


NOTE H -- LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)

<TABLE>
<CAPTION>
                                                                                     1998          1997     
                                                                                  ----------    ----------
       <S>                                                                        <C>           <C>     
       Note payable to a bank, collateralized by equipment,
       payable in monthly installments of $16,667 including
       interest at 9%, balance due May 30, 1999                                      750,000       950,000
                                                                                  ----------    ----------
                                                                                     750,000     1,397,194
       Less current portion                                                          750,000       647,194
                                                                                  ----------    ----------
                                                                                  $        -    $  750,000
                                                                                  ----------    ----------
                                                                                  ----------    ----------

</TABLE>

       Related party debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                                     1998          1997
                                                                                  ----------    ----------
       <S>                                                                        <C>           <C>     
       Subordinated notes payable to related parties, due
       February 28, 1999, interest at 10% (see notes F and I)                     $        -    $  671,800
                                                                                  ----------    ----------
                                                                                                   671,800
       Less current portion                                                                -             -
                                                                                  ----------    ----------
                                                                                  $        -    $  671,800
                                                                                  ----------    ----------
                                                                                  ----------    ----------

</TABLE>

NOTE I -- SUBORDINATED NOTES PAYABLE

       In March and April 1995, the Company issued debt securities in a private
       offering pursuant to which it raised $890,000. In exchange for each
       $10,000 invested, the nineteen investors were given a warrant to acquire
       approximately 1,312 shares of common stock at approximately $1.20 per
       share, to be exercised on or before December 31, 1996, for an aggregate
       of 116,768 shares, and a subordinated note for the amount invested. On
       March 1, 1996, the remaining balance of $471,800 was rolled over into new
       notes, with interest payable monthly at ten percent per annum. Interest
       of $47,180 and $39,316 was paid to the holders of these notes during 1997
       and 1996, respectively.

NOTE J -- TAXES ON INCOME

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

<TABLE>
<CAPTION>

                                  1998            1997           1996
                               ---------      -----------     -----------
<S>                            <C>            <C>             <C>
   CURRENT
     Federal                   $ 183,276        $ (20,342)     $ (569,268)
     State                             -                -         (24,635)
                               ---------      -----------     -----------
                               $ 183,276        $ (20,342)     $ (593,903)
                               ---------      -----------     -----------


   DEFERRED
     Federal                           -          (79,650)        215,390
     State                             -          (13,555)         36,658
                               ---------      -----------     -----------
                                       -          (93,205)        252,048
                               ---------      -----------     -----------
   Total                       $ 183,276        $(113,547)     $ (341,855)
                               ---------      -----------     -----------
                               ---------      -----------     -----------

</TABLE>

                                       F-15

<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE J -- TAXES ON INCOME (CONTINUED)

       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>
                                              1998         1997           1996
                                       -----------    ---------    -----------
<S>                                    <C>            <C>          <C>         
Provision (benefit) for income
  taxes at statutory rate              $   281,484    $(180,000)   $(1,598,400)
Change in valuation reserve             (1,016,400)     102,134      1,076,366
Use of operating loss carry forwards       907,700         --             --   
Stock options                                2,700        6,900          8,142
Other                                       32,200       13,342        172,037
Change in prior year estimate              (24,408)     (55,923)          --
                                       -----------    ---------    -----------
                                       $   183,276    $(113,547)   $  (341,855)
                                       -----------    ---------    -----------
                                       -----------    ---------    -----------

</TABLE>

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

<TABLE>
<CAPTION>
                                                              1998                1997       
                                                           -----------        -----------
                <S>                                        <C>                <C>  
                Alternative minimum tax credit             $   202,000        $        - 
                Deferred gain on sale                       (1,000,900)                - 
                Accrued salary expense                         211,900             81,900
                Allowance for doubtful accounts                377,200            227,000
                Other reserves                                 243,100                 - 
                NOL carryforward                                    -             907,700
                Other                                          128,800            (38,100)
                                                           -----------        -----------
                                                               162,100          1,178,500
                Valuation reserve                             (162,100)        (1,178,500)
                                                           -----------        -----------
                                                            $       -         $         - 
                                                           -----------        -----------
                                                           -----------        -----------

</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 K -- COMMITMENTS AND CONTINGENCIES

       The Company is obligated under certain operating leases for its
       facilities. The leases expire at various dates through 2001, with
       appropriate rentals as set forth below. Some leases also provide for
       payments of taxes and certain common area costs and expenses.

