<PAGE>
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

                  For the Fiscal Year Ended: DECEMBER 31, 2002

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURIITES EXCHANGE
         ACT OF 1934

           For the transition period from ___________ to ___________

                           Commission File No. 1-13852

                        CET ENVIRONMENTAL SERVICES, INC.
                 ----------------------------------------------
                 (Name of Small Business Issuer in its Charter)

          CALIFORNIA                                            33-0285964
(State or Other Jurisdiction of                              (I.R.S. Employer
 Incorporation or Organization)                             Identification No.)

7032 SOUTH REVERE PARKWAY, ENGLEWOOD, COLORADO                     80112
-----------------------------------------------                  ---------
   (Address of Principal Executive Offices)                      (Zip code)

         Issuer's telephone number:  (720) 875-9115

         Securities registered pursuant to Section 12(b) of the Act:

         Title of single class:     Name of exchange on which registered:
         COMMON STOCK               AMERICAN STOCK EXCHANGE
         ------------               -----------------------

         Securities registered pursuant to Section 12(g) of the Act:  NONE

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not 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:      $2,356,000

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, of the average bid and asked price of such common equity, as of a
specified date within the past 60 days. As of March 6, 2003, the aggregate
market value of the Company's common stock held by non-affiliates was
approximately $920,000.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of March 6, 2003, 5,757,792 shares
of common stock were outstanding.

Transitional Small Business Disclosure Format (Check one):  YES [ ] NO [X]

                      DOCUMENTS INCORPORATED BY REFERENCE:

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

<PAGE>
                                     PART I

ITEM 1.  BUSINESS.

The Company

         Incorporated in February, 1988, the Company, for more than a decade,
was engaged in environmental consulting, engineering, remediation, and related
construction activities. The Company also provided emergency response cleanup
services in certain western states for federal agencies, states, municipalities,
and commercial customers. By 1998, revenues exceeded $66 million, close to 50%
of which was derived from work performed for the Environmental Protection Agency
("EPA").

         However, in August, 1999, the Company received a notice of suspension
from the EPA, the provisions of which under Federal Regulations prohibited the
Company from receiving any new government contracts, although allowing for
continued performance on existing contracts. The suspension resulted from
allegations by the EPA that the Company engaged in intentional misconduct with
respect to billing for services under various contracts with the EPA. The
Company has denied all allegations of wrongdoing in its relations with the EPA.

         In November, 1999, the Company entered into an Administrative Agreement
with the EPA, and the suspension was terminated. The Company agreed to cooperate
in full with further investigations into the EPA allegations including access to
records, availability of personnel, certain reporting requirements, audit of EPA
billing prior to submission, and certain other restrictions. In turn, the
Company became immediately eligible to bid, receive, and perform any Federal
contract or subcontract. (See Item 3. Legal Proceedings and Notes C and Q to the
Consolidated Financial Statements.)

         However, despite the lifting of the suspension order, EPA revenues
under the then-existing contract never recovered to prior levels. The EPA
exercised the third year option of the contract in January, 2000, and was
empowered to issue delivery orders for up to $42 million in value; actual EPA
revenues for 2000 were $13.1 million. The fourth and final option year was
exercised in January, 2001, with an empowered value of $44 million; actual EPA
revenues in 2001 were only $12.3 million. In addition, revenue generation from
other federal agencies also failed to recover to pre-1999 levels.

         In view of the diminished level of EPA delivery orders received over
the three-year period and with no assurance that delivery orders would increase
even if the Company was successful in obtaining another EPA contract, management
decided to forgo bidding on a new contract. At the billing levels experienced in
the 2001-2002 period, the overhead costs necessary to perform EPA work make such
efforts marginally profitable, at best.

         Meanwhile, the water/wastewater treatment and services business
recorded revenues of $2.1 million in 2002. While this was an increase of 8% over
the prior year, narrowing margins reflecting the highly competitive bidding
environment, coupled with cost over-runs related to unanticipated site
conditions, resulted in an operating loss on this activity. After careful review
of the potential business available in this market and the highly competitive
bidding practices being encountered, the Company has decided to withdraw from
this market. Completion of existing contracts is expected to generate
approximately $270,000 in revenue during 2003, virtually all of which will be
recorded in the first half of the year.

         As a result of the foregoing, the Company has shifted its focus to
property development, primarily in urban areas and preferably having an
environmental remediation requirement as an element of the project.



                                       1
<PAGE>
Brownfields Remediation and Property Development

         Brownfields remediation, the work of restoring former industrial,
commercial, and other sites contaminated by hazardous materials, is among the
services historically provided by the Company. This activity is expected to
remain an integral component of the Company's property development efforts.

                  The Company is currently engaged in a redevelopment project
under an agreement with the City of Westminster, Colorado. The project includes
the purchase of certain property, the demolition of existing structures,
environmental remediation, and construction of 50 new affordable housing units.
Under the Development Agreement, the City of Westminster provided approximately
$901,000 toward the $1,601,000 purchase price of the property, agreed to pay the
Company approximately $185,000 for demolition work, and to provide other
assistance. The Company is required to sell at least 10 of the 50 housing units
at a base price of $170,000, or less, to qualified buyers; to make certain
off-site improvements along street frontages; and to provide the necessary
insurance for the project. As of December 31, 2002, the Company had capitalized
costs of $1.1 million on this project related to permits, architectural designs,
and land acquisition.

         The Company has completed the demolition work on the project and is
currently seeking to obtain project financing of approximately $1.6 million. The
Company is also negotiating with a general contractor for the construction of
the housing units. Construction is expected to begin during the second quarter
of 2003. The Company plans to use a real estate marketing firm to handle sales
of the housing units. The estimated aggregate sales price of the units is
approximately $8.7 million, and the Company believes that revenues from the
project could range from $4 to $6 million during 2003.

         In addition, the Company in engaged in another Brownfields development
of approximately five acres in size. Although in a different Colorado municipal
jurisdiction, the development is similar in scope requiring the purchase of
subject property, environmental remediation, and construction of 54 multi-family
housing units. At December 31, 2002, capitalized costs for permits,
architectural designs, and land acquisition were approximately $600,000. While
no revenues are anticipated from this project during 2003, the estimated
aggregate sales price of the housing units is estimated at $9.5 million. The
Company plans to seek financing for this project in the latter part of 2003.
This project is encumbered by an 8%, $300,000 loan due on December 31, 2003.

         Where applicable, many municipalities are actively seeking to restore
property currently idled by contamination in order to enhance the community's
tax base. Often, these municipalities are eligible for federal aid, state funds,
and other types of special financing. Also, towns and cities adjacent to or
close to major metropolitan centers are encouraging the gentrification of older
neighborhoods in order to revive the commercial and social activities of the
community. The Company believes that these trends offer an opportunity for niche
property development. Because of its past experience in the environmental market
place, the Company believes it can provide a particular expertise and add value
when remediation is required to bring the development to fruition.

         The Company believes it is subject to risks and uncertainties common to
the residential housing industry, including but not limited to (1) cyclical
markets sensitive to changes in general and local economic conditions; (2)
volatility of interest rates, which affects homebuilding demand and may affect
credit availability; (3) seasonal nature of the business due to weather-related
factors; (4) significant fluctuations in the price of building materials; (5)
demographic changes; and (6) changes in consumer confidence and preferences.

         As described above, the Company holds real estate properties for
development. This activity is expected to be the Company's primary focus for the
future. While the current and anticipated projects for land presently held are
for multi-family housing, future project development could include




                                       2
<PAGE>
commercial/industrial properties. The Company will seek to find niche property
sites, initially in the greater Denver area, that offer an opportunity to
upgrade value through demolition, remediation, and construction.

         The Company's administrative functions are centralized in order to
control overhead costs and permit the direct engagement of key management with
local municipal authorities in project development. Further, the Company will
attempt to minimize its fixed costs by contracting extensively with third
parties, such as architects, engineers, and contractors to design and build. The
Company intends to use third-party realtors for home sales.

         The pace of the Company's activity in the property development area
will be subject to a number of variables, many of which are outside its control.
These include market demand for the structures erected on the sites, interest
rates, and weather conditions, among others. In addition, the Company has
limited financial resources, and there can be no assurance that external
financing will be available on terms acceptable to the Company.

Government Regulation

         In connection with its Brownfields remediation activity, 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. Additionally, in the
normal course of property development, the Company is subject to local codes
governing construction activity.

