<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-KSB
 
    [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
 
           For the Fiscal Year ended: December 31, 1996
 
                                 OR
 
    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
    For the transition period from _______ to _______
  
                           Commission File No. 1-13852

                        CET ENVIRONMENTAL SERVICES, INC.
 
    (Exact Name of Small Business Issuer as Specified in its Charter)
 
       California                                           33-0285964
----------------------------                          ---------------------
(State Or Other Jurisdiction                             (I.R.S. Employer
   Of Incorporation Or                                Identification Number)
     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 24, 1997, 5,798,585 Shares of the Registrant's Common Stock were 
outstanding. The aggregate market value of voting stock held by nonaffiliates 
of the Registrant was approximately $13,100,000.
 
Check if there is no disclosure of delinquent filers in response to Item 405 
of Regulation S-B 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-KSB or any amendment to this Form 10-KSB. /  /
 
State Issuer's revenues for its most recent fiscal year: $54,918,520
 
Documents incorporated by reference: Proxy Statement for Annual Meeting of
Shareholders.

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                                   PART I
 
ITEM 1. DESCRIPTION OF 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 and South 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 five 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 large backlog of government work 
through the award of several multi-year contracts with the Department of 
Defense, Department of Energy and the Environmental Protection Agency. 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 500 sites.
 

    The Company's strategy has been to distinguish itself in the market by 
providing full service environmental contracting, municipal and 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 broad 
range 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 
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; Portland, Oregon; Edmonds, Washington; 
Denver, Colorado; Phoenix, Arizona; Pasadena, Texas; New Orleans, Louisiana; 
Jackson, Mississippi; Mobile, Alabama; and Atlanta, Georgia.
 
    In July, 1995, the Company completed an initial public offering of 
1,200,000 shares of its Common Stock, and in August 1995, sold an additional 
180,000 shares pursuant to an overallotment option. The net proceeds to the 
Company from the public offering were approximately $5,800,000. Concurrent 
with IPO, the Company became listed on the American Stock Exchange under the 
call letters "ENV."

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    On November 10, 1995, the Company acquired all of the outstanding stock 
of En-Tech, Inc., a Colorado corporation ("En-Tech"), doing business as 
Environmental Technologies, Inc., in exchange for 35,769 shares of the 
Company's Common Stock. En-Tech is engaged in the design, construction, and 
operation of industrial wastewater and water treatment facilities, and 
provides services in both the public and private sectors. En-Tech was merged 
into the Company effective March 15, 1996.
 
    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 729,248 shares with net proceeds to the Company totalling 
$2,053,562. The Company has committed to use its best efforts to register 
these shares for resale prior to December 31, 1997. 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.
 
THE ENVIRONMENTAL REMEDIATION INDUSTRY
 
    Environmental Business International, Inc. ("EBI") estimated that the 
total United States environmental services industry would generate revenues 
during 1996 in excess of $90 billionand that the remediation industry would 
account for approximately $8.5 billion of such estimated revenue Driven 
largely by legislation passed during the late 1970s and early 1980s in 
response to widespread public concern regarding clean air and water, the 
environmental remediation services business has grown rapidly during the past 
decade. The Company is involved primarily in the remediation segment of the 
environmental services industry that 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 business as a result of 
active military base and other facilities closure.
 
    Since 1994, relaxing cleanup regulations and pressure to create uses for 
contaminated and idle properties has driven the rapid growth of industrial 
redevelopment or "Brownfield" site remediation programs. The term 
"Brownfield" comes from an EOA 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.

                                      3


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    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 on-site treatment procedures for contaminated materials or 
the excavation and containment or off-site transportation of toxic materials. 
The Company provides an extensive full-service offering in all phases of 
contaminated site remediation.
 
    Innovative on-site remediation technologies are in high demand to provide 
an alternative to off-site disposal of hazardous waste. On-site 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 utilize 
these remediation techniques more efficiently than its competitors.
 
    Responding to emergency spills or leaks of contaminants by petroleum 
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.
 
ORGANIZATION OF THE COMPANY
 
    The Company is organized by function, with most remediation projects 
requiring a multi-disciplinary approach that involves more than one 
department. The Company utilizes the following resources to provide turnkey 
environmental remediation services to its customers:

    o    Registered engineers, geologists and earth scientists for      
         performing investigations and remediation feasibility studies. 

    o    In-house laboratory facilities for evaluating water treatment   
         techniques, numerous remedial technologies, monitoring ongoing  
         projects, and accelerating remediation.                         

    o    Engineers, earth scientists and construction managers to design  
         remediation and water/wastewater treatment systems from the      
         conceptual stage through final design.                           

    o    A team of certified water treatment system operators to provide   
         design, construction, consultation and operation for municipal,   
         industrial, and mining wastewater treatment.                      

    o    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.                                                 

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    o    Manpower and 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 services for environmental remediation 
of hazardous and toxic waste on a planned and emergency basis. 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.
 
        Customers contractually engage the Company to accomplish some or all of
the following tasks:


    o   Phase I Site Assessments
    o   Site Characterizations
    o   Remedial Investigations/Feasibility Studies
    o   Interim Remedial Management Programs
    o   Health Risk Assessments
    o   Remedial Action Plans
    o   Remedial Design and Construction
    o   Underground Storage Tank Management and Removal
    o   Regulatory Agency Coordination and Maintenance
    o   Remediation System Operation and Maintenance
    o   Facility Decontamination, Demolition and Site Restoration
    o   Emergency Response Cleanup Services
 
    REMEDIATION SERVICES.  The Company believes it has a solid reputation for
responsiveness and technical excellence in providing turnkey remediation
services such as design, construction, operation and maintenance for a variety
of innovative technologies, including:

    o   Bioremediation/Bioventing
    o   Vapor Extraction
    o   Gas/Air Sparging 
    o   Thermal Desorption (the Company owns and operates a
        TD system that is permitted in several states 
    o   Chemical Fixation
    o   Soil Washing


                                      5
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    o   Groundwater Remediation Systems
 
        - Ex Situ
 
                o   Free Product Extraction 
                o   Activated Carbon Adsorption
                o   Air Stripping
                o   Advanced Oxidation Technologies (Ultraviolet and Ozone)
 
        - In Situ 
     
                o   Gas/Air Sparging
                o   Bioremediation 
                o   Physical/Chemical Treatment
 
    The Company does not promote a single technology, but recommends the
remediation methods that provide the most cost-effective and timely mitigation.
 
    FACILITY CONSTRUCTION, MAINTENANCE AND CLOSURE SERVICES. In addition to
remediation of soil and groundwater, the Company provides services related to
facilities that have contaminated surrounding areas or have the potential to do
so. The Company has completed a variety of projects related to construction,
maintenance and closure/site restoration of facilities including:


    o   Mechanical Maintenance and Construction 
    o   Facility Decontamination and Demolition 
    o   Waste Area Closures 
    o   Drum Removals 
    o   Lab Packing and Waste Services 
    o   Excavation, Transport and Disposal of Waste
 
    WATER AND WASTEWATER TREATMENT.  The Company has gained a vast and
comprehensive body of experience in performing a variety of traditional and
innovative water and wastewater treatment services. These services range from
laboratory treatability studies to construction management and from conceptual
design to operation and maintenance.
 
    The following treatment technologies are currently being used successfully
by Company personnel in the performance of municipal and industrial wastewater
treatment projects:


    -   Filtration                            -   Ultraviolet Treatment 
    -   Chemical Precipitation                -   Dissolved Air 
    -   Reverse Osmosis                       -   Recirculated Air
    -   Ion Exchange                          -   Activated Sludge

                                      6
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    The Company provides water and wastewater treatment services to both 
public and private sector clients in the industrial, mining, municipal, and 
manufacturing markets. The key water/wastewater services provided are:
 
    FACILITY DESIGN AND CONSTRUCTION.  The Company's process and mechanical 
engineers have decades of experience in the planning, design, and 
construction of water and wastewater treatment facilities. Facilities are 
designed to minimize operating costs through the use of such techniques as 
energy efficient low-pressure air systems, ergonomic treatment building 
design, and rotating equipment optimized for energy consumption. The Company 
employs state of the art construction management techniques to efficiently 
construct water and wastewater treatment plants with its own work forces.
 
    FACILITY OPERATION AND MAINTENANCE SERVICES.  The Company provides cost 
effective operation and maintenance services that are customized to meet the 
needs of specific clients. All operations contracts include the development 
of site-specific preventive maintenance programs and standard operating 
procedures. All operators have routine equipment, maintenance skills, and are 
supported by a staff of mechanics who perform major maintenance of equipment, 
including rebuilds.
 
    LAB CAPABILITIES.  The Company has an in-house laboratory designed and 
certified to meet the needs of our water and wastewater treatment clientele. 
In addition to a complete battery of wet chemical and bacteriological 
testing, the lab is equipped to conduct treatability studies for water and 
wastewater treatment processes and pilot scale treatment plant investigations.
 
    PROJECT FINANCING AND CONCESSION AGREEMENTS.  The Company offers clients 
a comprehensive concession service that includes the highest quality facility 
design, construction, financing, and operational services. With today's 
increasingly stringent regulatory environment, and the need for more 
sophisticated treatment processes, the concession approach allows clients to 
place their water and wastewater treatment responsibilites in the hands of 
the Company's qualified team of professionals.
 
    OPERATION AND MAINTENANCE SERVICES.  Although a treatment process may be 
properly designed and constructed, successful remediation or water/wastewater 
treatment depend upon system operation and maintenance by trained, 
experienced staff. The Company provides not only the equipment, but services 
it on a long-term basis to see the remediation program through to completion. 
Most of the Company's remediation systems are installed with remote 
monitoring equipment so that the system can be efficiently monitored from a 
central location with operating information obtained and stored for later 
reference. The systems are serviced by in-house technicians and engineers. To 
control costs, visits to the site are made to perform preventive maintenance 
and to take quality assurance samples.
 
    Integral to successful system operation and maintenance of treatment 
systems, and ultimately the success of remediation, is system optimization 
which provides an engineering analysis of the system's performance. The 
Company provides periodic evaluations of system operating parameters to 
ensure the original design is performing to specification. If the monitoring 
results do not indicate that the desired result is occurring, the system is 
further analyzed to determine the problem and decide how to maximize 
performance.

                                      7
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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:

     PETROLEUM INDUSTRY
       Texaco                      Exxon
       Unocal                      LASMO Oil and Gas, Inc.
       Tesoro                      Enron Oil Trading and Transportation
       Ultramar
 
    FINANCIAL
       First Interstate Bank       Bank of America
       Seafirst Bank               Bank One
       Wells Fargo Bank            Principal Financial Group

    CHEMICAL, MANUFACTURING, DISTRIBUTING
       Monsanto Chemical           Fleming
       Georgia Pacific             Pacific Gas & Electric
       Hewlett-Packard             Certified Grocers of California, Ltd.
 
