<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                  For the Fiscal Year Ended: DECEMBER 31, 1999
                           Commission File No. 1-13852



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

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

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



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

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

                                     Yes X    No   ,
                                        ---     ---

As of March 21, 2000, there were 6,284,288 shares of Common Stock outstanding.
The aggregate market value of voting stock held by nonaffiliates of the
Registrant on that date was approximately $5,635,000.

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


                      DOCUMENTS INCORPORATED BY REFERENCE:

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





<PAGE>   2



                                     PART I

ITEM 1. BUSINESS.


The Company

         The Company was incorporated in February 1988 under the name "Thorne
Environmental, Inc." to conduct business in environmental consulting,
engineering, remediation, and construction. The Company's initial growth
resulted from its successful performance of emergency response cleanup services
in certain western states and the Trust Territory of the Pacific Islands for the
U.S. Government and various commercial clients. The Company has developed a
broad range of expertise in non-proprietary technology-based environmental
remediation and water treatment techniques for both the public and private
sectors.

         The Company was suspended by the Environmental Protection Agency in
August, 1999. This action caused significant short-term revenue loss. Shortly
after the notice of suspension was received, the Company was notified by its
bank, National Bank of Canada, that it required full repayment of the Company's
loan. These events necessitated that the Company rapidly downsize its operations
and change the focus of its ongoing operations.

         The Company is completing its existing government programs contractual
obligations. However, the Company has decided not to pursue any further
contracting relationship with the Environmental Protection Agency and the
Department of Defense. As described in detail further in this Section, the
Company is attempting to assign and sell this portion of the Company's business
operations.

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

         In July 1995, the Company completed an initial public offering of 1.2
million shares of its Common Stock, and in August 1995, sold an additional 0.2
million shares pursuant to an overallotment option. The net proceeds to the
Company from the public offering were approximately $5.8 million. Concurrent
with the IPO, the Company became listed on the American Stock Exchange under the
symbol "ENV." In conjunction with the offering, warrants for an additional
120,000 shares of Common Stock were issued as partial compensation for
underwriting services. These warrants are exercisable at a price of $6.00 per
share subject to certain price adjustments for five years from the date of the
offering.

         In December 1996, the Company commenced a Private Placement Offering of
Common Stock. This offering was completed in January 1997, and resulted in the
issuance of 0.7 million shares with net proceeds to the Company totaling $2.0
million. The Common Stock sold via this offering was registered for resale in a
Form S-3 Registration Statement which became effective January 7, 1998. In
conjunction with the offering, warrants for an additional 72,925 shares of
Common Stock were issued as partial compensation for underwriting services.
These warrants are exercisable at a price of $3.60 per share for five years from
the date of the offering.






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<PAGE>   3

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

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

         In December 1998, the Company sold all of the outstanding stock of WQM
and H2O for $12.5 million to AquaSource Services and Technologies, Inc. In
addition to the $12.5 million, additional consideration may be paid based on the
final audit of working capital levels. The Company recorded a gain of $10.2
million and received $11.3 million at the date of sale, and in the first quarter
of 1999 received an additional $1.25 million. As of December 31, 1999, the
Company has included in other receivables approximately $1.5 million remaining
from amounts due on the sale of WQM. In February 2000, the Company and
AquaSource signed a settlement agreement resolving the amounts due between the
parties (see Item 3. Legal Proceedings).

         In August 1998, the Company completed a private financing, raising $1.9
million of net proceeds in a placement of convertible preferred stock and
warrants. The preferred shares could be converted into shares of the Company's
Common Stock at a 15 percent discount to the price of the Common Stock at the
time of conversion with a maximum conversion price of $3.35. Three-year warrants
to purchase an aggregate of 35,000 shares of the Company's Common Stock at a
price of $3.00 per share were also issued. Through January 1999, a total of 430
shares of the preferred securities were converted into 472,803 shares of Common
Stock by the holders. The Common Stock issued upon conversion was registered for
resale in a Form S-3 Registration Statement which became effective August 13,
1998.

         In January 1999, the Company redeemed the remaining shares of Preferred
Stock for $1,927,400 plus $4,873 of unpaid dividends through the date of
redemption. The warrants issued in connection with the preferred stock remain
outstanding.

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

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

         After review of available information and consultation with its legal
counsel, management believes that the allegations brought against the Company
did not warrant suspension. Additionally,






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management intends to cooperate in full but also vigorously defend itself in the
EPA's further investigation into the allegations. However, there can be no
assurance that further suspension will not occur or that the Company will
prevail in this matter. If further suspension occurs, it will have a material
effect on the Company's financial position, results of operations and liquidity.

         In August 1999, following the EPA suspension, the Company initiated a
restructuring plan ("Restructuring Plan") to reduce operating costs and gain
efficiencies through sale, downsizing and closure of regional offices. In
September 1999, under the Restructuring Plan, the Company sold substantially all
its assets in the Mobile and Jackson regions for proceeds totaling $0.5 million.
Also under the Restructuring Plan, in October 1999, the Company closed its
regional offices located in New Orleans and Houston.

         In October 1999, the Company entered into an Asset Purchase and
Assignment Agreement (the "IT Purchase Agreement") with IT Corporation to sell
or assign substantially all of the assets in the Company's Seattle Regional
office for a sales price of $1.3 million. The IT Purchase Agreement provides for
the assignment of the Company's remaining EPA contract dated January 9, 1997
(the "EPA Contract") and the sale of certain assets and the assumption of
certain liabilities and obligations used in, directly associated with, and
necessary in the performance of the EPA Contract. Closing of the IT Purchase
Agreement is contingent upon the execution of a novation agreement by and
between the Company, IT Corporation and the EPA consenting to the assignment of
the EPA Contract. The closing of this IT Purchase Agreement is also contingent
on the normal closing conditions including the continued accuracy of
representation and warranties, no material adverse changes, and the receipt of
necessary consents from other parties. As discussed in Note C to the Company's
Consolidated Financial Statements, EPA revenue represents approximately 60%, 50%
and 39%, respectively, of the Company's revenue for the years ending December
31, 1999, 1998 and 1997. Upon novation of the EPA contract, the Company would
receive no further EPA revenue. However, there can be no assurance that approval
of the novation will be received from the EPA or that the subsequent closing of
the IT Purchase Agreement will occur. At the date of this report, the parties
are still in discussions with the EPA concerning the proposed novation.

         In December 1999, the Company entered into an Asset Purchase Agreement
(the "CAPE Purchase Agreement ") with Cape Environmental Management, Inc.
("CAPE") to sell or assign substantially all of the assets in the Company's
Tustin, California operations for a sale price of $2.1 million. The CAPE
Purchase Agreement provides for the assignment of certain federal/non-EPA and
commercial contracts, the sale of certain assets, and the assumption of certain
liabilities directly associated with the performance of the contracts. Closing
of the CAPE Purchase Agreement is contingent upon the execution of a novation
agreement by and between the Company, CAPE, and the U.S. Defense Contract
Management Command ("DCMC") consenting to the assignment of the federal
contracts. The related federal contracts consist of the Pre-Placed Remedial
Action Contracts ("PRAC"), the Air Force Center for Environmental Excellence
("AFCEE"), the Total Environmental Restoration Contract ("TERC"), and the
McClellan Environmental Technologies Remediation Implementation Contract
("METRIC"). The closing of this CAPE Purchase Agreement is also contingent on
the normal closing conditions including the continued accuracy of representation
and warranties, no material adverse changes, and the receipt of necessary
consents from other parties. Upon novation, the Company would receive no further
federal revenue which consisted of approximated 8%, 12% and 9% for the years
ending December 31, 1999, 1998 and 1997. In addition, the Company will enter
into a non-compete agreement with CAPE which would prohibit the Company from
performing environmental remediation services for the Department of Defense,
with certain limited exceptions, anywhere in the United States, or for certain
customers in California. The non-compete agreement would be for a term of four
years. However, there can be no assurance that approval of the novation will be
received from the DCMC or that the subsequent closing of the CAPE Purchase
Agreement will occur. At the date of this report, the parties are still in
discussions with the DCMC concerning the proposed novation.







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<PAGE>   5

         In February 2000, the Company closed its Richmond, California office
and transferred field equipment, office equipment and other assets to the
Company's other locations, primarily to a project located near Hercules,
California.

The Environmental Industry

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

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

         Innovative onsite remediation technologies are in high demand to
provide an alternative to offsite disposal of hazardous waste. These
technologies have been provided to various Company clients in order to minimize
and/or eliminate our clients' cradle-to-grave liability. Onsite technologies
such as bioremediation, bioventing, vapor extraction, gas/air sparging,
low-temperature thermal desorption, chemical fixation, and soil washing are
gaining wide-spread regulatory acceptance. The Company strives to use these
remediation techniques more efficiently than its competitors.

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

         Since 1994, increased pressure to create uses for contaminated and idle
properties has driven a rise in industrial redevelopment or "Brownfield" site
remediation programs. The term "Brownfield" comes from an EPA-sponsored program
to study the redevelopment of "abandoned, idled, or underused industrial
facilities where expansion or redevelopment is complicated by real or perceived
environmental contamination" (U.S. EPA). The exact number of Brownfield sites is
unclear; however, their existence and a governmental effort to facilitate their
cleanup have created an opportunity for full service remediation as well as
financial participation in the redevelopments.






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<PAGE>   6

Organization of the Company

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

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

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

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

         o        Manpower and equipment for performing site preparation such as
                  excavation, grading, berming and hauling soil; removal of
                  obstacles (i.e., drums, transformers, USTs, and piping); and
                  dismantling ASTs.

         o        Manpower and specialized equipment for erecting or installing
                  remediation equipment, support buildings, and enclosures for
                  remediation of contaminated soil, water, sludge or sediment.

Services and Products Provided by the Company

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

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

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

         o        Tank and sump services

         o        Water and wastewater treatment

         o        Specialty construction

         o        Plant operation and maintenance

         o        Waste management and removals

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






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         o        Waste area construction/closures

         o        Facility closures

         o        Emergency response

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

         The Company has developed a Brownfields Redevelopment Program that has
proven success in quickly and cost-effectively returning underutilized
properties to productive use. The cornerstone of this Program is CET's
integrated expertise in site assessment, remediation, and regulatory approval.

         Government Programs. The Company works with government agencies at all
levels: federal, state, county, municipal, and special districts. These
contracts are performed with the Company as the prime contractor, a teaming
partner, or a subcontractor. The services provided to the government are similar
to those provided to the private sector and include emergency response and
remediation services.

         The Company continues to perform work for the Environmental Protection
Agency and the Department of Defense. As previously discussed in this Section
under the heading "The Company", the Company has contracted for the sale of the
government programs business. While the Company will complete its existing
government program contractual obligations, it does not intend to procure new
environmental contracts with either the Environmental Protection Agency or the
Department of Defense.

Customers

         The Company's customers include federal, state, and local government
agencies and commercial enterprises including Fortune 500 companies.

         In August 1999, the Company secured a $16.0 million "brownfield"
remediation contract at a former explosives manufacturing plant near Hercules,
California. The project involves multiple phases including soil removal &
disposal; commercial development consisting of sewer, storm drain, roadway, and
sanitary sewer lift station construction; and wetland restoration. There remains
approximately $13.0 million of work to be completed in 2000.

         The Company continues to perform work for the Environmental Protection
Agency and the Department of Defense. As previously discussed in this Section
under the heading "The Company", the Company has contracted for the sale of the
government programs business. While the Company will complete its existing
government program contractual obligations, it does not intend to procure new
environmental contracts with either the Environmental Protection Agency or the
Department of Defense.