Potential Liability and Insurance

         The Company maintains quality assurance, quality control, and health
and safety programs to reduce the risk of damage to persons and property. In the
construction of the housing units, the Company requires the general contractor
to provide general liability and builders risk coverage. However, in providing
environmental remediation services, the Company faces substantial potential
liability for environmental damage, personal injury, property damage, economic
losses, and fines and costs imposed by regulatory agencies. The Company's
potential environmental liability arises, in part, from the nature of the
hazardous substances requiring remediation at the development sites.

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

         The market for liability insurance has been severely constrained at
times, due in part to high losses experienced by the insurance industry from
environmental impairment liability claims, including claims associated with
hazardous materials and toxic wastes. Consequently, the available insurance
coverage for enterprises such as the Company may be reduced, eliminated
entirely, or priced beyond the reach of many companies. To date, the Company has
been able to obtain any insurance required by a




                                       3
<PAGE>

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. A bond typically costs between 1% and 3%
of the project costs, and contractors without adequate bonding may be ineligible
to bid or negotiate on many projects.

         Although no payments have been made by any bonding company for bonds
issued for the Company, the impact of the EPA suspension in 1999 and the
Company's current financial status have made it increasingly difficult to obtain
bonding.

Employees

         As of January 2003, the Company employed approximately 12 full-time
employees, including three Company officers. The Company's employees are not
represented by a labor union or covered by a collective bargaining agreement,
and the Company believes it has good relations with its employees.

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

ITEM 2.  PROPERTIES.

         The Company headquarters and administrative facilities are located at
7032 S. Revere Parkway, Englewood, CO, in approximately 6,000 square feet of
leased office space at a monthly rental of approximately $6,100. The lease
expires May 31, 2005. The Company's corporate and administrative functions are
conducted from these facilities.

ITEM 3.  LEGAL PROCEEDINGS.

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

         On February 8, 2001, the Company filed an action in the Superior Court
of the State of California, County of Contra Costa for, among other things,
breach of contract, foreclosure of a previously filed mechanics' lien, and
judicial foreclosure of the deed of trust in the amount of $10.1 million against
LCRI Investments, LLC, an affiliated partnership of Remediation Financial, Inc.
("RFI"), in response to non-payment for services performed by the Company on the
Hercules project located in Hercules, CA. On March 5, 2001, the Company recorded
a notice of default under the subject secured deed of trust in order to pursue a
trustee's sale of the subject property. Following a prolonged




                                       4
<PAGE>

court-ordered arbitration proceeding, the Company and RFI, on August 7, 2002,
entered into a settlement agreement whereby the Company shall receive $3.2
million plus accrued interest at an annual rate of 8% from October 19, 2001,
contingent upon, but not limited to, the sale of the Hercules property by not
later than November 1, 2003. After such date, if the Hercules property has not
been sold, the Company may resume all legal action necessary including
foreclosure to recover the amount due at November 1, 2003.

         Since early 1998, the Company has been the subject of an investigation
by the Office of the Inspector General (OIG) of the Environmental Protection
Agency (EPA). While initially broad in scope, the investigation is now focused
on labor billing-rates to the EPA beginning in the 1992-1994 period and selected
subsequent years. The Company has cooperated fully in all OIG inquiries and will
continue to do so when and if required. Independent audits by the Defense
Contract Audit Agency (DCAA), subsequent to initiation of the OIG investigation,
have not been adverse nor have resulted in claims against the Company. In an
effort to resolve the dispute, the Company requested non-binding arbitration
which allows for a full discussion of the issues before a neutral party. The OIG
rejected this proposal. Subsequently, during the third quarter of 2002, the
Company attempted to reach a settlement agreement in order to limit further
legal costs. In response to this initiative, OIG has offered to settle the case
for $8.7 million based on certain scenarios and imputed costs generated within
its offices. The Company strongly disputes and rejects the basis upon which the
scenarios were developed and denies any wrongdoing in dealings with the EPA.

         On August 8, 2002, the Company was named as a third-party defendant in
a pending lawsuit in the U. S. District Court for the Western District of
Washington in which the United States Environmental Protection Agency ("EPA")
sued Dan Alexander and Harriett Alexander (the "Alexanders"). The EPA alleges
that the Alexanders caused the pollution of soil and groundwater through its use
and storage of a certain weed killer and is seeking reimbursement of costs the
EPA expended to clean up the site, which totaled approximately $3,500,000. The
Alexanders have denied liability but have asserted that, if they are held
liable, the Company, Dow Chemical Company, and Ecology and Environment, Inc.,
the third-party defendants named in the lawsuit, should be held at least
partially responsible. In 1998 and 1999, as required under the then-existing
Emergency and Rapid Response and Clean-Up Services contract with the EPA, the
Company provided and was compensated for clean-up operations at the site. The
Alexanders allege that the Company caused the amount of pollution to increase
through negligent actions in its clean-up operations. The Alexanders are also
seeking monetary damages from the Company to reimburse them for damage to their
property which they allege the Company caused during the clean-up operations.
The Company strongly disputes and rejects the allegations upon which the lawsuit
is based.

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

         No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 2002.



                                       5
<PAGE>
                                     PART II


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

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

<Table>
<Caption>
                                QUARTER ENDED                 HIGH           LOW
                                                             -------       -------
<S>                                                          <C>           <C>
                              March 31, 2001                 $  0.94       $  0.43
                              June 30, 2001                     0.65          0.37
                              September 30, 2001                0.58          0.36
                              December 31, 2001                 0.75          0.36
                              March 31, 2002                    0.84          0.45
                              June 30, 2002                     0.55          0.36
                              September 30, 2002                0.38          0.19
                              December 31, 2002              $  0.26       $  0.13
</Table>

         (b)      Approximate Number of Holders of Common Stock. The number of
                  record holders of the Company's common stock at March 6, 2003
                  was 38. This does not include approximately 740 shareholders
                  that hold their shares in street name.

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

         (d)      Sales of Unregistered Securities. None



                                       6
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

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

General

         The Company's primary focus is property development, preferably in
conjunction with municipal authorities and where remediation is a material
consideration in the development activity. In 2002, water/wastewater services
accounted for the majority of revenue, but as a result of margin erosion and
limited potential, the Company is phasing out of this activity. The Company's
headquarters and administrative offices are in Englewood, Colorado.

Business Strategy

         The severe impact of the EPA suspension order in 1999 and the extreme
difficulty collecting receivables from a major customer (see Liquidity and
Capital Resources) eroded the Company's resources. Personnel, facilities, and
equipment were sharply pared in the three-year period ended December 31, 2002.

         As the water/wastewater service business is phased out, the Company's
primary activities will relate to property development.

         The Company believes that by working with various levels of municipal
government, there is an opportunity to build a successful business in
redeveloping niche sites in urban areas, particularly those requiring
remediation, where the Company has unique experience.

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:




                                       7
<PAGE>

<Table>
<Caption>
                                                         PERCENTAGE
                                                       RELATIONSHIP TO           PERIOD TO
                                                       PROJECT REVENUE            PERIOD
                                                          YEAR ENDED               CHANGE
                                                  ---------------------------    -----------
                                                                                     2002
                                                                                      VS.
                                                     2002             2001           2001
                                                  -----------     -----------    -----------
<S>                                               <C>             <C>            <C>
   Project Revenue                                      100.0%          100.0%         (83.4)%

   Project Costs:
       Direct                                            95.7            73.7          (78.5)
       Indirect                                          20.5             8.8          (61.4)
                                                  -----------     -----------    -----------

    Gross profit (loss)                                 (16.1)           17.5         (115.3)

    Other operating expense (income):
       Selling                                            5.3             1.3          (33.8)
       General and administrative expense                66.1            14.8          (25.9)
                                                  -----------     -----------    -----------


    Operating income (loss)                             (87.6)            1.4       (1,157.5)
    Other income (expense)                              (15.7)            0.2       (1,673.7)
                                                  -----------     -----------    -----------

    Income (loss) before income taxes                  (103.3)            1.5       (1,213.0)
    Income tax (benefit)                                   --              --             --
                                                  -----------     -----------    -----------

    Net income (loss)                                  (103.3)%           1.5%        (1,213)%
                                                  -----------     -----------    -----------
</Table>

2002 COMPARED TO 2001

         PROJECT REVENUE. Project revenues were $2.4 million in 2002, down $11.8
million or 83% from $14.2 million in 2001. The decrease in revenues largely
reflects the completion of work orders from the EPA. The Company's contract with
the EPA expired on January 8, 2002 and EPA-related revenues were only $338,000
during the period, as compared with $12.3 million in the year-earlier period.
Non-EPA commercial revenues were slightly above $2 million, compared to $1.9
million in 2001.