    GOVERNMENT (FEDERAL AND STATE)
       U.S. EPA                    Oregon Department of Environmental Quality
       U.S. Corps of Engineers     Colorado Department of Health
       U.S. Navy                   Missouri Department of Natural Resources
       U.S. Dept. of Energy        Arizona Department of Environmental Quality
 
    The Company is the prime contractor for a six-year, $75 million Fixed 
Rate, Indefinite Quantity, Cost Plus Fixed Fee, Cost Plus Award Fee contract 
for the EPA to provide emergency response cleanup services ("ERCS") in EPA 
Regions IX and X, which include California, Hawaii, Nevada, Arizona, 
Washington, Oregon, Idaho, Alaska, Guam, American Samoa, Saipan and the Trust 
Territory of the Pacific Islands. Under the contract, which began March 1, 
1991, the Company has received over 120 delivery orders to provide ERCS for 
oil, petroleum and hazardous substance releases in accordance with the 
provisions of the federal Clean Water Act ("CWA"), RCRA and Superfund 
legislation.
 
    On December 20, 1996, the Company was notified by EPA of its selection as 
the successful bidder for the Emergency and Rapid Response Services (ERRS) 
West contract. This contract calls for the provision of similar services as 
the ERCS contract and covers EPA Regions VI, VIII and IX. It runs for five 
years and was originally estimated at $250 million. Subsequent to award, the 
Company was notified by EPA that the estimated contract amount has been 
increased to $292 million. The Company is currently awaiting notification on 
results from its bid for ERRS contracts in EPA Regions IV and X. The Company 
also provides similar emergency response services to other governmental and 
commercial clients under various contracts on an as-needed basis.
 
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    The ERRS West Contract, like most of the Company's other government 
contracts, is not a binding agreement requiring the performance of work by 
the Company and payment by the government. This occurs only when the 
government issues work orders under the contract. Management believes, based 
on its prior experience with government contracts, that the Company will 
receive work 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 is a prime contractor on a three year, $25 million Pre-placed 
Remedial Action Contract (PRAC) with the Corps of Engineers, Omaha District. 
Under this contract, the Company is providing remedial actions at hazardous 
waste sites within the District's Midwest region. Delivery orders are in the 
planning stages.

    The Company is a Prime Contractor for 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.
 
    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. In 1996, the Company 
opened an office in Brazil to pursue the growing water and wastewater market.
 
    The Company has Master Service Agreements with LASMO Oil and Gas, Inc.,
Texaco, Unocal, Tesoro, Monsanto, Bank of America and Seafirst Bank as well as
emergency response contracts with the State of Arizona, State of Missouri, Ryder
Trucks, Yellow Freight Lines, Burlington Northern Railroad, Exxon, U.S. Coast
Guard, United Parcel Service, Norfolk and Southern Railroad, Simplot and Cenex.
Master Service Agreements and the emergency response contracts 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:

    o   On-site 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 on-site       
        technologies.                                                     

    o   Privatization of drinking water and sewage treatment systems in the   
        U.S. and internationally will provide a large and expanding           
        opportunity throughout the decade and well into the next century.     

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

    o   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.                                                           
 
    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 expansion into new geographical territories including Latin 
America. Management has identified several areas of interest for expansion 
including additional work in the areas of emergency response service to the 
U.S. Government, mining facility decommissioning and reclamation, and 
privatization of water treatment facilities throughout North and South 
America.

    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 
balance between EPA and non-EPA work. (See "MANAGEMENT'S DISCUSSION AND 
ANALYSIS.")

    EMPHASIS ON RECURRING REVENUE. The Company seeks to expand its base of 
recurring revenue sources in order 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 largest 
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.

    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 environmental remediation 
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 alternatives, by efficient and 
understandable documentation on accounting systems, and by efficient and 
effective job site performance.

    PROFESSIONAL MARKETING AND MANAGEMENT. The Company is committed to 
maintaining a professional marketing 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. It is critical that 
contractors understand the intricacies of the detailed and time-consuming 
process associated with bidding and managing projects for the federal 
government. The Company utilizes non-proprietary specialized software for job 
cost accounting and governmental contracts to assist with both bidding and 
managing projects.

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    STABLE WORK FORCE. The Company strives to maintain a stable work force of 
skilled professionals (engineers, etc.), professional managers (executive and 
supervisory levels), dedicated administrative personnel (accounting, contract 
administration, etc.), as well as trained and experienced laborers 
(transportation, construction and remediation). The Company seeks to attract 
and retain such employees by providing fair compensation, cash bonus 
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 stable and experienced work force has 
contributed, and will continue to contribute, to the Company's excellent 
safety record, which reduces insurance costs and should make doing business 
with the Company more inviting for current and prospective customers.

    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 20 
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 by a Government 
Marketing Specialist with assistance from the Marketing Services Group. The 
Company pursues federal contracts which range from $5 to $70 million 
annually, as a prime contractor, especially if they are designated for SBEs. 
On larger opportunities, unless the Company is uniquely qualified such as 
with EPA work, the Company establishes teaming agreements with large 
engineering/construction firms that provide specific contract percentages if 
awarded.

    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 Manager or 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.

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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 quality environmental remediation 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 far 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 which will be posed by its competition in the future.

GOVERNMENT REGULATION

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

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

ENVIRONMENTAL LAWS

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

                                      12
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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 which must meet minimum federal requirements. In areas of 
environmental law where federal regulation is silent, the states may adopt 
their own environmental laws. As an example, some states monitor the transfer 
of real estate with potential environmental contamination by requiring the 
preparation of environmental assessments and disclosures of the findings of 
such assessments or the issuance of pre-transfer disclosure statements. Some 
states have also provided an environmental audit privilege whereby land 
owners undertaking such audits and disclosing the findings to the state will 
not be penalized for violations if they clean up the property.

    Local governments such as counties and municipalities may also enact and 
enforce environmental laws that address local concerns which 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 
also leads to business for the Company. For example, the EPA has promulgated 
regulations that require the registration and upgrading of USTs that contain 
liquid petroleum or hazardous substances, and the reporting of leaks and 
cleanup of contamination from those USTs. The UST regulations have in turn 
been adopted by the states in forms no less strict than the federal 
regulations. To encourage compliance with UST regulations, some states have 
passed laws that provide for the creation of a fund to cover the costs of 
cleanup but condition access to the fund or the amount of the costs for which 
an owner can obtain fund reimbursement on the proper registration of the USTs 
or compliance with other regulatory requirements.

    The federal laws and regulations described below constitute the major 
actions that have caused industry growth in the consulting, engineering and 
remediation and analytical laboratory 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. CERCLA in most instances 
imposes strict joint and several liability on certain hazardous substance 
generators, transporters and disposal facility owners and operators for the 
costs of removal or remedial action, other necessary response costs, damages 
for injury, destruction or loss of natural resources, and the costs of any 
health effects study. 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, 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

                                      13
<PAGE>


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.

    Regulations have been issued pursuant to RCRA in the following areas, 
among others: permitting assistance, remediation of environmental 
contamination associated with USTs, municipal solid waste disposal and land 
disposal of hazardous waste. HSWA has increased the number of hazardous waste 
generators subject to RCRA. HSWA also imposes land disposal restrictions on 
certain listed hazardous wastes which do not meet specified treatment 
standards, prescribes more stringent standards for hazardous waste disposal 
sites, sets standards for USTs, and provides for corrective action at or near 
sites of waste management units.

    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.

    Another significant segment of the environmental industry results from 
EPA requirements for upgrading or eliminating storage tanks. RCRA mandates 
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. 
According to the Environmental Business Report published by BTI Consulting 
Group, Inc., approximately 2,200,000 USTs containing petroleum products or 
hazardous chemicals are located in the United States. Over 1.6 million of 
these tanks are subject to federal regulations, and approximately 91 percent 
of those contain petroleum products. In order to comply with the December 
1998 deadline, approximately 250,000 tanks must be removed each year through 
1998. However, the greatest number of USTs replaced to date in a calendar 
year was approximately 80,000 during 1989. Thus, the Company anticipates that 
UST-related business opportunities will increase each year through 1998, and 
that a substantial number of UST owners then in violation of EPA mandates 
will provide business opportunities well into the start of the next decade. 
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.
Key areas for which regulations have been issued or are proposed include
industrial wastewater pretreatment, surface water toxic control, wastewater

                                       14
<PAGE>


sludge, disposal and storm water discharges. The CWA requires, under certain
circumstances, pretreatment of industrial wastewater before discharge into
municipal treatment facilities. These enforcement efforts by the EPA will
prompt facility upgrading and control of industrial discharges. The EPA and
delegated state agencies are placing some of the non-complying communities
under enforcement schedules. In cases of noncompliance, the EPA may assess
administrative penalties and may sue for court-ordered compliance and
penalties. Some public funding is available to assist municipalities in
complying with treatment requirements.

    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 three 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. To 
place the problem within a commercial context, an estimated one in four gas 
stations has a UST that is leaking, and a single leak can result in thousands 
of gallons of benzene-rich gasoline leaking into the watertable.

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

POTENTIAL LIABILITY AND INSURANCE

    The Company maintains quality assurance and quality control 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

                                       15
<PAGE>


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 has had no claim made against it by governmental agencies or 
third parties under environmental laws or regulations. The Company has had 
one claim made by a former customer related to the design of a remediation 
project, which has been settled. It has not established any reserves for 
potential liabilities as management of the Company, based on advice of 
counsel, believes that the Company will be successful in its defense of the 
claims.

    The Company maintains comprehensive general liability insurance and 
worker's compensation insurance that provide $5 million of coverage each. In 
addition, the Company maintains pollution liability and errors and omissions 
insurance that provides $2 million of coverage each. Because there are 
various exclusions and retentions under the insurance policies described 
above, not all liabilities that may be incurred by the Company are likely to 
be covered by insurance. In addition, certain of the policies are "claims 
made" policies which 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 which 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 in the 
past several years, 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 has been 
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 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

                                      16
<PAGE>


required to obtain such bonds in the future, particularly with government 
contracts. 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 the total amount 
of the bonds then outstanding against the Company exceeds the limits imposed 
by bonding companies based on the financial condition of the Company at the 
time. Bonds typically cost between 1 and 3 percent of the cost of a project. 
To date, no payments have been made by any bonding company for bonds issued 
for the Company.