                                       F-16
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996


       NOTE K -- COMMITMENTS AND CONTINGENCIES (CONTINUED)

       The following is a summary at December 31, 1998, of the future minimum
       rents due under noncancelable operating leases:

<TABLE>
<CAPTION>
       Year ending December 31,
<S>                                           <C>
                1999                          $   581,578
                2000                              462,997
                2001                              134,756
                                              -----------
                Total                         $ 1,179,331
                                              -----------
                                              -----------

</TABLE>

       Total rent expense under operating leases for the years ended December
       31, 1998, 1997, and 1996, was approximately $839,514, $723,900 and
       $892,700, respectively.

       Although the Company is involved in litigation in the normal course of
       its business, management believes that no pending litigation in which the
       Company is named as a defendant is likely to have a materially adverse
       effect on the Company's financial position or results of operations.

NOTE L -- STOCKHOLDERS' EQUITY

       On February 9, 1996, the Company filed a registration statement on Form
       SB-2 to register 402,537 shares of common stock for resale by certain
       shareholders (Selling Shareholders), which shares have been "restricted
       securities" as defined in Rule 144 under the Securities Act of 1933. None
       of the proceeds from the sale of the common stock by the Selling
       Shareholders were received by the Company.

       In January 1997, the Company completed a private offering of 729,248
       shares of its common stock. The net proceeds to the Company from this
       offering were approximately $2,035,000. In connection with this offering,
       the Company issued a warrant to the representatives of the underwriters
       in this offering to purchase up to 10% of the number of shares sold in
       the offering of the Company's common stock. The purchase price of such
       warrant was $100 and the exercise price under such warrants is $3.60 per
       share.

       The warrants may be exercised in whole or in part at any time or from
       time to time until the expiration date of December 31, 2001. The Company
       also issued warrants to purchase 100,000 shares of common stock at $4.25
       per share to a management services firm as consideration for its
       assistance on the private offering. The warrants may be exercised from
       July 1, 1998 through December 31, 1999. These warrants are considered
       stock issuance costs, with a value of approximately $235,000 based on the
       fair value at the grant date as required by Financial Accounting
       Standards 123.

                                       F-17
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE L -- STOCKHOLDERS' EQUITY (CONTINUED)

       In July 1998, the Company completed a private placement of 2,000 shares
       of 4% convertible preferred stock. The net proceeds were approximately
       $1,879,000. The preferred stock is 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
       is 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.

       The holders of 4% convertible preferred stock are entitled to receive
       dividends when declared by the Board of Directors, payable in cash or
       common stock of $40 per share. Such dividends are payable in quarterly
       installments on March 31, June 30, September 30 and December 31 of each
       year commencing September 30, 1998.

       In the event of a voluntary or involuntary dissolution, liquidation or
       winding up of the Company, the holders of 4% convertible preferred stock
       are entitled to receive out of the assets of the Company available for
       distribution, before payment shall be made to holders of common stock, an
       amount per share equal to $1,000 of such shares and all dividends which
       have accrued and are unpaid.

       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 may be exercised during the period commencing July 24, 1999 and
       ending on December 31, 2001.

       In January 1999, the Company bought back all the remaining shares of
       preferred stock for approximately $1,900,000. The warrants issued in
       connection with the preferred stock remain outstanding.

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

       The Company maintains a Profit Sharing and 401(k) Plan, which has been in
       effect since January 1, 1990. All classes of employees meeting the
       participation requirements are eligible to participate in the Plan.
       Company contributions to the Plan are discretionary.

       The Company does, however, make a matching contribution in the amount of
       25% of the first 6% of all elective deferrals. The Company contributed
       $82,103, $65,206, and $83,738 for the years ended December 31, 1998,
       1997, and 1996, respectively.

                                       F-18
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE N -- 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 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:

<TABLE>
<CAPTION>
                                              1998          1997             1996
                                          -----------   -----------    -------------
       <S>                                <C>           <C>            <C>           
       Net income (loss)
       As reported                        $   538,478   $  (347,291)   $  (3,756,450)
       Pro forma                              454,233      (495,586)       3,854,017

       Earnings (loss) per common share
       As reported                        $      0.09   $     (0.06)   $       (0.74)
       Pro forma                                 0.08         (0.09)           (0.76)

</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 1998, 1997 and 1996: no
       expected dividends; expected volatility of 74.77%; risk-free interest
       rate of 6.07%; and expected lives of five years.