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

<Table>
<Caption>
                                      Year Ended December 31,
                     ----------------------------------------------------------
                                2002                            2001
                     ---------------------------    ---------------------------
<S>                  <C>            <C>             <C>            <C>
Non-EPA              $  2,018,075           85.7%   $  1,872,938           13.2%
EPA                       337,845           14.3%     12,330,644           86.8%
                     ------------   ------------    ------------   ------------
Total                $  2,355,920          100.0%   $ 14,203,582          100.0%
                     ============   ============    ============   ============
</Table>

         DIRECT COSTS. Direct costs were $2.3 million in 2002, down $8.2 million
or 79% from $10.5 million in 2001. As a percentage of revenues, direct costs for
2002 were nearly equal to total revenues or 96%, up from 74% in 2001. The
relatively high level of direct costs during the current period reflects




                                       8
<PAGE>
close-out expenses related to EPA work orders and cost over-runs arising from
unanticipated difficulties at three water/wastewater projects which were
completed in the third quarter.

         INDIRECT COSTS. Indirect project costs were $482,000 in 2002, a
decrease of $766,000 or 61% from $1,248,000 in 2001. As a percentage of revenue,
indirect costs for 2002 were 21%, up from 9% in 2001. The relatively higher
level of indirect costs to revenues for the 2002 period is caused, in part, by
close-out expenses related to EPA work orders, during the early months of the
year.

         SELLING EXPENSE. Sales and marketing expenses were $124,000 in 2002,
down $64,000 or 34% from $188,000 in 2001, reflecting the decreased level of the
overall business.

         GENERAL & ADMINISTRATIVE EXPENSE. General and administrative expenses
were $1.6 million in 2002, down $0.5 million or 26% from $2.1 million in 2001.
Although general and administrative costs in total dollars decreased due to the
reduction in (1) personnel, (2) leased office space, and (3) overall business
operations, as a percentage of revenues, these expenses have increased to 66% of
total revenues in 2002 compared to 15% for the prior year. This increase is the
result of additional legal expenses relating to the RFI and its affiliated
partners litigation and employee severance costs incurred during the first
quarter following the expiration of the EPA contract.

         OTHER INCOME (EXPENSE). Other expenses, net of other income, were
$370,000, the bulk of which arose from the loss on equipment dispositions of
$389,000. In the 2001, other income of $28,000 plus interest income of $23,000,
less net losses on equipment disposals of $28,000, resulted in other income of
$23,000.

         NET INCOME. A net loss of $2,432,938 was recorded during the current
year compared to net income of $218,586 for the prior year. The loss in 2002 was
the result of the expiration of the EPA contract, reduced profit margins on the
water/waste water projects, and being in the start-up phase of the property
development business (revenues not expected until 2003).

Liquidity and Capital Resources

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

         During the third quarter of 2000, the Company experienced problems
collecting receivables from RFI and its affiliated partnerships for work
performed at Brownfields projects located at Santa Clarita and Hercules, CA. The
severity of the problems caused the Company to suspend work on the Santa
Clarita, CA project. Subsequently, the Company was presented with termination
notices for both the projects, with the Santa Clarita termination effective
October 6, 2000 and the Hercules termination effective October 31, 2000. At
December 31, 2001 receivables from the Santa Clarita project were approximately
$2.0 million while those arising from the Hercules project were $3.3 million,
for a total of $5.3 million or 74% of total accounts receivable.

         In February, 2002, the Company reached a settlement agreement with
respect to the Santa Clarita project and received $2.1 million. In August, 2002,
the Company entered into a settlement agreement with respect to the Hercules
project whereby the Company shall receive $3.2 million plus interest at an
annual rate of 8% from October 19, 2001, contingent upon, but not limited to,
the sale of the Hercules property by RFI no later than November 1, 2003. After
such time, if the Hercules property has not been




                                       9
<PAGE>

sold, the Company may resume all legal actions necessary to secure the amount
due at that date. At December 31, 2002, the Company had a receivable of
approximately $3.2 million for the Hercules project which has been reclassed to
a non-current receivable under Other Assets (See Note P, Contingencies to the
Company's Consolidated Financial Statements). The delay in collecting the
aforementioned receivable on a timely basis has adversely effected the Company's
cash flow.

         The Company is currently engaged in a redevelopment project under an
agreement with the City of Westminster, Colorado. The project includes the
purchase of certain property, the demolition of existing structures,
environmental remediation, and construction of 50 new affordable housing units.
Under the Development Agreement, the City of Westminster will provide
approximately $901,000 toward the $1,601,000 purchase price of the property,
agreed to pay the Company approximately $185,000 for demolition work, and to
provide other assistance. The Company is required to sell at least 10 of the 50
housing units at a base price of $170,000, or less, to qualified buyers; to make
certain off-site improvements along street frontages; and to provide the
necessary insurance for the project. At December 31, 2002, the Company had
capitalized $1.1 million of costs related to permits, architectural designs, and
land acquisition. The Company will record the $901,000 received from the City of
Westminster as a reduction to the cost of the property acquired.

         The Company has completed the demolition work on the project and is
currently working on obtaining project financing of approximately $1.6 million.
The Company is also negotiating with a general contractor for the construction
of the housing units. Construction is expected to begin during the second
quarter of 2003. The Company plans to use a real estate marketing firm to handle
sales of the housing units. The estimated aggregate sales price of the units is
approximately $8.7 million, and the Company believes that revenues from the
project could range from $4 to $6 million during 2003.

         The Company has also acquired a five-acre Brownfields remediation site
and plans to construct 54 residences providing a total estimated value of $9.5
million. At December 31, 2002, the Company had capitalized $600,000 of costs
related to permits, architectural design, and property acquisition. This
property is encumbered by an 8%, $300,000 note, due on December 31, 2003. The
Company will seek financing for this project later in 2003. However, there can
be no assurance that the Company will be successful in obtaining financing for
either of these projects on acceptable terms. Failure to achieve such financing
would have a major adverse impact on the Company's financial position, results
of operations, and liquidity.

         The Company's working capital decreased to $1.3 million at December 31,
2002, down $1.6 million from $2.9 million as of December 31, 2001. The change in
working capital is the net result of a decrease in current assets of $4.0
million and a decrease in current liabilities of $2.4 million. The decrease in
current assets results from collections of combined receivables of $5.3 million,
a decrease in cash of $0.1 million, and a combined other current assets of $0.2
million, offset by an increase in land under development of $1.5 million. The
decrease in current liabilities results primarily from payment of accounts
payable and accrued liabilities of $2.6 million, offset by the net increase in
notes payable by $0.2 million.

         The Company's cash and cash equivalents decreased approximately $0.1
million to $0.4 million at December 31, 2002 from $0.5 million at December 31,
2001. The decrease in cash and cash equivalents of approximately $0.1 million
reflects a reduction in combined receivables and other assets of $5.6 million
plus $0.6 million of depreciation and other non-cash charges, less an increase
of $1.2 million for capitalized cost for land under development, a decrease of
$2.6 million in accounts payable and accrued expenses, and the net loss of $2.4
million. Cash flow from investing activities of $0.1 million is from the sale of
equipment. Cash used in financing activities of $0.2 million is primarily for
payment of notes and the repurchase of the Company's common stock.



                                       10
<PAGE>
         DEBT FINANCING. In December 2002, the Company issued a note for
$300,000 for approximately five acres of land located in Colorado. The Company
intends to develop this parcel into an affordable multi-family housing complex.
The note bears an interest rate of 8% with monthly interest-only payments
beginning February 1, 2003. The principal balance is due December 31, 2003. In
addition, as of December 31, 2002, there were no outstanding amounts due under
capital leases, nor does the Company have any liability or related risk with any
"off-balance sheet financing arrangements".