EMPLOYEES

    The Company presently employs approximately 200 persons full time and 50 
part time at its 12 offices, including 4 people who are officers of the 
Company. 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.

    The Company typically hires temporary workers on location to staff 
certain projects. While all of the Company's jobs 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 full-time laborers as 
possible to staff jobs, the location and other factors affecting jobs 
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. DESCRIPTION OF PROPERTY.

    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 July, 1998. The 
Company's corporate and administrative functions are conducted from these 
facilities.

    The Company's remediation services are conducted from the following
spaces:
 
                                                                 CURRENT
                             SQ. FT       LEASE EXPIRATION     MONTHLY RENT
                            ---------  ----------------------  -------------
14761 Bentley Circle
Tustin, California......     18,490     April 14, 1997*           $6,700

                                     17
<PAGE>


120 West Dayton Street,
Suite A-7
Edmonds, Washington......................  6,910  December 31, 1997*    $7,198
 
150 West Dayton Street
Edmonds, Washington......................  5,000   February 28, 1998*   $2,522
 
3033 Richmond Parkway, Suite 300
Richmond, California.....................  7,664   April 30, 2001       $6,438
 
6900 E. 47th Avenue Drive, Suite 200
Denver, Colorado......................... 11,051   July 31, 1998        $2,993
 
525 South Madison 
Tempe, Arizona...........................  5,014   February 28, 1998    $3,150
 
7670 S. Vaughn Court, Ste. 130
Englewood, Colorado......................  4,600   July 31, 1998        $4,622
 
5275, 5251, & 5315 NW St. Helens Road
Portland, Oregon.........................  3,000   January 6, 1999      $3,500
 
150 Noel Street
Mobile, Alabama.......................... 20,000   April 30, 1997*      $2,950
 
13120 Carrere Court
New Orleans, Louisiana................... 13,520   April 14, 1998*      $3,500
 
3222 Pasadena Freeway
Pasadena, Texas..........................  2,755   May 31, 2001         $4,375
 
275-A Industrial Drive 
Jackson, Mississippi...................... 11,325   October 31, 1998*    $3,080
 
1401 Business Center Drive 
Conyers, Georgia 30207..................  5,000   June 30, 1997        $1,540
 
------------------------
 
*   Contains an option to renew or extend the lease.
 
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.

                                      18
<PAGE>


    On February 12, 1997, LMU & Company ("LMU") filed suit against the 
Company alleging that LMU was entitled to cash compensation of up to $25,000 
and warrants to purchase 100,000 shares of Common Stock of the Company at an 
exercise price based on the market price on or about November 1, 1996, for 
services rendered in conjunction with the development of the Private 
Placement equity offering which completed in January, 1997. The Company is 
currently in settlement discussions with the plaintiff.
 
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 fourth quarter of the period covered by this report.



                                     19
<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:
 
    QUARTER ENDED                  HIGH          LOW
    -------------------------    ---------    ---------
    September 30, 1995.......    $    7.25    $    4.75
    December 31, 1995........    $    9.50    $  7.0625
    March 31, 1996...........    $  11.625    $    9.00
    June 30, 1996............    $  13.375    $    9.50
    September 30, 1996.......    $   9.875    $   5.375
    December 31, 1996........    $    7.50    $  3.8125
 
    (b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The number of record 
holders of the Company's common stock at March 21, 1997, was 124. This does 
not include those 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 be, likely to be unable to meet its liabilities as they mature.
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
 
    The following discussion is intended to provide an analysis of the Company's
financial condition and results of operations and should be read in conjunction
with the Company's financial statements and notes thereto contained elsewhere
herein.
 
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 has 
provided these services from its Southern California and Seattle area offices 
since the Company was acquired by current management on November 29, 1991. 
Offices in metro San Francisco and Portland were established in 1993; offices 
in Phoenix, Denver and St. Louis were opened in 1994; offices in Houston, New 
Orleans, Jackson, Mobile, Atlanta and Georgetown, Colorado were opened in 
1995; and offices in Birmingham, Kansas City, Tucson and Campinas, Brazil 
were opened in 1996. In late 1996, the corporate offices of the Company were 
moved to Englewood, Colorado from Tustin, California.

                                     20
<PAGE>


STATISTICAL ANALYSIS OF 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>
                                                     RELATIONSHIP PERCENTAGE
                                                        TO PROJECT REVENUE               PERIOD TO 
                                                   -------------------------------     PERIOD CHANGE
                                                       YEAR ENDED DECEMBER 31,     --------------------
                                                   -------------------------------  1996 VS.   1995 VS.
                                                     1996       1995       1994       1995       1994   
                                                   ---------  ---------  ---------  ---------  ---------
<S>                                                <C>        <C>        <C>        <C>        <C>      
Project Revenue....................................  100.0%     100.0%     100.0%      14.7%     103.7%
Project Costs: 
  Direct ..........................................   79.5       71.7       75.1       27.1       95.6 
  Indirect.........................................   14.9       14.7       10.1       16.1      187.2 
                                                   ---------  ---------  ---------  ---------  ---------
                                                                                                        
Gross Profit (Loss)................................    5.6       13.6       14.8      (52.5)      87.5  
Other Operating Expenses (Income): 
  Selling .........................................    5.6        3.6        4.6       77.5       57.9            
  General and Administrative.......................    5.8        4.3        4.2       53.0      122.6            
  Amortization of excess of acquired                                                           
     net assets in excess of cost..................    0.0       (0.7)      (1.6)    (100.0)      (8.3)            
                                                   ---------  ---------  ---------  ---------  ---------
Operating Income (Loss)............................   (5.8)       6.3        7.6     (205.4)      66.1             
Other Income (Expense).............................   (1.7)      (0.7)      (0.6)    (185.7)      89.4              
                                                   ---------  ---------  ---------  ---------  ---------
Income (Loss) before taxes on income...............   (7.5)       5.6        7.0     (252.3)      64.0
Taxes on Income....................................   (0.7)       1.4        0.1     (152.0)    3691.2
                                                   ---------  ---------  ---------  ---------  ---------
Net Income (Loss)..................................   (6.8%)      4.3%       6.9%    (284.6%)     25.3% 
                                                   ---------  ---------  ---------  ---------  ---------
Pro forma information (Note 1):                                                                         
  Historical earnings before income taxes..........     --         5.6%       7.0%      --        64.0% 
  Pro forma income taxes...........................     --         2.3        1.7       --       114.2  
  Pro forma net income.............................     --         3.8        5.3       --        47.2  
</TABLE>
 
------------------------
 
Note 1   From January 1, 1994 to June 14, 1995, income taxes on net earnings 
         were payable personally by the stockholders pursuant to an election 
         under Subchapter S of the Internal Revenue Code not to have the 
         Company taxed as a corporation. However, the Company was liable for 
         state franchise taxes at a rate of 1.5 percent on its net income. 
         Pro forma financial information is presented to show the effects on 
         1995 and 1994 financial information had the Company not been 
         treated as an S Corporation for income tax purposes. Effective June 
         15, 1995, the Company terminated its Subchapter S election and 
         began to be taxed as a Subchapter C Corporation.                    

                                      21
<PAGE>


    The Company's revenues continued to grow in 1996, but at a much slower 
rate. Total revenues increased 14.7 percent from 1995 to 1996 compared to 
103.7 percent from 1994 to 1995. In the past two years, the Company has 
accomplished its goal of increasing the proportion of non-EPA work (in 1994 
EPA contract work accounted for 67 percent of revenues). With the award of 
the EPA ERRS contract, the proportion of non-EPA work will most likely reduce 
in 1997. However, the Company's goal is to maintain an equal distribution of 
revenues from government contracts and commercial contracts to produce a 
solid continuity of revenues, while optimizing margins.

    The Company has performed services for over 500 commercial customers. The 
following table sets forth the percentages of the Company's revenues 
attributable to the EPA vs. other non-EPA public and private sector customers:
 
                                    YEAR ENDED DECEMBER 31
                      --------------------------------------------------
                          1996                      1995
                      ------------------------   -----------------------
 
Non-EPA.............  $  44,065,990     80.2%   $ 34,959,345     73.0%
EPA.................  $  10,852,530     19.8%   $ 12,912,627     27.0%
                      -------------  ---------  -------------  ---------
Total...............  $  54,918,520    100.0%   $ 47,871,972    100.0%
                      -------------  ---------  -------------  ---------
 
    Direct costs as a percentage of revenues increased significantly from 72.1
percent in 1995 to 79.5 percent in 1996. This increase was due to a variety of
factors:

    o   Increased competition, which results in tighter bidding.

    o   Cost overruns on certain projects.

    o   Additional work performed without obtaining formal change orders.

    o   The write-down in the fourth quarter of $761,811 in revenue related  
        to a specific phase of work performed on a $13 million project       
        involving clean-up of a major chemical fire. Because there were      
        multiple entities involved on the client side, the authorization     
        for this phase of work was not fully documented. Management          
        believes that the work product for this phase is important to the    
        ongoing litigation related to the fire and that there is reasonable  
        likelihood of collecting a substantial portion of this amount. All   
        other amounts related to the project have been collected.            
  
    Indirect expenses increased from $7,039,432 (14.7% of revenues) in 1995 
to $8,175,951 (14.9% of revenues) in 1996. This increase was due primarily to 
the inclusion of a full year's cost in 1996 for offices opened in mid-1995, 
and the opening of additional offices in 1996.

    The combined increase in direct and indirect operating costs caused gross 
profit to decline from 13.6 percent of revenues in 1995 to 5.6 percent in 
1996. Much of this decline is attributable to the efforts undertaken to win 
the new EPA work. Several of the offices opened in 1995 and 1996 were 
specifically related to qualifying for that work. Since the award was delayed 
for one year, significant extra costs were incurred. Nevertheless, in 
response to this decline, the Company has taken the following corrective 
actions: 

                                     22
<PAGE>


    o   Closed unprofitable offices in Birmingham, Georgetown, Kansas City, 
        St. Louis and Tucson.

    o   Restructured employee benefit programs to reduce cost. 

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

    o    Hired a new Chief Financial Officer with significant industry 
         experience and further enhanced financial management staff in 
         conjunction with the move of the corporate office.

    o    Implemented revised processes and controls for contracts 
         administration, revenue recognition, billing and collection, and 
         accounts payable. 

    o    Initiated an analysis of pricing and bidding procedures to ensure 
         new projects are bid with adequate margins.

    These actions are projected to significantly reduce overhead and improve 
project performance, but are not expected to have any material impact on the 
Company's ability to perform current projects or obtain new work.