Business Strategy

         The Company plans to capitalize on the following trends:

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

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

         o        The U.S. EPA's Brownfields Economic Redevelopment Initiative,
                  various state voluntary cleanup programs, and a maturing of
                  the environmental marketplace have reduced the risk






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                  and uncertainty of selling, buying, and financing
                  underutilized or Brownfield sites, creating an opportunity to
                  redevelop prime land that was previously "untouchable" due to
                  contamination.

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

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

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

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

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

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

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

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







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<PAGE>   9

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

Marketing

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

         The marketing organization is primarily decentralized. Sales leads and
customer relationships are developed on a regional basis by the Regional
Manager, Project Managers, or the Business Development Manager. Individual
contracts have an award value of $25,000 to $100,000 for the performance of
specific tasks, and from $125,000 to $7,000,000 for comprehensive turnkey
services.

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

Competition

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

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

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






                                       8
<PAGE>   10


Government Regulation

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

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

Environmental Laws

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

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

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

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

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

         Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"). This legislation, as amended by the Superfund Amendments and
Reauthorization Act of 1986, established the Superfund program to identify and
clean up existing contaminated hazardous waste sites and other releases of
hazardous substances into the environment. While federal funds of approximately
$8.5 billion exist to pay for the cleanup, CERCLA gives the EPA authorization to
compel private parties to undertake the cleanup and enforcement incentives
including the imposition of penalties and punitive damages.

         Resource Conservation and Recovery Act of 1976 ("RCRA"). This
legislation, as amended by the Hazardous and Solid Waste Amendments of 1984
("HSWA"), provides for the regulation of





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<PAGE>   11

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

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

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

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

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

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







                                       10
<PAGE>   12

Potential Liability and Insurance

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

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

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

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

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

Bonding Requirements

         Commercial remediation projects, as well as federal, state, and
municipal projects, often require contractors to post both performance and
payment bonds at the execution of a contract. Performance bonds guarantee that
the project will be completed, and payment bonds guarantee that vendors will be
paid for equipment and other purchases. Contractors without adequate bonding may
be ineligible to bid or negotiate on many projects. The Company has frequently
been required to obtain such bonds, and it




                                       11
<PAGE>   13

should be assumed that the Company will continue to be required to obtain such
bonds in the future. The Company obtains required bonds on a case-by-case basis
as needed and has not experienced any problems in obtaining necessary bonds. The
Company could experience such difficulties in the future if its total amount of
bonds outstanding exceeds the limits imposed by bonding companies based on the
financial condition of the Company at any given time. Bonds typically cost
between 1% and 3% of the cost of a project. To date, no payments have been made
by any bonding company for bonds issued for the Company.

Employees

         As of March 2000, the Company employed approximately 73 employees
full-time and 71 part-time at its four offices, including three Company
officers. If the Asset Purchase and Assignment Agreement for the Seattle office
and Environmental Protection Agency contract is completed, the total of full
time employees will be decreased by 15 and the total of part-time employees will
be decreased by 30. In addition, if the Asset Purchase Agreement for the Tustin
office, certain commercial contracts, and the Department of Defense contracts is
completed, the total of full-time employees will be decreased by 26 and the
total of part-time employees total will be decreased by 26. The Company's
employees are not represented by a labor union or covered by a collective
bargaining agreement, and the Company believes it has good relations with its
employees.

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

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

ITEM 2. PROPERTIES.

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






                                       12
<PAGE>   14




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

<TABLE>
<CAPTION>
                                                                                                              CURRENT
                                                                                       LEASE                  MONTHLY
                                                                    SQ. FT           EXPIRATION                 RENT
          -----------------------------------------------------   ----------   ------------------------   ---------------
<S>                                                               <C>          <C>                        <C>
          14761 BENTLEY CIRCLE
          TUSTIN, CALIFORNIA  ***                                   18,490        April 14, 2002              $ 10,909.00
          -----------------------------------------------------   ----------   ------------------------   ---------------
          170 WEST DAYTON, STE. 106A
          EDMONDS, WASHINGTON
          (OFFICE)  **                                               6,920        March 31, 2001*                7,519.00
          -----------------------------------------------------   ----------   ------------------------   ---------------
          170 WEST DAYTON, STE. 106 B-D
          EDMONDS, WASHINGTON
          (WAREHOUSE)  **                                            5,568        March 31, 2001*                3,822.00
          -----------------------------------------------------   ----------   ------------------------   ---------------
          7032 S. REVERE PARKWAY
          ENGLEWOOD, COLORADO                                       12,027        May 31, 2004                  11,025.00
          -----------------------------------------------------   ----------   ------------------------   ---------------
          100 N. E. LOOP 410, STE. 1200
          SAN ANTONIO, TEXAS  ***                                      150        Month to Month                   414.00
          -----------------------------------------------------   ----------   ------------------------   ---------------
</TABLE>

               * CONTAINS AN OPTION TO RENEW OR EXTEND THE LEASE.

           ** INCLUDED IN THE ASSETS UNDER THE IT PURCHASE AGREEMENT.

          *** INCLUDED IN THE ASSETS UNDER THE CAPE PURCHASE AGREEMENT.


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.

         In 1998, the Company filed suit in the United States District Court for
the District of Oregon against Road Runner Oil, Inc. and Bernard J. Roscoe,
alleging breach of contract for non-payment of services performed by the Company
at an oil field in Utah. The amount of unpaid invoices, including interest and
collection costs, is approximately $2.1 million. In August 1998 the Oregon court
determined that the venue for the United States District Court action should be
in Utah, and venue for the action was changed accordingly. Road Runner also
filed a claim in this action against the Company for breach of contract seeking
unspecified damages. The Company has also filed mechanic's liens on certain
equipment at the site and against Road Runner's rights in the oil field. The
Default Judgments against Road Runner have been awarded in the Tribal Court and
Utah state court, and foreclosure proceedings and corresponding asset
investigation are in progress. This account receivable was written off in 1998.

         In 1998, the Company filed for arbitration against Environmental
Chemical Corporation ("ECC") for various claims related to a Subcontractor
Agreement under an Environmental Protection Agency ("EPA") contract. A
Settlement Agreement was executed by the parties on November 30, 1999 which
required the Company to pay to ECC $826,000 for work performed under the EPA
contract. The EPA Administrative Agreement established a Financial Reserve of
$700,000 in order to make certain that ECC was paid these monies. The first
payment of $413,000 was due on December 31, 1999, and the EPA refused to release
the funds to the Company. ECC has filed a lawsuit against the Company for the
collection of all monies owed. The Company has paid $413,000; however, the EPA
continues to refuse to release the Financial Reserve. The Company believes that
the Financial Reserve is sufficient to pay the balance owed to ECC.






                                       13
<PAGE>   15

         In 1998, the Company initiated a lawsuit in the U.S. District Court for
the Southern District of Texas - Houston Division against PTS Properties, Inc.,
the building owner, Allchem Industries, Inc. and Fertilizers and Chemicals,
Ltd., the chemical owners, and Aqua-Pak, Inc. for collection of an outstanding
receivable of approximately $400,000 from performance of an emergency response
in 1997 for Aqua-Pak, Inc. The Company has written off this account receivable.
In 1999, two of the defendants settled with the Company for a total received by
the Company of $200,000. And in February, 2000, the Company settled with the
remaining defendant for a total sum received of $43,000.

         On July 15, 1999, the Company filed a Complaint and Jury Demand against
AquaSource Services and Technologies, Inc. ("AquaSource"), a Texas corporation,
for additional amounts due under the Water Quality Management Stock Purchase
Agreement. On February 22, 2000, AquaSource and the Company signed a Settlement
and Mutual Release Agreement. The Settlement Agreement states that AquaSource
will pay the Company approximately $500,000 and release all claims is has
against the approximately $698,000 of retention related to a project that was
completed by the Company. The Company has agreed to indemnify AquaSource on
certain projects that have been completed by the Company, which were transferred
to AquaSource as part of the sale of WQM. In addition, the Company retained
$219,000 for certain amounts collected on behalf of WQM.

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

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

         No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1999.







                                       14
<PAGE>   16





                                     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, 1998                        $  7.25      $ 5.4375
                              --------------------------------   -------------  -------------
                              June 30, 1998                           6.375          2.50
                              --------------------------------   -------------  -------------
                              September 30, 1998                     2.8125          1.50
                              --------------------------------   -------------  -------------
                              December 31, 1998                      2.0625           .50
                              --------------------------------   -------------  -------------
                              March 31, 1999                           2.00         1.125
                              --------------------------------   -------------  -------------
                              June 30, 1999                           1.625         1.125
                              --------------------------------   -------------  -------------
                              September 30, 1999                       1.50           .25
                              --------------------------------   -------------  -------------
                              December 31, 1999                    $  2.125       $ .3125
</TABLE>

         (b)      Approximate Number of Holders of Common Stock. The number of
                  record holders of the Company's common stock at March 21, 2000
                  was 52. This does not include approximately 800 shareholders
                  who hold their shares in street name.

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

         (d)      Sales of Unregistered Securities. None





                                       15
<PAGE>   17


ITEM 6. SELECTED FINANCIAL DATA.

SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Following is a summary of the quarterly results of operations for the years
ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
                                                                               Fiscal Quarter
$ in thousands, except per share amounts                March 31    June 30     September 30      December 31       Total
                                                        --------    --------    -------------    -------------    --------
<S>                                                     <C>         <C>         <C>              <C>              <C>
1998:
Revenues                                                $ 11,455    $ 16,005    $      17,125    $      21,912    $ 66,497
Project costs                                             10,820      15,211           18,212           20,958      65,201
                                                        --------    --------    -------------    -------------    --------
     Gross profit (loss)                                     635         794           (1,087)             954       1,296
                                                        --------    --------    -------------    -------------    --------

Selling                                                      447         481              431              631       1,990
General and administrative (a)                               664         665              729            5,478       7,536
Other (income) loss, net (b)                                 190         252              356           (9,745)     (8,947)
                                                        --------    --------    -------------    -------------    --------
     Income (loss) before income tax                        (666)       (604)          (2,603)           4,590         717
                                                        --------    --------    -------------    -------------    --------

Income tax                                                    --          --               --               --         183
                                                        --------    --------    -------------    -------------    --------
     Net income (loss)                                  $   (666)   $   (604)   $      (2,603)   $       4,590    $    534
                                                        ========    ========    =============    =============    ========

Basic earning (loss) per common share                   $  (0.11)   $  (0.10)   $       (0.45)   $        0.75    $   0.09
Diluted earning (loss)  per common share                $  (0.11)   $  (0.10)   $       (0.45)   $        0.75    $   0.09

1999:
Revenues                                                $ 12,945    $  8,503    $      13,939    $       7,802    $ 43,189
Project costs                                             11,289       8,299           13,797            6,745      40,130
                                                        --------    --------    -------------    -------------    --------
     Gross profit (loss)                                   1,656         204              142            1,057       3,059
                                                        ========    ========    =============    =============    ========


Selling                                                      308         404              560              131       1,403
General and administrative                                   678         968              910              974       3,530
Restructuring                                                 --          --              913              (56)        857
Other (income) loss, net                                     105         325              133             (117)        446
                                                        --------    --------    -------------    -------------    --------
     Income (loss) before income tax                         565      (1,493)          (2,374)             125      (3,177)
                                                        --------    --------    -------------    -------------    --------


Income tax                                                   215        (215)              --               --          --
                                                        --------    --------    -------------    -------------    --------
     Net income (loss)                                  $    350    $ (1,278)   $      (2,374)   $         125    $ (3,177)
                                                        ========    ========    =============    =============    ========


Basic earning (loss)  per common share                  $   0.06    $  (0.20)   $       (0.38)   $        0.02    $  (0.51)
Diluted earning (loss)  per common share                $   0.06    $  (0.20)   $       (0.38)   $        0.02    $  (0.51)
</TABLE>

(a)  Includes fourth quarter $4.1 million of audit adjustments

(b)  Includes fourth quarter gain on sale of subsidiary of $10.2 million.





