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                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K
                    ANNUAL REPORT PURSUANT TO SECTION 13 OF
                      THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended             Commission File No. 0-20404
December 31, 2000

                                ENVIROGEN, INC.
                                 (Registrant)

       Delaware                               22-2899415
------------------------           ---------------------------------
(State of incorporation)           (IRS Employer Identification No.)

 4100 Quakerbridge Road
  Lawrenceville, NJ                              08648
-------------------------------                  -----
(Address of principal executive                (Zip code)
 offices)

Registrant's telephone number, including area code:  (609) 936-9300

Securities registered pursuant to Section 12(b) of the Act:  None

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

Common Stock, par value $.01 per share
--------------------------------------
     (Title of class)

     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 ___
    ---

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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. ___

     The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of February 23, 2001
was approximately $2,904,425.  (Reference is made to p. 14 herein for a
statement of the assumptions upon which this calculation is based.)

     The number of shares of the registrant's Common Stock outstanding as of
February 23, 2001 was 3,985,205.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant's definitive proxy statement relating to
its scheduled May 17, 2001 Annual Meeting of Stockholders (which proxy statement
is expected to be filed with the Commission not later than 120 days after the
end of the registrant's last fiscal year) are incorporated by reference in Part
III of this report.
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                                    PART I

ITEM 1.   BUSINESS

Envirogen, Inc. ("Envirogen" or the "Company") is organized primarily on the
basis of products and services being broken down into commercial operations and
research and development services.  The Company provides systems and services to
remove pollutants from the air, water and soil.  Many of its system and service
offerings rely on advanced biological techniques that have been developed or
refined by the Company. Envirogen's approach is to utilize the appropriate
technology to provide its clients with the most efficient, safe and cost-
effective solutions to hazardous waste cleanup and treatment needs.  The
developmental efforts at Envirogen focus on the isolation of naturally occurring
organisms, enhancement of their performance and the design of advanced systems
to optimize their activity for the biodegradation of various compounds in soil,
air and water.

While the activities of the Company are principally commercial remediation, a
portion of the activities of the Company to date have been related to research
funded by corporate and governmental sponsors to determine when advanced
biological treatment systems are appropriate to treat hazardous or noxious
waste.

Growth Strategy

Envirogen's growth model incorporates both an internal and external growth
strategy.  The internal growth strategy centers on increasing sales of the
Company's core products and services through the continued commercialization of
its technologies in concert with focused marketing and sales efforts.  To
supplement its internal growth, Envirogen has extended its product and service
lines and geographical presence through selective acquisitions of companies with
complementary capabilities aimed at producing synergistic results. The external
growth strategy also includes entering into joint ventures and collaborative
marketing agreements with firms that are interested in exploring and developing
alternative remediation and pollution control technologies.

In connection with this strategy, in 1998 Envirogen entered into a collaborative
marketing agreement with the Envirex Division of United States Filter
Corporation  ("US Filter") to jointly pursue opportunities in the treatment of
ammonium perchlorate, a component in rocket fuel, and methyl-tert-butyl-ether
("MTBE"), a gasoline additive.  In February 1999, Envirogen expanded its
relationship with the Davis Process Division of US Filter in the biofilter
market to treat noxious odors in municipal waste water applications. Under the
agreement, US Filter is responsible for sales, marketing and manufacturing,
while Envirogen continues product development and pursues sales opportunities as
appropriate.

Business Areas

Envirogen's core competency is the application of biotechnology and
biocomplementary technologies combined with expertise in traditional remediation
technology for both the remediation of contaminated waste sites and for the
treatment of contaminated waste streams. The evolution of the Company, aided by
acquisitions which have added synergistic technologies and capabilities onto its
core base of expertise, is demonstrated by its increased scope of services and
products offered to the marketplace and the expansion of its geographic
presence.  Increasingly, the Company is identifying and focusing its marketing
efforts on markets that are distinguished by specific compounds such as MTBE or
ammonium perchlorate.  In these markets, the Company has technological solutions
that offer advantages over competitive technologies. Envirogen's primary
business areas are described as follows.

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Soil Treatment
--------------

The majority of environmental problems is the result of the release into the
environment of contaminants ranging from simple hydrocarbons to complex
chlorinated compounds. Generally, the less complex molecular make-up of a
contaminant, the more easily and quickly it will be degraded by bacteria that
use the contaminant as a "food source. " For instance, when hydrocarbon-based
compounds, such as gasoline or heating oil, are spilled onto the ground,
indigenous soil bacteria are likely to be present to begin the biodegradation
process to break down the contaminant into its core components of carbon dioxide
and water. Contaminants with more complex molecular structures generally are
more difficult to degrade.  As molecular complexity increases, the presence of
indigenous bacteria that are capable of degrading the compound is less likely,
resulting in the need for intervention to enhance the degradation process. The
extent of intervention ranges from the relatively subtle, such as biostimulation
(stimulating indigenous bacteria) and bioaugmentation (injecting bacteria
isolated in a laboratory into the subsurface), to the more conspicuous, such as
excavation and transport to another location. With an understanding of the
direct relationship between cost and intervention, whereby costs generally
increase with added degrees of intervention, Envirogen designs solutions that
employ the least amount of intervention necessary  to achieve an environmentally
effective and cost-efficient solution.

Depending on the specific circumstances, the remediation of contaminated soils
and groundwater may be undertaken with the contamination remaining in place, or
in situ, or it may require removal of material from the contaminated area(s) for
ex situ destruction. In the latter case, additional costs associated with the
removal process, as well as the costs associated with increased handling,
treatment or storage and transport of contaminated matter, are incurred.

Accordingly, Envirogen's process of designing solutions to maximize cost savings
for its clients employs a hierarchical model of increasingly aggressive cleanup
techniques. In situations where the cleanup can be performed in situ, the most
"passive" form of biodegradation known as intrinsic remediation, is first
considered by Envirogen.  Intrinsic remediation is the approach that allows
contamination to be biodegraded through microbial degradation processes that
have developed naturally at a contaminated site, and thereby occurs without any
intervention. Based on the increased regulatory acceptance of intrinsic
remediation in recent years, Envirogen has accelerated its efforts with this
approach by developing intrinsic remediation protocols for a wide range of
target contaminants from petroleum hydrocarbons to chlorinated solvents.

Envirogen's full range of in situ technologies include: traditional approaches,
such as soil vapor extraction and air sparging; innovative biological-based
techniques, such as biostimulation and bioaugmentation; and approaches combining
the two, such as biosparging and bioventing, both of which stimulate degradative
microbial activity through the addition of oxygen to the subsurface. Envirogen
has steadily increased its in situ capabilities both through its internal
developmental efforts as well as through acquisitions of companies with
technologies in this category. Envirogen's acquisition of Massachusetts-based
Vapex Environmental Technologies, Inc. ("Vapex") in 1991 and Michigan-based MWR
in 1996 provided it with a portfolio of proprietary in situ capabilities. The
Company has recently developed commercial in situ capabilities for destruction
of MTBE and trichloroethylene ("TCE").  The scope of Envirogen's economical in
situ capabilities has been a major factor in Envirogen's success in receiving
several contract awards from groups of prestigious Fortune 100 clients for the
cleanup of Superfund sites.

Envirogen's ex situ capabilities for soil treatment include both traditional and
innovative approaches. Envirogen is a provider of reactor-based biosystems for
the on-site destruction of vapor streams as a final remediation step that
follows initial processes such as vapor extraction.  Other ex situ technologies
used by Envirogen include advanced landfarming, which involves the periodic
mixing of contaminated soil with a

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solid sludge or aqueous slurry surface layer that contains degradative bacteria,
and soil pile treatment, which uses soil mounded in rows and periodic tilling of
the rows to stimulate biological degradation of contaminants.

Water Treatment
---------------

The enforcement of more rigorous water quality regulations has created a need
for cost-effective systems to degrade contaminants in groundwater and plant
effluent streams.  The biological treatment of contaminated water streams is
generally recognized as a cost-effective alternative to more traditional
physical and chemical methods such as thermal, ultraviolet-based and adsorption
processes.

The biological treatment of contaminated water streams relies on the destruction
of chemicals by microorganisms, attached to a filter media or otherwise
contained in a reactor, to catalyze chemical reactions that break down
contaminants into less harmful compounds.  Utilizing its knowledge of
biocatalysis and advanced reactor design, the Company is able to combine
efficient microorganisms with the optimum bioreactor design to achieve the
destruction of a given contaminant.  Envirogen's research and development has
led to full-scale reactor systems for the treatment of contaminants ranging in
complexity from simple hydrocarbons to complex compounds, such as MTBE, which
are difficult to degrade. The Company has developed the following reactor
designs:

     .  Fluidized Bed Reactor - The fluidized bed reactor ("FBR") consists of a
        columnar reactor containing media that serves as an attachment surface
        for microorganisms. The contaminated liquid flows through the reactor
        where microorganisms degrade the contaminants. The reactor maintains
        high concentrations of biomass under high flow rate conditions. The
        optimal use of this system is for the treatment of high flow, medium
        concentration waste streams containing contaminants such as
        hydrocarbons, aromatics, solvents, ammonia or nitrates.

        Examples of applications of Envirogen's FBR system include the removal
        of aniline and nitrobenzene from groundwater at an industrial site, to
        treat groundwater leachate on the site of a former manufactured gas
        plant for an electric utility and for the removal of ammonium
        perchlorate from groundwater. Ammonium perchlorate is associated with a
        number of industries and has been suspected as a groundwater contaminant
        in 46 states.

     .  Membrane Bioreactor - The membrane bioreactor ("MBR") consists of a
        liquid-phase bioreactor coupled with a membrane clarification unit.
        Following the biological treatment of the contaminated stream, the
        contents of the bioreactor are pumped to the membrane unit where the
        solids and liquids are separated with clean effluent being discharged
        and biomass being recycled back into the bioreactor. The Company offers
        a line of modular transportable membrane biological reactor ("TIMBR")
        systems. These systems incorporate proprietary designs and certain
        features for which a patent application has been filed. Examples of
        applications of Envirogen's MBR and TIMBR systems include leachate
        treatment at an industrial/municipal wastewater treatment facility and
        process wastewater treatment in a fine chemicals production facility.
        The MBR is very effective in the treatment of high concentration,
        moderate flow-rate streams with complex or difficult to degrade
        compounds, such as MTBE, 1,4-dioxane and pesticides.

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Air Treatment
-------------

Motivated by the 1990 Clean Air Act Amendments ("CAAA"), which have increasingly
regulated the release of toxic compounds into the atmosphere, Envirogen embarked
upon a program in the early 1990s to commercialize biotechnology to treat both
odor-causing chemicals and volatile organic compounds. Referred to as
biofiltration technology, the biological treatment of contaminated air streams
is generally recognized as a cost effective alternative to physical and chemical
treatment methods such as incineration, adsorption and chemical scrubbing.
Envirogen's advancements in biofiltration include the development of systems for
the cost-effective treatment of odors and contaminants such as hydrogen sulfide,
carbon disulfide, styrene, terpenes, alcohols, aldehydes, mixed solvents
associated with the printing and surface coating industry and hydrocarbons
associated with remediation.

A biofiltration system consists of a large containment vessel ("reactor"),
within which microorganisms are attached to either an organic or inorganic
filter media and are used to catalyze chemical reactions that break down
airborne contaminants into less harmful compounds. As a contaminated vapor
stream passes through the filter bed, contaminants are transferred from the
vapor to the biofilm layer and are consumed by the microorganisms.  Research and
numerous field trials done by Envirogen resulted in the following bioreactor
technologies:

   .  Biofilter - A biofilter utilizes an organic filter media as the support
      for the biofilm layer containing the microorganisms.  The system, which is
      optimized for dilute waste streams, provides destruction efficiencies of
      up to 99% and typically provides substantial operating cost savings and
      equivalent or lower capital costs when compared to the more traditional
      chemical or physical removal technologies.

   .  Biotrickling Filter - A biotrickling filter operates on the same principle
      as a biofilter but utilizes a synthetic packing material instead of the
      organic filter media used in the biofilter. The biotrickling filter
      operates with a recirculating liquid flow over the packing material. This
      recirculating liquid flow is initially inoculated with microorganisms that
      form a biofilm layer on the packing.  The contaminants are transferred to,
      and degraded by, microorganisms present within both the recirculating
      liquid and the biofilm layer.  The biotrickling filter is an attractive
      alternative for the treatment of more difficult-to-degrade compounds with
      the advantage of reduced system footprint and reduced operating costs as
      compared to more traditional technologies.

Envirogen offers a line of modular biofiltration systems and other technologies
for the treatment of odors, air toxics and volatile organic compounds for
specific segments of the air pollution control market. These technologies,
combined with the customized biofilter and biotrickling filter designs of
Envirogen, underscore Envirogen's goal to attain a leadership position in the
biological air pollution control market. These products have applications in a
number of industries, which include municipal waste treatment facilities,
composting plants and the forest products industries.  Envirogen is
distinguished in this market by having completed work on numerous full-scale air
system installations ranging in contract size from approximately $35,000 to $1.8
million.

In February 1999, Envirogen expanded its relationship with the Davis Process
Division of US Filter in the biofilter market to treat noxious odors in
municipal waste water applications. Under the agreement, US Filter is
responsible for sales, marketing and manufacturing, while Envirogen continues
product development and to pursue sales opportunities as appropriate.

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Technology

Envirogen conducts research and development aimed at developing new, more
efficient environmental technologies for the remediation of hazardous waste and
for pollution control.  Envirogen's technology is based on two elements:
microorganisms (biocatalysts) with exceptional degradative abilities; and
engineered systems, including proprietary bioreactors and processes.  Envirogen
has conducted extensive testing of microorganisms and bioreactors and has
assembled a staff of scientists, engineers and consultants with expertise in
biochemistry, molecular biology, microbiology, hydrology, chemical and
mechanical engineering and systems design.  During 2000, Envirogen spent
approximately $2.0 million on research and development projects, approximately
$1.6 million of which was funded by third parties or government agencies.