         CAPITAL COMMITMENTS. At present, the Company has no material
commitments with respect to capital expenditures. However, if and when actual
residential housing construction begins on the Westminster project, capital
expenditures of approximately $7.5 million may be required. Management believes
that such capital requirements could be met through secured lending arrangements
but can give no assurance that such financing will be available when required,
nor under terms acceptable to the Company. Management anticipates some capital
expenditures in 2003 which may be funded from working capital, term loans,
and/or equipment leases.

        The Company has a lease for its existing facility with such lease
expiring in May, 2005. Monthly rentals currently are approximately $6,100 in the
aggregate.

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

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

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Please see pages F-1 through F-28.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         None.


                                       11
<PAGE>
                                    PART III


ITEM 9, 10, 11 AND 12. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information required by these Items is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held June 10, 2003.



                                       12
<PAGE>
                                     PART IV

ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

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

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

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

                  3.       Exhibits.  The following exhibits are filed herewith:

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

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

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

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

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

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

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



                                       13
<PAGE>

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

     10.7        Line of Credit with Compass Bank                       Incorporated by reference to Exhibit 10.7
                                                                        to the Company's Annual Report on Form 10-K
                                                                        for the year ended December 31, 2001.

     10.8        Amendment to the Lease Agreement by and between the    Filed herewith electronically
                 Company and Sky Harbor Associates Limited Partnership

     10.9        Development Agreement with the City of Westminster,    To be filed by Amendment
                 CO.

      21         Subsidiaries of the Registrant                         Filed herewith electronically

      23         Consent of Grant Thornton LLP                          Filed herewith electronically

</Table>
            (b)   Reports on Form 8-K.

                  None.

ITEM 14.  CONTROLS AND PROCEDURES.

         Under the supervision and with the participation of management,
including the principal executive officer and the principal financial officer,
disclosure controls and procedures were evaluated with respect to effectiveness
and operation within 90 days of the filing date of this annual report. Based on
this evaluation, the principal executive officer and principal financial officer
deem the controls and procedures to be effective. Subsequent to the date of the
evaluation, there were no significant changes or other factors that would impact
disclosure controls or procedures.

         Certain controls and procedures are designed to ensure that management,
including the principal executive officer and the principal financial officer,
as appropriate, receive information requiring disclosure under the Securities
Exchange Act on a timely and complete basis. Such controls and procedures allow
the Company to file or submit required disclosure information on the appropriate
formats as required by the rules and regulations prescribed by the Securities
and Exchange Commission.




                                       14
<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:  March 31, 2003                 By  /s/ Steven H. Davis
                                           -------------------------------------
                                           Steven H. Davis
                                           President and Chief Executive Officer

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

<Table>
<Caption>
           Signature                  Capacity                        Date
<S>                                 <C>                          <C>
/s/ Steven H. Davis                 President,                   March 31, 2003
---------------------------------   Chief Executive Officer,
Steven H. Davis                     Secretary and Director


/s/ Craig C. Barto                  Director                     March 31, 2003
---------------------------------
Craig C. Barto


/s/ John D. Hendrick                Director                     March 31, 2003
---------------------------------
John D. Hendrick


/s/ George Pratt                    Director                     March 31, 2003
---------------------------------
George Pratt


/s/ Dale W. Bleck                   Chief Financial Officer      March 31, 2003
---------------------------------   and Assistant Secretary
Dale W. Bleck
</Table>





                                       15
<PAGE>
                                 CERTIFICATIONS

I, Steven H. Davis, certify that:

         1. I have reviewed this annual report on Form 10-KSB of CET
Environmental Services, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

              (a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

              (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

              (c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

              (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and

              (b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003                             /s/ Steven H. Davis
                                           -------------------------------------
                                           Steven H. Davis
                                           President and Chief Executive Officer
                                           (Principal Executive Officer)



                                       16
<PAGE>
I, Dale W. Bleck, certify that:

         1. I have reviewed this annual report on Form 10-KSB of CET
Environmental Services, Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

              (a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

              (b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

              (c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

              (a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and

              (b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Dated: March 31, 2003                          /s/ Dale W. Bleck
                                            -----------------------------------
                                            Dale W. Bleck
                                            Chief Financial Officer
                                            (Principal Financial Officer)





                                       17
<PAGE>
                  CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
                           CHIEF FINANCIAL OFFICER OF
                        CET ENVIRONMENTAL SERVICES, INC.
                       PURSUANT TO 18 U.S.C. SECTION 1350


         We certify that, to the best of our knowledge and belief, the Annual
Report on Form 10-KSB of CET Environmental Services, Inc. for the period ending
December 31, 2002:

         (1) complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and

         (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of CET
Environmental Services, Inc.


       /s/ Steven H. Davis                             /s/ Dale W. Bleck
------------------------------------            -------------------------------
Steven H. Davis                                 Dale W. Bleck
Chief Executive Officer                         Chief Financial Officer
March 31, 2003                                  March 31, 2003



                                       18
<PAGE>
CET ENVIRONMENTAL SERVICES, INC.


FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS



December 31, 2002 and 2001


                                       F-1

<PAGE>
                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
CET Environmental Services, Inc.

We have audited the accompanying consolidated balance sheets of CET
Environmental Services, Inc. as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2002 and 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of CET Environmental
Services, Inc. as of December 31, 2002, and the consolidated results of its
operations and its cash flows for the years ended December 31, 2002 and 2001, in
conformity with accounting principles generally accepted in the United States of
America.




GRANT THORNTON LLP



Denver, Colorado
February 25, 2003


                                       F-2

<PAGE>
                        CET Environmental Services, Inc.

                           CONSOLIDATED BALANCE SHEET


<Table>
<Caption>
 ASSETS                                                           December 31,
                                                                      2002
                                                                  -------------
<S>                                                               <C>
CURRENT ASSETS:
     Cash                                                         $     391,304
     Accounts receivable, less allowance for
         doubtful accounts of $17,094                                   262,400
     Contracts in process less allowance for doubtful
         accounts of $8,944                                              42,295
     Retention receivable                                                27,200
     Other receivables                                                   23,662
     Supplies Inventory                                                  13,972
     Real estate inventories                                          1,700,891
     Prepaid expenses                                                    92,442
                                                                  -------------
                 Total current assets                                 2,554,166
                                                                  -------------

EQUIPMENT AND IMPROVEMENTS:
     Field equipment                                                    160,412
     Vehicles                                                           311,199
     Furniture & fixtures                                                56,647
     Office equipment                                                   145,859
     Leasehold improvements                                              24,931
                                                                  -------------
                                                                        699,048
     Less allowance for depreciation and amortization                  (610,655)
                                                                  -------------
                 Equipment and improvements - net                        88,393
                                                                  -------------

OTHER ASSETS:
     Deposits                                                            12,268
     Accounts receivable - non current                                3,234,739
                                                                  -------------
                 Total other assets                                   3,247,007
                                                                  -------------

                                                                  $   5,889,566
                                                                  =============
</Table>

        The accompanying notes are an integral part of these statements.
                                      F-3

<PAGE>
                        CET Environmental Services, Inc.

                           CONSOLIDATED BALANCE SHEET


                    LIABILITIES AND STOCKHOLDERS' EQUITY

<Table>
<Caption>
                                                                     December 31,
                                                                        2002
                                                                    -------------
<S>                                                                 <C>
CURRENT LIABILITIES:
     Accounts payable                                               $     928,586
     Accrued expenses                                                      51,217
     Accrued payroll and benefits                                          27,943
     Notes payable - current                                              300,000
                                                                    -------------
                 Total current liabilities                              1,307,746
                                                                    -------------


COMMITMENTS AND CONTINGENT LIABILITIES                                         --

STOCKHOLDERS' EQUITY:
     Common stock (no par value) - authorized 20,000,000 shares;
         5,757,792 shares issued and outstanding                        8,419,407
     Paid-in capital                                                      104,786
     Accumulated deficit                                               (3,942,373)
                                                                    -------------

                 Total stockholders' equity                             4,581,820
                                                                    -------------

                                                                    $   5,889,566
                                                                    =============
</Table>

        The accompanying notes are an integral part of these statements.
                                      F-4
<PAGE>
                        CET Environmental Services, Inc.