                                       16
<PAGE>   18








         The following selected financial information for the years ended
December 31, 1999, 1998, 1997, 1996, and 1995 is derived from financial
statements of the Company audited by Grant Thornton LLP, independent certified
public accountants.

Balance Sheet Data (in thousands):

<TABLE>
<CAPTION>
                                           -----------------------------------------------
                                                          AT DECEMBER 31,
                                           -----------------------------------------------
                                            1999       1998      1997      1996      1995
----------------------------------------   -------   -------   -------   -------   -------
<S>                                        <C>       <C>       <C>       <C>       <C>
CURRENT ASSETS                             $11,132   $26,670   $25,089   $18,424   $21,245
----------------------------------------   -------   -------   -------   -------   -------
TOTAL ASSETS                                13,805    30,202    29,883    23,795    25,708
----------------------------------------   -------   -------   -------   -------   -------
CURRENT LIABILITIES                          7,619    18,835    12,970    15,121    12,921
----------------------------------------   -------   -------   -------   -------   -------
WORKING CAPITAL                              3,513     7,835    12,119     3,303     8,324
----------------------------------------   -------   -------   -------   -------   -------
LONG TERM DEBT                                 179       251     8,204     1,700     2,077
----------------------------------------   -------   -------   -------   -------   -------
TOTAL LIABILITIES                            7,798    19,086    21,174    16,821    14,998
----------------------------------------   -------   -------   -------   -------   -------
SHAREHOLDERS' EQUITY                       $ 6,007   $11,116   $ 8,709   $ 6,974   $10,710
----------------------------------------   -------   -------   -------   -------   -------
</TABLE>

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

<TABLE>
<CAPTION>
                                           -----------------------------------------------------------------
                                                                FOR THE YEARS ENDED DECEMBER 31,
                                           -----------------------------------------------------------------
                                              1999           1998         1997         1996          1995
----------------------------------------   ----------    ----------   ----------    ----------    ----------
<S>                                        <C>           <C>          <C>           <C>           <C>
   REVENUES                                $   43,189    $   66,497   $   54,170    $   54,919    $   47,872
----------------------------------------   ----------    ----------   ----------    ----------    ----------
   OPERATING EXPENSES                          45,920        74,727       54,047        58,096        44,858
----------------------------------------   ----------    ----------   ----------    ----------    ----------
   NET INCOME (LOSS)
     FROM CONTINUING
     OPERATIONS                                (3,177)          538         (347)       (3,756)        2,035
----------------------------------------   ----------    ----------   ----------    ----------    ----------
   NET INCOME (LOSS) FROM
     CONTINUING OPERATIONS PER
     COMMON SHARE                           $   (0.51)   $     0.09   $    (0.06)   $    (0.74)   $     0.49
----------------------------------------   ----------    ----------   ----------    ----------    ----------
   WEIGHTED AVERAGE SHARES                  6,282,346     5,828,537    5,785,264     5,066,537     4,113,725
----------------------------------------   ----------    ----------   ----------    ----------    ----------
   CASH DIVIDENDS PER
     COMMON SHARE                                 -0-           -0-          -0-           -0-           -0-
----------------------------------------   ----------    ----------   ----------    ----------    ----------
</TABLE>


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

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

General

         The Company provides comprehensive environmental remediation services
of hazardous and toxic waste on a planned and emergency basis to both government
and private sector customers. It also provides water and wastewater treatment
facilities and services to municipal and industrial clients. The Company
provides these services from its offices in: Denver, Colorado; Edmond,
Washington; Tustin, California; and San Antonio, Texas.






                                       17
<PAGE>   19

Business Strategy

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

         Future strategic alternatives currently being considered by the Company
include, among others, (i) the pursuit of opportunities in its core
environmental remediation business; (ii) expansion into water and wastewater
treatment construction, operation and maintenance through direct investment or
acquisitions; (iii) the proposed sales of the Edmond, Washington and Tustin,
California offices and related EPA and federal contracts; and (iv) continued
focus on the improvement of contract profitability.

Results of Operations

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


<TABLE>
<CAPTION>
                                                   PERCENTAGE RELATIONSHIP TO
                                                        PROJECT REVENUE           PERIOD TO PERIOD
                                                          YEAR ENDED                   CHANGE
                                                   -------------------------     -----------------
                                                                                  1999       1998
                                                                                   VS.        VS.
                                                    1999      1998      1997      1998       1997
                                                   -----     -----     -----     -----     -------
<S>                                                <C>       <C>       <C>       <C>          <C>
Project Revenue                                    100.0%    100.0%    100.0%    (35.1)%      22.8%

Project Costs:
    Direct                                          78.5      87.7      79.9     (41.8)       34.7
    Indirect                                        14.4      10.4      10.4      (9.9)       22.3
                                                   -----     -----     -----     -----     -------
 Gross profit                                        7.1       1.9       9.7     136.0       (75.3)

 Other operating expense (income):
    Selling                                          3.2       3.0       3.8     (29.5)       (3.9)
    General and administrative expense              10.2      11.3       5.6     (41.8)      147.6
                                                   -----     -----     -----     -----     -------

 Operating income (loss)                            (6.3)    (12.4)      0.3     (66.8)     (6,790)
 Other income (expense)                             (1.0)     13.5      (1.1)    781.0     1,632.7
                                                   -----     -----     -----     -----     -------


 Income (loss) before income taxes                  (7.4)      1.1      (0.8)   (539.9)      256.6
 Income tax (benefit)                                          0.3      (0.2)               (260.5)
                                                   -----     -----     -----     -----     -------

 Net income (loss)                                  (7.4)      0.8%     (0.6)%  (689.2)      255.3%
                                                   -----     -----     -----     -----     -------
</TABLE>






                                       18
<PAGE>   20


1999 COMPARED TO 1998

         Project revenues. Project revenues decreased $23.3 million or 35%, from
$66.5 million in 1998 to $43.2 million in 1999. The decrease is primarily
attributed to (i) an $8.0 million decrease in revenues due to the sale of WQM in
December 1998 (see Note E to the Company's Consolidated Financial Statements);
(ii) a decline of $6.1 million in commercial contract revenue as a result of an
overall decrease in the Company's commercial business in 1999; (iii) a decrease
in EPA contract revenues of $6.9 million due to the suspension issued by the EPA
against the Company for the months August through November of 1999. During the
suspension period, the Company was not allowed to secure or bid on additional
EPA or other government projects, which disrupted the normal flow of business,
reducing EPA revenues by approximately $10.0 million dollars in the fourth
quarter of 1999 compared to the fourth quarter of 1998 (see Note C to the
Company's Consolidated Financial Statements); (iv) a $1.9 million reduction of
other government contract revenues as a result of the EPA Suspension, which
precluded the Company from bidding on any governmental projects; (v) and a
decline of $2.6 million in revenues provided to the Company in 1998 under a
Pre-Placed Remedial Actions Contract ("PRAC") with the US Army Corp of
Engineers. These decreases were off-set by an increase of $2.2 million in
project revenues from the Hercules project started in August 1999.

         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,
              ===================================================================================
                         1999                        1998                         1997
              -------------------------    -------------------------    -------------------------

<S>           <C>           <C>            <C>           <C>            <C>           <C>
Non-EPA       $17,231,604          39.9%   $33,569,412          50.5%   $33,125,032          61.2%
EPA           $25,957,715          60.1%   $32,927,870          49.5%   $21,044,721          38.8%
              -----------   -----------    -----------   -----------    -----------   -----------
Total         $43,189,319         100.0%   $66,497,282         100.0%   $54,169,753         100.0%
              ===========   ===========    ===========   ===========    ===========   ===========
</TABLE>


         DIRECT PROJECT COSTS. Direct costs decreased $24.4 million or 42%, from
$58.3 million or 88% of project revenues in 1998 to $33.9 million or 79% or
project revenues in 1999. The overall reduction in direct costs is commensurate
with the overall decrease in project revenues noted above. However, the
improvement of directs costs as a percentage of project revenues in 1999 results
primarily from project cost overruns experienced in 1998. Specifically, the
State of Washington and Monfort of Colorado, Inc. projects experienced $2.2
million in costs overruns or 3.3% of revenues in 1998. Other negative revenue
adjustments of $.8 million or 1.3% of revenues were also experienced in 1998. In
1999, the Company had no significant project cost overruns. In addition, certain
typical direct labor costs were charged to indirect costs as a result of the EPA
Suspension as noted below.

         INDIRECT PROJECT COSTS. Indirect project costs decreased approximately
$.68 million or 10%, from $6.93 million or 10.4% of project revenues in 1998, to
$6.22 million or 14.4% of project revenues in 1999. The overall decrease is
commensurate with the reduction in project revenues as noted above. However, the
increase as a percentage of revenues is primarily attributed to retaining
certain key project manager/employees during the EPA Suspension, which labor
costs were not chargeable to direct projects. Total indirect labor costs
increased slightly from $1.85 million in 1998 to $1.89 million in 1999. As a
result, certain typical direct project labor costs were charged to indirect
project costs due to the steady reduction in EPA projects during this period. In
addition, there were increases in other indirect project costs related to
employee training and relocation and certain non-recurring project costs related
to the EPA Suspension.






                                       19
<PAGE>   21

         SELLING EXPENSE. Sales and marketing expenses decreased approximately
$.59 million or 30%, from $1.99 million or 3.0% of project revenues in 1998, to
$1.40 million or 3.2% of project revenues in 1999. As a percentage of revenues,
sales and marketing remained relatively constant between 1998 and 1999. The
decrease in sales and marketing expenses is attributed to the significant
restructuring of the Company during 1999, which resulted in the sale or closure
of several operating regions/locations within the U.S. In addition, the Company
reduced certain marketing expenses as an overall cost reduction policy for 1999
related to the Restructuring Plan (See Note D regarding discussion of the
"Restructuring" in the Company's Consolidated Financial Statements).

         GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expenses
decreased by approximately $3.15 million or 42%, from $7.54 million or 11.3% of
project revenues in 1998 to $4.39 million or 10.2% of project revenues in 1999.
The decrease is primarily attributed to certain non-recurring adjustments
related to the write off of receivables of $2.4 million and provisions for bad
debt allowances of $1.3 million is 1998. For comparative purposes, disregarding
the $3.7 million of non-recurring adjustments in 1998, general and
administrative expenses increased by approximately $.59 million, from $3.80
million in 1998 to $4.39 million in 1999. This increase is primarily attributed
to the restructuring charge of approximately $.9 million incurred in September
1999 as a result of the EPA Suspension (See Note D regarding discussion of the
"Restructuring" in the Company's Consolidated Financial Statements). The
restructuring charges were off-set by cost savings in general and administrative
expenses in the fourth quarter by implementation of the Restructuring Plan.

         RESTRUCTURING CHARGE. Following the EPA suspension, the Company
initiated a restructuring plan ("Restructuring Plan") to reduce operating costs
and gain efficiencies through sale, downsizing and closure of regional offices.
In September 1999, under the Restructuring Plan, the Company sold substantially
all its assets in the Mobile and Jackson regions for proceeds totaling $0.5
million. Also under the Restructuring Plan, in October 1999, the Company closed
its regional office located in New Orleans and Houston. As a result, the Company
recorded a total restructuring charge of approximately $0.9 million, including a
$0.3 million non-cash charge for loss on the sale of the regional offices.

         OTHER INCOME (EXPENSE). Other income/expense decreased $9.4 million,
from $8.95 million of income in 1998 to $.45 million of net expense in 1999. The
decrease in attributed to the non-recurring gain of $10.2 million on the sale of
WQM in 1998. In addition, interest expense decreased approximately $.42 million,
from $.89 million in 1998 to $.47 million in 1999. This reduction is attributed
to the Company reducing its line of credit and other debt during 1999.