Microorganisms
--------------

Envirogen's biodegradation processes are based on naturally occurring
microorganisms that are either indigenous to a hazardous waste site or are
introduced to the site for controlled usage by Envirogen.  The microorganisms
under development are primarily bacteria, which are microscopic, single-cell
organisms that under defined conditions can break down contaminants into less
complex substances.  For example, if the contaminant is benzene, the byproducts
from its complete degradation are carbon dioxide and water.

There are naturally occurring bacteria capable of degrading nearly all natural
organic compounds under appropriate conditions.  However, highly effective
naturally occurring bacteria capable of degrading many synthetic compounds (such
as polychlorinated biphenyls ("PCB's") and TCE) are not as common and can be
difficult to utilize.  These synthetic compounds were designed to be chemically
stable, which means that it may take many years before they are naturally
degraded.

Envirogen has isolated natural strains of bacteria that partially or completely
degrade or accelerate the degradation of a number of recalcitrant hazardous
wastes, including MTBE, PCBs, TCE, chloroform and other chlorinated solvents,
hydrochlorofluorocarbons ("HCFCs," ozone-depleting refrigerants) and polycyclic
aromatic hydrocarbons ("PAHs").  These bacteria have been isolated using
specialized enrichment techniques that allow Envirogen to select, isolate and
optimize the superior strains from the general population of bacteria found at
contaminated sites. Envirogen is also designing and testing genetically-modified
bacteria that can have several advantages over naturally occurring bacteria.
These advantages include the ability to degrade wastes faster, reducing the
overall cost of remediation or waste stream treatment.

Envirogen's commitment to developing leading-edge technologies not only serves
to provide new business opportunities for Envirogen, but has also helped
establish Envirogen as a leader in environmental biotechnology.  As mentioned
earlier, one of the major areas of focus for Envirogen has been the development
and testing of advanced in situ bioremediation technologies such as
bioaugmentation, whereby highly efficient microorganisms are injected directly
into a contaminated aquifer.

Engineered Systems
------------------

Envirogen has designed and constructed several different engineered systems
using bioreactors to enhance the biodegradative capabilities of the
microorganisms when they make contact with the contaminated air, water or soil.
By using a bioreactor, variables such as temperature and pH (acid or base) can
be controlled, and measured amounts of oxygen and nutrients can be added to the
mixture of microorganisms and contaminated materials, thereby optimizing the
degradative environment.

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Envirogen believes that the engineering and design of a variety of bioreactors
is an important factor in its ability to develop and sell commercially viable
systems for the biodegradation of hazardous chemicals.  The design of a
bioreactor to be used at a particular site or in a particular waste stream
depends on the types of wastes to be degraded, the media (e.g., soil, water or
air) in which the wastes are located, the concentration of the targeted waste
and the combination of other chemical wastes associated with the targeted waste.
Envirogen continues to develop and test bench-scale and pilot-scale bioreactor
designs utilizing naturally occurring and genetically-modified bacteria for the
degradation of perchloroethylene ("PCE"), TCE, MTBE, air toxics, industrial
wastewater effluents, and groundwater contaminants.

In 1998, Envirogen was awarded a patent on its process for the biodegradation of
MTBE.  The invention utilizes a class of microorganisms that use propane and
propanol as their growth substrate while also biodegrading MTBE and other ether-
based fuel additives.  Envirogen successfully completed a field demonstration of
its MTBE bioremediation technology and believes that the technology provides a
mechanism to remove MTBE from contaminated groundwater on a cost-effective
basis.

Externally Funded Research
--------------------------

As discussed earlier, strict regulations and the prohibitive cost of traditional
treatment methods have forced business and government to seek lower-cost
alternatives to their hazardous waste problems.  In particular, various agencies
of the Federal government have been early and strong supporters of innovative
technologies aimed at achieving this goal.  This support is evident through the
government's Small Business Innovation Research ("SBIR") program, which awards
grants of various sums to companies for specific areas of research and
development.  Throughout its history the Company has been awarded numerous Phase
I and Phase II SBIRs for the development of advanced technologies.  In 2000, the
Company completed two projects for the Department of Defense ("DOD"), to develop
and field test bioreactor systems for treating air containing odors, and paint
and paint-stripping solvents.  Another DOD SBIR (awarded in 1998), for in situ
biotreatment of chlorinated solvents using biostimulation, was also completed in
2000.  Three other Phase I SBIRs conducted during the year involved technology
development for MTBE remediation, biocatalysis, and foams for in situ metal
remediation.  Through another DOD/EPA/DOE Strategic Environmental Research &
Development Program ("SERDP"), the Company has also been developing and testing
an in situ technology for cleanup of aquifers contaminated with ammonium
perchlorate (a major component of rocket fuel).  In 2000, Envirogen also began a
major field trial in California for its proprietary in situ MTBE remediation
technology.  This project is funded by the DOD Environmental Security Technology
Certification Program ("ESTCP") and has been chosen to be evaluated under an EPA
verification program.

The Company contracts with major corporations and government entities to conduct
feasibility studies, sponsored research and development and to remediate
contamination problems.  Pursuant to the Company's contracts, the work is
generally conducted in phases beginning with feasibility studies to demonstrate
that the Company's bacteria will degrade the targeted waste.  Each sponsoring
corporation or governmental entity may terminate the work being conducted by the
Company upon the completion of each phase and each additional phase generally is
separately contracted for by the sponsoring corporation or governmental entity.
With limited exceptions, the Company is not subject to any royalty or exclusive
license agreements arising from its research and development contracts.  See
Note 12 to the Company's Consolidated Financial Statements for a description of
existing license agreements.

Envirogen's research and development efforts with microorganisms and engineered
systems, along with many other existing products and systems still under
development, lay the scientific groundwork for safer, more responsive commercial
applications.  The result is a cleaner environment achieved at a cost that is
reasonable for government and industry.

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Marketing

The Company's products and services are marketed to customers by both a
dedicated sales staff and by the Company's technical staff.  Once a potential
client or project opportunity is identified, the Company uses its expertise in a
variety of disciplines as appropriate to provide specific solutions to meet an
individual client's needs.

Governmental Regulation

The federal and state environmental laws regulating Envirogen's current and
proposed biodegradation systems are complex, subject to varying interpretations
and continually evolving.  Compliance with these laws, rules and regulations is
expected to be time consuming and costly.  Failure to comply with these
requirements, even if unintentional, could give rise to liabilities, penalties
or fines that could materially adversely affect Envirogen's financial condition
and its reputation.

Under the Toxic Substances Control Act ("TSCA"), the EPA has the authority to
regulate the use of chemicals for commercial purposes.  A premanufacture notice
("PMN") is required to be filed with the EPA 90 days in advance of the
manufacture for commercial purposes of any "new" chemical substance.  To date,
the EPA has not asserted that isolated strains of naturally-occurring
microorganisms are chemical substances under TSCA.  Since 1986, however,
genetically-modified microorganisms, with certain limited exceptions, have been
considered "new" chemical substances by the EPA.  As a result, any manufacture
of genetically-modified microorganisms that Envirogen may consider in the future
for commercial use or the release of genetically-modified microorganisms into
the environment will require the filing of a PMN, subject Envirogen to the EPA's
premanufacturing review process and require the development of risk assessment
information. Depending on the nature of the microorganism, this process may be
time-consuming and costly.  Envirogen has been advised by the EPA that
Envirogen's proposed use of genetically-modified microorganisms in a bioreactor
is a "contained" use for purposes of research and development. In April 1997,
the EPA adopted regulations for its TSCA biotechnology program that define the
criteria under which the use of genetically-modified microorganisms in a
bioreactor will be considered "contained."  Envirogen believes the time and cost
of obtaining EPA approval for its commercial systems may be reduced as a result
of the EPA's regulations for its TSCA biotechnology program. Envirogen continues
to monitor regulatory approvals required by the EPA under TSCA and by various
state and local authorities related to Envirogen's intended use of genetically-
modified bacteria.

Recombinant DNA research conducted with grants from the National Institute of
Health ("NIH") must comply with NIH's Guidelines for Research Involving
Recombinant DNA Molecules (the "Guidelines"). Although compliance with the
Guidelines is not currently mandated for entities that do not receive any NIH
funding, Envirogen has conducted its research involving genetically-modified
microorganisms in compliance with the Guidelines.  The Guidelines prohibit or
restrict certain recombinant DNA experiments, set forth levels of biological and
physical containment of recombinant DNA molecules for various types of research
and require that institutional biosafety committees, composed of representatives
of Envirogen and the public, approve certain experiments before they are
initiated.

Envirogen's research and development activities on PCBs currently require a
permit under TSCA, and certain of its other research activities on other
hazardous substances require state permits.  These permits have been obtained.
Additionally, other permits may be required from the EPA and various state and
local agencies in connection with the installation, use or operation of
Envirogen's biodegradation systems.

Envirogen's biodegradation systems, whether used at a hazardous waste
generator's facility or at a hazardous waste site, also may be subject to
permitting under the Resource Conservation and Recovery Act

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("RCRA") as a Treatment, Storage or Disposal Facility ("TSD facility"). The
field demonstration of a bioreactor system may also require a permit under RCRA.
Obtaining a TSD facility permit can be a time consuming and expensive process,
requiring considerable documentation, including process information, waste
specifications and information regarding compliance assessments, security
procedures, emergency plans and insurance, as well as local public hearings.
Local public opposition may delay the issuance of a TSD facility permit for a
number of years or even cause the EPA to deny the permit.

Envirogen's systems may also be subject to other environmental regulations
including mandatory destruction levels and prohibitions on the release of
significant levels of hazardous wastes into the environment.

Envirogen's vapor extraction technology is subject to strict enforcement of
various EPA and state environmental regulations and various site specific
permitting requirements.  EPA or state regulatory agency review of the remedial
action plan is a prerequisite to installation of a full-scale vapor extraction
system.  In addition, the vapor extraction system must comply with federal and
state air and water pollution control standards and an air emissions permit is
often required.  In some instances, the system will require a permit in order to
discharge the treated waste stream into ground or surface waters.

Federal and state safety and health regulations require Envirogen to train its
employees for work at hazardous waste sites and require the preparation of
health and safety plans for each individual project.

Management believes that Envirogen is in material compliance with all material
regulatory requirements.

Competition

The environmental remediation industry is highly fragmented and competitive. The
Company competes primarily on the basis of price by using its technologies to
provide remediation solutions that are more cost effective than alternative
approaches.  Competitors include engineering and construction firms,
environmental management service firms and specialized technology companies,
including companies focusing on developing advanced biological remediation
technologies similar to Envirogen's technologies. As technological advances are
made and become more widely known, the larger environmental firms may acquire
these companies and technologies and offer such technologies as part of an
overall solution to a hazardous waste remediation project.  Because these
companies have significantly greater financial resources than Envirogen and can
offer a wider range of services, Envirogen may be at a competitive disadvantage.

In general, competition in the hazardous waste management industry is based
primarily upon the cost of the volume of waste treated, contained or removed.
Where the waste is removed, customers are typically charged based on tons of
contaminated soil excavated and transported to a hazardous waste landfill.
Additional competitive factors include corporate presence in a geographic area,
regulatory support, performance standards and technical reliability and
competence.  Envirogen's competitive position is premised upon the lower-cost
treatment approach traditionally associated with biodegradation techniques, with
particular focus upon Envirogen's distinctive approach to degrading recalcitrant
hazardous waste.

Envirogen and many other environmental companies offer full-service, turn-key
approaches that are capable of providing an overall solution to a hazardous
waste remediation project.  Where appropriate, Envirogen teams with larger
environmental service firms to offer consulting, engineering, project
management, materials handling and other complementary techniques that are
provided by other firms in conjunction with Envirogen's biodegradation
technology.  To date, Envirogen has been able to establish acceptable levels of
such teaming arrangements on satisfactory terms.

                                       9
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In response to the search for alternatives to incineration, deep-well injection
and hazardous waste landfills, various developmental chemical and physical
treatment technologies are being explored by sources within industry, university
research centers and the EPA.  Any of these alternative technologies, if found
to be effective and cost efficient, may directly or indirectly compete with
Envirogen's technologies.  Certain present remediation alternatives are under
regulatory review and, as in the case of incineration, their availability may be
limited or restricted in the future, thereby increasing the need to develop
acceptable alternatives.

Envirogen is aware of a number of potential competitors seeking to develop
commercial systems employing biological degradation technology, many of which
have considerably greater financial resources than Envirogen.  Some of these
companies are focusing directly on the enhancement of the degradative activities
of indigenous microorganisms, and some have isolated strains of microorganisms
that alone or in combination with other isolated strains of bacteria will
degrade certain hazardous wastes.  Envirogen does not expect that other entities
seeking solely to enhance conventional biological treatment systems will be able
to demonstrate these systems' effectiveness in degrading the more recalcitrant
hazardous chemicals targeted by Envirogen.  There are, however, a number of
companies attempting to develop advanced biological treatment techniques similar
to those of Envirogen for treatment of these recalcitrant chemicals. The less
stable hydrocarbon wastes are not particularly difficult to degrade using
conventional biological methods, and Envirogen expects greater competition in
that market sector.

Envirogen is aware of other companies that have targeted the biodegradation of
MTBE and/or TCE and have performed various degrees of testing.  Envirogen is not
aware of any competitor that has had substantial positive results in the
biodegradation of PCB wastes, although Envirogen believes that various companies
have targeted the PCB biodegradation market.  Envirogen is aware of and expects
continued competition in the areas of remediation of industrial air toxics,
industrial wastewaters, groundwater and soils.