    Selling expenses increased from 3.6 percent of revenue in 1995 to 5.6 
percent of revenue in 1996. This increase is the result of Management's 
commitment to a formal sales/bid and proposal staff and the increase in 
salaries and benefits primarily resulting from the addition of personnel. The 
dedicated sales staff increased from 9 to 20 persons during 1995, with 1996 
results reflecting a full year of these personnel costs. Approximately 50% of 
the costs in 1996 were related to the development of specific bids and 
proposals, both public and private sector.

    General and administrative expenses increased from 4.3 percent of 
revenues in 1995 to 5.8 percent of revenues in 1996. Contributors to this 
increase included higher insurance costs, additional financial management 
personnel, move of the corporate office and an increase in the allowance for 
doubtful accounts of approximately $400,000.

    Amortization of acquired net assets in excess of cost was $337,437 in 
1995 ($0 in 1996). The acquired net assets in excess of cost was created when 
the estimated fair value of net assets purchased exceeded the purchase price 
by approximately $1,472,000 when the Company was acquired by current 
management on November 29, 1991. The acquired net assets in excess of cost 
were amortized over a four-year period beginning December 1, 1991, and ending 
on November 30, 1995. The four-year period for amortization was selected 
because it matched the term of the contract with the EPA.

    Interest expense (net) increased from $326,331 in 1995 to $627,537 in
1996, due primarily to increased borrowing. The increased borrowings were
necessary because of greater working capital needs due to the Company's
expansion into new geographic areas, the growth in the Company's business,
and a tightened cash flow in the last half of the year.

    Until June 15, 1995, the Company was a Subchapter S Corporation as
defined by the Internal Revenue Service and substantially all taxes were
paid by the shareholders. However, the Company has traditionally made
distributions of cash to its shareholders in approximately the

                                  23
<PAGE>


amount of such shareholders' tax liabilities related to the income of the 
Company. On June 15, 1995, the Company made a revocation of its Subchapter S 
Corporation status and accordingly is now subject to the tax laws and rates 
applicable to a Subchapter C Corporation. Distributions of $927,101 were paid 
to the Company's shareholders prior to the termination of the Company's 
Subchapter "S" tax status. Immediately following these distributions, the 
shareholders loaned $357,865 to the Company, and these loans were repaid from 
the proceeds of the Company's initial public offering in July 1995. At the 
date of the revocation of the "S" status, there were no net operating loss 
carryforwards available to be carried forward to any subsequent period. 
Additionally, at the date of the revocation, any prior earnings of the S 
Corporation not previously distributed will be reclassified from retained 
earnings to paid-in capital accounts. A special grace period of one year will 
exist whereby these undistributed S Corporation earnings could be distributed 
to the S Corporation shareholders in a tax-free manner.

    In 1996, the Company was able to carryback losses equivalent to 1995 
profits for federal tax purposes, resulting in a federal tax benefit of 
$353,878 for 1996. This carryback does not apply for state income taxes, but 
there will be amounts available as loss carryforward for both federal and 
state tax purposes in 1997.

BONDING

    The amount of bonding capacity offered by sureties is a function of the 
financial health of the company requesting the bond. At March 1997, the 
bonding capacity for the Company was $25 million.

LIQUIDITY AND CAPITAL RESOURCES

    Capital resources are used primarily to fund the acquisition of capital 
equipment and increase 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 installment and 
term loans.

    DEBT. In February 1994, as amended in March 1995, the Company entered into 
a credit arrangement with Comerica whereby Comerica provided a credit line to 
the Company. Borrowings are based on 75 percent of certain eligible accounts 
receivable, plus certain adjustments, up to $4,000,000. The credit line was 
collateralized by all assets of the Company and personally guaranteed by the 
shareholders of the Company. Interest accrued at Comerica's base rate plus 
1.5 percent, payable monthly.

    On October 14, 1994, the Company borrowed $380,000 from Comerica, with 
interest payable monthly at Comerica's base rate plus 2.0 percent. The 
monthly payment is $7,917. The loan is collateralized by certain fixed assets 
of the Company. In 1995, the Company borrowed $300,000, in loan amounts of 
$195,000 and $105,000, from Comercia, with interest payable monthly at 
Comerica's base rate plus 2.0 percent. The monthly payments are  $4,062 and 
$2,187, respectively. The loans are collateralized by certain fixed assets of 
the Company. The combined amount of these loans was refinanced in March, 1996 
as described below.
 
    In January 1995, the Company borrowed $550,000 from the Birnie
Children's Trust No. I (the "Birnie Trust") at the interest rate of 2
percent per month, due and payable monthly. The

                                      24
<PAGE>


wife of Steven H. Davis, President of the Company, is a beneficiary of the 
Birnie Trust. The Company has borrowed funds from the Birnie Trust at various 
times in order to meet its working capital requirements. These borrowings 
have allowed the Company to grow at the rate it has in the past. The Company 
believes that the cash from operations and borrowings under the existing or 
future lines of credit will be sufficient to fund future growth. However, the 
Company believes the Birnie Trust could be a source of funds in the future, 
if necessary. The Company repaid $350,000 of this loan with proceeds of the 
Company's initial public offering which closed during July 1995. The 
remaining $200,000 was invested into the subordinated notes described in the 
following paragraph.

    In February 1995, the Board of Directors determined to issue Subordinated 
Notes, coupled with warrants to purchase shares of common stock at an 
exercise price of $1.20 per share which can be exercised on or before 
December 31, 1996. The Subordinated Notes were offered on a selective, 
privately arranged basis, and bear interest at ten percent per annum, payable 
monthly, and are subordinated to senior commercial or institutional lending 
indebtedness. Each $10,000 face value note purchaser received a warrant to 
purchase 1,312 shares of the Company's common stock. The notes are secured by 
a second lien on the Company's accounts receivable and contracts in progress 
and were due and payable on March 1, 1996. The Company received subscriptions 
for $890,000 of these notes. Relatives of officers of the Company accounted 
for $680,000 of such subscriptions. One of the notes in the amount of $80,000 
was paid off during August 1995. During December 1995, all nineteen of the 
investors exercised their warrants to purchase a total of 116,768 shares of 
common stock. Eighteen of the investors exchanged a total of $127,575 of the 
outstanding Subordinated Notes and one investor paid $12,600 in cash to 
exercise his warrants. A total amount of $210,625 of the remaining balance of 
$682,425 of the Subordinated Notes was paid off at maturity and the remaining 
balance of $471,800 was rolled over into new notes due in one year with 
interest payable monthly at 10 percent per annum.
 
    On July 24, 1996, the Company borrowed an additional $200,000 from the
Birnie Trust under a Promissory Note payable in one year at 10% interest. On
March 1, 1997, the notes totaling $671,800 were extended to February 28,
1998.

    During December 1995, the Company financed two purchases of equipment 
through Comerica for $74,774 and $354,297. These loans are payable in 36 
monthly installments of $2,378 and $11,267 including interest at nine percent 
commencing December 30, 1995 and January 30, 1996, respectively. As of 
December 31, 1996, the combined balance due on these loans was $296,675.

    In March, 1996, the Company established a line of credit facility with 
Union Bank of California, N.A. (the "Bank") to replace the Comerica facility. 
This line provides up to $6,000,000 of available credit to the Company based 
upon a percentage (75%) of eligible receivables (as defined in the loan 
agreement). Interest is payable monthly at the Bank's adjusted LIBOR Rate 
plus 2% or the Bank's Reference Rate, at the option of the Company. The line 
of credit facility has an expiration date of May 1, 1997. In addition, the 
Company borrowed $124,940 from the Bank for the purchase of equipment. 
Interest will be payable monthly at the Bank's adjusted LIBOR Rate plus 2.25% 
or at the Bank's Reference Rate plus .25%, at the option of the Company. This 
bank also loaned the Company $600,000 to pay off equipment loans at the 
former bank. Interest will be payable monthly at the Bank's Reference Rate 
plus .25%.

                                      25
<PAGE>


    The Company has been notified by the Bank that the Company is in breach 
of certain loan covenants relating to the three Company loans from the Bank 
under which, as of December 31, 1996, the Company had borrowed an aggregate 
of approximately $4,776,000. The Company is not in default with respect to 
any loan payments due to the Bank. The breached covenants relate to the ratio 
of the Company's liabilities to its tangible net worth, the maintenance of a 
minimum net worth, and the maintenance of profitable operations. The Bank 
notified the company that no further funds would be loaned while the Company 
is in breach of covenants.

    The Company has entered into an agreement with the Bank whereby the Bank 
has agreed to forebear from taking any action against the Company based upon 
the breached covenants as long as the Company does not default on any payment 
due to the Bank or otherwise breaches any of the other terms of the 
forbearance agreement. Under the terms of the forbearance agreement, in 
addition to regular interest payments, the Company has made payments of 
$500,000 on January 10, 1997; $250,000 on February 15, 1997; $169,244 on 
February 26, 1997; and $250,000 on March 15, 1997. An additional $250,000 is 
due on April 15, 1997 with the balance of the loan repaid not later than May 
1, 1997. These payments are personally guaranteed by certain of the officers 
and directors of the Company. The forbearance agreement has also increased 
the interest rate on the line of credit to the Bank's Reference Rate plus 1. 
5%.

    If the Company does not comply with the forbearance agreement, the Bank 
could declare the loans in default and could proceed to foreclose on the 
collateral securing the loans, which consists of all the Company's accounts 
receivable, inventory, equipment, and other assets. Any such actions by the 
Bank would have a material adverse impact upon the Company. Management 
intends to fully comply with the forbearance agreement and believes that they 
will be able to secure enough funds through operations or by obtaining 
additional financing sufficient to pay all amounts due the Bank within the 
required time frame.
 
        On March 25, 1997, the Company accepted a proposal (out of three 
proposals received) from another bank to replace the Union Bank facility with 
a line of credit of $9,000,000 and equipment term loan of $1,000,000. This 
proposal is contingent upon due diligence and approval of the bank's credit 
committee.
 
    On November 8, 1996, the Company borrowed $545,000 from Signal Hill 
Petroleum under a Promissory Note payable in 30 days at 10% interest per 
annum. This note was extended to January 15, 1997, then repaid in the amount 
of $300,000 on January 15, 1997, and $250,129 (including accrued interest) on 
February 27, 1997.

    The Company has also financed vehicles and equipment using long term 
capital leases from various entities. As of December 31, 1996, the combined 
balance due on these leases was $1,204,457.
 