         INCOME TAX EXPENSE (BENEFIT). During 1999 the Company did not record an
income tax expense or benefit due to the net loss. During 1998 the Company
recorded income tax expense of $0.2 million. The 1998 income tax expense is
related to the gain on sale of WQM.

         NET INCOME (LOSS). Net loss for the year ended December 31, 1999 was
$3.18 million compared to a net income of $.5 million for 1998. As discussed
above, the income which was generated in 1998 was primarily the result of a
$10.2 million gain from the sale of WQM, off-set by project cost overruns of
$2.2 million, non-recurring general and administrative charges of $3.7 million,
and the additional interest expense of approximately $.4 million.

1998 COMPARED TO 1997

         PROJECT REVENUE. Project revenues increased 22.8% from $54.2 million in
1997 to $66.5 million in 1998. The increase was primarily due to (i) an increase
of $11.9 million in revenue provided by EPA contracts (see table below); (ii) an
increase of $2.0 million in revenue provided by WQM; and (iii) an increase
resulting from the acquisition of H20 in January 1998 providing for revenues of
approximately $1.5 million in 1998. See also, Item 1. Business - "The Company"
and Note E to Company's




                                       20
<PAGE>   22

Consolidated Financial Statements.

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


<TABLE>
<CAPTION>
                                                         Year Ended December 31,
              ===================================================================================
                         1998                         1997                         1996
              -------------------------    -------------------------    -------------------------
<S>            <C>          <C>            <C>           <C>            <C>           <C>
Non-EPA        33,569,412          50.5%   $33,125,032          61.2%   $44,065,990          80.2%
EPA            32,927,870          49.5%   $21,044,721          38.8%   $10,852,530          19.8%
              -----------   -----------    -----------   -----------    -----------   -----------
Total          66,497,282         100.0%   $54,169,753         100.0%   $54,918,520         100.0%
              ===========   ===========    ===========   ===========    ===========   ===========
</TABLE>


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

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

         SELLING EXPENSE. Selling expense remained relatively constant from 1997
to 1998, while revenue increased 22.8%. Selling expense decreased to 3.0% of
revenue 1998 from 3.8% of revenue in 1997.

         GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $4.5 million from $3.0 million in 1997 to $7.5 million in 1998. The
increase was due primarily to a non-recurring adjustment of $2.4 million to
write off amounts due under contracts. See also Item 3. Legal Proceedings.
Additionally, non-recurring adjustments of $1.3 million were recorded in 1998 to
provide allowances for accounts receivable, contracts in process, and
disallowance of cost incurred on government contracts.

         OTHER INCOME (EXPENSE). Other income increased $9.5 million from $0.6
million other expense in 1997 to $8.9 million other income in 1998. The increase
was due primarily to a non-recurring gain of $10.2 million on the sale of WQM in
December 1998. See also Item 1. Business - "The Company" and Note E to Company's
Consolidated Financial Statements.

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

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






                                       21
<PAGE>   23

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, proceeds from offerings of equity securities, and loans
from shareholders. 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. Other sources of
liquidity included the sale of WQM in which proceeds for $11.3 million were
received in 1998, with an additional payment of $1.3 million in January 1999.
Additionally, the Company has entered into letters of intent for the sale of the
EPA contract and related Edmond, Washington office and the sale of non-EPA
federal contracts, its non-RFI commercial contracts and related Tustin,
California office for amounts approximating $3.4 million in gross proceeds.
These transactions are expected to close in the second quarter of 2000, subject
to novation of the EPA and federal contracts, normal closing conditions
including the continued accuracy of representation and warranties, no material
adverse changes, and the receipt of necessary consents from other parties. The
net proceeds will be used for working capital requirements and further expansion
into the maintenance and construction of waste/water treatment facilities
through either direct investment or through possible industry acquisitions. The
Company's future growth will be dependent upon expansion into the maintenance
and construction of waste/water treatment facilities, optimizing margins on its
EPA and non-EPA environmental remediation projects, marketing, and its ability
to obtain financing at favorable terms.

         In January 2000, the Company satisfied the repayment terms of its line
of credit with the National Bank of Canada, which has now released all claims
against the Company. The Company is currently exploring new financing
arrangements; however, due to the recent EPA Suspension and continued Office of
Inspector General's investigation, the Company can give no assurance that it
will be able to obtain financing at favorable terms.

         Management believes that it will be successful in obtaining alternate
sources of financing and that future cash flows from operations, the sale of the
Tustin, California or Edmond, Washington offices and related EPA and Non-EPA
federal contracts, and the funds available under new financing arrangements,
will be sufficient to fund the Company's immediate needs for working capital.
However, there can be no assurance that alternate financing sources can be
successfully negotiated, which if not obtained, could have a material effect on
the Company's financial position, operating activities and liquidity.

         The Company's financial position declined in 1999 as a result of the
continued losses from operations in 1998 and 1999. The Company's working capital
declined $4.3 million from $7.8 million as of December 31, 1998 to $3.5 million
as of December 31, 1999. The change in working capital results from a decrease
in current assets of $15.5 million compared to a decrease in current liabilities
of $11.2 million. The decrease in current assets results from a continued
reduction in combined receivables of $14.0 million and a decrease in other
current assets of $1.5 million resulting from the collection of $1.3 million on
the sale of WQM. The decrease in current liabilities results primarily from a
reduction of cash overdrafts, accounts payable, taxes payable and accrued
liabilities of $10.3 million and the reduction of short-term debt of $.9
million.

         The Company's total obligations decreased by $11.3 million from $19.1
million at December 31, 1998 to $7.8 million at December 31, 1999. However, the
Company's shareholders equity declined by $5.1 million as a result of the
redemption of the convertible preferred stock for $1.9 million and the $3.2
million loss for the year. The Company has continued to reduce its combined
receivables by $14.0






                                       22
<PAGE>   24

million, from $21.9 million or 120 days sales outstanding at December 31, 1998
to $7.9 million or 66 days sales outstanding at December 31, 1999.

         The Company's cash and cash equivalents increased $480,000, from
$25,000 at December 31, 1998 to $505,000 at December 31, 1999. The increase in
cash and cash equivalents results from cash provided from operating activities
and investing activities of $5.6 million and $0.3 million, respectively. The
cash provided by operating and investing activities is offset by cash used in
financing activities of $5.4 million. Cash provided by operating activities of
$5.6 million results primarily from a decrease in combined receivables of $14.0
million. This increase in cash is offset by a reduction of accounts payable and
accrued expenses of $8.4 million. Cash provided by investing activities of $0.3
million results from the receipt of $1.2 million additional proceeds on the sale
of WQM offset by $0.9 million in net equipment additions during 1999. Cash used
in financing activities of $5.4 million results primarily from a payment of $1.9
million for the redemption of the Company's preferred stock (see also Note K to
the Company's Consolidated Financial Statements), a reduction of $1.8 million in
the Company's cash overdraft and payments on the Company's debt of $1.7 million.

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

         In January 2000, the Company satisfied its repayment terms with the
National Bank of Canada, which has now released all claims against the Company.
The Company is currently exploring new financing arrangements. However, due to
the recent EPA Suspension and continued Office of Inspector General's
investigation, the Company can give no assurance that it will be able to obtain
financing at favorable terms.

         The Company has also financed vehicles and equipment using long term
capital leases from various entities. As of December 31, 1999, the combined
balance due on these leases was $0.3 million.

         In June 1999, the Company financed its insurance premiums over the next
two years by issuing a subordinated note, with monthly payments of $41,374
through June 2000, changing to $10,021 thereafter until maturity. The note pays
interest of 6.55% and matures on April 1, 2002.

         EQUITY FINANCING. In connection with the Company's initial public
offering in July 1995, the Company issued 120,000 warrants to the underwriters
as part of the Underwriters Agreement. Each warrant is convertible into one
share of Common Stock at an exercise price of $6.00 subject to certain purchase
price adjustments. The warrants may be exercised in whole or in part at any time
until the expiration date of July 25, 2000. All of the warrants remain
outstanding at December 31, 1999.

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

         In August 1998, the Company completed a private financing, raising $1.9
million of net proceeds in a placement of convertible preferred stock and
warrants. The preferred shares could be converted into shares of the Company's
common stock at a 15 percent discount to the price of the common shares at the
time of conversion with a maximum conversion price of $3.35. An aggregate of
three-year warrants to






                                       23
<PAGE>   25

purchase 35,000 shares of the Company's common stock at a price of $3.00 per
share was also issued. A total of 430 shares of the preferred securities were
converted into 472,803 shares of common stock by the holders. In January 1999,
the Company redeemed the remaining 1,570 preferred shares for $1.9 million in
cash. The warrants issued remain outstanding at December 31, 1999.

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

        CAPITAL COMMITMENTS. The Company has entered into leases for its
existing facilities with such leases expiring at various dates through 2004.
Monthly rentals currently are approximately $33,689 in the aggregate. Management
anticipates some capital expenditures in 2000 which will be funded from working
capital, term loans and equipment leases.

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

Year 2000 Compliance

         A comprehensive, company-wide, Year 2000 program was initiated in late
1998 to identify and remediate potential Year 2000 problems. The Year 2000
program was implemented over several stages which included assessment, testing,
renovation and validation. The Company incurred approximately $350,000 during
1999, which of approximately $250,000 was capitalized for the purchase of new
software and equipment. Future spending for remaining system remediation and
implementation is currently estimated to be about $25,000.

         As of the date of this report, the Company has experienced no
significant problems related to the Year 2000 conversion. After system
verification and testing, all computerized information and project control
systems are operating normally. The performance of EPA and non-EPA customers and
critical suppliers continues without notable change. Production and business
activities are normal at all locations. The Company also has not received any
material complaint regarding any Year 2000 issue related to its services.
However, the Company cannot provide assurance that problems will not arise.

         The Company continues to monitor the status of its operations,
suppliers and customers to ensure no significant interruptions.

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

         Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         Please see pages F-1 through F-27.

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

         None.






                                       24
<PAGE>   26




                                    PART III


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

         The information required by these Items is incorporated herein by
reference to the Company's definitive Proxy Statement relating to the Annual
Meeting of Shareholders to be held June 1, 2000.








                                       25
<PAGE>   27





                                    PART IV

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

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

<TABLE>
<CAPTION>
--------------------------------------------------------------   ---------------
                                                                     PAGES
--------------------------------------------------------------   ---------------
<S>                                                              <C>
Report of Independent Certified Public Accountants               F-1 - F-2
--------------------------------------------------------------   ---------------
Consolidated Balance Sheets                                      F-3 - F-4
--------------------------------------------------------------   ---------------
Consolidated Statements of Operations                            F-5
--------------------------------------------------------------   ---------------
Consolidated Statements of Stockholders' Equity                  F-6
--------------------------------------------------------------   ---------------
Consolidated Statements of Cash Flows                            F-7 - F-8
--------------------------------------------------------------   ---------------
Notes to Consolidated Financial Statements                       F-9 - F-27
--------------------------------------------------------------   ---------------
</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        Loan Documents Between National Bank of Canada and    Incorporated by reference to
                 the Company                                           Exhibit 10.3 to the Company's
                                                                       Annual Report on Form 10-K for the year
                                                                       ended December 31, 1997.

     10.4        Amendment to Loan and Security Agreement and Loan     Incorporated by reference to
                 Documents between National Bank of Canada             Exhibit 10.4 to the Company's
                 and the Registrant                                    Annual Report on Form 10-K for the year
                                                                       ended December 31, 1998.