In addition, there are a significant number of companies that offer soil vapor
extraction and related remediation services.  The EPA has rated soil vapor
extraction as one of the top innovative technologies. Changes in governmental
regulations, the enforcement of regulations or advances in technology may result
in a decrease in the demand for vapor extraction services or affect the
competitive environment in which Envirogen operates.

Employees

As of December 31, 2000, Envirogen had 148 full-time employees, including 87 in
engineering, 18 in research and development, 30 in administration and finance
and 13 in marketing.  Doctoral degrees are held by 11 employees and encompass
the disciplines of biochemistry, molecular biology, chemical engineering,
environmental engineering, hydrogeology, microbiology and microbial physiology.
Each of Envirogen's key employees is subject to a confidentiality agreement with
Envirogen covering Envirogen's processes and plans relating to its business and
activities.  Envirogen is not subject to any collective bargaining agreements
and believes that its relationship with its employees is excellent.

Environmental Liability and Insurance

Envirogen could be held strictly liable under various laws and regulations if
microorganisms or hazardous wastes cause harm to humans or the environment, even
if Envirogen were not negligent.  Although Envirogen has a combined professional
liability and contractor's pollution liability insurance program that also
provides limited product liability coverage, there can be no assurance that
environmental liabilities that

                                       10
<PAGE>

may be incurred by Envirogen will be covered by its insurance or that the dollar
amount of covered liabilities will not exceed policy limits. Accordingly, a
partially or completely uninsured judgment against Envirogen could have a
materially adverse effect on Envirogen. Liability insurance market conditions
may make it impossible or uneconomical for Envirogen to obtain combined
professional and contractor's pollution liability or product liability
insurance, which may adversely affect its ability to market its products and
services. Although Envirogen attempts to mitigate some of the uninsured risks by
typically not taking title to its customers' waste or transporting such waste,
such measures may not be sufficient to avoid all potential liability.

Envirogen may be required to indemnify its customers against losses and fines
associated with work under certain of its contracts in the event that
Envirogen's, and under certain circumstances, its subcontractors performance
under such contract or contracts is faulty or not conducted in compliance with
deadlines. Although Envirogen will make every effort to mitigate losses under
indemnification clauses contained in its contracts, a claim, if successful and
of sufficient magnitude, could have a materially adverse effect on the business
or financial condition of Envirogen.

ITEM 2.  PROPERTIES

The Company's headquarters is located in Lawrenceville, New Jersey, where it
leases 40,200 square feet of office space for its administrative, research and
pilot facilities and for its commercial operations. The Company also leases an
aggregate of approximately 42,000 square feet of office and warehouse space for
its administrative and commercial operations in Illinois, Massachusetts,
Michigan and Wisconsin. Management believes that the Company's facilities are
adequate and suitable for its current and proposed operations for the
immediately foreseeable future.

ITEM 3.  LEGAL PROCEEDINGS

The Company is currently involved in litigation relating to services previously
provided at a customer site where remediation work was performed.  This customer
filed a claim against the Company for professional malpractice, breach of
warranty of professional services contract and misrepresentation.  No specific
damages were claimed by this customer and, at the present time, management of
the Company is unable to predict the outcome of this matter or to determine
whether the outcome of this matter will materially affect the Company's results
of operations, cash flows or financial position.

The Company is subject to claims and lawsuits in the ordinary course of its
business.  In the opinion of management, such claims are either adequately
covered by insurance or, if not insured, will not individually or in the
aggregate result in a material adverse effect on the consolidated financial
condition of the Company.


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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

                                       11
<PAGE>

                             Additional Information

The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:

Executive Officers of the Company

The executive officers of the Company serve at the discretion of the Board of
Directors.  There are no family relationships between any of the executive
officers of the Company.  The following information indicates the position and
age of the Company's executive officers as of the date of this report and their
previous business experience.
<TABLE>
<CAPTION>

          Name                   Age             Position
          ----                   ---             --------
     <S>                        <C>   <C>
     Robert S. Hillas             52  President, Chief Executive Officer and
                                        Chairman of the Board
     Ronald Unterman, Ph.D.       55  Senior Vice President and Chief
                                        Scientific Officer
     Mark J. Maten                43  Vice President, Finance and Chief
                                        Financial Officer
     David N. Enegess             54  Vice President National Group

     Richard W. Schowengerdt      45  Vice President Wisconsin Operations
</TABLE>

Robert S. Hillas, President, Chief Executive Officer and Chairman of the Board,
joined the Company in April 1998.  Mr. Hillas served as a Managing Director and
a member of E.M. Warburg, Pincus & Co., L.L.C. ("Warburg"), a specialized
investment firm, and its predecessors from 1993 until April 1998.  Mr. Hillas
served as Warburg's nominee director to the Company from April 1997 to April
1998.  Mr. Hillas is also a director of ATMI, Inc.  Mr. Hillas received a B. A.
in mathematics from Dartmouth College and a Masters in Business Administration
from Stanford University.

Ronald Unterman, Ph.D., Senior Vice President and Chief Scientific Officer, is a
founder of the Company and has been with the Company since August 1988.  From
1981 until he joined the Company, Dr. Unterman served as a staff scientist (from
November 1981 to December 1987) and as a manager (from January 1988 to July
1988) of the Environmental Technology Program at General Electric Company.  His
primary area of research expertise is in the development of methods for
biodegrading PCBs.  Dr. Unterman received a B.A. in biology from Haverford
College, studied under a Molecular Biology Fellowship at Rockefeller University
and holds a Ph.D. in biochemistry from Columbia University.

Mark J. Maten joined the Company in January 1998 as Vice President, Finance and
Chief Financial Officer. From February 1997 until December 1997, Mr. Maten
served as a business and financial advisor in a consulting capacity to a number
of companies.  From June 1992 until January 1997, Mr. Maten was Senior Vice
President and Chief Financial Officer of Enviroplan, Inc., a leading provider of
continuous emission monitoring systems to the electric utility industry.  Mr.
Maten also served as a member of the Board of Directors for Enviroplan, Inc.
Mr. Maten is a member of the American Institute of Certified Public Accountants.
Mr. Maten received his undergraduate degree from the University of Michigan and
a Masters in Business Administration from Indiana University.

                                       12
<PAGE>

David N. Enegess was appointed Vice President National Group in January 1999.
The group was formerly known as Systems Sales and Services. Mr. Enegess is a
founder of the Company and has served as Vice President of Marketing and
Commercial Development (June 1988 until March 1997) as well as Vice President of
Product Development (April 1997 until December 1998). From 1982 until he joined
the Company in June 1988, he served in various capacities, most recently as Vice
President of Corporate Development, for American NuKEM Corporation (formerly
known as WasteChem Corporation), a company which sells equipment, systems and
services for the treatment of hazardous wastes. Mr. Enegess received his
undergraduate and masters degrees in chemical engineering from Tufts University.

Richard W. Schowengerdt joined the Company when Fluid Management, Inc. ("FMI"),
a full-service environmental consulting and engineering firm of which he was a
founder, was acquired by the Company in April 1997, and served as Vice President
of Design Engineering until May 1999.  Mr. Schowengerdt was named Vice President
Wisconsin Operations in May 1999.  He served as Vice President of Technical
Development at FMI since 1990.  Mr. Schowengerdt's background includes
management and technical expertise in construction, engineering, geology and
hydrogeology.  Mr. Schowengerdt received a B.S. in hydrology from Michigan
Technological University.

                                       13
<PAGE>

                                 PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Envirogen's Common Stock is traded in the Nasdaq SmallCap Market under the
symbol "ENVG." The Common Stock prices are inter-dealer prices, without retail
markup, markdown or commission, and may not necessarily represent actual
transactions.  The following table sets forth for the periods indicated the high
and low closing prices for Envirogen's Common Stock as reported by Nasdaq.

<TABLE>
<CAPTION>
            2000                        HIGH         LOW
            ----                        ----         ---
          <S>                          <C>          <C>
          1st Quarter                  $6.25        $1.56
          2nd Quarter                  $3.94        $2.03
          3rd Quarter                  $2.63        $1.56
          4th Quarter                  $2.13        $0.72

            1999
            ----
          1st Quarter                  $1.88        $1.09
          2nd Quarter                  $1.75        $0.88
          3rd Quarter                  $1.66        $0.75
          4th Quarter                  $1.69        $0.81
</TABLE>

The closing price for the Common Stock on February 23, 2001 was $1.22.  For
purposes of calculating the aggregate market value of the shares of Common Stock
of the Company held by nonaffiliates, as shown on the cover page of this report,
it has been assumed that all the outstanding shares were held by nonaffiliates
except for the shares held by directors and executive officers of the Company
and stockholders owning 10% or more of outstanding shares.  However, this should
not be deemed to constitute an admission that all such persons are, in fact,
affiliates of the Company, or that there are not other persons who may be deemed
to be affiliates of the Company.  Further information concerning ownership of
the Company's securities by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.

The number of stockholders of record as of February 5, 2001 was 204, which
includes stockholders whose shares were held in nominee name.  The number of
beneficial stockholders at that date was over 1,300.

Envirogen has never declared or paid cash or other dividends on its Common
Stock.  The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon Envirogen's earnings, capital
requirements, financial condition and other relevant factors.  Envirogen
presently intends to retain all earnings, if any, for future use in its business
and does not anticipate paying dividends in the foreseeable future.

                                       14
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

The following table contains selected financial data for each of the Company's
last five fiscal years.  This data should be read in conjunction with the
Company's consolidated financial statements and related notes appearing
elsewhere in this report and with Item 7 of this report.

Summary of Operations

<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                             -----------------------------------------------------------------------------
                                  2000          1999          1998/(1)/       1997/(2)/         1996/(3)/
                                  ----          ----          ----            ----              ----
 <S>                         <C>            <C>            <C>             <C>              <C>
 Revenues                    $ 20,339,401   $ 24,049,968   $  26,220,877   $  25,769,509    $  12,919,594
 Costs and expenses            22,585,697     25,601,135      52,541,064      28,885,818       15,689,306
 Interest, net                    193,169        134,765         159,277         210,573          170,783
 Equity in (loss) income of
    joint ventures                                  (393)         13,688        (210,497)         (52,629)
 Other, net                         1,966         (7,604)         (3,804)         26,047            7,601
                             ------------   ------------   -------------   -------------    -------------
 Net loss                      (2,051,161)    (1,424,399)    (26,151,026)     (3,090,186)      (2,643,957)
 Preferred stock dividends              -              -               -               -          (36,458)
                             ------------   ------------   -------------   -------------    -------------
 Net loss applicable to
   Common Stock               ($2,051,161)   ($1,424,399)   ($26,151,026)   ($ 3,090,186)    ($ 2,680,415)
                             ============   ============   =============   =============    =============

 Basic and diluted net
   loss per share
   applicable
   to Common Stock/(4)/            ($0.52)        ($0.36)         ($6.64)         ($0.93)          ($1.41)
                             ============   ============   =============   =============    =============
</TABLE>

Summary of Financial Position

<TABLE>
<CAPTION>
                                                           December 31,
                             -------------------------------------------------------------------------------

                                  2000          1999           1998          1997/(2)/         1996/(3)/
                                  ----          ----           ----          ----              ----
<S>                          <C>            <C>            <C>             <C>              <C>
Total assets                 $ 12,266,296   $ 16,370,865   $  17,945,879   $  42,727,012    $  12,716,624
Working capital                 3,212,674      4,786,503       5,151,482       8,099,057        7,094,266
Long-term obligations              11,800              -           4,644          12,671           42,176
Redeemable convertible
  Preferred Stock                       -              -               -               -                -
Stockholders' equity            5,111,223       7,093,390       8,461,789      33,992,254       10,047,233
</TABLE>

(1)  Costs and expenses for 1998 includes a non-cash charge of $21,670,028
     representing the impairment of goodwill associated with the FMI
     acquisition.
(2)  The financial data for 1997 includes the results of operations of FMI
     (acquired April 10, 1997) from  the date of acquisition.
(3)  The financial data for 1996 includes the results of operations of MWR
     (acquired February 9, 1996) from the date of acquisition.
(4)  The per share amounts have been adjusted to reflect the one-for-six reverse
     stock split of the Company's common stock on November 24, 1998 on a
     retroactive basis.

                                       15
<PAGE>

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

The following information should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this report.

Certain statements made herein are forward-looking and are made pursuant to the
safe harbor provisions of the Securities Litigation Reform Act of 1995.  Such
statements involve risks and uncertainties which may cause results to differ
materially from those set forth in these statements.  In particular,
unanticipated changes in the economic, competitive, governmental, technological,
marketing and other factors identified herein and in the Company's other filings
with the Securities and Exchange Commission could affect such results.

General
-------

The Company has received most of its revenue from commercial remediation
services and systems, which includes, primarily, revenue attributable to
traditional remediation services such as soil vapor extraction and air sparging.
In addition, a portion of the Company's revenue to date has been derived from
research funded largely by corporate and governmental sponsors to develop cost
effective advanced biological treatment systems.  Revenues from these advanced
treatment technologies are still in the early stages of commercial development,
and additional expenditures by the Company will be required for continued
research and development and expanded marketing activities.  The amount and
timing of such expenditures cannot be predicted and will vary depending on
several factors, including the progress of development and testing, funding from
third parties, the level of enforcement of environmental regulations by federal
and state agencies, technological advances, changing competitive conditions and
determinations with respect to the commercial potential of the Company's
systems.