    During 1996, the Company increased its available cash by $1,410,346. Cash 
flow provided by operations was $1,057,486 as the Company experienced a 
significant decrease in accounts receivable. This was compared to cash flow 
used in operations of $4,284,087 in 1995. During 1996, net cash used in 
investing activities was $1,457,777 compared to $2,777,630 in 1995. This was 
due to reduced equipment purchases. Cash flow provided by financing 
activities was $1,810,637 in 1996, compared to $7,106,417 in 1995 which 
included the receipt of $5,763,679 from the Company's initial public offering.

                                      26

<PAGE>

    As of December 31, 1996, the Company had working capital of $3,302,299
compared to working capital of $8,323,783 at December 31, 1995. The change was
primarily due to the decrease in accounts receivable.
 
    Management believes that funds provided from operations, the new lines of
credit and the sale of stock in January 1997 (as described below) 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 1998. Monthly
rentals currently are approximately $51,000 in the aggregate.
 
    Management anticipates that capital expenditures in the foreseeable future
will be at similar levels to 1996, and will be funded from working capital and
equipment leases.
 
    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 729,248 shares with net proceeds to the Company totalling
$2,053,562. The shares issued pursuant to this offering are currently classified
as "restricted securities" as such term is defined in Rule 144 of the Securities
Act of 1933. The Company has committed to use its best efforts to register these
shares for resale prior to December 31, 1997. 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.
 
ITEM 7. FINANCIAL STATEMENTS.
 
    Please see pages F-1 through F-22.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
 
None.

                                      27
<PAGE>

                                    PART III
 
ITEM 9. 10, 11 AND 12. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT; 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 May 15, 1997.

                                       28
<PAGE>
                                    PART IV
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 
    (a) Exhibits.
 
<TABLE>
<CAPTION>
  EXHIBIT                                                                                                    SEQUENTIAL
  NUMBER                      DESCRIPTION                                     LOCATION                        PAGE NO.
-----------  ---------------------------------------------  ---------------------------------------------  ---------------
<C>          <S>                                            <C>                                            <C>
 
  3.1        Amended and RestatedArticles of Incorporation  Incorporated by reference to Exhibit 3.1 to           --
                                                            the Company's Form SB-2 Registration
                                                            Statement No. 33-91602
 
  3.2        Bylaws                                         Incorporated by reference to Exhibit 3.2 to           --
                                                            the Company's Form SB-2 Registration
                                                            Statement No. 33-91602
 
 10.1        Incentive Stock Option Plan                    Incorporated by reference to Exhibit 10.1 to          --
                                                            the Company's Form SB-2 Registration
                                                            Statement No. 33-91602
 
 10.2        Form of Incentive Stock Option Agreement       Incorporated by reference to Exhibit 10.2 to          --
                                                            the Company's Form SB-2 Registration
                                                            Statement No. 33-91602
 
 10.3        Loan Documents Between Comerica Bank and the   Incorporated by reference to Exhibit 10.3 to          --
             Company                                        the Company's Form SB-2 Registration
                                                            Statement No. 33-91602
 
 10.4        Award/Contract No. 68-W1-0012 Between the      Incorporated by reference to Exhibit 10.4 to          --
             Company and the EOA (unredacted)               the Company's Form SB-2. Registration 
                                                            Statement No. 33-91602
 
 23          Consent of Grant Thornton LLP                  Filed herewith electronically                         --
 
 27          Financial Data Schedule                        Filed herewith electronically                         --
</TABLE>
 
    (b) Reports on Form 8-K. During the last quarter of the period covered by
this Report, the Company did not file any Reports of Form 8-K.
 
                                      29
<PAGE>

                         [Grant Thornton Letterhead]








              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
Board of Directors
CET Environmental Services, Inc.
 
We have audited the accompanying balance sheets of CET Environmental 
Services, Inc. as of December 31, 1996 and 1995, and the related statements 
of operations, stockholders' equity and cash flows for each of the years then 
ended. These financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these financial 
statements based on our audits.
 
We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the 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 financial position of CET Environmental 
Services, Inc. as of December 31, 1996 and 1995, and the results of its 
operations and its cash flows for each of the years then ended, in conformity 
with generally accepted accounting principles.



/s/GRANT THORNTON LLP


Denver, Colorado
March 25, 1997

                                       F-1

<PAGE>

                       CET Environmental Services, Inc.
                                BALANCE SHEETS
                                 December 31,

                                    ASSETS

<TABLE>
<CAPTION>
                                                       1996           1995
                                                   ------------   ------------
<S>                                               <C>            <C>
CURRENT ASSETS
  Cash......................................       $  1,887,001   $    476,655
  Accounts receivable, less allowance for 
    doubtful accounts; $538,087 in 1996 and
    $135,404 in 1995........................          7,454,393     13,356,823
  Contracts in process......................          6,656,862      6,213,490
  Income tax receivable.....................          1,282,778         --
  Due from related party....................            158,010         --
  Other receivables.........................            199,016        146,531
  Inventories...............................            171,642        256,140
  Prepaid expenses..........................            613,770        506,240
  Deferred income tax asset.................              --           289,330
                                                   ------------   ------------
     Total current assets....................         18,423,472     21,245,209
                                                   ------------   ------------
EQUIPMENT AND IMPROVEMENTS
  Field equipment and vehicles..............          5,672,638      4,061,144
  Office furniture, equipment and
    leasehold improvements..................          1,591,910      1,204,474
                                                   ------------   ------------
                                                      7,264,548      5,265,618
  Less allwoance for depreciation
    and amortization........................         (2,378,260)    (1,281,716)
                                                   ------------   ------------
    Equipment and improvements--net.........          4,886,288      3,983,902
GOODWILL....................................            352,644        373,061
DEPOSITS....................................            132,913        105,679
                                                   ------------   ------------
                                                   $ 23,795,317   $ 25,707,851
                                                   ------------   ------------
                                                   ------------   ------------
</TABLE>

The accompanying notes are an integral part of these statements.
 
                                       F-2
<PAGE>

                       CET Environmental Services, Inc.
                                BALANCE SHEETS - CONTINUED
                                 December 31,

                     LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                       1996           1995
                                                   ------------   ------------
<S>                                                <C>            <C>
CURRENT LIABILITIES
  Note payable--line of credit..............       $  4,200,650   $  2,424,836
  Loan from shareholder.....................            545,000         --
  Acounts payable...........................          7,758,668      7,857,824
  Accrued expenses..........................          1,156,858      1,730,853
  Income taxes payable......................             --            372,162
  Current obligations under capital leases..            329,934        208,248
  Current portion of long-term debt.........          1,130,063        327,503
                                                   ------------   ------------
    Total current liabilities...............         15,121,173     12,921,426
DEFERRED INCOME TAXES.......................             --             37,282
OBLIGATONS UNDER CAPITAL LEASES.............            874,523        661,697
NOTES PAYABLE TO RELATED PARTIES............            671,800        682,425
LONG-TERM DEBT..............................            153,848        694,953
COMMITMENTS AND CONTINGENT LIABILITIES......             --              --
STOCKHOLDERS' EQUITY
  Common stock (no par value)--authorized 
    20,000,000 shares; issued and 
    outstanding, 5,066,537 shares...........          6,165,977      6,165,977
  Paid-in capital...........................            555,530        535,175
  Retained earnings.........................            252,466      4,008,916
                                                   ------------   ------------
    Total stockholders' equity..............          6,973,973     10,710,068
                                                   ------------   ------------
                                                   $ 23,795,317   $ 25,707,851
                                                   ------------   ------------
                                                   ------------   ------------
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-3
<PAGE>
                        Ch Environmental Services Inc.

                            STATEMENTS OF OPERATIONS

                            Year Ended December 31,
 
<TABLE>
<CAPTION>
                                                                                         1996           1995
                                                                                     -------------  -------------
<S>                                                                                  <C>            <C>
PROJECT REVENUE....................................................................  $  54,918,520  $  47,871,972
PROJECT COSTS
  Direct...........................................................................     43,660,435     34,343,855
  Indirect.........................................................................      8,175,951      7,039,432
                                                                                     -------------  -------------
                                                                                        51,836,386     41,383,287
                                                                                     -------------  -------------
    Gross profit...................................................................      3,082,134      6,488,685
                                                                                     -------------  -------------
OTHER OPERATING EXPENSES (INCOME)
  Selling..........................................................................      3,101,197      1,747,298
  General and administrative.......................................................      3,158,707      2,064,848
  Amortization of excess of acquired net asset in excess of cost...................       --             (337,437)
                                                                                     -------------  -------------
                                                                                         6,259,904      3,474,709
                                                                                     -------------  -------------
    Operating income (loss)........................................................     (3,177,770)     3,013,976
                                                                                     -------------  -------------
OTHER INCOME (EXPENSE)
  Interest expense, net............................................................       (627,537)      (326,331)
  Other income (expense)...........................................................       (292,998)         4,144
                                                                                     -------------  -------------
                                                                                          (920,535)      (322,187)
                                                                                     -------------  -------------
    Income (loss) before taxes on income...........................................     (4,098,305)     2,691,789
    (Benefit) taxes on income......................................................       (341,855)       656,792
                                                                                     -------------  -------------
      NET INCOME (LOSS)............................................................  $  (3,756,450) $   2,034,997
                                                                                     -------------  -------------
                                                                                     -------------  -------------
Weighted average number of shares outstanding......................................      5,066,537      4,113,725
  Net income per common share......................................................  $       (0.74)
                                                                                     -------------
                                                                                     -------------
Pro forma Information (Note B)
  Historical earnings before income taxes..........................................  $          --  $   2,691,789
  Pro forma income taxes...........................................................                       882,538
                                                                                     -------------  -------------
  Pro forma net income.............................................................  $          --  $   1,809,251
                                                                                     -------------  -------------
                                                                                     -------------  -------------
  Pro forma net income per common share............................................  $          --  $        0.44
                                                                                     -------------  -------------
                                                                                     -------------  -------------
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-4
<PAGE>
                        CET Environmental Services, Inc.
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
 
                     Years Ended December 31, 1996 And 1995
 
<TABLE>
<CAPTION>
                                                                    COMMON STOCK                               TOTAL
                                                                --------------------   PAID-IN   RETAINED   STOCKHOLDERS'
                                                                 SHARES     AMOUNT     CAPITAL   EARNINGS      EQUITY
                                                                ---------  ---------  ---------  ---------  ------------
<S>                                                             <C>        <C>        <C>        <C>        <C>
Balance at January 1, 1995....................................  3,534,000  $  12,123  $  --      $3,399,599  $3,411,722
Distributions paid............................................     --         --         --       (927,101)    (927,101)
Undistributed S Corp. earnings................................     --         --        498,579   (498,579)      --
Initial public offering of common stock.......................  1,380,000  5,763,679     --         --        5,763,679
Shares issued for acquisition of En-Tech, Inc.................     35,769    250,000     --         --          250,000
Exercise of stock purchase warrants by holders of
  sub-ordinated promissory notes..............................    116,768    140,175     --         --          140,175
Issuance of stock options at exercise price below market value     --         --         36,596     --           36,596
Net income for the year.......................................     --         --         --      2,034,997    2,034,997
                                                                ---------  ---------  ---------  ---------  ------------
Balance at December 31, 1995..................................  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 income (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
                                                                ---------  ---------  ---------  ---------  ------------
</TABLE>
 
         The accompanying notes are an integral part of this statement.
 