     10..5       Second Amendment to Loan and Security Agreement and   Incorporated by reference to
                 Loan Documents between National Bank of Canada        Exhibit 10.4 to the Company's
                                                                       Annual Report on Form 10-K for the year
                                                                       ended December 31, 1998.
</TABLE>

                                       26
<PAGE>   28



<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                           DESCRIPTION                                         LOCATION
<S>              <C>                                                   <C>
     10.6        Third Amendment to Loan and Security                  Incorporated by reference to
                 Agreement and Loan Documents between                  Exhibit 10.6 to the Company's
                 National Bank of Canada and the Registrant            Annual Report on Form 10-K for the year
                                                                       ended December 31, 1998.

     10.7        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.

     10.8        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.

     10.9        Seventh Amendment to Loan and Security                Incorporated by reference to Exhibit 10.2
                 Agreement and Loan Documents between                  to Company's Form 10-Q for the nine
                 National Bank of Canada and the Registrant            months ended September 30, 1999.

     10.10       Ninth Amendment to Loan and Security                  Incorporated by reference to Exhibit 10.3
                 Agreement and Loan Documents between                  to Company's Form 10-Q for the nine months
                 National Bank of Canada and the Registrant            ended September 30, 1999.

     10.11       Eleventh Amendment to Loan and Security Agreement     Incorporated by reference to Exhibit 10.4
                 and Loan Documents between                            to Company's Form 10-Q for the nine
                 National Bank of Canada and the Registrant            months ended September 30, 1999.

     10.12       Thirteenth Amendment to Loan and Security             Incorporated by reference to Exhibit
                 Agreement and Loan Documents between                  10.5 to Company's Form 10-Q for the
                 National Bank of Canada  and the Registrant           nine months ended September 30, 1999.

     10.13       Fourteenth Amendment to Loan and Security             Incorporated by reference to Exhibit
                 Agreement and Loan Documents between                  10.6 to Company's Form 10-Q for the
                 National Bank of Canada  and the Registrant           nine months ended September 30, 1999.

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

     10.15       Asset Purchase and Assignment Agreement by and         Filed herewith electronically
                 between the Company and IT Corporation

     10.16       Asset Purchase and Assignment Agreement by and         Filed herewith electronically
                 between the Company and CAPE Environmental
                 Management, Inc.

     10.17       Lease Agreement by and between the Company and Sky     Filed herewith electronically
                 Harbor Associates Limited Partnership

      21         Subsidiaries of the Registrant                         Filed herewith electronically

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





                                       27
<PAGE>   29


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                           DESCRIPTION                                         LOCATION
<S>              <C>                                                   <C>


      27         Financial Data Schedule                               Filed herewith electronically
</TABLE>



(b)      Reports on Form 8-K.

                  None.




                                       28
<PAGE>   30



                                   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 24, 2000               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 24, 2000
-------------------------------------            Chief Executive Officer,
Steven H. Davis                                  Secretary and Director

/s/ Douglas W. Cotton                            Executive Vice President           March 24, 2000
-------------------------------------            and Director
Douglas W. Cotton


/s/ Craig C. Barto                               Director                           March 24, 2000
-------------------------------------
Craig C. Barto


/s/ George Pratt                                 Director                           March 24, 2000
-------------------------------------
George Pratt


/s/ Dale W. Bleck                                Interim Chief Financial Officer    March 24, 2000
-------------------------------------            and Assistant Secretary
Dale W. Bleck
</TABLE>








                                       29
<PAGE>   31
CET ENVIRONMENTAL SERVICES, INC.

FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS

December 31, 1999 and 1998





                                      F-1
<PAGE>   32
                           [GRANT THORNTON LETTERHEAD]


                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
Environmental Services, Inc.

We have audited the accompanying consolidated balance sheets of CET
Environmental Services, Inc. as of December 31, 1999, and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of CET Environmental
Services, Inc. as of December 31, 1999, and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
then ended, in conformity with generally accepted accounting principles.


/s/ GRANT THORNTON LLP

Denver, Colorado
March 1, 2000


                                       F-2

<PAGE>   33


                        CET ENVIRONMENTAL SERVICES, INC.

                                 BALANCE SHEETS

                                  December 31,

                  ASSETS

<TABLE>
<CAPTION>

                                                                             1999                 1998
                                                                         ------------         ------------
<S>                                                                      <C>                  <C>
CURRENT ASSETS
     Cash                                                                $    504,583         $     25,192
     Accounts receivable, less allowance for
         doubtful accounts; $359,648 in 1999 and
         $721,857 in 1998                                                   6,086,086           11,781,212
     Contracts in process less allowance for doubtful
         accounts of $118,907 in 1999 and $284,128 in 1998                  1,770,954           10,154,501
     Retention receivable                                                     318,883              663,998
     Income tax receivable                                                     90,542                   --
     Due from related party                                                   104,036              124,036
     Other receivables                                                      1,612,962            3,371,828
     Inventories                                                               73,601              267,491
     Prepaid expenses                                                         570,532              281,935
                                                                         ------------         ------------
                 Total current assets                                      11,132,179           26,670,193
                                                                         ------------         ------------

EQUIPMENT AND IMPROVEMENTS
     Field equipment                                                        3,059,206            3,752,213
     Vehicles                                                                 890,193            2,009,267
     Furniture & fixtures                                                      84,543              100,237
     Office equipment                                                         815,278              495,307
     Leasehold improvements                                                    49,861                6,300
                                                                         ------------         ------------
                                                                            4,899,081            6,363,324
     Less allowance for depreciation and amortization                      (2,262,736)          (2,883,021)
                                                                         ------------         ------------

                 Equipment and improvements - net                           2,636,345            3,480,303
DEPOSITS                                                                       36,656               51,318
                                                                         ------------         ------------
                                                                         $ 13,805,180         $ 30,201,814
                                                                         ============         ============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       F-3


<PAGE>   34


                        CET ENVIRONMENTAL SERVICES, INC.

                                 BALANCE SHEETS

                                  December 31,


     LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                      1999                  1998
                                                                                   ------------         ------------
<S>                                                                                <C>                  <C>
CURRENT LIABILITIES
     Cash overdraft                                                                $    118,348         $  1,936,741
     Accounts payable                                                                 4,959,733           11,383,109
     Accrued expenses                                                                   586,612              709,580
     Accrued contract costs                                                             364,573            1,456,850
     Accrued payroll and benefits                                                       361,443              846,184
     Current obligations under capital leases                                           119,091              316,798
     Income taxes payable                                                                    --              158,958
     Current portion of long-term debt                                                  290,982              986,405
     Line of credit                                                                     818,152            1,039,925
                                                                                   ------------         ------------

                 Total current liabilities                                            7,618,934           18,834,550


OBLIGATIONS UNDER CAPITAL LEASES                                                         25,669              250,784

LONG-TERM DEBT                                                                          153,127                   --

COMMITMENTS AND CONTINGENT LIABILITIES

STOCKHOLDERS' EQUITY
   Common stock (no par value) - authorized 20,000,000
       shares; 6,284,288 and 6,129,271 shares
       issued and outstanding at December 31, 1999 and 1998, respectively             8,671,261            8,539,716
   4% convertible preferred stock (no par value) -
       authorized 5,000,000 shares; -0- and 1,710
          shares issued and outstanding at December 31,
          1999 and 1998, respectively                                                        --            1,589,102
   Paid-in capital                                                                      104,786              574,629
   Retained earnings (accumulated deficit)                                           (2,768,597)             413,033
                                                                                   ------------         ------------

                 Total stockholders' equity                                           6,007,450           11,116,480
                                                                                   ------------         ------------

                                                                                   $ 13,805,180         $ 30,201,814
                                                                                   ============         ============
</TABLE>

        The accompanying notes are an integral part of these statements.




                                      F-4
<PAGE>   35



                        CET ENVIRONMENTAL SERVICES, INC.

                            STATEMENTS OF OPERATIONS

                            Years ended December 31,


<TABLE>
<CAPTION>

                                                              1999                 1998                 1997
                                                          ------------         ------------         ------------
<S>                                                       <C>                  <C>                  <C>
PROJECT REVENUE                                           $ 43,189,319         $ 66,497,282         $ 54,169,753

PROJECT COSTS
  Direct                                                    33,909,701           58,298,144           43,286,506
  Indirect                                                   6,219,975            6,902,927            5,645,781
                                                          ------------         ------------         ------------
                                                            40,129,676           65,201,071           48,932,287
                                                          ------------         ------------         ------------

     Gross profit                                            3,059,643            1,296,211            5,237,466
                                                          ------------         ------------         ------------

OTHER OPERATING EXPENSES
  Selling                                                    1,403,149            1,989,584            2,070,130
  General and administrative                                 3,529,675            7,535,966            3,044,045
  Restructuring expense                                        857,469                   --                   --
                                                          ------------         ------------         ------------

                                                             5,790,293            9,525,550            5,114,175
                                                          ------------         ------------         ------------

     Operating income (loss)                                (2,730,650)          (8,229,339)             123,291
                                                          ------------         ------------         ------------

OTHER INCOME (EXPENSE)
  Loss on sale of equipment                                    (89,167)                  --                   --
  Gain on sale of subsidiary                                        --           10,154,028                   --
  Interest expense, net                                       (475,504)            (892,213)            (704,575)
  Other income (expense)                                       118,564             (310,722)             120,446
                                                          ------------         ------------         ------------
                                                              (446,107)           8,951,093             (584,129)
                                                          ------------         ------------         ------------

     Income (loss) before taxes on income                   (3,176,757)             721,754             (460,838)
     (Benefit) taxes on income                                      --              183,276             (113,547)
                                                          ------------         ------------         ------------
          NET INCOME (LOSS)                               $ (3,176,757)        $    538,478         $   (347,291)
                                                          ============         ============         ============

Weighted average number of
  shares outstanding                                         6,282,346            5,828,537            5,785,264



Earnings (loss) per common share                          $      (0.51)        $       0.09         $      (0.06)
                                                          ============         ============         ============

Earnings (loss) per common share--
  assuming dilution                                       $      (0.51)        $       0.09         $      (0.06)
                                                          ============         ============         ============
</TABLE>


        The accompanying notes are an integral part of these statements.



                                      F-5
<PAGE>   36


                        CET ENVIRONMENTAL SERVICES, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>


                                                                                                     Retained
                                        Common stock            Preferred stock                      earnings          Total
                                   -----------------------   ---------------------     Paid-in     (accumulated    stockholders'
                                    Shares        Amount     Shares      Amount        capital       deficit)         equity
                                   ---------   -----------   ------    -----------    ---------    ------------    ------------
<S>                                <C>         <C>           <C>       <C>            <C>          <C>             <C>
Balance at January 1, 1997         5,066,537   $ 6,165,977       --    $        --    $ 555,530    $    252,466    $  6,973,973

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

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

Issuance of stock options
     at exercise price below
     market value                         --            --       --             --       12,423              --          12,423
                                                                                                                   ------------
Net (loss) for the year                   --            --       --             --           --        (347,291)       (347,291)
                                   ---------   -----------   ------    -----------    ---------    ------------    ------------

Balance at December 31, 1997       5,805,485     8,235,589       --             --      567,953         (94,825)      8,708,717


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

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

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

Net income for the year                   --            --       --             --           --         538,478         538,478
                                   ---------   -----------   ------    -----------    ---------    ------------    ------------

Balance at December 31, 1998       6,129,271     8,539,716    1,710      1,589,102      574,629         413,033      11,116,480


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

Redemption of preferred stock             --            --   (1,570)    (1,457,557)    (469,843)             --      (1,927,400)

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

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

                                   ---------   -----------   ------    -----------    ---------    ------------    ------------
Balance at December 31, 1999       6,284,288   $ 8,671,261       --    $        --    $ 104,786    $ (2,768,597)   $  6,007,450
                                   =========   ===========   ======    ===========    =========    ============    ============
</TABLE>


        The accompanying notes are an integral part of these statements.