On April 10, 1997, the Company acquired Fluid Management, Inc. ("FMI"), a full-
service environmental consulting and engineering firm that is now operated as
the Company's Wisconsin and Illinois Divisions. Remediation services and
installation of traditional remediation systems are the Divisions' core business
and generate the greatest portion of the Divisions' revenues.  Pursuant to the
Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"), a program funded
by the State of Wisconsin for cleaning up underground storage tanks, the
Wisconsin Division's clients (or their lending banks) are entitled to seek
reimbursement for a majority of the remediation costs paid to the Wisconsin
Division.  The Wisconsin Department of Commerce ("DCOM") reviews claims for
reimbursement under PECFA to determine the extent to which submitted claims will
be reimbursed.  The DCOM review process may not be completed until one to three
years after the expense has been incurred and paid by the Wisconsin Division's
client (or its bank).  This exposes the client to the risk that remediation
expenses it incurred and paid ultimately may be disallowed for PECFA
reimbursement by DCOM.  The Wisconsin Division has in a number of cases
reimbursed its clients (or their lending banks) for the remediation costs for
services provided by the Wisconsin Division which ultimately were determined by
DCOM to be ineligible for reimbursement under PECFA.  Since the Company acquired
FMI, the Company has reimbursed its clients and their lending banks an aggregate
of $1,857,394, including $514,083 in the year ended December 31, 2000.  At
December 31, 2000, the Company had $3,039,122 in reserves with respect to
potential ineligible claims related to approximately $41 million in claims that
had not yet been fully reviewed by DCOM. There can be no assurance that the
amount of such reserve, which was determined by management based on historic
reimbursement disallowance rates under the PECFA program, will be adequate.

On April 17, 1998, the State of Wisconsin adopted emergency rules ("Emergency
Rules") with regard to PECFA which effectively reduced the expected revenue per
site that the Wisconsin Division can capture

                                       16
<PAGE>

under the program for the foreseeable future. The State of Wisconsin's stated
intent for issuance of the Emergency Rules was to reduce the amount of funds
being paid for cleanup efforts under the PECFA program. Until the issuance of
the Emergency Rules, the Wisconsin Department of Natural Resources ("DNR")
determined the appropriate remedial activity for each site under the program in
every instance. Per the Emergency Rules, DNR's authority extends only to sites
where groundwater contamination is evident. Where contamination of soil exists
without groundwater contamination, DCOM administers the remedial program with no
DNR involvement. Under the Emergency Rules, lower-cost natural attenuation is
mandated unless certain conditions exist which would indicate that active
remediation is necessary. This is a significant change, because natural
attenuation was previously not an approved option and virtually all sites were
actively remediated. Based upon the Company's experience, it is estimated that
the active remediation approach under PECFA resulted in revenues ranging from
$50,000 to $1,000,000 per site. Since the adoption of the Emergency Rules, the
Company's revenues from a typical site have been reduced to approximately
$40,000 to $100,000. This regulatory event has resulted, and is expected to
continue to result, in a dramatic decrease in revenue, net income and cash flow
from the Wisconsin Division.

As a result of this event, the Company reviewed the carrying value of the long-
lived assets associated with its acquisition of FMI and recorded a non-cash
charge of $21,670,028 in the second quarter of 1998 representing the impairment
of the goodwill.  This charge is based on the amount by which the book value
exceeded the current estimated fair market value of the goodwill.  The current
estimated fair market value was determined primarily using the anticipated cash
flows of the Wisconsin Division discounted at a rate commensurate with the risk
involved.  The impairment charge fully eliminated the remaining carrying value
of the goodwill associated with the FMI acquisition.

Results of Operations
---------------------

2000 Compared to 1999
---------------------

For the year ended December 31, 2000, the Company's total revenues decreased 15%
to  $20,339,401 from $24,049,968 in 1999.  The net loss increased 44% to
$2,051,161 from $1,424,399 in 1999, while the basic and diluted net loss per
share was $0.52 compared to $0.36 in 1999.

Commercial revenues (net of reserves for ineligible PECFA claims) decreased 11%
in 2000 to $18,723,719 from $21,114,503 in 1999. The decreased commercial
revenues are due primarily to reduced revenue in the Wisconsin Division under
the PECFA program related to the adoption of the Emergency Rules in April 1998.

Revenues from corporate research and development contracts decreased in 2000 by
45% to $1,615,682 from $2,935,465 in 1999.  Revenues decreased primarily due to
the timing of work associated with Phase II government projects and to the fewer
number of projects as compared to 1999.

Total costs and expenses decreased to $22,585,697 in 2000 from $25,601,135 in
1999. The cost of commercial operations decreased 12% to $15,773,287 during 2000
from $17,973,543 in 1999 due primarily to decreased revenue levels and slightly
improved project margins.  Research and development expenses decreased 33% to
$2,001,165 during 2000 from $2,981,959 in 1999 as a result of lower revenue
levels. Marketing, general and administrative expenses increased 4% to
$4,811,245 from $4,645,633 due primarily to increased marketing costs and as a
result of increased marketing efforts.

Interest income increased 38% to $205,538 in 2000 from $148,531 in 1999, due
primarily to the increased average cash available for investment and higher
interest rates.

                                       17
<PAGE>

1999 Compared to 1998
---------------------

For the year ended December 31, 1999, the Company's total revenues decreased 8%
to  $24,049,968 from $26,220,877 in 1998.  The net loss decreased 95% to
$1,424,399 from $26,151,026 in 1998, while the basic and diluted net loss per
share was $0.36 compared to $6.64 in 1998.  The 1998 net loss included a
goodwill impairment charge of $21,670,028, or approximately $5.50 per share.

Commercial revenues (net of reserves for ineligible PECFA claims) decreased 11%
in 1999 to $21,114,503 from $23,648,398 in 1998. The decreased commercial
revenues are due primarily to reduced revenue under the PECFA program related to
the adoption of the Emergency Rules in April 1998.

Revenues from corporate research and development contracts increased in 1999 by
14% to $2,935,465 from $2,572,479 in 1998.  Revenues increased primarily due to
the timing of work associated with Phase II government projects on which the
Company worked in 1999.

Total costs and expenses decreased to $25,601,135 in 1999 from $52,541,064 in
1998. The 1998 costs included the impairment charge of $21,670,028. Exclusive of
the impairment charge, total costs and expenses decreased 17% for 1999. The cost
of commercial operations decreased 14% to $17,973,543 during 1999 from
$20,944,137 in 1998 due primarily to decreased revenue levels.  Research and
development expenses decreased 1% to $2,981,959 during 1999 from $2,998,271 in
1998.  Marketing, general and administrative expenses decreased 33% to
$4,645,633 from $6,928,628 due primarily to ongoing cost reduction programs,
continuing headcount reductions and purchasing efficiencies.  As discussed
above, in 1998 the Company recorded a charge of $21,670,028 for impairment of
goodwill due to significant changes in the PECFA program that occurred in April
1998 and that have negatively impacted the performance of the Wisconsin
Division.

Interest income decreased 18% to $148,531 in 1999 from $180,545 in 1998, due
primarily to the decreased average cash available for investment.

Liquidity and Capital Resources
-------------------------------

The Company has funded its operations to date primarily through revenues from
commercial services, sales of biodegradation systems, public offerings and
private placements of equity securities, research and development agreements
with major industrial companies and research grants from government agencies. At
December 31, 2000, the Company had cash and cash equivalents of $3,826,006 and
working capital of $3,212,674.  Cash and cash equivalents decreased $701,973
from December 31, 1999 to December 31, 2000 due primarily to cash used in
operations of $354,328 and capital expenditures of $343,990.

From December 31, 1999 to December 31, 2000, accounts receivable decreased by
$1,847,558 primarily  as a result of reduced revenues and improved collections.
In the same period, accounts payable decreased by $1,683,285 due to shifts in
the timing of project expenses and related subcontractor charges.    At December
31, 2000, the Company had $3,210,622 in reserve for claim adjustments and
warranties, $3,039,122 of which is available for potential PECFA claim
adjustments related to approximately $41 million in unsettled PECFA submittals
and $171,500 of which is available for potential systems warranty claims and
other contract issues.

It is anticipated that the Company's currently available cash, cash equivalents
and cash expected to be generated from operations will provide sufficient
operating capital for at least the next 18 to 24 months. The Company may seek
additional funds through equity or debt financing.  However, there can be no
assurance that such additional funds will be available on terms favorable to the
Company, if at all.

                                       18
<PAGE>

Other Matters
-------------

As of December 31, 2000, the Company had a net operating loss carry forward of
approximately $27.5 million for federal income tax reporting purposes available
to offset future taxable income, if any, through 2020.  The timing and manner in
which these losses may be utilized are limited under Section 382 of the Internal
Revenue Code of 1986 to approximately $1,700,000 per year based on preliminary
calculations of certain ownership changes to date and may be further limited in
the event of additional ownership changes.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is, as amended, effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1,
2001 for the Company).  SFAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value.  Changes in the fair value of
the derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The
implementation of SFAS 133 is not expected to have any impact on the Company's
consolidated results of operations, financial position or cash flows.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has limited exposure to financial market risks, including changes in
interest rates.  At December 31, 2000, all available excess funds are cash or
cash equivalents whose value is not subject to changes in interest rates.  The
Company currently holds no derivative instruments and does not earn foreign-
source income.

                                       19
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                ENVIROGEN, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                   ------------------------------------
                                                                       2000                    1999
                                                                   ------------            ------------
<S>                                                                <C>                     <C>
ASSETS
Current assets:
     Cash and cash equivalents                                     $  3,826,006            $  4,527,979
     Accounts receivable, net of allowance for doubtful
           accounts of $795,852 in 2000 and $740,522 in 1999          4,058,523               5,906,081
     Unbilled revenue                                                 2,170,510               3,128,747
     Prepaid expenses and other current assets                          300,908                 501,171
                                                                   ------------            ------------
          Total current assets                                       10,355,947              14,063,978

Property and equipment, net                                             957,335               1,128,562
Intangible assets, net                                                  768,141                 957,716
Other assets                                                            184,873                 220,609
                                                                   ------------            ------------
          Total assets                                             $ 12,266,296            $ 16,370,865
                                                                   ============            ============
LIABILITIES
Current liabilities:
     Accounts payable                                              $  2,508,738            $  4,192,023
     Accrued expenses and other liabilities                           1,064,653                 942,263
     Reserve for claim adjustments and warranties                     3,210,622               3,596,136
     Deferred revenue                                                   354,222                 542,409
     Current portion of long-term note payable                            5,038
     Current portion of capital lease obligation                                                  4,644
                                                                   ------------            ------------
          Total current liabilities                                   7,143,273               9,277,475

Long-term note payable, net of current portion                           11,800
                                                                   ------------            ------------
          Total liabilities                                           7,155,073               9,277,475
                                                                   ------------            ------------
Commitments and contingencies (see Note 12)

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value (2,000,000 shares
     authorized; none issued)
Common stock, $.01 par value (50,000,000 shares
     authorized; 3,982,353 and 3,975,868 issued at
     December 31, 2000 and 1999, respectively)                           39,824                  39,759
Additional paid-in capital                                           59,796,118              59,727,189
Accumulated deficit                                                 (54,718,769)            (52,667,608)
Less:  Treasury stock, at cost (9,917 shares at
     December 31, 2000 and 1999)                                         (5,950)                 (5,950)
                                                                   ------------            ------------
          Total stockholders' equity                                  5,111,223               7,093,390
                                                                   ------------            ------------
          Total liabilities and stockholders' equity               $ 12,266,296            $ 16,370,865
                                                                   ============            ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       20
<PAGE>

                                   ENVIROGEN, INC.
                        CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                   ----------------------------------------------------------
                                                        2000                1999                   1998
                                                   --------------       --------------        ---------------
<S>                                                <C>                  <C>                   <C>
Revenues:
    Commercial operations                          $   18,723,719       $   21,114,503        $    23,648,398
    Research and development services                   1,615,682            2,935,465              2,572,479
                                                   --------------       --------------        ---------------
      Total revenues                                   20,339,401           24,049,968             26,220,877
                                                   --------------       --------------        ---------------
Cost of commercial operations                          15,773,287           17,973,543             20,944,137
Research and development costs                          2,001,165            2,981,959              2,998,271
Marketing, general and administrative expenses          4,811,245            4,645,633              6,928,628
Impairment of long-lived assets                                                                    21,670,028
                                                   --------------       --------------        ---------------
      Total costs and expenses                         22,585,697           25,601,135             52,541,064
                                                   --------------       --------------        ---------------
Other income (expense):
    Interest income                                       205,538              148,531                180,545
    Interest expense                                      (12,369)             (13,766)               (21,268)
    Equity in (loss) income of joint venture                                      (393)                13,688
    Other, net                                              1,966               (7,604)                (3,804)
                                                   --------------       --------------        ---------------
      Other income, net                                   195,135              126,768                169,161
                                                   --------------       --------------        ---------------
Net loss                                              ($2,051,161)         ($1,424,399)          ($26,151,026)
                                                   ==============       ==============        ===============

Basic and diluted net loss per share                       ($0.52)              ($0.36)                ($6.64)
                                                   ==============       ==============        ===============
Weighted average number of shares of
    Common Stock used in computing basic
    and diluted net loss per share                      3,969,785            3,965,951              3,940,269
                                                   ==============       ==============        ===============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       21
<PAGE>

                                ENVIROGEN, INC.
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
             For the years ended December 31, 2000, 1999 and 1998


<TABLE>
<CAPTION>
                                                                   Additional
                                             Common Stock           Paid-in       Accumulated           Treasury Stock
                                       ------------------------                                  -------------------------
                                          Shares       Amount       Capital          Deficit       Shares         Amount
                                       -----------   ----------   -------------   -------------  -----------    ----------
<S>                                    <C>           <C>          <C>             <C>            <C>            <C>
Balance at December 31, 1997            3,892,400      $38,924     $59,051,463    ($25,092,183)    (9,917)       ($5,950)

Net loss                                                                           (26,151,026)
Issuance of Common Stock for cash          83,334          833         619,167
Exercise of stock options                     134            2             559
                                       -----------   ----------   -------------   -------------  -----------    ----------
Balance at December 31, 1998            3,975,868      $39,759     $59,671,189    ($51,243,209)    (9,917)       ($5,950)

Net loss                                                                            (1,424,399)
Deferred fees                                                           56,000
                                       -----------   ----------   -------------   -------------  -----------    ----------
Balance at December 31, 1999            3,975,868      $39,759     $59,727,189    ($52,667,608)    (9,917)       ($5,950)

Net loss                                                                            (2,051,161)
Deferred fees                                                           66,000
Issuance under Deferred Fee Plan            5,137           51             (51)
Exercise of stock options                   1,248           13           2,981
Other                                         100            1              (1)
                                       -----------   ----------   -------------   -------------  -----------    ----------
Balance at December 31, 2000            3,982,353      $39,824     $59,796,118    ($54,718,769)    (9,917)       ($5,950)
                                       ===========   ==========   =============   =============  ===========    ==========
</TABLE>








The accompanying notes are an integral part of these consolidated financial
statements.