                                      F-5
<PAGE>
                        CET Environmental Services, Inc.
 
                            STATEMENT OF CASH FLOWS
 
                     Year Ended December 31, 1996 And 1995
 
<TABLE>
<CAPTION>
                                                                                          1996           1995
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).................................................................  $  (3,756,450) $   2,034,997
  Adjustments to reconcile net income to net cash (used in) provided by operating
    activities:
    Depreciation and amortization...................................................      1,252,781        761,840
    Amortization of excess of acquired net assets in excess of cost.................       --             (337,437)
    Provision for bad debts.........................................................        402,683         71,441
    Deferred income taxes...........................................................        252,048       (250,756)
    Loss on sale of equipment.......................................................         13,304         18,842
    Employee stock option plan......................................................         20,355         36,596
    Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable....................................      5,499,747    (10,543,941)
      Increase in contracts in process..............................................       (443,372)    (3,253,311)
      Increase in due from related party............................................       (158,010)      --
      Increase in income tax & other receivables....................................     (1,335,263)       (92,791)
      Increase in prepaid expenses..................................................       (107,530)      (415,462)
      (Increase) decrease in inventory and deposits.................................         50,210       (200,163)
      Increase (decrease) in accounts payable.......................................        (99,156)     6,220,408
      Increase (decrease) in accrued expenses and income taxes......................       (533,861)     1,665,650
                                                                                      -------------  -------------
        Net cash (used in) provided by operating activities.........................      1,057,486     (4,284,087)
                                                                                      -------------  -------------
INVESTING ACTIVITIES:
  Purchase of equipment.............................................................     (1,523,418)    (2,779,478)
  Proceeds from sale of equipment...................................................         65,641          1,848
                                                                                      -------------  -------------
        Net cash used in investing activities.......................................     (1,457,777)    (2,777,630)
                                                                                      -------------  -------------
FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt..........................................        766,751        727,254
  Payments on long-term debt........................................................       (917,592)      (222,466)
  Payments on capital leases........................................................       (348,711)      (134,185)
  Proceeds from credit line loan--net of payments...................................      1,775,814      1,076,636
  Borrowings from related party trust fund..........................................        200,000        550,000
  Payments on related party trust fund..............................................       --             (350,000)
  Proceeds from issuance of stock...................................................       --            5,763,679
  Distributions paid................................................................       --             (927,101)
  Proceeds from loans from shareholders.............................................        545,000        357,865
  Payments on loans from shareholders...............................................       --             (357,865)
  Proceeds from exercise of stock purchase warrants.................................  $    --        $      12,600
  Proceeds from issuance of subordinated notes payable..............................       --              690,000
  Payments on subordinated notes payable............................................       (210,625)       (80,000)
                                                                                      -------------  -------------
        Net cash provided by financing activities...................................      1,810,637      7,106,417
                                                                                      -------------  -------------
</TABLE>

        The accompanying notes are an integral part of these statements.
 
                                      F-6
<PAGE>
                        CET Environmental Services, Inc.
 
                      STATEMENT OF CASH FLOWS-CONTINUED
 
                     Year Ended December 31, 1996 And 1995
 
<TABLE>
<CAPTION>
                                                                                          1996           1995
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
INCREASE IN CASH....................................................................  $   1,410,346  $      44,700
Cash at beginning of year...........................................................        476,655        431,955
                                                                                      -------------  -------------
Cash at end of year.................................................................  $   1,887,001  $     476,655
                                                                                      -------------  -------------
                                                                                      -------------  -------------
Supplemental disclosures to cash flow information:
  Cash paid during the year
    Interest........................................................................  $     485,951  $     282,230
    Income taxes....................................................................  $     656,900  $     518,757
Noncash investing and financing activities:
  Acquisition of business
    Fair value of tangible and intangible assets acquired...........................  $    --        $     500,047
    Liabilities assumed or incurred.................................................       --              250,047
                                                                                      -------------  -------------
    Fair value of common stock paid as consideration................................  $    --        $     250,000
                                                                                      -------------  -------------
                                                                                      -------------  -------------
  Reduction of subordinated notes payable as a result of the exercise of related
    stock purchase warrants.........................................................  $    --        $     127,575
  Capital lease and financing obligations incurred for equipment....................  $     683,223  $     837,000
  Conversion of remaining portion of related party note payable to a subordinated
    note payable....................................................................  $    --        $     200,000
  Issuance of note payable for financing of insurance premiums......................  $     412,296  $    --
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-7
<PAGE>

                      CET Environmental Services, Inc.
                 
                NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1996 and 1995

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 ("Acquisition Date"), Environmental Operations, Inc., purchased 100% of
    the Company's outstanding stock from Consolidated Environmental 
    Technologies, Inc. In August 1992, Environmental Operations, Inc. was merged
    into CET Environmental Services, Inc. The Company 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 and South America and the Trust Territory of the Pacific
    Islands.
 
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
    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 revenues and expenses during the 
    reporting period. Actual results could differ from those estimates.
 
    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 revenues are 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. Revenues are 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 consists of the accumulated unbilled labor at
    contracted rates, material, subcontractor costs and other direct job costs 
    and award fees related to projects in process.
 
                                 F-8

<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995

NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
 
    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.
 
    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 3 to 7 years.
 
    GOODWILL
 
    The excess of the purchase price over the estimated fair values of the
    assets acquired less the liabilities assumed, from the Company's November 
    1995 purchase of En-Tech, Inc. was recorded as goodwill. Such goodwill 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.
 
    ACQUIRED NET ASSETS IN EXCESS OF COST
 
    The acquisition of the Company by Environmental Operations, Inc. on November
    29, 1991 (see Note A), was accounted for as a purchase. The estimated fair 
    value of net assets purchased exceeded the purchase price by approximately 
    $1,472,000 (after a reduction of all long-term assets to zero). The acquired
    net assets in excess of cost was amortized over a four-year period beginning
    December 1, 1991. The amount was fully amortized at December 31, 1995.
 
    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.
 
    From January 1, 1994 to June 14, 1995, income taxes on net earnings were
    payable personally by the stockholders pursuant to an election under 
    Subchapter S of the Internal Revenue Code not to have the Company taxed as a
    corporation. However, the Company was liable for state franchise taxes at a 
    rate of 1.5 percent on its net income. Pro forma financial information is 
    presented to show the effects on 1995 financial information had the Company
    not been treated as an S Corporation for income tax purposes. Effective 
    June 15, 1995, the Company terminated its Subchapter S election and began 
    to be taxed as a Subchapter C corporation.
 
                                     F-9

<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995


NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
 
    STOCK SPLIT AND EARNINGS PER SHARE
 
    Earnings per share has been computed based upon the weighted average number
    of shares outstanding and equivalent shares outstanding during the year.
    Equivalent shares relate to shares issuable upon the exercise of stock 
    options and warrants. On March 1, 1995, the Board of Directors of the 
    Company approved a resolution which increased the number of authorized 
    shares from 10,000,000 shares to 20,000,000 shares. Additionally, a stock
    split was approved which converted each issued and outstanding share into
    291.5 shares. All share and per share data have been retroactively restated
    to give effect to this stock split.
 
    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: The carrying amount approximates fair value due to the short-term
    maturity.
 
    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.
 
    Loan from shareholder: The carrying amount approximates the fair value
    because of the short terms to maturity of the notes (within 3 months).
 
    Long-Term Debt / Obligations Under Capital Leases: The carrying value
    approximates fair value as the interest rate at December 31, 1996 and 1995 
    is considered to approximate the market rate.
 
    Notes Payable to Related Parties: The carrying value approximates fair value
    as the interest rate at December 31, 1996 and 1995 is considered to 
    approximate the market rate.
 
    RECLASSIFICATIONS
 
    Certain financial statement reclassifications have been made in 1995 to
    conform with presentations used in 1996.
 
                                     F-10

<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995


NOTE C--CONTRACTS IN PROCESS
 
    Contracts in process consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                        1996         1995
                                                                     ----------  ------------
<S>                                                                  <C>         <C>
Government--EPA contracts..........................................  $  648,973  $    832,468
Commercial contracts...............................................   6,007,889     5,209,500
Award Fees/Project Management--EPA contracts.......................      --           171,522
                                                                     ----------  ------------
   Totals..........................................................   6,656,862  $  6,213,490
                                                                     ----------  ------------
                                                                     ----------  ------------
</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.
 
NOTE D--SIGNIFICANT CUSTOMERS
 
    A significant portion of the Company's business is from a contract entered
    into in March 1991, with the Environmental Protection Agency (EPA). A new
    contract was awarded by the EPA in December 1996 with estimated maximum 
    revenues of $292,000,000 over five years. As of December 31, 1996 and 1995,
    the net balance of accounts receivable from the EPA was $2,256,448 and 
    $2,610,539, respectively. Revenues from the EPA in 1996 and 1995 amounted 
    to approximately $10.9 million and $12.9 million, respectively.
 
NOTE E--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. On November 8, 1996, the Company
    borrowed $545,000 from Signal Hill Petroleum, a company controlled by Craig
    C. Barto, one of the Company's directors, pursuant to a 30 day note which 
    bears interest at 10% per annum. The due date on the note was extended to 
    January 15, 1997. The Company also borrowed $671,800, which includes 
    subordinated notes of $471,800 (see Notes G and H), from relatives of 
    Steven H. Davis, President, pursuant to one year notes which bear interest
    at the rate of 10% per annum. These notes are due February 28, 1998. The 
    Company intends to repay these loans from revenues when sufficient funds
    are available. Interest expense attributable to these related party 
    borrowings amounted to $55,898 and $44,696 for 1996 and 1995, respectively.
 
                                     F-11

<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995

NOTE E--RELATED PARTY TRANSACTIONS--CONTINUED
 
    A director and 12.1% 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, 
    1996 and 1995 for fees amounting to approximately $340,000 and $293,000,
    respectively.
 