                     CONSOLIDATED STATEMENTS OF OPERATIONS



<Table>
<Caption>
                                                            Year Ended December 31,
                                                         ----------------------------
                                                             2002            2001
                                                         ------------    ------------
<S>                                                      <C>             <C>
PROJECT REVENUE                                          $  2,355,920    $ 14,203,582

PROJECT COSTS:
      Direct                                                2,254,308      10,469,510
      Indirect                                                481,830       1,247,512
                                                         ------------    ------------
                                                            2,736,138      11,717,022
                                                         ------------    ------------

              Gross profit                                   (380,218)      2,486,560
                                                         ------------    ------------

OTHER OPERATING EXPENSES:
      Selling                                                 124,307         187,688
      General and administrative                            1,558,230       2,103,809
                                                         ------------    ------------

                                                            1,682,537       2,291,497
                                                         ------------    ------------

              Operating income (loss)                      (2,062,755)        195,063
                                                         ------------    ------------

OTHER INCOME (EXPENSE):
      Loss on sales of equipment                             (389,110)        (27,897)
      Interest income (expense), net                           11,607          23,063
      Other income, net                                         7,320          28,357
                                                         ------------    ------------
                                                             (370,183)         23,523
                                                         ------------    ------------

              Income (loss) before taxes on income         (2,432,938)        218,586
              Provision for income taxes                           --              --
                                                         ------------    ------------
NET INCOME (LOSS)                                        $ (2,432,938)   $    218,586
                                                         ============    ============


Earnings (loss) per common share                         $      (0.42)   $       0.04
                                                         ============    ============

Weighted average number of common shares                    5,779,967       6,076,872
                                                         ============    ============

Earnings (loss) per common share - assuming dilution     $      (0.42)   $       0.04
                                                         ============    ============

Weighted average number of fully diluted common shares      5,779,967       6,089,941
                                                         ============    ============
</Table>

        The accompanying notes are an integral part of these statements.
                                      F-5
<PAGE>

                        CET Environmental Services, Inc.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                     Years ended December 31, 2002 and 2001

<Table>
<Caption>
                                             Common stock                                               Total
                                      ----------------------------      Paid-in      (Accumulated    stockholders'
                                        Shares          Amount          capital        deficit)        equity
                                      ------------    ------------    ------------   ------------    ------------
<S>                                   <C>             <C>             <C>            <C>             <C>
Balance at December 31, 2000             6,258,803       8,629,755         104,786     (1,728,021)      7,006,520

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

Repurchase & retirement of
      common stock from former
      Director of the Company             (189,454)        (75,000)             --             --         (75,000)
Net income for the year                                                                   218,586         218,586
                                      ------------    ------------    ------------   ------------    ------------
Balance at December 31, 2001             5,976,549    $  8,506,007    $    104,786   $ (1,509,435)   $  7,101,358
                                      ------------    ------------    ------------   ------------    ------------

Repurchase & retirement of
      common stock from former
      Director of the Company             (218,757)        (86,600)             --             --         (86,600)
Net loss for the year                                                                  (2,432,938)     (2,432,938)
                                      ------------    ------------    ------------   ------------    ------------
Balance at December 31, 2002             5,757,792    $  8,419,407    $    104,786   $ (3,942,373)   $  4,581,820
                                      ============    ============    ============   ============    ============
</Table>


        The accompanying notes are an integral part of these statements.
                                      F-6

<PAGE>
                        CET Environmental Services, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<Table>
<Caption>
                                                                           Years ended December 31,
                                                                          --------------------------
                                                                             2002           2001
                                                                          -----------    -----------
<S>                                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income (loss)                                                   $(2,432,938)   $   218,586
      Adjustments to reconcile net (loss) income to net cash used in
          operating activities:
              Depreciation and amortization                                   180,200        391,751
              Loss on disposal of equipment                                   389,110         27,897
              Changes in operating assets and liabilities:
                 Decrease (increase) in accounts receivable                 3,595,604        401,150
                 Decrease (increase) in contracts in process                1,709,579      1,603,729
                 Decrease (increase) in income tax, retention
                      and other receivables                                    33,659        338,474
                 Decrease (increase) in prepaid expenses                      135,818         78,079
                 Decrease (increase) in supplies inventory and deposits       191,802        (84,967)
                 Decrease (increase) in real estate inventories            (1,215,541)      (185,350)
                 Increase (decrease) in accounts payable                   (2,413,122)    (2,895,411)
                 Increase (decrease) in accrued expenses
                    and income taxes                                         (215,054)      (213,392)
                                                                          -----------    -----------
                        Net cash used in
                           operating activities                               (40,883)      (319,454)
                                                                          -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchase of equipment                                                    (2,236)       (14,865)
      Proceeds from sale of equipment                                         149,550         29,500
                                                                          -----------    -----------
                        Net cash provided by
                             investing activities                             147,314         14,635
                                                                          -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Payments on notes payable                                               (98,466)       (17,817)
      Payments on capital leases                                                   --        (37,318)
      Payments on repurchase of common stock                                  (86,600)      (123,748)
                                                                          -----------    -----------
                        Net cash used in
                        financing activities                                 (185,066)      (178,883)
                                                                          -----------    -----------
                        Decrease in cash                                      (78,635)      (483,702)
                                                                          -----------    -----------
Cash at beginning of year                                                     469,939        953,641
                                                                          -----------    -----------

Cash at end of year                                                       $   391,304    $   469,939
                                                                          ===========    ===========
</Table>


        The accompanying notes are an integral part of these statements.
                                      F-7

<PAGE>
                        CET Environmental Services, Inc.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS


<Table>
<Caption>
                                                              Years ended December 31,
                                                             -------------------------
                                                                2002          2001
                                                             -----------   -----------
<S>                                                          <C>           <C>
Supplemental disclosures of cash flow information:
      Cash paid during the year
          Interest                                           $     4,226   $    15,072
                                                             ===========   ===========


Noncash investing and financing activities:
      Issuance of note payable for financing of
          insurance premiums                                 $        --   $   228,001
                                                             ===========   ===========

      Issuance of note payable for real estate inventories   $   300,000   $        --
                                                             ===========   ===========
</Table>



        The accompanying notes are an integral part of these statements.
                                      F-8

<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A -- ORGANIZATION AND DESCRIPTION OF COMPANY

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

       The Company has restructured its business activity and is now focused on
       property development in urban areas. Initial efforts in this area involve
       residential housing where land remediation tasks are required in order to
       achieve the desired result. Reflecting highly competitive pricing and the
       consequent margin erosion coupled with limited opportunities, the
       water/wastewater services business will be substantially phased out
       during the first half of 2003.

NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                                     GENERAL

       Consolidation

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

       Cash

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

       Accounts Receivable

       Credit is extended based on evaluation of a customer's financial
       condition and, generally, collateral is not required. Accounts receivable
       are due within thirty days and are stated at amounts due from customers
       net of an allowance for doubtful accounts. Accounts outstanding longer
       than the contractual payment terms are considered past due. The Company
       determines its allowance by considering a number of factors, including
       the length of time trade accounts receivable are past due, the Company's
       previous loss history, the customer's current ability to pay its
       obligation to the Company, and the condition of the general economy and
       the industry as a whole. The Company writes-off accounts receivable when
       they become uncollectible, and payments subsequently received on such
       receivables are credited to the allowance for doubtful accounts.



                                      F-9
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       Supplies Inventory

       Supplies inventory consists 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 following
       estimated useful lives. Leasehold improvements are amortized over the
       lives of the respective leases or the service lives of the improvements,
       whichever is shorter.

                           Description                      Depreciable life
                           -----------                      ----------------
                           Field equipment                  7 years
                           Vehicles                         5 years
                           Furniture & fixtures             5 years
                           Office equipment                 5 years

       Income Taxes

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

       Estimated Fair Value Information

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

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

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

       Note Payable: The carrying value approximates fair value at the interest
       rate at December 31, 2002 and is considered to approximate the market
       rate.

       Use of Estimates

       In preparing financial statements in conformity with accounting
       principles, generally accepted in the United States of America,
       management is required to make estimates and assumptions that



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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       affect the reported amounts of assets and liabilities, the disclosure of
       contingent assets and liabilities at the date of the financial
       statements, and the reported amounts of revenue and expenses during the
       reporting period. Actual results could differ from those estimates.

       Concentrations of Credit Risk

       The Company's cash balances, which are at times in excess of federally
       insured levels, are maintained at a large regional bank, and are
       continually monitored to minimize the risk of loss. The Company grants
       credit to its customers, who are varied in terms of size and financial
       strength. Customer balances are continually monitored to minimize the
       risk of loss.