                                       22
<PAGE>

                                ENVIROGEN, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31,
                                                                            ------------------------------------------------------
                                                                                 2000               1999                1998
                                                                            ---------------    ---------------    ---------------
<S>                                                                         <C>                <C>                <C>
Cash flows from operating activities:
  Net loss                                                                     ($2,051,161)       ($1,424,399)      ($26,151,026)
  Adjustments to reconcile net loss to cash used in operating activities:
    Depreciation and amortization                                                  725,601            796,792          1,336,935
    Provision for claim adjustments and warranties                                 146,782            393,148          2,324,823
    Provision for doubtful accounts                                                131,042            312,280             73,533
    Deferred fees                                                                   66,000             56,000
    Equity in loss (income) of joint venture                                                              393            (13,688)
    Impairment of long-lived assets                                                                                   21,670,028
    Other                                                                           (1,966)             7,604              3,811

  Changes in operating assets and liabilities:

       Accounts receivable                                                       1,716,516            109,238            576,029
       Unbilled revenue                                                            958,237            899,436            185,470
       Prepaid expenses and other current assets                                   200,263            395,297           (100,564)
       Restricted cash                                                                                309,300
       Other assets                                                                 35,736             22,679             19,448
       Accounts payable                                                         (1,683,285)           750,909             (8,398)
       Accrued expenses and other liabilities                                      122,390           (282,596)          (826,298)
       Reserve for claim adjustments and warranties                               (532,296)          (947,145)          (751,908)
       Deferred revenue                                                           (188,187)          (216,651)            28,695
                                                                            ---------------    ---------------    ---------------
       Net cash (used in) provided by operating activities                        (354,328)         1,182,285         (1,633,110)
                                                                            ---------------    ---------------    ---------------
Cash flows from investing activities:
   Capital expenditures                                                           (343,990)          (245,485)          (453,307)
   Proceeds from the dissolution of joint venture                                                     174,653
   Proceeds from sale of property and equipment                                      1,966             15,838             27,690
                                                                            ---------------    ---------------    ---------------
       Net cash used in investing activities                                      (342,024)           (54,994)          (425,617)
                                                                            ---------------    ---------------    ---------------
Cash flows from financing activities:

  Debt repayment                                                                    (3,971)
  Capital lease principal repayments                                                (4,644)            (7,222)           (17,582)
  Net proceeds from exercise of stock options                                        2,994                                   561
  Net proceeds from issuance of Common Stock                                                                             620,000
                                                                            ---------------    ---------------    ---------------
       Net cash (used in) provided by financing activities                          (5,621)            (7,222)           602,979
                                                                            ---------------    ---------------    ---------------
Net (decrease) increase in cash and cash equivalents                              (701,973)         1,120,069         (1,455,748)

Cash and cash equivalents at beginning of year                                   4,527,979          3,407,910          4,863,658
                                                                            ---------------    ---------------    ---------------
Cash and cash equivalents at end of year                                        $3,826,006         $4,527,979         $3,407,910
                                                                            ===============    ===============    ===============
Supplemental disclosures of cash flow information:
--------------------------------------------------
  Cash paid for interest                                                        $   12,421         $   20,925         $   29,251
                                                                            ===============    ===============    ===============
  Cash refunded for income taxes                                                   ($1,565)           ($7,264)          ($94,152)
                                                                            ===============    ===============    ===============
Supplemental disclosures of non-cash investing and financing activities:
------------------------------------------------------------------------
 The Company financed a capital expenditure through a note payable amounting to $20,809 in 2000.
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                      23

<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


1.   Business and Organization
     -------------------------

     Envirogen, Inc. ("Envirogen" or the "Company") offers systems and services
     to remove pollutants from the air, water and soil. Many of its system and
     service offerings rely on advanced biological techniques, developed or
     refined by the Company.

     The Company has received most of its revenue from commercial remediation
     services and systems, which includes, primarily, revenue attributable to
     traditional remediation services such as soil vapor extraction and air
     sparging. In addition, a portion of the Company's revenue to date has been
     derived from research funded largely by corporate and governmental sponsors
     to develop cost effective advanced biological treatment systems. Revenues
     from these advanced treatment technologies are still in the early stages of
     commercial development, and additional expenditures by the Company will be
     required for continued research and development and expanded marketing
     activities. The Company is subject to a number of other risks similar to
     those of other companies in similar stages of development, including but
     not limited to short operating history, losses to date, future capital
     needs, dependence on key personnel, competition, risk of technological
     obsolescence, governmental regulations and approvals and limited
     manufacturing and marketing capabilities.

2.   Summary of Significant Accounting Policies
     ------------------------------------------

     Principles of Consolidation

     The consolidated financial statements include the accounts of Envirogen and
     its wholly-owned subsidiary, MWR, Inc. ("MWR"). Investments in companies in
     which ownership interests range from 20 to 50 percent are accounted for
     using the equity method. All material intercompany balances and
     transactions are eliminated in consolidation.

     Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements, in conformity with accounting
     principles generally accepted in the United States, requires management to
     make estimates and assumptions that affect the reported amounts of assets
     and liabilities and disclosure of contingent assets and liabilities at the
     dates of the financial statements and the reported amounts of revenues and
     expenses during the reporting periods. Actual results could differ from
     those estimates. Significant estimates in the preparation of these
     financial statements include provisions made for doubtful accounts, reserve
     for claim adjustments and warranties and amortization periods for
     intangibles.

     Cash Equivalents

     The Company considers all highly liquid investments with original
     maturities of three months or less when purchased to be cash equivalents.

                                       24
<PAGE>


                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


     Property and Equipment

     Property and equipment is recorded at cost and consists primarily of
     office, laboratory and field equipment and leasehold improvements.
     Leasehold improvements are amortized over the shorter of the terms of the
     related leases or the estimated useful lives of the assets. Depreciation
     and amortization is calculated on the straight-line method over the
     estimated useful lives of the assets which range from three to seven years.
     Gains and losses on disposals are recognized in the year of disposal.
     Repair and maintenance expenditures are expensed as incurred; significant
     renewals and betterments are capitalized. Property and equipment leased
     under capital leases are capitalized at the lower of the present value of
     minimum lease payments or the fair value of the leased property.

     Intangible Assets

     Intangible assets are recorded at cost and are amortized using the
     straight-line method over their estimated useful lives, ranging from 5 to
     10 years. It is the Company's policy to periodically review and evaluate
     whether there has been a permanent impairment in the value of intangibles.
     Factors considered in the valuation include current operating results,
     trends, prospects and anticipated undiscounted future cash flows.

     Reserves for Claim Adjustments and Warranties

     The Company provides for potential amounts it could repay to customers
     related to remediation performed by the Company under the State of
     Wisconsin Petroleum Environmental Cleanup Fund Act ("PECFA"). On each PECFA
     related revenue dollar a reserve is established to cover amounts which may
     be declared ineligible. The Wisconsin Department of Commerce ("DCOM")
     reviews claims for reimbursement under PECFA to determine the extent to
     which submitted claims will be reimbursed. The DCOM review process may not
     be completed until one to three years after the expense has been incurred
     and paid by the Company's client (or its bank). This exposes the client to
     the risk that remediation expenses it incurred and paid ultimately may be
     disallowed for PECFA reimbursement by DCOM. The Company has in a number of
     cases reimbursed its clients (or their lending banks) for the remediation
     costs for services provided by the Company which ultimately were determined
     by DCOM to be ineligible for reimbursement under PECFA. At December 31,
     2000, the Company had $3,039,122 in reserves with respect to potential
     ineligible claims related to approximately $41 million in claims that had
     not yet been fully reviewed by DCOM. There can be no assurance that the
     amount of such reserve, which was determined by management based on
     historic reimbursement disallowance rates under the PECFA program will be
     adequate.

     The Company also had $171,500 in reserves at December 31, 2000 with respect
     to potential systems warranty claims and other contract issues. Estimated
     warranty reserves are related to specific projects and are provided for by
     charges to operations in the period in which the related revenue is
     recognized or at such time as a potential claim arises.

                                       25
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


     Revenue Recognition

     Revenue from certain contracts is recognized as services are provided and
     costs are incurred. For fixed-price contracts, revenue is recognized on the
     percentage-of-completion method, measured by the percentage of costs
     incurred over the estimated total costs for each contract. This method is
     used because management considers expended costs to be the best available
     measure of progress on these contracts. Contract costs include all direct
     material and labor costs and those indirect costs related to contract
     performance. Selling, general and administrative costs are charged to
     expense as incurred. Provisions for estimated losses on uncompleted
     contracts are made in the period in which such losses are determined.

     The asset "unbilled revenue" represents revenues recognized in excess of
     amounts billed. Unbilled revenue generally represents work currently
     billable and such work is usually billed through the normal billing
     process. Correspondingly, the liability "deferred revenue" represents
     billings in excess of revenues recognized.

     Balances billed but not paid by customers pursuant to retainage provisions
     in contracts will be due upon completion of the contracts and acceptance by
     the owner. The retainage balance at December 31, 2000 of $17,323 is
     expected to be collected within the next 12 months.

     An allowance for doubtful accounts has been established based on
     management's assessment of the collectibility of all amounts billed and
     unbilled (including amounts subject to retainage) as of December 31, 2000.

     Research and Development

     All costs relating to research and development activities are expensed as
     incurred.

     Per Share Data

     Basic per share amounts are computed by dividing net loss applicable to
     common stock by the weighted average number of common shares outstanding
     during the period. Diluted per share amounts are computed by dividing net
     loss applicable to common stock by the weighted average number of common
     shares outstanding plus the dilutive effect of common share equivalents.
     Since the Company incurred net losses for all periods presented, both basic
     and diluted per share calculations are the same. Accordingly, options,
     warrants and other rights to purchase 615,777, 499,719 and 501,739 shares
     of common stock that were outstanding at December 31, 2000, 1999 and 1998,
     respectively, were not included in diluted per share calculations, as their
     effect would be antidilutive.

     On October 28, 1998, the Company's Board of Directors authorized a one-for-
     six reverse split of the Company's common stock. Effective November 24,
     1998, the stockholders approved the reverse split. All prior period
     references to number of shares, per share amounts, stock option data,
     warrants and market prices of the Company's common stock have been adjusted
     to reflect the reverse stock split on a retroactive basis.

                                       26
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


     Segment Information

     The Company discloses its segment information using the management
     approach, which designates the internal organization that is used by
     management for making operating decisions and assessing performance as the
     source of the Company's reportable segments. The Company also provides
     disclosures about products and services, geographic areas and major
     customers (see Note 16).

     Impact of the Future Adoption of Recently Issued Accounting Standards

     In June 1998, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, is
     effective for all fiscal quarters of all fiscal years beginning after June
     15, 2000 (January 1, 2001 for the Company). SFAS 133 requires that all
     derivative instruments be recorded on the balance sheet at their fair
     value. Changes in the fair value of the derivatives are recorded each
     period in current earnings or other comprehensive income, depending on
     whether a derivative is designated as part of a hedge transaction and, if
     it is, the type of hedge transaction. The implementation of SFAS 133 is not
     expected to have any impact on the Company's consolidated results of
     operations, financial position or cash flows.

     Income Taxes

     The Company accounts for income taxes under the liability method, which
     requires recognition of deferred tax liabilities and assets for the
     expected future tax consequences of events that have been included in the
     financial statements or tax returns. Under this method, deferred tax
     liabilities and assets are determined based on the difference between the
     financial statement and tax bases of assets and liabilities using enacted
     tax rates in effect for the year in which the differences are expected to
     reverse (see Note 8).

3.   Impairment of Long-Lived Assets
     -------------------------------

     In April 1997, the Company acquired FMI, now known as the Wisconsin and
     Illinois Divisions. The majority of the Wisconsin Division work is eligible
     for reimbursement to its clients under the Wisconsin Petroleum
     Environmental Cleanup Fund Act ("PECFA"), the program funded by the State
     of Wisconsin for cleaning up leaking underground storage tanks. On April
     17, 1998, the State of Wisconsin adopted new emergency rules with regard to
     PECFA which effectively reduced, and is expected to continue to reduce, the
     revenue per site that the Wisconsin Division can capture under the program.
     The State of Wisconsin's stated intent for issuance of the new emergency
     rules is to reduce the amount of funds being paid for cleanup efforts under
     the PECFA program. Pursuant to the emergency rules, lower cost natural
     attenuation is mandated unless certain conditions exist that would indicate
     that active remediation is necessary.

     As a result of this event, the Company reviewed the carrying value of long-
     lived assets associated with its acquisition of FMI and recorded a non-cash
     charge of $21,670,028 in the second quarter of 1998 representing the
     impairment of goodwill. This charge is based on the amount by which the
     book value exceeded the current estimated fair market value of the
     goodwill. The current estimated

                                       27
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


     fair market value was determined primarily using the anticipated cash flows
     of the Wisconsin Division discounted at a rate commensurate with the risk
     involved. The impairment charge fully eliminated the remaining carrying
     value of the goodwill associated with the acquisition.