    On April 30, 1996, the Company loaned $105,764 to an officer and director of
    the Company pursuant to a demand note which bears interest at the rate of 
    8.25% per annum. Interest is payable monthly and principal is due on demand.
    Throughout 1996, the Company made additional advances to this individual
    bringing the total amount due to $158,010 at December 31, 1996.
 
    In March and April 1995, the Company issued debt securities in a private
    offering totaling $890,000 of which $680,000 were issued to investors 
    related to Company management (see Note H).
 
NOTE F--CAPITAL LEASES
 
    Vehicles and equipment recorded under capital leases consist of the
    following at December 31:
 
<TABLE>
<CAPTION>
                                                                         1996         1995
                                                                     ------------  ----------
<S>                                                                  <C>           <C>
Vehicles...........................................................  $  1,497,407  $  882,347
Equipment..........................................................       272,151     239,117
                                                                     ------------  ----------
                                                                        1,769,558   1,121,464
Less accumulated depreciation......................................      (465,228)   (167,474)
                                                                     ------------  ----------
    Totals.........................................................  $  1,504,330  $  953,990
                                                                     ------------  ----------
                                                                     ------------  ----------
</TABLE>

    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:
 
<TABLE>
<CAPTION>
                                                                          1996
                                                                      ------------
<S>                                                                   <C>        
        1997.......................................................    $  471,092
        1998.......................................................       427,256
        1999.......................................................       377,575
        2000.......................................................       265,251
        2001.......................................................        35,337
                                                                        ---------
      Total minimum lease payments.................................     1,576,511
      Less amounts representing estimated executory costs (taxes)..       120,977
                                                                        ---------
      Net minimum lease payments...................................     1,455,534
      Less amount representing interest............................       251,077
                                                                        ---------
      Present value of net minimum lease payments..................  $  1,204,457
                                                                        ---------

</TABLE>
 
                                       F-12
<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995

NOTE F--CAPITAL LEASES--CONTINUED
 
<TABLE>
<S>                                                               <C>
     Current portion............................................     329,934
     Noncurrent portion.........................................     874,523
                                                                   ---------
                                                                  $1,204,457
                                                                   ---------
                                                                   ---------
</TABLE>
 
NOTE G--LINE OF CREDIT AND LONG-TERM DEBT
 
    The Company has a line of credit facility with Union Bank of California,
    N.A. (the "Bank") which provides up to $6,000,000 of available credit to the
    Company based upon a percentage (75%) of eligible receivables (as defined in
    the loan agreement). Interest is payable monthly at the Bank's adjusted 
    LIBOR-Rate plus 2% or the Bank's Reference Rate, at the option of the 
    Company. The line of credit facility has an expiration date of May 1, 1997.
    In addition, the Company borrowed $124,940 from the Bank for the purchase of
    equipment. Interest is be payable monthly at the Bank's adjusted LIBOR-Rate 
    plus 2.25% or at the Bank's Reference Rate plus .25%, at the option of the 
    Company. This Bank also loaned the Company $600,000 to pay off equipment 
    loans at the former bank. Interest is payable monthly at the Bank's 
    Reference Rate plus .25%.
 
    The Company has been notified by the Bank that the Company is in breach of
    certain loan covenants relating to the three Company loans from the Bank 
    under which, as of December 31, 1996, the Company had borrowed an aggregate 
    of approximately $4,776,000. The Company is not in default with respect to 
    any loan payments due to the Bank. The breached covenants relate to the 
    ratio of the Company's liabilities to its tangible net worth, the 
    maintenance of a minimum net worth, and the maintenance of profitable 
    operations. The Bank notified the Company that no further funds would be 
    loaned while the Company is in breach of these covenants.
 
    The Company has entered into an agreement with the Bank whereby the Bank has
    agreed to forebear from taking any action against the Company based upon the
    breached covenants as long as the Company does not default on any payment 
    due to the Bank or otherwise breach any of the other terms of the 
    forbearance agreement. Under the terms of the forbearance agreement, in 
    addition to regular interest payments the Company has made a payment of 
    $500,000 on January 10, 1997, and then made payments of $250,000 each on 
    January 31, 1997, February 15, 1997 and March 15, 1997 with a required 
    payment of $250,000 on April 15, 1997. The Company made an additional 
    payment of $170,000 in January 1997. The balance on the loan shall be repaid
    not later  than May 1, 1997. These payments are personally guaranteed by 
    certain of the officers and directors of the Company.
 
    If the Company does not comply with the forbearance agreement, the Bank
    could declare the loans in default and could proceed to foreclose on the
    collateral securing the loans which consists of all the Company's accounts
    receivable, inventory, equipment, and other assets. Any such actions by the
    Banks would have a material adverse impact upon the Company. Management 
    intends to fully comply with the forbearance agreement and believes that 
    they will be able to secure enough funds through operations and by obtaining
    additional financing sufficient to pay all amounts due the Bank within the 
    required time frame.
 
                                       F-13

<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995

NOTE G--LINE OF CREDIT AND LONG-TERM DEBT--CONTINUED
 
    Long-term debt consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                               1996        1995
                                                                             ---------  ----------
<S>                                                                         <C>        <C>
    Note payable to bank, collateralized by equipment, 
    payable in 48 monthly installments of $7,917 plus 
    accrued interest at the bank's base rate plus 2%. 
    Paid in 1996.                                                              $  --      $  267,667

    Note payable to bank, collateralized by equipment, 
    payable in 48 monthly installments of $2,187 plus
    accrued interest at the bank's base rate plus 2%. 
    Paid in 1996.                                                                 --          89,687

    Note payable to bank, collateralized by equipment, 
    payable in 48 monthly installments of $4,062 plus 
    accrued interest at the bank's base rate plus 2%. 
    Paid in 1996.                                                                 --         170,625

    Note payable to bank, collateralized by equipment, 
    payable in 36 monthly installments of $2,378 including 
    interest at 9%, beginning December 30, 1995.                                 49,859       72,957

    Note payable to bank, collateralized by equipment, 
    payable in 36 monthly installments of $11,267 including 
    interest at 9%, beginning January 30, 1996.                                 246,816      354,297

    Eight installment notes payable to a bank and finance 
    companies, collateralized by vehicles, payable in monthly 
    installments ranging from $182 to $713 including interest
    ranging from 9.75% to 18%. Paid in 1996.                                      --          67,223

    Note payable to a bank, collateralized by equipment, 
    payable in monthly installments of $16,667 including 
    interest at 8.5%, due May 1, 1997.                                          450,000         --

    Note payable to a bank collateralized by equipment, 
    due May 1, 1997, interest at 8.25%.                                         124,940         --
</TABLE>
 
                                     F-14

<PAGE>

                      CET Environmental Services, Inc.

                 NOTES TO FINANCIAL STATEMENTS - CONTINUED
                        
                        December 31, 1996 and 1995


NOTE G--LINE OF CREDIT AND LONG-TERM DEBT--CONTINUED
 
<TABLE>
<CAPTION>
                                                                                             1996        1995
                                                                                          ----------  ----------
<S>                                                                                       <C>         <C>
    Note payable for annual insurance premium, interest at 
    4.98%, with monthly payments of $43,531, due June 15, 1997.........................      412,296      --
                                                                                           ---------   ---------
                                                                                           1,283,911   1,022,456
                                                                                         
Less current portion...................................................................    1,130,063     327,503
                                                                                           ---------   ---------
                                                                                          $  153,848  $  694,953
                                                                                           ---------   ---------
</TABLE>
 
    Scheduled future maturities of these notes for the years ending December 31
    are as follows:
 
<TABLE>
            <S>                                                   <C>
             1997................................................  $1,130,063
             1998................................................     153,848
                                                                    ---------
                                                                   $1,283,911
                                                                    ---------
</TABLE>
 
    Related party debt consists of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                                 1996          1995
                                                                              ---------  --------------
<S>                                                                          <C>        <C>
    Loan from shareholder, uncollateralized, due January 15, 
    1997, interest at 10% (see Note E)..................................        545,000         --

    Note payable to related party, uncollateralized, due 
    February 28, 1998, interest at 10% (see Note E).....................        200,000         --
                                                                                               
    Subordinated notes payable to related parties, due 
    February 28, 1998, interest at 10% (see Notes E and H)..............        471,800      682,425
                                                                              ---------      -------
                                                                              1,216,800      682,425
Less current portion....................................................        545,000         --
                                                                              ---------      -------
                                                                           $    671,800   $  682,425
                                                                              ---------      -------
</TABLE>
 
NOTE H--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 

                                     F-15 

<PAGE>

                      CET Environmental Services, Inc.
                 
                NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1996 and 1995

NOTE H--SUBORDINATED NOTES PAYABLE--CONTINUED
 
    or before December 31, 1996, for an aggregate of 116,768 shares, and a
    subordinated note for the amount invested. The subordinated notes bore 
    interest at ten percent per annum payable on the first day of each month
    commencing on April 1, 1995. The subordinated notes are redeemable by the 
    Company at any time upon 60 days' notice to the holders and have a maturity
    date of March 1, 1996. Holders of the subordinated notes have a security 
    interest in the Company's accounts receivable and contracts in progress that
    is subordinate to holders of the senior indebtedness. Investors holding 
    subordinated notes in the aggregate amount of $680,000 are related to 
    Company management. In August 1995, one subordinated note in the amount of
    $80,000 was paid off. During December 1995, all nineteen of the investors 
    exercised their warrants to purchase a total of 116,768 shares of common 
    stock. Eighteen of the investors exchanged a total of $127,575 of the 
    outstanding subordinated notes and one investor paid $12,600 in cash to 
    exercise his warrants. Interest of approximately $60,000 was paid to the
    holders of these subordinated notes during 1995.
 
    On March 1, 1996, $210,625 of the remaining balance of $682,425 of the
    subordinated notes was paid off. The remaining $471,800 was rolled over into
    new notes payable February 28, 1998 with interest payable monthly at ten 
    percent per annum. Interest of $39,316 was paid to the holders of these 
    notes during 1996.
 
NOTE I--TAXES ON INCOME
 
    The provision (benefit) for taxes on income includes the following for the
    year ended December 31:
 
<TABLE>
<CAPTION>
                                                                          1996         1995
                                                                       -----------  ----------
<S>                                                                    <C>          <C>
         CURRENT 
             Federal.............................................     $  (569,268) $  732,205
             State...............................................         (24,635)    176,635
                                                                       ----------   ---------
                                                                         (593,903)    908,840
                                                                       ----------   ---------

       DEFERRED 
             Federal.............................................         215,390    (215,390)
             State...............................................          36,658     (36,658)
                                                                       ----------   ---------
                                                                          252,048    (252,048)
                                                                       ----------   ---------
      TOTAL.......................................................    $  (341,855) $  656,792
                                                                       ----------   ---------
</TABLE>
 
    A reconciliation between the expected federal income tax expense computed by
    applying the Federal statutory rate to income before income taxes and the 
    actual provision (benefit) for taxes on income for the year ended December 
    31 is as follows:
 
                                     F-16

<PAGE>

                      CET Environmental Services, Inc.
                 
                NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1996 and 1995

NOTE I TAXES ON INCOME--CONTINUED
 
<TABLE>
<CAPTION>
                                                                       1996           1995
                                                                   -------------  ------------
   <S>                                                                <C>            <C>
    Provision (benefit) for income taxes at statutory rate.......  $  (1,598,400) $  1,076,715
    Change in valuation reserve..................................      1,076,366        --
    Stock options................................................          8,142        14,638
    Purchase accounting effects Negative goodwill................         --          (134,975)
    S Corporation earnings.......................................         --          (225,746)
    Other........................................................        172,037       (73,840)
                                                                   -------------  ------------
                                                                   $    (341,855) $    656,792
                                                                   -------------  ------------

</TABLE>
 
    Deferred tax assets and liabilities consist of the following at December 31:
 
<TABLE>
<CAPTION>
                                                                         1996         1995
                                                                      -----------  ----------
<S>                                                                   <C>          <C>
    Net deferred tax asset 
        Accrued salary expense...................................  $    85,704  $  154,203
        Allowance for doubtful accounts..........................      198,661      58,223
        NOL carryforward.........................................      870,209        --
        Other....................................................      (78,208)     76,904
                                                                     ---------    --------
                                                                     1,076,366     289,330
                                                                     ---------    --------
        Valuation reserve........................................   (1,076,366)       --
                                                                     ---------    --------
                                                                   $    --      $  289,330
    Deferred tax liability depreciation and amortization.........  $    --      $  (37,282)
                                                                     ---------    --------
</TABLE>
 
    Realization of the deferred tax asset depends on achieving a certain minimum
    level of future taxable income and although management currently believes 
    that the achievement of the required future taxable income is more likely 
    than not, it is reasonably possible that this belief could change in the 
    near term, resulting in an adjustment to the valuation allowance.
 
    The Company has net operating loss carryforwards for tax purposes of
    $2,231,304 which expire in 2011.
 
NOTE J--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-17

<PAGE>

                      CET Environmental Services, Inc.
                 
                NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1996 and 1995

NOTE J--COMMITMENTS AND CONTINGENCIES--CONTINUED
 
    The following is a summary at December 31, 1996, of the future minimum rents
    due under noncancellable operating leases:
 
<TABLE>
<CAPTION>
           YEAR ENDING
           DECEMBER 31,
          ------------
<S>                                                     <C> 
            1997......................................   $  634,933
            1998......................................      308,151
            1999......................................      170,717
            2000......................................      151,825
            2001......................................       49,412
                                                         ----------
            Total.....................................   $1,315,038
                                                         ----------
</TABLE>
 
    Total rent expense under operating leases for the years ended December 31,
    1996 and 1995 was approximately $892,700 and $492,400, 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 K--STOCKHOLDERS' EQUITY
 
    A reclassification of $498,579 from retained earnings to paid-in capital was
    made which represented the approximate balance in the Company's S 
    corporation accumulated adjustment account which had not been distributed to
    shareholders as of June 15, 1995 (date of termination of the Company's S 
    corporation status, see Note B).
 
    In June 1995, the Company distributed an aggregate of $927,101 to certain
    shareholders, which aggregate amount is approximately the amount of the tax
    liabilities of such shareholders resulting from the Company's former 
    Subchapter "S" tax status. The primary source of funds for such distribution
    was the proceeds from the sale of the Subordinated Notes (Note H). 
    Immediately after such distribution, these same shareholders loaned an 
    aggregate of $357,865 to the Company. Such shareholder loans bore interest 
    at 10% and were repaid out of the proceeds of the Company's initial public 
    offering in July 1995.
 
    In July 1995, the Company completed an initial public offering of 1,200,000
    shares of its common stock, and in August 1995, sold an additional 180,000
    shares pursuant to an over-allotment option. The net proceeds to the Company
    from the public offering was approximately $5,800,000.
 
    In connection with this offering, the Company issued a warrant to the
    representatives of the underwriters in this offering to purchase up to 
    120,000 shares of the Company's common stock at $6.00 per share (the

                                     F-18

<PAGE>

NOTE K -STOCKHOLDERS' EQUITY--Continued
 
    "Representatives' Warrant"). The Representatives' Warrant is entitled to the
    benefit of adjustments in the purchase price and in the number of shares of
    common stock and/or other securities deliverable upon the exercise thereof 
    in the event of a stock dividend, stock split, reclassification, 
    reorganization, consolidation or merger and may be exercised at any time 
    during the four-year period commencing on July 18, 1996. The 
    Representatives' Warrant is restricted from sale, transfer, assignment, or
    hypothecation until July 18, 1996, except to officers or partners of the 
    underwriters and members of the selling group or their officers and 
    directors.
 
    On November 10, 1995, the Company acquired all of the outstanding stock of
    En-Tech, Inc., a Colorado corporation ("En-Tech"), doing business as
    Environmental Technologies, Inc., in exchange for 35,769 shares of the 
    Company's common stock. En-Tech was engaged in the design, construction, and
    operation of industrial wastewater and water treatment facilities, and 
    provided services in both the public and private sectors. This acquisition 
    was accounted for as a purchase and, accordingly, En-Tech's assets, 
    liabilities and results of operations were included in the December 31, 1995
    balance sheet and statement of income since the date of acquisition. En-Tech
    was merged into the Company effective March 15, 1996.
 
    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.
 
NOTE L--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 profit sharing 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 $83,738 
    and $50,304 for the years ended December 31, 1996 and 1995, respectively.
 
NOTE M--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 

                                     F-19

<PAGE>

NOTE M--STOCK OPTIONS-- Continued 

    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 3-5
    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>
                                                                       1996           1995
                                                                   -------------  ------------
<S>                                                                <C>            <C>
    Net income (loss) 
        As reported....................................            $  (3,756,450) $  1,809,251
        Pro forma......................................               (3,854,017)    1,781,220

    Earnings (loss) per common share 
        As reported....................................            $       (0.74) $       0.44
        Pro forma......................................                    (0.76)         0.43
</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 1996 and 1995: no expected dividends; 
    expected volatility of 50%; risk-free interest rate of 5.5%; and expected 
    lives of 6 years.
 
    A summary of the status of the Plan follows:
 
<TABLE>
<CAPTION>
                                                                                            AVERAGE
                                                                                           PRICE PER
                                                                                SHARES       SHARE
                                                                              ---------  -----------
<S>                                                                          <C>        <C>
    Outstanding at January 1, 1995......................................         --
    Granted.............................................................      181,000   $    3.50
    Exercised...........................................................         --
</TABLE>

                                     F-20

<PAGE>

                      CET Environmental Services, Inc.
                 
                NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1996 and 1995
 
NOTE M--STOCK OPTIONS--CONTINUED
 
<TABLE>
<S>                                                                          <C>           <C>
    Canceled...........................................................        (5,000)  $    3.50
                                                                            ---------   ---------
    Outstanding at December 31, 1995...................................       176,000   $    3.50
                                                                            ---------   ---------
    Total exercisable at December 31, 1995.............................        10,000   $    3.50
                                                                            ---------   ---------
    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
                                                                            ---------   ---------
</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 $20,355 
    and $36,596 in 1996 and 1995 respectively, relating to these options. 
    Compensation expense of $22,361 will be recorded in future periods as these
    options vest over a five-year period commencing December 31, 1996.
 
NOTE N--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, 1996 and 1995 are as follows:

                                                    1996
                                                  -------

                                     Carrying Amount        Estimated Fair Value
                                     ---------------        --------------------

    Cash............................   $ 1,887,001             $ 1,887,001
    Note payable-line of credit.....     4,200,650               4,200,650
    Loan from shareholder...........       545,000                 545,000
    Long-term debt..................     1,348,340               1,348,340
    Capitalized lease obligations...     1,204,457               1,204,457
    Notes payable to related parties       671,800                 671,800

                                      F-21

<PAGE>

                      CET Environmental Services, Inc.
                 
                NOTES TO FINANCIAL STATEMENTS - CONTINUED

                       December 31, 1996 and 1995

NOTE N--DISCLOSURE ABOPUT FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued

                                                    1995
                                                  -------

                                     Carrying Amount        Estimated Fair Value
                                     ---------------        --------------------

    Cash............................   $   476,644             $   476,655
    Note payable--line of credit.....    2,424,836               2,424,836
    Long-term debt..................     1,022,456               1,012,509
    Notes payable to related parties       682,425                 682,425
    Capitalized lease obligations...       869,945                 869,945


NOTE O--FOURTH QUARTER ADJUSTMENTS

    During the fourth quarter of the year ended December[nb]31, 1996, the 
    Company wrote off accounts receivable, recorded as a reduction of revenues,
    approximately $731,500. This adjustment was considered necessary due to the
    age of the receivable which resulted from disputed amounts arising from
    contract changes.

NOTE P--SUBSEQUENT EVENT

    In January[nb]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 $2,060,000. 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 was 
    warrants was $100 and the exercise price under such warrants is $3.60 per 
    share. The warrant may be exercised in whole or in part at any time or from 
    time to time until the expiration date of December 31, 2001.

                                     F-22
<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 10, 1997            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.
 
          SIGNATURE                      CAPACITY                   DATE
------------------------------  ---------------------------  -------------------


     /s/ STEVEN H. DAVIS        President, Chief Executive
------------------------------    Officer and Director         April 10, 1997
       Steven H. Davis

                                Executive Vice  President      April 10, 1997
     /s/ RICK C. TOWNSEND         and Chief Financial
------------------------------    Officer (Principal
       Rick C. Townsend           Accounting Officer)

      /s/ CRAIG C. BARTO        Director                        April 10, 1997
------------------------------
        Craig C. Barto

    /s/ ROBERT S. COLDREN       Director                        April 10, 1997
------------------------------
      Robert S. Coldren

                                Executive Vice President,       April 10, 1997
    /s/ DOUGLAS W. COTTON         Chief Operating Officer,
------------------------------    Secretary and Director
      Douglas W. Cotton           


    /s/ JOHN G. L. HOPKINS      Senior Vice President           April 10, 1997
------------------------------    and Director 
      John G. L. Hopkins          


     /s/ ROBERT A. TAYLOR       Director                        April 10, 1997
------------------------------
       Robert A. Taylor