       The Company's residential housing segment has two primary projects.
       Although there were no revenues recorded in the residential housing
       segment for 2002, these two projects will provide a significant portion
       of the Company's future revenues and cash flows. If any unforeseen
       circumstance would interrupt the development and completion of these
       projects, it would have a material adverse affect on the Company's
       financial position, results of operations, and liquidity.

       Earnings per Share

       The Financial Accounting Standards Board Statement of Financial
       Accounting Standards No. 128, Earnings Per Share (SFAS 128) requires the
       presentation of basic earnings per share (EPS) and, for companies with
       potentially dilutive securities such as convertible debt, options, and
       warrants, diluted EPS. In 2002, all options were excluded from the
       computation of potential common shares as the option price exceeded the
       average market price during the period and the Company incurred a net
       loss. Similarly, options and warrants of 59,600 and 72,925 were excluded
       in 2001.

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


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<Table>
<Caption>
                                                         2002          2001
                                                      ----------    ----------
<S>                                                   <C>           <C>
     Numerator for diluted earnings per share:
             Net income (loss)                        $   (2,433)   $      219
                                                      ==========    ==========

     Denominator:
         Denominator for basic earnings per share -
             weighted average shares outstanding           5,780         6,077

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

     Denominator for diluted earnings per share:           5,780         6,090
                                                      ==========    ==========

     Basic earnings (loss) per share                  $    (0.42)   $     0.04
                                                      ==========    ==========

     Diluted earnings (loss) per share                $    (0.42)   $     0.04
                                                      ==========    ==========
</Table>


       In 2002, basic earnings per share data was computed by dividing net loss
       by weighted average number of common shares outstanding during the
       period. Diluted earnings-per-share computations do not give effect to
       potentially dilutive securities including stock options and warrants as
       their effect would have been anti-dilutive.

       In 2001, basic earnings-per-share data was computed by dividing net
       income by the weighted average number of common shares outstanding during
       the period. Diluted earnings per share were adjusted for the assumed
       conversion of potentially dilutive securities such as stock options.

       Stock-Based Compensation

       SFAS No. 123, Accounting for Stock-Based Compensation, establishes
       financial accounting and reporting standards for stock-based employee
       compensation plans. SFAS No. 123 encourages entities to adopt a
       fair-value-based method of accounting for stock compensation plans.
       However, SFAS No. 123 also permits entities to continue to measure
       compensation costs under APB 25 with the requirement that pro forma
       disclosures of net income and earnings per share be included in the notes
       to financial statements. The Company follows the disclosure requirements
       of SFAS No. 123 by presenting pro forma results of net income and
       earnings per share data; however, the Company uses the intrinsic value
       method as prescribed by APB 25 to account for its stock-based employee
       compensation plans.



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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Had compensation cost for these plans been determined consistent with
       SFAS No. 123, the Company's net loss and loss per share would have been
       reduced to the following pro forma amounts:

<Table>
<Caption>
                                                    December 31,     December 31,
                                                        2002              2001
                                                    -------------    -------------
<S>                                                 <C>              <C>
        Net loss available to
            common stockholders:

        As reported                                 $  (2,432,938)   $     218,586
        Stock compensation expense                        (13,873)         (52,278)
                                                    -------------    -------------
        Pro forma                                   $  (2,446,811)   $     166,308
                                                    =============    =============


        Basic and diluted net loss available
            to Common Stockholders per
            common share:

        As reported                                 $        (.42)   $         .04
        Pro forma                                   $        (.42)   $         .03
</Table>

       Segment Information

       CET has determined that its reportable segments are those that are based
       on the Company's method of internal reporting, which disaggregates its
       business by product category. CET's revenues and expenses are generated
       from two segments, water/wastewater construction and management, and
       residential housing development and construction. Transfers and sales
       between reportable segments, if any, are recorded at cost.

       Recent Accounting Pronouncements

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

                  WATER/WASTE WATER CONSTRUCTION AND MANAGEMENT

       Contracts

       Contracts are defined in terms as either fixed price or
       time-and-materials. A majority of the CET's revenues for 2002 were
       generated from fixed price contracts whereby revenue is recorded as costs
       are incurred as a percentage of estimated total costs. Due to
       uncertainties in the estimation process, actual results could differ from
       estimates used. Provision for losses on uncompleted contracts are made in
       the period in which such losses are determined. Recoveries are recorded
       to revenue when received.


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Time-and-material contracts specify fixed hourly rates for each type of
       labor hour and reimbursement, which may include a small mark-up, for
       material, inventories and subcontractor costs. In addition, many of the
       time and material contracts have a stated maximum contract price, which
       cannot be exceeded without an authorized change order. Revenue is
       recorded on time and materials contracts based upon the labor costs
       incurred as a percentage to estimated total labor costs on the percentage
       of completion method.

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

                              PROPERTY DEVELOPMENT

       Real Estate Inventories

       Real estate inventories consist of land under development. All direct
       costs, including land, home construction costs, interest and real estate
       taxes, and indirect costs related to construction or development are
       capitalized during the construction or development period. Land and
       improvement costs are allocated within a project based on relative sales
       value. Actual construction of residential housing is anticipated to begin
       in 2003. It is not possible to determine the amount of real estate
       inventory that will be sold during the next year.

       Real estate inventories are stated at the lower of cost or fair value.
       Fair value is based on estimated sales price less cost to sell.

       Revenue Recognition

       Revenues from the sale of real estate inventories will be recognized when
       a sufficient down payment has been received; financing has been arranged;
       title, possession and other attributes of ownership have been transferred
       to the buyer; and the Company is not obligated to perform significant
       additional activities after sale and delivery.

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

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

       In November 1999, following consideration of certain information provided
       by the Company to the EPA, the EPA's suspension was terminated, and an
       Administrative Agreement ("Administrative Agreement") between the EPA and
       the Company was executed. Upon execution of the



                                      F-14
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       Administrative Agreement, the Company became immediately eligible to bid
       for, receive, and perform any federal contract or subcontract, or
       participate in any assistance, loan, or benefit without restriction. In
       the Administrative Agreement, the Company agreed to cooperate in full
       with further investigations into the EPA allegations including access to
       records, availability of Company personnel, certain reporting
       requirements, audit of EPA billing prior to submission, and certain
       restrictions of Company assets without notification to the EPA (See Note
       Q - LEGAL for additional information).

       The fourth and final option period under the existing EPA contract
       expired on January 8, 2002. At that time, the Company elected not to
       pursue a new contract with the EPA. The Company has completed the EPA
       work-orders awarded up to the date of expiration; received payment for
       final invoices and award fees, other than some incidental amounts for
       disputed items remaining from the year 2000; closed all EPA related
       operations and locations; and reduced personnel levels to conform with
       current operating activities.

NOTE D -- SIGNIFICANT CUSTOMERS

       Historically, a significant portion of the Company's business was from
       contracts with the EPA. As of December 31, 2002 and 2001, the balance of
       accounts receivable from the EPA was $0 and $1,737,993, respectively.
       Revenue from the EPA in 2002 and 2001 amounted to approximately $338,000
       and $12 million, or 14% and 87% of annual revenues, respectively. The
       Company elected not to pursue a new EPA contract, and the existing
       contract expired on January 8, 2002 (see Notes C and Q).

       The Company performed work for two Brownfields projects located in
       Hercules and Santa Clarita, CA. During the third quarter of 2000, the
       Company experienced problems collecting receivables from Remediation
       Financial, Inc. ("RFI"), and its affiliated partnerships Santa Clarita,
       LLC and LCRI Investments, LLC, the developers of the two Brownfields
       projects. The severity of the problems was of such sufficiency to cause
       the Company to suspend work on the Santa Clarita, CA project.
       Subsequently, the Company was presented with termination notices for both
       projects with the Santa Clarita termination effective October 6, 2000 and
       the Hercules termination effective October 31, 2000. In February, 2002,
       the Company entered into a settlement agreement with respect to the Santa
       Clarita project and received $2.1 million reflecting complete recovery of
       the receivable being carried by the Company for the Santa Clarita
       project. On August 7, 2002, after a lengthy court-ordered arbitration,
       the Company entered into an agreement with RFI allowing for the recovery
       of $3.2 million plus accrued interest at an annual rate of 8% from
       October 19, 2001, contingent upon the sale of the Hercules property (see
       Note P Contingencies for additional information).