                                      F-6

<PAGE>   37


                        CET ENVIRONMENTAL SERVICES, INC.

                            STATEMENTS OF CASH FLOWS

                            Years ended December 31,

<TABLE>
<CAPTION>
                                                                          1999                 1998                 1997
                                                                      ------------         ------------         ------------
<S>                                                                   <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                   $ (3,176,757)        $    538,478         $   (347,291)
  Adjustments to reconcile net income to net cash (used in)
      provided by operating activities:
          Depreciation and amortization                                    989,732            1,453,900            1,573,085
          Gain on sale of subsidiary                                            --          (10,154,028)                  --
          Restructuring charge                                             390,324                   --                   --
          Provision for bad debts                                         (527,430)             333,268              104,010
          Loss on disposal of equipment                                     89,167              216,007                   --
          Employee stock option plan                                            --                6,676               12,423
          Changes in operating assets and liabilities:
             (Increase) decrease in accounts receivable                  6,057,335           (3,348,937)          (2,692,133)
             Decrease (increase) in contracts in process                 8,548,768            2,905,590           (6,687,357)
             Decrease (increase) in income tax, retention
                  and other receivables                                  1,040,654           (1,942,137)           1,037,665
             Decrease (increase) in prepaid expenses                       347,112             (370,848)              47,686
             Decrease (increase) in inventory and deposits                  88,159              403,074             (421,828)
             Increase (decrease) in accounts payable                    (6,423,376)           3,152,811            1,215,834
             Increase (decrease) in accrued expenses
                and income taxes                                        (1,858,944)             619,832            2,199,847
                                                                      ------------         ------------         ------------
                    Net cash provided by (used in)
                       operating activities                              5,564,744           (6,186,314)          (3,958,059)
                                                                      ------------         ------------         ------------

INVESTING ACTIVITIES:
  Purchase of equipment                                                 (1,190,209)          (1,381,135)            (462,947)
  Proceeds from sale of equipment                                          251,649                   --                   --
  Proceeds from sale of subsidiary                                       1,250,000           11,250,000                   --
  Net purchase of subsidiary                                                    --             (803,845)            (186,798)
                                                                      ------------         ------------         ------------
                    Net cash provided by (used in)
                         investing activities                              311,440            9,065,020             (649,745)
                                                                      ------------         ------------         ------------

FINANCING ACTIVITIES:
  Bank overdraft                                                        (1,818,393)           1,936,741                   --
  Proceeds from issuance of long-term debt                                      --                   --            1,286,476
  Payments on long-term debt                                            (1,178,005)            (754,877)          (1,475,158)
  Payments on capital leases                                              (266,349)            (411,359)            (327,230)
  Net (payments) proceeds from credit line loan                           (221,773)          (5,158,706)           1,997,981
  Payment of dividends on preferred stock                                   (4,873)             (30,620)                  --
  Proceeds from issuance of preferred stock                                     --            1,879,229            2,035,662
  Proceeds from exercise of stock options                                       --               14,000               33,950
  Proceeds from loans from shareholders                                         --              500,000                   --
  Payments on loans from shareholders                                           --             (500,000)            (545,000)
  Net payments from related party                                           20,000                   --               58,000
  Preferred stock redemption                                            (1,927,400)                  --                   --
</TABLE>

        The accompanying notes are an integral part of these statements.



                                      F-7
<PAGE>   38


                        CET ENVIRONMENTAL SERVICES, INC.

                            STATEMENTS OF CASH FLOWS

                            Years ended December 31,


<TABLE>
<CAPTION>
                                                                          1999                 1998                 1997
                                                                      ------------         ------------         ------------
<S>                                                                   <C>                  <C>                  <C>

  Payments on subordinated notes payable                              $         --         $   (671,800)        $         --
                                                                      ------------         ------------         ------------
                    Net cash provided by (used in)
                    financing activities                                (5,396,793)          (3,197,392)           3,064,681
                                                                      ------------         ------------         ------------

                    INCREASE (DECREASE) IN CASH                            479,391             (318,686)          (1,543,123)

Cash at beginning of year                                                   25,192              343,878            1,887,001
                                                                      ------------         ------------         ------------

Cash at end of year                                                   $    504,583         $     25,192         $    343,878
                                                                      ============         ============         ============

Supplemental disclosures of cash flow information:
  Cash paid during the year
      Interest                                                        $    482,707         $  1,060,211         $    717,980
      Income taxes                                                              --                   --                   --

Noncash investing and financing activities:
Issuance of note payable for financing of
          insurance premiums                                          $    635,709         $    485,818         $    301,965
                                                                      ============         ============         ============

Conversion of preferred stock to common                               $    131,546         $    290,127         $         --
                                                                      ============         ============         ============

Transfer of CIP from deposits to fixed assets                         $         --         $    368,452         $         --
                                                                      ============         ============         ============

Return of leased equipment                                             $    215,820         $         --         $         --
                                                                      ============         ============         ============
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-8
<PAGE>   39


                        CET ENVIRONMENTAL SERVICES, INC.

                         NOTES TO FINANCIAL STATEMENTS

                        December 31 1999, 1998 and 1997


NOTE A - ORGANIZATION AND DESCRIPTION OF COMPANY

       CET Environmental Services, Inc. (the Company) was incorporated on
       February 9, 1988 under the laws of the State of California. On November
       29, 1991, Environmental Operations, Inc., purchased 100% of the Company's
       outstanding stock from Consolidated Environmental Technologies, Inc. In
       August 1992, Environmental Operations, Inc. was merged into CET
       Environmental Services, Inc. In August 1997, the Company acquired all of
       the outstanding stock of Water Quality Management Corporation (WQM). WQM
       was operated as a wholly owned subsidiary of the Company. WQM was sold in
       December 1998 (see Note E).

       In December 1999, the Company formed a wholly owned subsidiary,
       Cleanwater Contracting, Inc. (Cleanwater). Cleanwater had no activity for
       1999.

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


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Cash

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

       Contracts

       A majority of the Company's revenue is generated from time-and-material
       contracts whereby the Company provides services, as prescribed under the
       various contracts, for a specified fixed hourly rate for each type of
       labor hour and receives reimbursement for material, inventories and
       subcontractor costs. Many of the contracts also have a fixed mark-up to
       be applied to material, inventories and subcontract costs. In addition,
       many of the time and material contracts have a stated maximum contract
       price, which cannot be exceeded without an authorized change order.
       Revenue is recorded on contracts based upon the labor hours and costs
       incurred. Provision for losses on uncompleted contracts are made in the
       period in which such losses are determined. Claims are recorded in
       revenue when received.




                                      F-9
<PAGE>   40

                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Contracts (Continued)

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

       Inventories

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

       Equipment and Improvements

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

       Income Taxes

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

       Estimated Fair Value Information

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

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

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

       Due from related party: The carrying amount approximates the fair value
       because it is due on demand.



                                      F-10
<PAGE>   41


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Estimated Fair Value Information (Continued)

       Note Payable - Line of Credit: The carrying amount approximates fair
       value as the line of credit has a variable interest rate which is
       considered to approximate the market rate.

       Long-Term Debt / Obligations Under Capital Leases: The carrying value
       approximates fair value as the interest rate at December 31, 1999 and
       1998 is considered to approximate the market rate.

       Use of Estimates

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

       Impairment of Long-lived Assets

       In March 1995, the Financial Accounting Standards Board issued Statement
       of Financial Accounting Standards 121, Accounting for the Impairment of
       Long-lived Assets and for Long-lived Assets to be Disposed of (SFAS 121).
       SFAS 121 requires that long-lived assets and certain identifiable
       intangibles held and used by an entity be reviewed for impairment
       whenever events or changes in circumstances indicate that the carrying
       amount of an asset may not be recoverable. If the sum of the expected
       future cash flows (undiscounted and without interest) is less than the
       carrying amount of the asset, an impairment loss is recognized.
       Measurement of that loss would be based on the fair value of the asset.
       SFAS 121 also generally requires that long-lived assets and certain
       identifiable intangibles to be disposed of be reported at the lower of
       the carrying amount or the fair value, less cost to sell. SFAS 121 is
       effective for the Company's 1997 fiscal year-end. Any impairment
       provisions recognized in accordance with SFAS 121 are permanent and may
       not be restored in the future. No impairment expense was recognized in
       the years ended December 31, 1999, 1998 and 1997.

       Earnings per Share

       The Financial Accounting Standards Board recently issued Statement of
       Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128).
       SFAS 128 requires the presentation of basic earnings per share (EPS) and,
       for companies with potentially dilutive securities such as convertible
       debt, options and warrants, diluted EPS.



                                      F-11
<PAGE>   42


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997



NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

       Earnings per Share (Continued)


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

<TABLE>
<CAPTION>

                                                            1999            1998           1997
                                                          -------         -------         -------
<S>                                                       <C>             <C>             <C>
Numerator
   Net income (loss)                                     $(3,177)        $   539         $  (347)

   Preferred stock dividends                                  (5)            (31)             --
                                                          -------         -------         -------

   Numerator for basic earnings per share -
       income available to common stockholders            (3,182)            508            (347)

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

   Numerator for diluted earnings per share -
       income available to common stockholders
        after assumed conversions                         $(3,182)        $   508         $  (347)
                                                          =======         =======         =======

Denominator:
   Denominator for basic earnings per share -
       weighted average shares outstanding                  6,282           5,829           5,785

   Effect of dilutive securities:

       Warrants                                                --              24              --

       Convertible preferred stock                             --              --              --

       Stock options                                           --              22              --
                                                          -------         -------         -------
            Dilutive potential common shares                   --              46              --

   Denominator for diluted earnings per share -
       adjusted weighted average share and
       assumed conversion                                   6,282           5,875           5,785
                                                          =======         =======         =======
Basic earnings (loss) per share                           $ (0.51)        $  0.09         $ (0.06)
                                                          =======         =======         =======
Diluted earnings (loss) per share                         $ (0.51)        $  0.09         $ (0.06)
                                                          =======         =======         =======
</TABLE>




                                      F-12
<PAGE>   43


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       In 1999 and 1997, 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 1998, basic earnings per share data was computed by dividing net
       income, less preferred stock dividends, by the weighted average number of
       common shares outstanding during the period. Diluted earnings per share
       were adjusted for the assumed conversion of potentially dilutive
       securities including stock options and warrants to purchase common stock.
       However, dilutive earnings per share computation does not give effect to
       the assumed conversion of convertible preferred stock as its effect would
       have been anti-dilutive.

       Reclassifications

       Certain financial statement reclassifications have been made in 1998 and
       1997 to conform to presentations used in 1999.

NOTE C - EPA SUSPENSION AND SUBSEQUENT LIFTING OF SUSPENSION

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

       In November 1999, following consideration of certain information provided
       by the Company to the EPA, the EPA's suspension was terminated and an
       Administrative Agreement (Administrative Agreement) between the EPA and
       the Company was executed. Upon execution of the Administrative Agreement,
       the Company became immediately eligible to bid for, receive, and perform
       any federal contract or subcontract, or participate in any assistance,
       loan or benefit without restriction. In the Administrative Agreement, the
       Company agreed to cooperate in full with further investigations into the
       EPA allegations including access to records, availability of Company
       personnel, certain reporting requirements, audit of EPA billing prior to
       submission and certain restrictions of Company assets without
       notification to the EPA. In addition, the Administrative Agreement
       provides for a financial reserve of $700,000. Management has been advised
       that this reserve relates to the resolution of claims filed against the


                                      F-13
<PAGE>   44


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE C - EPA SUSPENSION AND SUBSEQUENT LIFTING OF SUSPENSION (CONTINUED)

       Company related to the Company's Subcontractor Agreement with
       Environmental Chemical Corporation (ECC) in which work was performed
       under an EPA contract. The financial reserve shall be established by
       funds withheld by the EPA from current and future EPA invoices, estimated
       base fees and determined award fees. The Company had accrued sufficient
       reserves for these claims at December 31, 1998, in accordance with normal
       operating procedures of the Subcontractor Agreement for work performed on
       the EPA contract during 1998 (see Note R).