4.   Significant Fourth Quarter Adjustments
     --------------------------------------

     During the fourth quarter of 1998, the Company recorded a $1,650,000 charge
     to increase the reserve for ineligible PECFA claims. On each PECFA related
     revenue dollar a reserve is set up to cover amounts which may be declared
     ineligible (see Note 2). DCOM reviews claims for reimbursement under PECFA
     to determine the extent to which submitted claims will be reimbursed.
     Typically the DCOM review process is not completed until one to three years
     after the expense has been incurred and paid by the Company's client (or
     its bank). An analysis of trends at that time indicated an increase in the
     claims the State is declaring ineligible for reimbursement, which resulted
     in an increase in the reserve and the additional charge to earnings in
     1998.

5.   Property and Equipment
     ----------------------

     Property and equipment, net at December 31, 2000 and 1999 consisted of
     the following:

<TABLE>
<CAPTION>
                                                       2000                    1999
                                                    ----------             ----------
<S>                                                 <C>                    <C>
     Computer equipment                             $  761,116             $  681,101
     Acquired computer software                        557,630                556,006
     Vehicles                                           63,109                 42,300
     Laboratory and field equipment                  2,783,805              2,582,717
     Equipment and vehicles under
       capital leases                                  598,975                598,975
     Furniture and office equipment                    675,228                630,299
     Leasehold improvements                            599,538                583,204
     Construction in progress                            4,850                  4,850
                                                    ----------             ----------
                                                     6,044,251              5,679,452
     Less:  Accumulated depreciation and
       amortization                                  5,086,916              4,550,890
                                                    ----------             ----------
                                                    $  957,335             $1,128,562
                                                    ==========             ==========
</TABLE>

     Accumulated amortization on equipment under capital leases amounted to
     $598,975 and $594,544 at December 31, 2000 and 1999, respectively.
     Depreciation expense amounted to $520,124, $548,786 and $641,957 for the
     years ended December 31, 2000, 1999 and 1998, respectively. Amortization
     expense on equipment under capital leases and leasehold improvements
     amounted to $15,902 $22,698 and $76,969 for the years ended December 31,
     2000, 1999 and 1998, respectively. No interest has been capitalized in
     2000, 1999 or 1998.

                                       28
<PAGE>


                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


6.   Intangible Assets
     -----------------

     Intangible assets, net at December 31, 2000 and 1999 consisted of the
     following:

                                               2000            1999
                                           -----------     -----------
     Goodwill                              $ 1,431,700     $ 1,431,700
     Patents                                   222,611         222,611
     Covenant not to compete                   232,000         232,000
                                           -----------     -----------
                                             1,886,311       1,886,311
     Less:  Accumulated amortization         1,118,170         928,595
                                           -----------     -----------
                                           $   768,141     $   957,716
                                           ===========     ===========

     Amortization expense for intangible assets amounted to $189,575, $225,308
     and $635,555 for the years ended December 31, 2000, 1999 and 1998,
     respectively.

7.   Accrued Expenses and Other Liabilities
     --------------------------------------

     Accrued expenses and other liabilities at December 31, 2000 and 1999
     consisted of the following:

                                                 2000           1999
                                              ----------     ---------
     Salaries, benefits and payroll taxes     $  607,006     $ 521,987
     Taxes                                       245,992       223,684
     Joint venture distribution                  103,938       100,942
     Professional fees                            92,063        60,269
     Other                                        15,654        35,381
                                              ----------     ---------
                                              $1,064,653     $ 942,263
                                              ==========     =========
8.   Income Taxes
     ------------

     The Company has provided a full valuation allowance against the net
     deferred tax assets due to the uncertainty of realization. The change in
     the valuation allowance for the year ended December 31, 2000 was an
     increase of $2,180,225.

                                       29
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


     Temporary differences and carryforwards which give rise to deferred tax
     assets and liabilities at December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                  2000                        1999
                                              Deferred Tax                Deferred Tax
                                           Assets (Liabilities)        Assets (Liabilities)
                                           --------------------        --------------------
<S>                                        <C>                         <C>
     Accrued liabilities                     $  1,210,328                 $  1,277,428
     Contract reserve                              54,910                       78,880
     Depreciation                                 122,133                      154,695
     Amortization                                 127,198                      100,555
     Bad debts                                    270,590                      251,777
     Net operating loss - federal               9,352,828                    8,555,880
     State taxes                                3,451,665                    1,990,212
     Tax credits                                  297,187                      297,187
                                             ------------                 ------------
               Total                           14,886,839                   12,706,614
     Valuation allowance - federal            (11,435,174)                 (10,716,402)
     Valuation allowance - state               (3,451,665)                  (1,990,212)
                                             ------------                 ------------
     Total net deferred taxes                $          0                 $          0
                                             ============                 ============
</TABLE>

     As of December 31, 2000, the Company had a net operating loss carryforward
     of approximately $27,500,000 for Federal income tax purposes which is
     available to offset future taxable income, if any, between the years 2001
     and 2020. The timing and manner in which these losses may be utilized are
     limited to approximately $1,700,000 per year based on preliminary
     calculations of ownership changes to date under Internal Revenue Code
     Section 382.

9.   Capital Stock
     -------------

     Common Stock

     In May 1999, the Company adopted the "Deferred Fee Plan for Non-Employee
     Directors" ("Deferred Fee Plan"). Under the terms of the Deferred Fee Plan,
     non-employee directors of the Company can defer receipt of all quarterly
     and meeting fees and permit such deferred fees to be credited to stock
     accounts. These stock accounts accumulate shares of the Company's Common
     Stock at the fair market price of the Common Stock for each deferral date
     equivalent to the value of fees earned. There were deferred fees of
     $114,000 for 75,982 shares of common stock at December 31, 2000 and
     deferred fees of $56,000 for 42,083 shares of common stock at December 31,
     1999. In 2000, the Company issued 5,137 shares of common stock to a former
     non-employee director from his stock account.

10.  Options and Warrants
     --------------------

     The Company's 1990 Incentive Stock Option and Non-Qualified Stock Option
     Plan (the "Plan") expired in March 2000. Under the amended terms of the
     Plan, the Company's Stock Option Committee was authorized to grant
     incentive stock options ("ISOs") to officers and other key employees, as
     well as non-qualified stock options ("NQSOs") to key employees, directors,
     scientific advisory board members and consultants to purchase an aggregate
     of 583,334 shares of Common

                                       30
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            ______________________


     Stock. Standard provisions of the Plan, which varied with Board and
     stockholder approval, required that the term of each grant not exceed ten
     years. At December 31, 2000, there were no additional options available for
     grant under the Plan.

     In May 1993, the Company adopted the 1993 Directors' Non-Qualified Stock
     Option Plan (the "1993 Plan"), which expires in May 2003. Under the amended
     terms of the 1993 Plan, an option to purchase 2,500 shares of Common Stock
     shall be automatically granted to each new Non-Employee Director on the day
     the Non-Employee Director is first elected as a member of the Board of
     Directors. Thereafter, an option to purchase 834 shares of Common Stock
     shall be granted on June 1 of each year to each Non-Employee Director who
     is elected at subsequent annual meetings of stockholders, except that a
     Non-Employee Chairman of the Board shall be granted an option to purchase
     1,250 instead of 834 shares of Common Stock. Non-Employee Directors who are
     not initially elected at an Annual Meeting of Stockholders will receive a
     pro rata portion of 834 shares (or 1,250 shares with respect to a Non-
     Employee Chairman of the Board) of Common Stock based on the number of full
     months remaining from the date of election until the next Annual Meeting of
     Stockholders divided by twelve. Any fractional shares resulting from such
     calculation shall be rounded up to the nearest whole number. The 1993 Plan
     provides for grants to purchase an aggregate of 41,667 shares of Common
     Stock. Standard provisions of the Plan, which may vary with Board and
     stockholder approval, require that the term of each grant not exceed ten
     years. At December 31, 2000, there were 14,942 additional options available
     for grant under the 1993 Plan.

     In May 2000, the Company adopted the 2000 Incentive Stock Option and Non-
     Qualified Stock Option Plan (the "2000 Plan"), which expires on February
     28, 2010. Under the terms of the 2000 Plan, the Company's Stock Option
     Committee is authorized to grant incentive stock options ("ISOs") to
     officers and other key employees, as well as non-qualified stock options
     ("NQSOs") to key employees, directors, scientific advisory board members
     and consultants to purchase an aggregate of 350,000 shares of Common Stock.
     Standard provisions of the 2000 Plan, which may vary with Board and
     stockholder approval, require that the term of each grant not exceed ten
     years. At December 31, 2000, there were 329,500 additional options
     available for grant under the 2000 Plan.

     In 1998, the Board of Directors approved a program allowing employees to
     exchange all options held for an equal number of replacement options at the
     greater of (i) the then current market price or (ii) $2.40 per share.
     Participating employees received new stock options with an exercise price
     of $2.40 per share and agreed to a new five-year vesting schedule (20% per
     year) commencing on December 7, 1998. As a result, options for 296,495
     shares were forfeited in exchange for new options to purchase the same
     number of shares. The President of the Company excluded himself from
     participating in the option exchange program.

     Generally, options granted become exercisable at a rate of 20% per annum
     from the date of grant, and the option price may not be less than 100% and
     75% of the fair market value on the date of grant for ISOs and NQSOs,
     respectively. The annual Non-Employee Director grants vest at the end of
     the first year of grant.

                                       31
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                ______________

         Following is a summary of the stock option transactions for 1998, 1999
         and 2000:

<TABLE>
<CAPTION>
                                                                   Weighted                               Weighted
                                                                   Average                                 Average
                                                  Number of        Exercise                               Fair Value
                                                   Shares          Price Per             Option           per Option
                                                 Outstanding         Share             Price Range          Granted
                                                 -----------      -----------       ----------------      -----------
         <S>                                     <C>              <C>               <C>                   <C>
         Balance December 31, 1997                   384,397         $16.06          $ 1.20 - $43.50
         Granted                                     404,000         $ 3.69                                 $  1.60
         Forfeited                                  (343,192)        $15.67
         Exercised                                      (134)        $ 4.20
                                                   ---------
         Balance December 31, 1998                   445,071         $ 5.16          $ 1.20 - $35.28
                                                   ---------
         Granted                                      49,954         $ 1.28                                 $  0.84
         Forfeited                                   (94,056)        $ 4.42
         Exercised                                         -              -
                                                   ---------
         Balance December 31, 1999                   400,969         $ 4.82          $ 1.20 - $35.28
                                                   ---------
         Granted                                     166,268         $ 1.72                                 $ 1.15
         Forfeited/Expired                           (60,028)        $ 2.77
         Exercised                                    (1,248)        $ 2.40
                                                   ---------
         Balance December 31, 2000                   505,961         $ 4.05          $ 0.94 - $35.28
                                                   =========

         Exercisable at December 31, 1998             45,751         $16.68
         Exercisable at December 31, 1999            105,572         $ 8.79
         Exercisable at December 31, 2000            162,918         $ 6.95
</TABLE>

         The following table summarizes the information about stock options
outstanding at December 31, 2000:

<TABLE>
<CAPTION>
                                                 Options Outstanding                       Options  Exercisable
                                    ---------------------------------------------       ---------------------------
                                                        Weighted
                                        Number          Average          Weighted           Number         Weighted
                                    Outstanding at     Remaining         Average        Exercisable at     Average
              Range of               December 31,     Contractual        Exercise        December 31,      Exercise
           Exercise Prices               2000         Life (Years)        Price              2000           Price
         ----------------------------------------------------------------------------------------------------------
         <S>                        <C>               <C>                <C>            <C>                <C>
         $  0.94 to $  4.84           379,419            8.44             $ 2.02             87,875         $ 2.26
         $  6.54 to $ 14.28            96,118            6.96             $ 7.21             45,619         $ 7.87
         $ 16.92 to $ 23.28            26,840            5.44             $17.81             25,840         $17.85
         $ 30.00 to $ 35.28             3,584            1.56             $31.51              3,584         $31.51

         ----------------------------------------------------------------------------------------------------------
         $  0.94 to $ 35.28           505,961            7.95             $ 4.05            162,918         $ 6.95
         ----------------------------------------------------------------------------------------------------------
</TABLE>

                                       32
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                ______________

         The Company applies the provisions of APB 25 and related
         interpretations in accounting for its stock-based compensation plans.
         Accordingly, no compensation has been recognized in the financial
         statements in respect to the above plans as all options have been
         granted at or greater than fair market value. Had compensation costs
         for the above plans been determined based on the fair value at the
         grant dates for awards under those plans consistent with the method of
         Statement of Financial Accounting Standards No. 123 "Accounting for
         Stock Based Compensation", the Company's net loss and net loss per
         share would have been increased to the pro forma amounts below:

<TABLE>
<CAPTION>
                                                                     2000             1999             1998
                                                                -------------     -------------    -------------
         <S>                                                    <C>               <C>              <C>
         Pro forma net loss applicable to
            Common Stock                                         ($2,314,129)      ($1,630,168)     ($26,777,247)
         Pro forma basic and diluted net loss per
            share applicable to Common Stock                          ($0.58)           ($0.41)           ($6.80)
</TABLE>

         As options vest over a varying number of years, and awards are
         generally made each year, the pro forma impacts shown here are likely
         to increase given the same level of activity in the future.