NOTE E -- REAL ESTATE INVENTORIES

       Real estate inventories at December 31, 2002 consist of land under
       development.

       The Company has signed a development agreement with a Colorado
       municipality to redevelop a residential real-estate project. The project
       entails purchasing subject property, demolition and environmental
       remediation, and construction of new residential housing units and other
       related structures. Under the Development Agreement, the municipality
       will provide approximately




                                      F-15
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       $901,000 toward the $1,601,000 purchase price of the property, agreed to
       pay the Company approximately $185,000 for demolition work, and to
       provide other assistance. The Company is required to sell at least 10 of
       the 50 housing units at a base price of $170,000, or less, to qualified
       buyers; to make certain off-site improvements along street frontages; and
       to provide the necessary insurance for the project. In addition, the
       Company is engaged in a Brownfields project of approximately five acres
       in size that entails purchasing subject property, environmental
       remediation, and construction of residential housing units. At this time,
       the Company is in the process of building the infrastructure required of
       such developments but has not commenced construction of the housing
       units. Accordingly, there has been no revenue recorded on these projects.
       All direct costs, including land, land development costs, and indirect
       costs related to development are capitalized during the development
       period.

NOTE F -- OTHER ASSETS - ACCOUNT RECEIVABLES - NON CURRENT

       The Company and RFI, on August 7, 2002, entered into a settlement
       agreement whereby the Company shall receive $3.2 million plus accrued
       interest at an annual rate of 8% from October 19, 2001, contingent upon,
       but not limited to, the sale of the Hercules property by not later than
       November 1, 2003. After such date, if the Hercules property has not been
       sold, the Company may resume all legal action necessary including
       foreclosure to recover the amount due at November 1, 2003. Due to the
       uncertainty regarding the timing of the realization of the receivable,
       the $3.2 million carrying value of the receivable has been reclassified
       from a current asset to Other Assets, Account receivable - Non-current at
       December 31, 2002. The Company has not and will not record interest until
       paid. In the event foreclosure is necessary, the Company believes that
       the value of its secured interest in the Hercules property is more than
       sufficient to recover the carrying amount of the Hercules receivable. The
       prolonged delay in collecting this receivable has impaired the Company's
       cash flow. (See Note P Contingencies for further information).

NOTE G -- OTHER EQUIPMENT DISPOSALS

       During 2002, equipment dispositions and write-offs consisted of $538,660
       of net equipment disposals for cash proceeds of $149,550. The Company
       recorded a loss of $389,110 on the disposals.

       During 2001, equipment dispositions and write-offs consisted of $55,142
       of net equipment disposals for cash proceeds of $29,500 and $54,273 of
       leased equipment returns. The Company recorded a loss of $25,642 on the
       disposals plus an additional loss of $2,255 for leased equipment returns.




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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H -- NOTES PAYABLE

<Table>
<S>                                                                                  <C>
       Notes payable consists of the following at December 31, 2002:

       Note payable for real estate inventories (land), interest at 8.00%, with
       monthly interest-only payments of $2,000, principal balance due December
       31, 2003. The land is collateral for the note.                                $300,000
                                                                                     --------
                                                                                     $300,000
       Less current portion                                                           300,000
                                                                                     --------
                                                                                     $     --
                                                                                     ========
</Table>

NOTE I -- STOCKHOLDERS' EQUITY

       On May 2, 2001, the Company reached an agreement to purchase 631,514
       shares of the Company's common stock from a former Director and Executive
       Vice President of the Company for a maximum of $250,000, or approximately
       $0.395 per share. Initially, the Company purchased 189,454 shares for
       $75,000. The remaining 442,060 shares would be purchased for a maximum of
       $175,000, the payment would be contingent upon receipt of the past due
       receivables from RFI and its affiliated partners. Under the terms of the
       agreement, 5% of the proceeds from RFI as collected, up to the maximum of
       $175,000, would be applied to the purchase of the stock. In February
       2002, as a result of the Santa Clarita settlement with RFI and its
       affiliated partners, the Company purchased 218,757 shares of common stock
       for $86,600 or $0.395 per share.

NOTE J -- STOCK REPURCHASE PLAN

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

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

       The Company maintains a Profit Sharing and a 401(k) Plan covering certain
       qualified employees, which includes employer participation in accordance
       with the provisions of Section 401(k) of the Internal Revenue Code. The
       Plan allows participants to make pretax contributions and the Company is
       required to match 50% of the first 6% of all elective deferrals. The
       profit sharing portion of the Plan is discretionary and noncontributory.
       All amounts contributed to the plan are deposited into a trust fund
       administered by an independent trustee.



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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       The Company's matching 401(k) contributions required by the 401(k) plan
       were $13,786 and $13,925 for the years ended December 31, 2002 and 2001,
       respectively. The Company has not made any discretionary contributions
       under the profit sharing portion of the Plan.

NOTE L -- STOCK OPTIONS

       On March 1, 1995, the Company adopted an Incentive Stock Option Plan (the
       Plan) for key personnel. A total of 550,000 shares of the Company's
       common stock are reserved for issuance pursuant to the exercise of stock
       options (the Options) which may be granted to full-time employees,
       including officers and directors who are also employees of the Company.
       The Plan is administered by the Board of Directors. In addition to
       determining who will be granted Options, the Board of Directors has the
       authority and discretion to determine when Options will be granted and
       the number of Options to be granted. The Board of Directors may grant
       Options intended to qualify for special treatment under the Internal
       Revenue Code of 1986, as amended (Incentive Stock Options) and may
       determine when each Option becomes exercisable, the duration of the
       exercise period for Options, and the form of the instruments evidencing
       Options granted under the Plan. The Plan is accounted for under APB
       Opinion 25 and related interpretations. The Options generally have a term
       of 10 years when issued and vest over three to five years.

       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 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 2002: no expected
       dividends, expected volatility of 152%, risk-free interest rate of 6.0%,
       and expected lives of 10 years.






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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



       A summary of the status of the Plan follows:

<Table>
<Caption>
                                                                                  Weighted
                                                                               average exercise
                                                                Shares         price per share
                                                             --------------    ----------------
<S>                                                          <C>               <C>
              Outstanding at January 1, 2001                        124,600    $         1.43
              Granted                                                    --                --
              Exercised                                                  --                --
              Canceled                                                   --                --
                                                             --------------    --------------
              Outstanding at December 31, 2001                      124,600    $         1.43
                                                             --------------    --------------

              Total exercisable at December 31, 2001                 73,400    $         1.93
                                                             ==============    ==============

              Outstanding at January 1, 2002                        124,600    $         1.43
              Granted                                                 5,000    $          .20
              Exercised                                                  --                --
              Canceled                                              (51,000)             1.30
                                                             --------------    --------------
              Outstanding at December 31, 2002                       78,600    $         1.33
                                                             --------------    --------------

              Total exercisable at December 31, 2002                 55,100    $         1.70
                                                             ==============    ==============
</Table>

       Weighted average fair value of options granted during the year ended
       December 31, 2002 is $.20. There were no options granted in 2001.

       The following information applies to options outstanding at December 31,
       2002:

<Table>
<Caption>
                                            Options Outstanding                   Options Exercisable
                                 -------------------------------------------   --------------------------
                                                 Weighted
                                                 average          Weighted                      Weighted
                                                remaining         average                       average
                                    Number      contractual       exercise       Number         exercise
                                 outstanding   life (years)        price       exercisable       price
                                 -----------   -------------    ------------   -----------    -----------
       Range of
       exercise prices
       ---------------
<S>                               <C>          <C>              <C>             <C>            <C>
       $0.20 - $0.66                50,000        8.12             $0.41           28,000         $0.43
       $1.30 - $1.95                 7,500        6.44             $1.31            6,000         $1.31
       $3.00 - $4.50                21,100        2.39             $3.50           21,100         $3.50
                                  --------                                      ---------

                                    78,600                                         55,100
                                  ========                                       ========
</Table>



                                      F-19
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE M -- TAXES ON INCOME

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

<Table>
<Caption>
                                              2002          2001
                                           ----------    ----------
<S>                                        <C>           <C>
          Provision (benefit) for income
             taxes at statutory rate       $ (827,200)   $   74,300
          Change in valuation reserve         917,400        16,400
          Use of operating loss carry
             forwards                              --       (46,800)
          Stock options                            --            --
          Other                               (90,200)       13,200
          Change in prior year estimate            --       (57,100)
                                           ----------    ----------

                                           $       --    $       --
                                           ==========    ==========
</Table>

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

<Table>
<Caption>
                                                     2002           2001
                                                  -----------    -----------
<S>                                               <C>            <C>
                Alternative minimum tax credit    $   127,400    $   127,400
                Allowance for doubtful accounts         9,900         39,000
                Other reserves                          7,900         12,300
                NOL carryforward                    1,729,000        871,500
                Other                                 (30,000)      (123,400)
                                                  -----------    -----------
                                                    1,844,200        926,800
                Valuation reserve                  (1,844,200)      (926,800)
                                                  -----------    -----------

                                                  $        --    $        --
                                                  ===========    ===========
</Table>

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

       At December 31, 2002, the Company has net operating carry forwards for
       regular income tax purposes of approximately $4.5 million which expire in
       various amounts and in years 2018 through 2022.