       In certain circumstances of non-compliance, the EPA has the right under
       the Administrative Agreement to terminate the agreement and reinstate the
       Company's suspension. In addition, as defined in the Administrative
       Agreement, in the case of misconduct by the Company during the EPA's
       continued investigation, the EPA may immediately terminate EPA contracts,
       subcontracts or further award fees. EPA revenue represents approximately
       60%, 50% and 39%, respectively, of the Company's revenue for the years
       ended December 31, 1999, 1998 and 1997.

       Following the notice of suspension, the Company initiated a Restructuring
       Plan, which downsized its operations as a decline in revenues occurred.
       The Restructuring Plan includes the sale, downsizing and closure of
       certain regional offices. Following completion of the Restructuring Plan,
       the Company will maintain offices in Denver, Colorado, Edmond,
       Washington, Tustin, California and San Antonio, Texas.

       After review of available information and consultation with its legal
       counsel, management believes that the allegations brought against the
       Company did not warrant suspension. Additionally management intends to
       cooperate in full but also vigorously defend itself in the EPA's further
       investigation into the allegations. However, there can be no assurance
       that further suspension will not occur or that the Company will prevail
       in this matter. If further suspension occurs, it will have a material
       effect on the Company's financial position, results of operations and
       liquidity.

NOTE D - RESTRUCTURING

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


                                      F-14
<PAGE>   45


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE E - SALE OF SUBSIDIARY

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

NOTE F - PENDING ASSET DISPOSITIONS

       In October 1999, the Company entered into an Asset Purchase and
       Assignment Agreement (the Purchase Agreement) with IT Corporation to sell
       or assign substantially all of the assets in the Company's Seattle
       Regional office for sales price of $1.3 million. The Purchase Agreement
       provides for the assignment of the Company's remaining EPA contract dated
       January 9, 1997 (the EPA Contract), the sale of certain assets, the
       assumption of certain liabilities and obligations used in, directly
       associated with and necessary in the performance of the EPA Contract.
       Closing of the Purchase Agreement is contingent upon the execution of a
       novation agreement by and between the Company, IT Corporation and the EPA
       consenting to the assignment of the EPA Contract. Upon novation of the
       EPA contract, CET would receive no further EPA revenue. However, there
       can be no assurance that approval of the novation will be received from
       the EPA or that the subsequent closing of the Purchase Agreement will
       occur.

       In December 1999, the Company entered into an Asset Purchase Agreement
       (the CAPE Purchase Agreement) with Cape Environmental Management, Inc. to
       sell or assign substantially all of the assets in the Company's Tustin,
       California operations for a sales price of $2.1 million. The CAPE
       Purchase Agreement provides for the assignment of certain Federal and
       Commercial contracts, the sale of certain assets and assumption of
       certain liabilities directly associated with the performance of the
       contracts.

NOTE G - SIGNIFICANT CUSTOMERS

       A significant portion of the Company's business is from contracts with
       the EPA. A new contract was awarded by the EPA in January 1997, with
       estimated maximum revenue of $292 million over five years. As of December
       31 1999 and 1998, the net balance of accounts receivable from the EPA was
       $2,393,956 and $8,359,389, respectively. Revenue from the EPA in 1999,
       1998, and 1997


                                      F-15
<PAGE>   46


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE G - SIGNIFICANT CUSTOMERS (CONTINUED)

       amounted to approximately $26 million, $30 million, and $21 million, or
       60%, 50% and 39% of annual gross revenues, respectively.

       The Company also performs work for the U.S. Army Corps of Engineers and
       other governmental agencies that accounted for 8%, 10% and 7% of revenue
       in 1999, 1998, and 1997, respectively.

       In August of 1999, the Company secured a new commercial account, which
       accounted for 5% of revenue in 1999.

       Contracts in process consist of the following at December 31,:

<TABLE>
<CAPTION>
                                                     1999                1998
                                                  -----------        -----------
<S>                                               <C>                <C>
Government - EPA contracts                        $ 1,543,442        $ 1,971,002
Non-EPA contracts                                     227,512          8,183,499
                                                  -----------        -----------

         Total                                    $ 1,770,954        $10,154,501
                                                  ===========        ===========
</TABLE>

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

NOTE H - OTHER EQUIPMENT DISPOSALS

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

NOTE I - CAPITAL LEASES

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

<TABLE>
<CAPTION>
                                                     1999               1998
                                                 -----------        -----------
<S>                                              <C>                <C>
Vehicles                                         $   668,053        $ 1,363,960
Equipment                                             32,736            202,123
                                                 -----------        -----------
                                                     700,789          1,566,083
Less accumulated depreciation                       (501,934)          (751,693)
                                                 -----------        -----------

         Total                                   $   198,855        $   814,390
                                                 ===========        ===========
</TABLE>


                                      F-16
<PAGE>   47


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE I - CAPITAL LEASES (CONTINUED)

       The following is a schedule by year of the future minimum lease payments
       under capital leases together with the present value of the net minimum
       lease payments as of December 31, 1999:

<TABLE>
<S>                                                                   <C>
2000                                                                  $ 135,707
2001                                                                     29,273
                                                                      ---------

Total minimum lease payments                                            164,980
       Less amounts representing estimated
        executory costs (taxes)                                         (10,195)
                                                                      ---------
Net minimum lease payments                                              154,785
Less amount representing interest                                       (10,025)
                                                                      ---------

Present value of net minimum lease payments                           $ 144,760
                                                                      =========

Current portion                                                       $ 119,091
Non-current portion                                                      25,669
                                                                      ---------
                                                                      $ 144,760
                                                                      =========
</TABLE>


NOTE J - RELATED PARTY TRANSACTIONS

       The Company, from time to time, borrows funds on a short-term basis from
       affiliates of the Company or from a trust fund of a relative of the
       President. In 1997, the Company borrowed $671,800, from relatives of
       Steven H. Davis, President, pursuant to one-year subordinated notes,
       which bear interest at the rate of 10% per annum. The Company repaid
       these notes in December 1998. Interest expense attributable to these
       related party borrowings amounted to $-0-, $95,761, and $73,544 for 1999,
       1998, and 1997, respectively.

       A director and 11.5% owner of the Company is a 50% owner in Signal Hill
       Petroleum, Inc., Paramount Petroleum Corp. and Fletcher Oil. The Company
       provided services to these companies during the years ended December 31,
       1999, 1998, and 1997 for fees amounting to approximately $39,003,
       $273,000, and $835,000, respectively.

       In 1997, the Company made advances to a former officer and director of
       the Company. The balance due was $104,036 and $124,036 at December 31,
       1999 and 1998, respectively. Interest is payable monthly at 10% per
       annum, and principal is due on demand.


                                      F-17
<PAGE>   48


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE K - LINE OF CREDIT AND LONG-TERM DEBT

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

       In January 1999, the Company reduced the maximum available under this
       financing Agreement to $7.5 million comprised of a line of credit of
       $6.75 million and an equipment term loan of $750,000. The Agreement had
       an expiration date of May 30, 1999 upon which amounts outstanding under
       the line of credit and term loan were due and payable.

       Pursuant to subsequent amendments to the Agreement, the maturity date of
       the Agreement was extended to January 28, 2000 combined with certain
       repayments due weekly until maturity.

       As of December 31, 1999, the Company's remaining debt under its Agreement
       with National Bank of Canada consisted of $818,152 outstanding under its
       line of credit. Beginning September 1, 1999 interest is payable under the
       Agreement at Bank's Reference Rate plus 2% (10.5% at December 31, 1999).

       On January 27, 2000, the Company completed the terms of repayment under
       the Agreement. The National Bank of Canada has now released all claims
       against the Company.

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


<TABLE>
<CAPTION>
                                                              1999         1998
                                                              ----         ----
<S>                                                         <C>         <C>
Note payable for annual insurance premium, interest at
6.25%, with monthly payments of $46,989 due June
30, 1999                                                    $      --   $236,405

Note payable for annual insurance premium, interest at
6.55%, with monthly payments of $41,374 through
June 2000, changing to $10,021 thereafter until maturity,
balance due April 1, 2002                                     444,109         --
</TABLE>


                                      F-18
<PAGE>   49


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


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


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

                                                              444,109    986,405
Less current portion                                          290,982    986,405
                                                             --------   --------

                                                             $153,127   $     --
                                                             ========   ========
</TABLE>

NOTE L - STOCKHOLDERS' EQUITY

       In connection with the Company's initial public offering in July 1995,
       the Company issued 120,000 warrants to the underwriters as part of the
       Underwriters Agreement. Each warrant is convertible into one share of
       Common Stock at an exercise price of $6.00 subject to certain purchase
       price adjustments. The warrants may be issued in whole or in part at any
       time until the expiration date of July 25, 2000. All the warrants remain
       outstanding at December 31, 1999.

       In January 1997, the Company completed a private offering of 729,248
       shares of its common stock. The net proceeds to the Company from this
       offering were approximately $2,035,000. In connection with this offering,
       the Company issued warrants to the representatives of the underwriters in
       this offering to collectively purchase up to 10% of the number of shares
       sold in the offering of the Company's common stock. The purchase price of
       such warrants was $100, and the exercise price under such warrants is
       $3.60 per share. The 72,925 warrants issued may be exercised in whole or
       in part at any time or from time to time until the expiration date of
       December 31, 2001.

       The Company also issued warrants to purchase 100,000 shares of common
       stock at $4.25 per share to a management services firm as consideration
       for its assistance on the private offering. The warrants could be
       exercised from July 1, 1998 through December 31, 1999. These warrants
       were considered stock issuance costs, with a value of approximately
       $235,000 based on the fair value at the grant date as required by
       Financial Accounting Standards 123. There were no conversions, and the
       warrants expired in full on December 31, 1999.


                                      F-19
<PAGE>   50


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE L - STOCKHOLDERS' EQUITY (CONTINUED)

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

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

       In connection with this offering, the Company issued warrants to the
       representatives of the underwriters in this offering to purchase up to
       35,000 shares of the Company's common stock at $3.00 per share. The
       warrants may be exercised during the period commencing July 24, 1999 and
       ending on December 31, 2001.

       In January 1999, the Company redeemed the remaining shares of Preferred
       Stock for $1,927,400 plus $4,873 of unpaid dividends through the date of
       redemption. The warrants issued in connection with the preferred stock
       remain outstanding.

NOTE M - PROFIT SHARING AND 401(K) PLAN

       The Company maintains a Profit Sharing and a 401(k) Plan covering certain
       qualified employees, which includes employer participation in accordance
       with the provisions of Section 401(k) of the Internal Revenue Code. The
       Plan allows participants to make pretax contributions and the Company is
       required to match 25% of the first 6% of all elective 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-20
<PAGE>   51


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


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

       The Company's matching 401(k) contributions required by the 401(k) plan
       were $79,289, $82,103, and $65,206 for the years ended December 31, 1999,
       1998, and 1997, respectively. The Company has not made any discretionary
       contributions under the profit sharing portion of the Plan.