                                       F-19
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE N -- STOCK OPTIONS (CONTINUED)

       A summary of the status of the Plan follows:

<TABLE>
<CAPTION>
                                                             Average price
                                                 Shares        per share  
                                                --------     -------------
       <S>                                      <C>          <C>     
       Outstanding at January 1, 1996            176,000       $   3.50
       Granted                                   150,000       $   6.89
       Exercised                                    --             --
       Canceled                                 (112,000)      $   4.83
                                                --------       --------

       Outstanding at December 31, 1996          214,000       $   5.60
                                                --------       --------

       Total exercisable at December 31, 1996     41,600       $   3.92
                                                --------       --------
                                                --------       --------
       Outstanding at January 1, 1997            214,000       $   5.60
       Granted                                    96,900       $   7.00
       Exercised                                  (9,700)      $   3.50
       Canceled                                  (70,400)      $   9.04
                                                --------       --------
                                                             
       Outstanding at December 31, 1997          230,800       $   5.10
                                                --------       --------
                                                             
       Total exercisable at December 31, 1997     80,375       $   4.27
                                                --------       --------
                                                --------       --------
       Outstanding at January 1, 1998            230,800       $   5.10
       Granted                                      --         $   --
       Exercised                                  (4,000)      $   3.50
       Canceled                                 (114,700)      $   4.45
                                                --------       --------
                                                             
       Outstanding at December 31, 1998          112,100       $   5.08
                                                --------       --------
                                                             
       Total exercisable at December 31, 1998     51,950       $   4.75
                                                --------       --------
                                                --------       --------

</TABLE>

<TABLE>
<CAPTION>
                                                                               Weighted average
                                      Range         Options       Proceeds      exercise price
                                  ------------   ------------   ------------   ----------------
       <S>                        <C>            <C>            <C>            <C>
       Exercisable at                                                                              
         December 31, 1998        $3.50 - 7.00        51,950      $ 246,950         $ 4.75

</TABLE>

                                       F-20
<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE N -- STOCK OPTIONS (CONTINUED)

       The following information applies to options outstanding at December 31,
       1998:

<TABLE>
<CAPTION>
                                                                                 Weighted average
            Range of               Options           Weighted average                remaining
       exercisable prices        outstanding          exercise price             contractual life
       ------------------        -----------         ----------------            -----------------
       <S>                       <C>                 <C>                         <C>
         $3.50 - 7.00              112,100                 $5.08                     6 years

</TABLE>

       In May 1995, options for 181,000 shares of common stock were granted
       under the Plan of which options for 90,500 shares will vest only upon the
       occurrence of certain circumstances. On December 31, 1995, 13,500 of such
       remaining options were granted as events upon which these options were
       contingent occurred. The Company recorded compensation expense of $6,676,
       $12,423, and $20,355 in 1998, 1997, and 1996, respectively, relating to
       these options. Compensation expense of $3,172 will be recorded in future
       periods as these options vest over a five-year period commencing December
       31, 1996.

NOTE O -- 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, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>

                        1998                              Carrying amount         Estimated fair value
             ---------------------------                  ---------------         --------------------
             <S>                                          <C>                     <C>           
             Cash                                           $       25,192           $       25,192
             Due from related party                                124,036                  124,036
             Other receivables                                   3,371,828                3,371,828
             Note payable - line of credit                       1,039,925                1,039,925
             Long-term debt                                        750,000                  750,000
             Capitalized lease obligations                         567,582                  567,582

</TABLE>

<TABLE>
<CAPTION>
                        1997                              Carrying amount         Estimated fair value
             ---------------------------                  ---------------         --------------------
             <S>                                          <C>                     <C>           
             Cash                                            $     343,878            $     343,878
             Due from related party                                100,010                  100,010
             Other receivables                                     154,838                  154,838
             Note payable - line of credit                       6,198,631                6,198,631
             Long-term debt                                      1,397,194                1,397,194
             Capitalized lease obligations                         877,227                  877,227
             Notes payable to related parties                      671,800                  671,800

</TABLE>

                                       F-21


<PAGE>

                        CET Environmental Services, Inc.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                        December 31, 1998, 1997 and 1996

NOTE P -- FOURTH QUARTER ADJUSTMENTS

       During the fourth quarter of the year ended December 31, 1998, the
       Company made the following adjustments:

<TABLE>
              <S>                                                                       <C>
              Wrote off specific accounts receivable that were determined to be
              uncollectible.                                                            $ 2,400,000

              Increase in allowance for bad debts.                                          740,000

              Increase contract cost for an expected settlement with a
              subcontractor.                                                                400,000

              Wrote off costs of a project in Brazil that was determined not to
              be feasible.                                                                  175,000

</TABLE>



                                       F-22