                                      F-20
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N -- LEASE COMMITMENTS

       The Company is obligated under certain operating leases for its
       facilities. The leases expire at various dates through 2005, with
       appropriate rentals as set forth below. Some leases also provide for
       payments of taxes and certain common area costs and expenses.

       The following is a summary at December 31, 2002, of the future minimum
       rents due under noncancelable operating leases:

<Table>
<Caption>
                        Year ending December 31,
                        ------------------------
<S>                                                              <C>
                                 2003                            $  83,673
                                 2004                               77,495
                                 2005                               32,800
                                                                 ---------

                                 Total                           $ 193,968
                                                                 =========
</Table>

       Total rent expense under operating leases for the years ended December
       31, 2002 and 2001 was $110,917 and $217,573.

NOTE O -- DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

       The estimated fair values of the Company's financial instruments at
       December 31, 2002 are as follows:

<Table>
<Caption>
             2002                                         Carrying amount         Estimated fair value
             ----                                         ---------------         --------------------
<S>                                                       <C>                     <C>
             Cash                                            $ 391,304                $ 391,304
             Accounts receivable - current                   $ 262,400                $ 262,400
             Other receivables                               $  23,662                $  23,662
             Note payable                                    $ 300,000                $ 300,000
</Table>

NOTE P -- CONTINGENCIES

       In conjunction with the contract to provide services described in Note D,
       the Company, LCRI Investments, and RFI are parties to a Commercial
       Insurance Premium Finance and Security Agreement under which the Company
       guaranteed a $10.1 million Bond to Secure Financial Obligation for the
       Hercules, CA project. The bond secures a note that requires quarterly
       principal payments of $542,278 which are made by LCRI Investments, LLC.
       As of December 31, 2002, LCRI Investment, LLC was in default on their
       2001 and 2002 quarterly payments. On July 11, 2001, a letter was issued
       to LCRI Investments, LLC, RFI, and the Company calling for the immediate
       payment of remaining principal and interest of $7.2 million. LCRI and/or
       RFI allegedly entered into certain agreements with the note holder and
       the bond company providing for a temporary forbearance from pursuing
       their respective




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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       claims. There has been no legal action taken against the Company for the
       default. Management believes the Company is entitled to be indemnified to
       the extent it is ultimately obligated to make any payments under any of
       these arrangements. Based on the secured deed of trust mentioned in Note
       D, management believes that any amounts paid as a result of the guarantee
       will be recovered.

       Guarantee Bank has issued a Letter of Credit for $150,000 as collateral
       for bonding requirements of the Company's water/wastewater treatment and
       construction efforts.

NOTE Q -- LEGAL

       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.

       Since early 1998, the Company has been the subject of an investigation by
       the Office of the Inspector General (OIG) of the Environmental Protection
       Agency (EPA). While initially broad in scope, the investigation is now
       focused on labor billing-rates to the EPA beginning in the 1992-1994
       period and selected subsequent years. The Company has cooperated fully in
       all OIG inquiries and will continue to do so when and if required.
       Independent audits by the Defense Contract Audit Agency (DCAA),
       subsequent to initiation of the OIG investigation, have not been adverse
       nor have resulted in claims against the Company. In an effort to resolve
       the dispute, the Company requested non-binding arbitration which allows
       for a full discussion of the issues before a neutral party. The OIG
       rejected this proposal. Subsequently, during the third quarter of 2002,
       the Company attempted to reach a settlement agreement in order to limit
       further legal costs. In response to this initiative, OIG has offered to
       settle the case for $8.7 million based on certain scenarios and imputed
       costs generated within its offices. The Company strongly disputes and
       rejects the basis upon which the scenarios were developed and denies any
       wrongdoing in dealings with the EPA. No loss provision has been made at
       December 31, 2002 relating to this matter as the probable outcome is
       unknown. If the Company does not prevail in its defense of this dispute,
       it could have a material adverse effect on the Company's financial
       position, results of operations, and liquidity.

       On August 8, 2002, the Company was named as a third-party defendant in a
       pending lawsuit in the U. S. District Court for the Western District of
       Washington in which the United States Environmental Protection Agency
       ("EPA") sued Dan Alexander and Harriett Alexander (the "Alexanders"). The
       EPA alleges that the Alexanders caused the pollution of soil and
       groundwater through its use and storage of a certain weed killer and is
       seeking reimbursement of costs the EPA expended to clean up the site,
       which totaled approximately $3,500,000. The Alexanders have denied
       liability but have asserted that, if they are held liable, the Company,
       Dow Chemical Company, and Ecology and Environment, Inc., the third-party
       defendants named in the lawsuit, should be held at least partially
       responsible. In 1998 and 1999, as required under the then-existing
       Emergency and Rapid Response and Clean-Up Services contract with the EPA,
       the Company provided and was compensated for clean-up operations at the
       site. The Alexanders allege that the Company caused the amount of
       pollution to increase through negligent




                                      F-22
<PAGE>
                        CET ENVIRONMENTAL SERVICES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       actions in its clean-up operations. The Alexanders are also seeking
       monetary damages from the Company to reimburse them for damage to their
       property which they allege the Company caused during the clean-up
       operations. No loss provision has been made at December 31, 2002 relating
       to this matter as the probable outcome is unknown. If the Company does
       not prevail in its defense of this dispute, it could have a material
       adverse effect on the Company's financial position, results of
       operations, and liquidity.

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

NOTE R -- SEGMENT INFORMATION

       The Company operates in two business segments - water/wastewater
       construction and management, and residential housing development and
       construction. All of the Company's operations and customers are located
       in Colorado. A summary of the Company's business segments is shown below
       (in thousands).

<Table>
<Caption>
                                                                Water/wastewater
                                                 Residential     Construction &
       December 31, 2002                           Housing          Management            Total
                                               ---------------   ---------------    ---------------
<S>                                            <C>               <C>                <C>
             Revenues                          $            --   $         2,356    $         2,356

             Segment profit (loss)             $            --   $        (2,433)   $        (2,433)

             Interest revenue (expense) net    $            --   $            12    $            12
             Depreciation and amortization     $                 $           180    $           180
             Segment assets                    $         1,701   $         4,189    $         5,890

             Expenditures for segment assets   $           215   $             2    $         1,217

       December 31, 2001

             Revenues                          $            --   $        14,204    $        14,204

             Segment profit (loss)             $            --   $           219    $           219

             Interest revenue (expense) net    $            --   $            23    $            23
             Depreciation and amortization     $            --   $           392    $           392
</Table>





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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       NOTE S -- SUBSEQUENT EVENTS

       401(K) Plan

       The Company has made the decision to terminate the CET Environmental
       Services, Inc. 401(K) Plan effective April 1, 2003.


                                      F-24




<PAGE>
                                EXHIBIT INDEX

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

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

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

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

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

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

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

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

     10.7        Line of Credit with Compass Bank                            Incorporated by reference to Exhibit 10.7
                                                                             to the Company's Annual Report on Form 10-K
                                                                             for the year ended December 31, 2001.

     10.8        Amendment to the Lease Agreement by and between the         Filed herewith electronically
                 Company and Sky Harbor Associates Limited Partnership

     10.9        Development Agreement with the City of Westminster,         To be filed by Amendment
                 CO.

     21          Subsidiaries of the Registrant                              Filed herewith electronically

     23          Consent of Grant Thornton LLP                               Filed herewith electronically

</Table>