NOTE N - STOCK OPTIONS

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

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

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


                                      F-21
<PAGE>   52


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE N - STOCK OPTIONS (CONTINUED)

<TABLE>
<CAPTION>
                                          1999              1998           1997
                                     -------------    -------------   -------------
<S>                                  <C>              <C>             <C>
Net income (loss)
As reported                          $  (3,176,757)   $     538,478   $    (347,291)
Pro forma                               (3,236,694)         454,233        (495,586)

Earnings (loss) per common share
As reported                          $        (.51)   $        0.09   $       (0.06)
Pro forma                                     (.52)            0.08           (0.09)
</TABLE>

       The fair value of each option grant is estimated on the date of grant
       using the Black-Scholes options-pricing model with the following
       weighted-average assumptions for grants used in 1999, 1998 and 1997: no
       expected dividends; expected volatility of 74.5%; risk-free interest rate
       of 6.0% to 8%; and expected lives of 10 years.

<TABLE>
<CAPTION>
                                                     Average price
                                          Shares       per share
                                         --------    -------------
<S>                                       <C>            <C>
Outstanding at January 1, 1997            214,000        $5.60
Granted                                    96,900         7.00
Exercised                                  (9,700)        3.50
Canceled                                  (70,400)        9.04
                                         --------        -----

Outstanding at December 31, 1997          230,800         5.10
                                         --------        -----

Total exercisable at December 31, 1997     80,375        $4.27
                                         ========        =====

Outstanding at January 1, 1998            230,800        $5.10
Granted                                        --           --
Exercised                                  (4,000)        3.50
Canceled                                 (114,700)        4.45
                                         --------        -----

Outstanding at December 31, 1998          112,100         5.08
                                         --------        -----

Total exercisable at December 31, 1998     51,950        $4.75
                                         ========        =====
</TABLE>


                                      F-22
<PAGE>   53


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE N - STOCK OPTIONS (CONTINUED)

<TABLE>
<CAPTION>
                                                      Average price
                                          Shares        per share
                                         --------     -------------
<S>                                      <C>          <C>
Outstanding at January 1, 1999            112,100        $5.08
Granted                                   220,500         1.70
Exercised                                      --           --
Canceled                                 (138,000)        4.10
                                         --------        -----

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

Total exercisable at December 31, 1999     56,800        $2.46
                                         ========        =====
</TABLE>


<TABLE>
<CAPTION>
                                                                                Weighted
                                                                                average
                               Range          Options       Proceeds         exercise price
                               -----          -------       --------         --------------
<S>                        <C>                <C>           <C>              <C>
Exercisable at
 December 31, 1999         $1.31 - 3.50        56,800       $128,255             $2.46
</TABLE>


       The following information applies to options outstanding at December 31,
       1999:

<TABLE>
<CAPTION>
                                                           Weighted average
Range of               Options      Weighted average           Remaining
exercisable prices     outstanding    exercise price       contractual life
------------------     -----------  -------------------    ----------------
<S>                    <C>          <C>                    <C>
$1.31 - 3.50           194,600      $    1.98                  7.9 years
</TABLE>


       In May 1995, options for 181,000 shares of common stock were granted
       under the Plan of which options for 90,500 shares will vest only upon the
       occurrence of certain circumstances. On December 31, 1995, 13,500 of such
       remaining options were granted as events upon which these options were
       contingent occurred. The Company recorded compensation expense of $-0-,
       $6,676, and $12,423 in 1999, 1998, and 1997, respectively, relating to
       these options. Compensation expense of $3,172 will be recorded in future
       periods as these options vest over a five-year period commencing December
       31, 1996.


                                      F-23
<PAGE>   54


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE O - TAXES ON INCOME

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

<TABLE>
<CAPTION>
                  1999        1998         1997
               ---------   ---------    ---------
<S>            <C>         <C>          <C>
CURRENT
     Federal   $      --   $ 183,276    $ (20,342)
     State            --          --           --
               ---------   ---------    ---------
                      --     183,276      (20,342)
               ---------   ---------    ---------

DEFERRED
     Federal   $      --   $      --    $ (79,650)
     State            --          --      (13,555)
               ---------   ---------    ---------
                      --          --      (93,205)
               ---------   ---------    ---------

Total          $      --   $ 183,276    $(113,547)
               =========   =========    =========
</TABLE>

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

<TABLE>
<CAPTION>
                                    1999           1998           1997
                                 -----------    -----------    -----------
<S>                              <C>            <C>            <C>
Provision (benefit) for income
  taxes at statutory rate        $(1,112,000)   $   281,484    $  (180,000)
Change in valuation reserve          764,000     (1,016,400)       102,134
Use of operating loss carry
  forwards                                --        907,700             --
Stock options                          1,000          2,700          6,900
Other                                 26,000         32,200         13,342
Change in prior year estimate        321,000        (24,408)       (55,923)
                                 -----------    -----------    -----------

                                 $        --    $   183,276    $  (113,547)
                                 ===========    ===========    ===========
</TABLE>


                                      F-24
<PAGE>   55


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE O - TAXES ON INCOME (CONTINUED)

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

<TABLE>
<CAPTION>
                                      1999           1998
                                  -----------    -----------
<S>                               <C>            <C>
Alternative minimum tax credit    $        --    $   202,000
Deferred gain on sale                (519,900)    (1,000,900)
Accrued salary expense                     --        211,900
Allowance for doubtful accounts       187,500        377,200
Other reserves                        264,000        243,100
NOL carryforward                    1,184,000             --
Other                                (189,000)       128,800
                                  -----------    -----------
                                      926,100        162,100
Valuation reserve                    (926,100)      (162,100)
                                  -----------    -----------
                                  $        --    $        --
                                  ===========    ===========
</TABLE>

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

NOTE P - LEASE COMMITMENTS

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

       The following is a summary at December 31, 1999, of the future minimum
       rents due under noncancelable operating leases:

<TABLE>
<CAPTION>
Year ending December 31,
<S>                            <C>
        2000                   $  431,669
        2001                      307,009
        2002                      176,485
        2003                      143,320
        2004                       48,106
                               ----------

           Total               $1,106,589
                               ==========
</TABLE>

       Total rent expense under operating leases for the years ended December
       31, 1999, 1998, and 1997, was approximately $670,179, $839,514 and
       $723,900, respectively.


                                      F-25
<PAGE>   56


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE Q - 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, 1999, and 1998, are as follows:


<TABLE>
<CAPTION>
         1999                 Carrying amount       Estimated fair value
         ----                 ---------------       --------------------
<S>                           <C>                   <C>
Cash                            $  504,583               $  504,583
Due from related party             104,036                  104,036
Other receivables                1,612,962                1,612,962
Note payable - line of credit      818,152                 818,152,
Long-term debt                     444,109                  444,109
Capitalized lease obligations      144,760                  144,760
</TABLE>


<TABLE>
<CAPTION>
         1998                 Carrying amount       Estimated fair value
         ----                 ---------------       --------------------
<S>                           <C>                   <C>
Cash                            $   25,192               $   25,192
Due from related party             124,036                  124,036
Other receivables                3,371,828                3,371,828
Note payable - line of credit    1,039,925                1,039,925
Long-term debt                     986,405                  986,405
Capitalized lease obligations      567,582                  567,582
</TABLE>


NOTE R - CONTINGENCIES


       On February 13, 1998, the Company filed suit in the United States
       District Court for the District of Oregon against Road Runner Oil, Inc.
       and Bernard J. Roscoe, alleging breach of contract for non-payment of
       services performed by the Company at an oil field in Utah. The amount of
       unpaid invoices, including interest and collection costs, is
       approximately $2.1 million. The Default Judgments against Road Runner
       have been awarded in the Tribal Court and Utah state court, and
       foreclosure proceedings and corresponding asset investigation are in
       progress. The Company wrote off this account receivable in 1998.

       In 1998, Environmental Chemical Corporation (ECC) filed for arbitration
       against the Company for various claims related to the Company's
       Subcontractor Agreement under an


                                      F-26
<PAGE>   57


                        CET ENVIRONMENTAL SERVICES, INC.

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                         December 31 1999, 1998 and 1997


NOTE R - CONTINGENCIES (CONTINUED)

       EPA contract. As discussed in Note C, in November 1999, the Company
       executed an Administrative Agreement, which provides for a financial
       reserve of $700,000. Management has been advised that this reserve
       relates to the resolution of the claims filed by ECC. The financial
       reserve has been established by funds withheld by the EPA from current
       and future EPA invoices, estimated base fee and determined award fees.

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

NOTE S - SUBSEQUENT EVENTS

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

       In February 2000, the Company closed its Richmond, California office and
       transferred field equipment, office equipment and other assets to the
       Company's other locations, primarily to a project located near Hercules,
       California.

       In March 2000, the Company received approximately $36,000 on a note
       receivable from a related party.


                                      F-27
<PAGE>   58
                               INDEX TO EXHIBITS

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

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

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

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

     10.3        Loan Documents Between National Bank of               Incorporated by reference to
                 Canada and the Company                                Exhibit 10.3 to the Company's
                                                                       Annual Report on Form 10-K for the year
                                                                       ended December 31, 1997.

     10.4        Amendment to Loan and Security Agreement and Loan     Incorporated by reference to
                 Documents between National Bank of Canada             Exhibit 10.4 to the Company's
                 and the Registrant                                    Annual Report on Form 10-K for the year
                                                                       ended December 31, 1998.

     10..5       Second Amendment to Loan and Security Agreement       Incorporated by reference to
                 and Loan Documents between                            Exhibit 10.4 to the Company's
                 National Bank of Canada                               Annual Report on Form 10-K for the year
                                                                       ended December 31, 1998.
</TABLE>


<PAGE>   59


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                           DESCRIPTION                                         LOCATION
---------------  --------------------------------------------------    ---------------------------------------------
<S>              <C>                                                   <C>
     10.6        Third Amendment to Loan and Security                  Incorporated by reference to
                 Agreement and Loan Documents between                  Exhibit 10.6 to the Company's
                 National Bank of Canada and the Registrant            Annual Report on Form 10-K for the year
                                                                       ended December 31, 1998.

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

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

     10.9        Seventh Amendment to Loan and Security                Incorporated by reference to Exhibit 10.2
                 Agreement and Loan Documents between                  to Company's Form 10-Q for the nine
                 National Bank of Canada and the Registrant            months ended September 30, 1999.

     10.10       Ninth Amendment to Loan and Security                  Incorporated by reference to Exhibit 10.3
                 Agreement and Loan Documents between                  to Company's Form 10-Q for the nine
                 National Bank of Canada and the Registrant            months ended September 30, 1999.

     10.11       Eleventh Amendment to Loan and Security               Incorporated by reference to Exhibit 10.4
                 months and Loan Documents between                     to Company's Form 10-Q for the nine
                 National Bank of Canada and the Registrant            months ended September 30, 1999.

     10.12       Thirteenth Amendment to Loan and Security             Incorporated by reference to Exhibit 10.5
                 Agreement and Loan Documents between                  to Company's Form 10-Q for the
                 National Bank of Canada and the Registrant            nine months ended September 30, 1999.

     10.13       Fourteenth Amendment to Loan and Security             Incorporated by reference to Exhibit 10.6
                 Agreement and Loan Documents between                  to Company's Form 10-Q for the
                 National Bank of Canada and the Registrant            nine months ended September 30, 1999.

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

     10.15       Asset Purchase and Assignment Agreement by            Filed herewith electronically
                 and between the Company and IT Corporation

     10.16       Asset Purchase and Assignment Agreement by            Filed herewith electronically
                 and between the Company and CAPE
                 Environmental Management, Inc.

     10.17       Lease Agreement by and between the Company            Filed herewith electronically
                 and Sky Harbor Associates Limited Partnership

      21         Subsidiaries of the Registrant                        Filed herewith electronically

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


<PAGE>   60


<TABLE>
<CAPTION>
    EXHIBIT                           DESCRIPTION                                        LOCATION
    NUMBER
---------------  --------------------------------------------------    ---------------------------------------------
<S>              <C>                                                   <C>
      27         Financial Data Schedule                               Filed herewith electronically
</TABLE>