         The pro forma compensation expense of $262,968, $205,769 and $626,221
         for 2000, 1999 and 1998, respectively, was calculated based on the fair
         value of each option grant using the Black-Scholes model with the
         following weighted-average assumptions used for grants:

<TABLE>
<CAPTION>
                                                2000             1999             1998
                                           -------------     -------------    -------------
         <S>                               <C>               <C>              <C>
         Dividend yield                           0                 0                0
         Expected volatility                    64.3%             63.8%            51.2%
         Risk free interest rate             5.18%-6.63%       4.71%-5.88%         4.99%
         Expected option lives                 6.5 years         6.5 years       6.5 years
</TABLE>

         In May 1996, the Company issued warrants to purchase an aggregate of
         33,334 shares of the Company's Common Stock at an exercise price of
         $15.00 per share, including warrants to purchase 25,000 shares to a
         principal stockholder. The warrants expire seven years from the date of
         issuance.

11.      Research and Development Contracts
         ----------------------------------

         The Company contracts with major corporations and government entities
         to conduct feasibility studies, sponsored research and development and
         to remediate contamination problems. Pursuant to the Company's
         contracts, the work is generally conducted in phases beginning with
         feasibility studies to demonstrate that the Company's bacteria will
         degrade the targeted waste. Each sponsoring corporation or governmental
         entity may terminate the work being conducted by the Company upon the
         completion of each phase and each additional phase generally is
         separately contracted for by the sponsoring corporation or governmental
         entity. Generally, the Company is not subject to any royalty or
         exclusive license agreements arising from its research and development
         contracts, except as described in Note 12.

                                       33
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                ______________

12.  Commitments and Contingencies
     -----------------------------

     Leases

     The Company is party to various operating leases relating to office,
     laboratory and pilot plant facilities, as well as vehicles and office
     equipment. All leases expire prior to 2005. The leases include escalation
     clauses and require that the Company pay for certain operating costs. It is
     expected that in the normal course of business the majority of the leases
     will be renewed or replaced by other leases. The Company had no capitalized
     leases at December 31, 2000.

     Future minimum payments under noncancelable operating leases consisted of
     the following at December 31, 2000:

                                                  Operating
                                                    Leases
                                                 ------------
            2001                                 $  1,117,119
            2002                                    1,074,657
            2003                                      923,474
            2004                                      509,066
            2005                                            -
            Thereafter                                      -
                                                  -----------
            Total minimum lease payments          $ 3,624,316
                                                  ===========

     Rent expense for operating leases was $1,224,649, $1,408,315 and $1,655,676
     for the years ended December 31, 2000, 1999 and 1998, respectively.

     Licenses

     The Company has granted a customer, exclusively for its own operations, an
     irrevocable, non-exclusive, nontransferable license to use all presently
     existing and any future technology that the Company may own relating to PCB
     remediation and that is not otherwise subject to restrictions imposed by
     third parties. With certain limited exceptions, the Company is required to
     pay the customer a royalty based on gross revenues received by the Company
     from the utilization of any jointly-owned technology or any PCB-related
     remediation technology owned, developed or obtained by the Company. The
     maximum aggregate royalty payable to the customer by the Company under the
     technology agreement may not exceed the development funding received by the
     Company from the customer. The customer provided no additional funding
     since 1996. At December 31, 2000, the Company had no obligations under the
     royalty agreement and had received development funding from the inception
     of the development work in 1990 of approximately $3,523,000.

     Litigation

     The Company is currently involved in litigation relating to services
     previously provided at a customer site where remediation work was
     performed. This customer filed a claim against the Company for professional
     malpractice, breach of warranty of professional services contract and
     misrepresentation. No specific damages have been claimed by this customer
     and, at the present

                                       34
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                _______________

     time, management of the Company is unable to predict the outcome of this
     matter or to determine whether the outcome of this matter will materially
     affect the Company's results of operations, cash flows or financial
     position.

     The Company is also subject to other claims and lawsuits in the ordinary
     course of its business. In the opinion of management, such other claims are
     either adequately covered by insurance or, if not insured, will not
     individually or in the aggregate result in a material adverse effect on the
     Company's results of operations, cash flows or financial position.

     Environmental Liability and Insurance

     The Company could be held liable under various laws and regulations if
     microorganisms or hazardous wastes cause harm to humans or the environment,
     even if the Company were not negligent. Although the Company has
     contractor's pollution liability insurance, there can be no assurance that
     environmental liabilities that may be incurred by the Company will be
     covered by its insurance or that the dollar amount of covered liabilities
     will not exceed policy limits.

13.  Related Party Transactions
     --------------------------

     In April 1998, Robert S. Hillas, the Company's newly-appointed Chairman,
     President and Chief Executive Officer, purchased 83,334 shares of Common
     Stock from the Company at $7.50 per share in connection with the execution
     of his employment agreement. The shares were registered in 1999.

14.  Employee Benefits
     -----------------

     The Company sponsors a combined 401(k) employee savings and retirement plan
     and profit sharing plan covering all employees, who are at least 21 years
     of age. The Company's contribution expense related to the 401(k) savings
     plan was $126,609, $142,247 and $77,573 for the years ended December 31,
     2000, 1999 and 1998, respectively. There was no contribution expense
     related to the profit sharing plan.

     In 1998, the Wisconsin and Illinois Divisions had a 401(k) plan that
     provided for employee salary deferral contributions. Substantially all
     Wisconsin and Illinois employees were eligible to participate in this plan.
     No Company contributions were made to this plan. The Company's 401(k) plans
     were merged on December 31, 1998. The Company does not maintain other
     pension or post retirement benefit plans.

                                       35
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                _______________

15.  Concentration of Credit Risk/Other
     ----------------------------------

     The Company provides credit to customers on an unsecured basis after
     evaluating customer credit worthiness. The Company also provides a reserve
     for bad debts for accounts receivable where there is a probability of loss.

     The Company maintains demand deposits with two major banks and money market
     accounts with two financial institutions. At December 31, 2000 and 1999,
     substantially all of the Company's cash and cash equivalents were held in
     these money market accounts.

     The Company earns revenues under contracts for various federal government
     agencies. Revenue recognized under these contracts for the years ended
     December 31, 2000, 1999 and 1998 was $1,886,415, $2,673,745 and $2,248,509,
     respectively. These revenues are primarily from research and development
     contracts.

16.  Segment Information
     -------------------

     The Company is organized primarily on the basis of products and services
     being broken down into two reportable segments (i) commercial operations
     and (ii) research and development services. The commercial operations
     segment is comprised of a number of business units in various locations
     which offer similar products and services to address the hazardous waste
     clean-up and treatment needs of a variety of customers throughout the
     United States. The Company offers products and services to provide its
     customers with solutions across all types of matter (soil, water and air).
     Usually, environmental problems affect more than one form of matter. As an
     example, a clean-up project at an industrial facility may include the
     following: 1) consulting services to define the problem and develop a
     clean-up strategy; 2) design, installation and operation of a soil vapor
     extraction system to remove contaminants from the soil; 3) design and
     installation of air treatment systems to prevent atmospheric contamination;
     and 4) design and installation of a ground water treatment system to treat
     pollutants which have passed through the contaminated soil and into the
     ground-water.

     The research and development services segment identifies and develops
     innovative techniques to address pollution problems. The primary source of
     revenue for this segment consists of funding provided by third parties and
     government agencies to perform contract research to identify the techniques
     and technologies to address the problem, as opposed to commercial
     utilization of those techniques. This segment includes a core group based
     in the Company's Lawrenceville, New Jersey headquarters.

     The accounting policies of the segments are the same as those described in
     the "Summary of Significant Accounting Policies" (see Note 2). The Company
     evaluates the performance of its segments on income before marketing,
     general and administrative expenses, income taxes, interest and other non-
     operating income and expense items. Intersegment sales and transfers are
     not significant.

                                       36
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                _______________



     Information about reported segments for the years ended December 31, 2000,
     1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                                  Research and
                                                  Commercial       Development
                                                  Operations         Services           Other            Total
                                                --------------    ---------------   ---------------   --------------
     <S>                                         <C>               <C>               <C>               <C>
     2000
     ----
     Revenues                                   $  18,723,719     $    1,615,682              --      $  20,339,401
     Segment profit (loss)                          2,950,432           (385,483)    ($ 4,616,110)       (2,051,161)
     Depreciation and amortization                    416,223             65,342           54,461           536,026

     1999
     ----
     Revenues                                   $  21,114,503     $    2,935,465              --      $  24,049,968
     Segment profit (loss)                          3,140,960            (46,494)    ($ 4,518,865)       (1,424,399)
     Depreciation and amortization                    423,032             87,668           60,784           571,484

     1998
     ----
     Revenues                                   $  23,648,398     $    2,572,479              --      $  26,220,877
     Segment profit (loss)                          2,704,261           (425,792)    ($28,429,495)      (26,151,026)
     Depreciation and amortization                    278,293            159,434          263,653           701,380
</TABLE>

     The following table presents the details of "Other" segment for the years
     ended December 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                      2000             1999            1998
                                                                   ------------    -------------   ------------
     <S>                                                           <C>             <C>             <C>
     Marketing, general and
        administrative expenses                                    ($ 4,811,245)   ($ 4,645,633)   ($ 6,928,628)
     Impairment of long-lived assets                                         --              --     (21,670,028)
     Interest income                                                    205,538          148,531        180,545
     Interest expense                                                   (12,369)         (13,766)       (21,268)
     Equity in (loss) income of joint-venture                                --             (393)        13,688
     Other, net                                                           1,966           (7,604)        (3,804)
                                                                   ------------    -------------   ------------
                                                                   ($ 4,616,110)    ($ 4,518,865)  ($28,429,495)
                                                                   ============    =============   ============
</TABLE>

     No customer accounted for more than 10% of the Company's revenues in 2000,
     1999 or 1998.

     The Company's business is conducted principally in the United States.
     Foreign revenues are not material. Asset information by reportable segment
     is not reported as the Company does not produce such information
     internally.

                                       37
<PAGE>

                                ENVIROGEN, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                _______________

17.  Joint Venture
     -------------

     The Company obtained a 50% interest in Miller Environmental Technologies
     L.L.C. ("MET") when it acquired FMI on April 10, 1997. In December 1999,
     the net assets of MET were liquidated and the venture dissolved. MET was
     jointly-owned by the Company and a subsidiary of a Milwaukee, Wisconsin
     based scrap metal recycler. All of the consulting and engineering services
     delivered by MET were conducted by the Company through subcontracting
     arrangements. The Company also received a monthly fee in the amount of
     $1,000 from MET for the provision of certain office and record keeping
     services. Fees earned for providing services to MET amounted to $71,831 and
     $152,242 for the years ended December 31, 1999 and 1998.

18.  Supplementary Statement of Operations Information
     -------------------------------------------------

     Maintenance and repairs expense for the years ended December 31, 2000, 1999
     and 1998 was $139,953, $109,600 and $179,473, respectively.

19.  Subsequent Event
     ----------------

     In January 2001, under a program in place in the state of New Jersey, the
     Company sold a portion of its available potential New Jersey net operating
     loss tax benefits related to losses incurred in prior years. The net amount
     received by the Company was $210,790.

20.  Quarterly Financial  Data (Unaudited)
     -------------------------------------

     The following is a summary of the quarterly results of operations for the
     years ended December 31, 2000 and 1999.

<TABLE>
<CAPTION>
                                   First        Second          Third         Fourth
                                  Quarter       Quarter        Quarter        Quarter
                                  -------       -------        -------        -------
<S>                            <C>            <C>            <C>            <C>
2000
----
Revenues                       $ 4,431,445    $ 5,385,078    $ 4,857,528    $ 5,665,350
Net loss applicable to
   Common Stock                   (541,896)      (464,547)      (769,830)      (274,888)
Basic and diluted net
   loss per share applicable
   to Common Stock                  ($0.14)        ($0.12)        ($0.19)        ($0.07)

1999
----
Revenues                       $ 5,067,124    $ 5,867,834    $ 5,990,702    $ 7,124,308
Net loss applicable to
   Common Stock                   (616,047)      (318,963)      (207,837)      (281,552)
Basic and diluted net
   loss per share applicable
   to Common Stock                  ($0.16)        ($0.08)        ($0.05)        ($0.07)
</TABLE>

                                       38
<PAGE>

                                                                     Schedule II
                                Envirogen, Inc.
                       Valuation and Qualifying Accounts
                 Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                   Balance at        Charged to                              Balance
                                                   beginning          costs and                             at end of
                 Description                       of period          expenses          Deductions            period
---------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>                <C>                 <C>
Year ended December 31, 2000:

     Allowance for doubtful accounts            $   740,522          $  131,042         $   75,712 (a)     $   795,852
     Tax valuation allowance                     12,706,614           2,180,225                             14,886,839
     Reserve for claim adjustments
         and warranties                           3,596,136             146,782            532,296 (b)       3,210,622

Year ended December 31, 1999:

     Allowance for doubtful accounts            $   539,544          $  312,280         $  111,302 (a)     $   740,522
     Tax valuation allowance                     13,464,209            (757,595)                            12,706,614
     Reserve for claim adjustments
         and warranties                           4,150,133             393,148            947,145 (b)       3,596,136

Year ended December 31, 1998:

     Allowance for doubtful accounts            $   605,963          $   73,533         $  139,952 (a)     $   539,544
     Tax valuation allowance                     12,052,397           1,411,812                             13,464,209
     Reserve for claim adjustments
         and warranties                           2,577,218           2,324,823            751,908 (b)       4,150,133
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a)  Uncollectible accounts written-off to the allowance account

(b)  Actual write-offs and cash payments

                                       39
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Envirogen, Inc.

We have audited the accompanying consolidated balance sheets of Envirogen, Inc.
at December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholder's equity, and cash flows for the years then ended. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
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 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 Envirogen, Inc. at
December 31, 2000 and 1999, and the consolidated results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

                                                               Ernst & Young LLP




MetroPark, New Jersey
February 14, 2001

                                       40
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Envirogen, Inc.:

In our opinion, the consolidated statements of operations, stockholders' equity
and cash flows for the year ended December 31, 1998 (listed in the index
appearing under Item 14(a)(1) on page 43) present fairly, in all material
respects, the results of operations and cash flows of Envirogen, Inc. for the
year ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule for the year ended December 31, 1998 (listed in the
index appearing under Item 14(a)(2) on page 43) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
consolidated financial statements or financial statement schedule of Envirogen,
Inc. for any period subsequent to December 31, 1998.

PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 17, 1999

                                       41
<PAGE>

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

Not applicable.

                                   PART III

INCORPORATED BY REFERENCE

The information called for by Item 10 "Directors and Executive Officers of the
Registrant" (other than the information concerning executive officers set forth
in Part I after Item 4 herein), Item 11 "Executive Compensation," Item 12
"Security Ownership of Certain Beneficial Owners and Management" and Item 13
"Certain Relationships and Related Transactions" is incorporated herein by
reference to the Company's definitive proxy statement for its Annual Meeting of
Stockholders scheduled to be held on May 17, 2001, which definitive proxy
statement is expected to be filed with the Commission not later than 120 days
after the end of the fiscal year to which this report relates.

                                       42
<PAGE>

                                     PART IV

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

(a)  Documents filed as a part of this Report.

<TABLE>
<S>                                                                                               <C>
1.   Financial Statements:
     ---------------------

     Consolidated Balance Sheets as of December 31, 2000 and 1999...............................  20

     Consolidated Statements of Operations for the years ended
     December 31, 2000, 1999 and 1998...........................................................  21

     Consolidated Statements of Changes in Stockholders' Equity

     for the years ended December 31, 2000, 1999 and 1998.......................................  22

     Consolidated Statements of Cash Flows for the years ended
     December 31, 2000, 1999 and 1998...........................................................  23

     Notes to Consolidated Financial Statements.................................................  24

2.   Financial Statement Schedules:
     ------------------------------

     II.  Valuation and Qualifying Accounts.....................................................  39

     Report of Independent Auditors - 2000 and 1999.............................................  40

     Report of Independent Accountants - 1998...................................................  41
</TABLE>

     All other schedules not listed above have been omitted because they are not
     applicable or are not required, or because the required information is
     included in the consolidated financial statements or notes thereto.

3.   Exhibits:
     ---------

<TABLE>
<CAPTION>
     Exhibit No.                   Description                                                 Location
     ----------                    -----------                                                 --------
     <S>        <C>                                                                          <C>
     2.1        Agreement and Plan of Merger dated January 14, 1997 by and
                among Fluid Management, Inc., William C. Smith,
                Douglas W. Jacobson, Gary W. Hawk, Richard W. Schowengerdt
                and the Registrant.........................................................  (4) (Exh. 2.1)

     3.1(a)     Restated Certificate of Incorporation dated

                September 5, 1991..........................................................  (2) (Exh. 3.1(a))

     3.1(b)     Certificate of Amendment to Restated

                Certificate of Incorporation dated August 18, 1992.........................  (2) (Exh. 3.1(c))
</TABLE>

                                       43
<PAGE>

<TABLE>
<CAPTION>
     Exhibit No.                   Description                                                Location
     ----------                    -----------                                                --------
     <S>        <C>                                                                          <C>

     3.1(c)     Certificate of Amendment to Amended and Restated Certificate
                of Incorporation dated November 24, 1998...................................  (7) (Exh. 3)

     3.2        By-Laws, as amended........................................................  (2) (Exh. 3.2)

     10.1       Envirogen, Inc. 401(k) Plan................................................  (2) (Exh. 10.18)

     10.2       Envirogen, Inc. 1990 Incentive Stock Option and Non-
                Qualified Stock Option Plan, as amended*...................................  (5) (Exh. 10.22)

     10.3       Envirogen, Inc. 1993 Director's Non-Qualified Stock
                Option Plan, as amended*...................................................  (3) (Exh. 10.27)

     10.4       Securities Purchase Agreement dated January 14, 1997
                between Warburg, Pincus Ventures, L.P. and the
                Company....................................................................  (4) (Exh. 2.2)

     10.5       Employment Agreement dated April 16, 1998 between
                the Company and Robert S. Hillas*..........................................  (6) (Exh. 10)

     10.6(a)    Employment Agreement dated April 10, 1997 between the Company
                and Richard W. Schowengerdt*...............................................  (8) (Exh. 10.7(a))

     10.6(b)    Amendment No. 1 dated November 3, 1998 to Schowengerdt
                Employment Agreement*......................................................  (8) (Exh. 10.7(b))

     10.7       Envirogen, Inc. 2000 Incentive Stock Option and Non-Qualified
                Stock Option Plan*.........................................................  (1)

     21         Subsidiaries of the Company................................................  (1)

     23.1       Consent of Ernst & Young LLP...............................................  (1)

     23.2       Consent of PricewaterhouseCoopers LLP......................................  (1)

     24         Powers of Attorney.........................................................  (1)
</TABLE>

                                       44
<PAGE>

     (1)  Filed herewith.
     (2)  Incorporated by reference to the indicated exhibit to the Company's
          Registration Statement on Form S-1 (File No. 33-48576), which became
          effective on August 11, 1992.
     (3)  Incorporated by reference to the indicated exhibit to the Company's
          Report on Form 10-K for the year ended December 31, 1995.

     (4)  Incorporated by reference to the indicated exhibit to the Company's
          Report on Form 8-K filed January 14, 1997.

     (5)  Incorporated by reference to the indicated exhibit to the Company's
          Report on Form 10-K for the year ended December 31, 1996.

     (6)  Incorporated by reference to the indicated exhibit to the Company's
          Report on Form 8-K filed April 16, 1998.

     (7)  Incorporated by reference to the indicated exhibit to the Company's
          Report on Form 8-K filed November 24, 1998.

     (8)  Incorporated by reference to the indicated exhibit to the Company's
          Report on Form 10-K for the year ended December 31, 1999.

     *    Indicates a management contract or compensatory plan or arrangement.

     (b)  Reports on Form 8-K

          None

                                       45
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                            ENVIROGEN, INC.

Dated:  March 23, 2001                      By:    /s/ Robert S. Hillas
                                                ----------------------------
                                                       Robert S. Hillas
                                                          President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on behalf of the registrant, in the capacities indicated,
on the 23rd day of March, 2001.

<TABLE>
<CAPTION>
                Signature                                  Title
                ---------                                  -----
<S>                                     <C>
           Robert S. Hillas*            President, Chief Executive Officer and Chairman of the Board
 --------------------------------------
            Robert S. Hillas            (Principal Executive Officer)

           /s/ Mark J. Maten            Vice President, Finance and Chief Financial Officer
 --------------------------------------
             Mark J. Maten              (Principal Financial and Accounting Officer)

           William R. Cook *            Director
 --------------------------------------
            William R. Cook

        Robert F. Hendrickson*          Director
---------------------------------------
         Robert F. Hendrickson

          Robert F. Johnston*           Director
---------------------------------------
          Robert F. Johnston

            Peter J. Neff*              Director
---------------------------------------
             Peter J. Neff

           William C. Smith*            Director
---------------------------------------
           William C. Smith
</TABLE>

*Robert S. Hillas, pursuant to a Power of Attorney executed by each of the
directors noted above and filed with the Securities and Exchange Commission as
Exhibit 24 to this Annual Report on Form 10-K, by signing his name hereto, does
hereby sign and execute this Annual Report on Form 10-K on behalf of each of the
persons noted above, in the capacities indicated, and does hereby sign and
execute this Annual Report on Form 10-K on his own behalf, in the capacities
indicated.

                                                          /s/ Robert S. Hillas
                                                       -------------------------
                                                              Robert S. Hillas

                                       46
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
     Exhibit No.                       Description
     -----------                       -----------
     <S>          <C>
     2.1          Agreement and Plan of Merger dated January 14, 1997 by and
                  among Fluid Management, Inc., William C. Smith, Douglas W.
                  Jacobson, Gary W. Hawk, Richard W. Schowengerdt and the
                  Registrant, (4) (Exh. 2.1)

     3.1(a)       Restated Certificate of Incorporation dated September 5, 1991,
                  (2) (Exh. 3.1(a))

     3.1(b)       Certificate of Amendment to Restated Certificate of
                  Incorporation dated August 18, 1992, (2) (Exh. 3.1(c))

     3.1(c)       Certificate of Amendment to Amended and Restated Certificate
                  of Incorporation dated November 24, 1998, (7) (Exh. 3)

     3.2          By-Laws, as amended, (2) (Exh. 3.2)

     10.1         Envirogen, Inc. 401(k) Plan, (2) (Exh. 10.18)

     10.2         Envirogen, Inc. 1990 Incentive Stock Option and Non-Qualified
                  Stock Option Plan, as amended*, (5) (Exh. 10.22)

     10.3         Envirogen, Inc. 1993 Director's Non-Qualified Stock Option
                  Plan, as amended*, (3) (Exh. 10.27)

     10.4         Securities Purchase Agreement dated January 14, 1997 between
                  Warburg, Pincus Ventures, L.P. and the Company, (4) (Exh. 2.2)

     10.5         Employment Agreement dated April 16, 1998 between the Company
                  and Robert S. Hillas*, (6) (Exh. 10)

     10.6(a)      Employment Agreement dated April 10, 1997 between the Company
                  and Richard W. Schowengerdt*, (8) (Exh. 10.7(a))

     10.6(b)      Amendment No. 1 dated November 3, 1998 to Schowengerdt
                  Employment Agreement*, (8) (Exh. 10.7(b))

     10.7         Envirogen, Inc. 2000 Incentive Stock Option and Non-Qualified
                  Stock Option Plan*, (1)

     21           Subsidiaries of the Company, (1)

     23.1         Consent of Ernst & Young LLP, (1)

     23.2         Consent of PricewaterhouseCoopers LLP, (1)

     24           Powers of Attorney, (1)
</TABLE>

                                       47
<PAGE>

        (1)    Filed herewith.

        (2)    Incorporated by reference to the indicated exhibit to the
               Company's Registration Statement on Form S-1 (File No. 33-48576),
               which became effective on August 11, 1992.

        (3)    Incorporated by reference to the indicated exhibit to the
               Company's Report on Form 10-K for the year ended December 31,
               1995.

        (4)    Incorporated by reference to the indicated exhibit to the
               Company's Report on Form 8-K filed January 14, 1997.

        (5)    Incorporated by reference to the indicated exhibit to the
               Company's Report on Form 10-K for the year ended December 31,
               1996.

        (6)    Incorporated by reference to the indicated exhibit to the
               Company's Report on Form 8-K filed April 16, 1998.

        (7)    Incorporated by reference to the indicated exhibit to the
               Company's Report on Form 8-K filed November 24, 1998.

        (8)    Incorporated by reference to the indicated exhibit to the
               Company's Report on Form 10-K for the year ended December 31,
               1999.

        *      Indicates a management contract or compensatory plan or
               arrangement.

                                       48
<PAGE>

                                                                    Exhibit 10.7

                                ENVIROGEN, INC.

                        2000 INCENTIVE STOCK OPTION AND
                        NON-QUALIFIED STOCK OPTION PLAN
                        -------------------------------

     1.   PURPOSE. This Envirogen, Inc. 2000 Incentive Stock Option and Non-
          -------
Qualified Stock Option Plan ("Plan") is intended to provide a means whereby
Envirogen, Inc. (the "Company") may, through the grant of incentive stock
options ("ISOs") to purchase common stock of the Company ("Common Stock") to
officers and other key employees ("Key Employees") and through the grant of
nonqualified stock options ("NQSOs" and, collectively with ISOs, "Options") to
Key Employees, directors, scientific advisory board members and consultants
(together with Key Employees, "Optionees"), attract and retain such Key
Employees and other Optionees and motivate such Key Employees and other
Optionees to exercise their best efforts on behalf of the Company and of any
related corporation ("Related Corporation").

     For purposes of the Plan, a Related Corporation of the Company shall mean
either a corporate subsidiary of the Company, as defined in section 424(f) of
the Internal Revenue Code of 1986, as amended ("Code"), or the corporate parent
of the Company, as defined in section 424(e) of the Code. Further, as used in
the Plan, (a) the term "incentive stock option" shall mean an option which, at
the time such option is granted under the Plan, qualifies as an ISO within the
meaning of section 422 of the Code and is designated as an ISO in the Option
Agreement (as hereinafter defined); and (b) the term "nonqualified stock option"
shall mean an option which, at the time such option is granted, does not qualify
as an ISO and/or is designated as an NQSO in the Option Agreement.

     2.   ADMINISTRATION. The Plan shall be administered by the Company's
          --------------
Executive Compensation and Stock Option Committee ("Committee"), which shall
consist of not less than three (3) non-employee directors (within the meaning of
Rule 16b-3(b)(3) under the Securities Exchange Act of 1934 (the "Exchange Act"),
or any successor thereto) who are also outside directors (within the meaning of
Treas. Reg.ss.1.162-27(e)(3), or any successor thereto) of the Company who shall
be appointed by, and shall serve at the pleasure of, the Company's Board of
Directors ("Board"). Each member of such Committee, while serving as such, shall
be deemed to be acting in his capacity as a director of the Company.

     The Committee shall have full authority, subject to the terms of the Plan,
to select the Key Employees and other Optionees to be granted ISOs and NQSOs
under the Plan, to grant options on behalf of the Company and to set the date of
grant and the other terms of such Options. The Committee also shall have the
authority to establish such rules and regulations, not inconsistent with the
provisions of the Plan, for the proper administration of the Plan, and to amend,
modify or rescind any such rules and regulations, and to make such
determinations and interpretations under, or in connection with, the Plan, as it
deems necessary or advisable. All such rules, regulations, determinations and
interpretations shall be binding and conclusive upon the Company, its
stockholders and all employees, and upon their respective legal representatives,
beneficiaries, successors and assigns and upon all other persons claiming under
or through any of them.

     3.   ELIGIBILITY. The class of employees who shall be eligible to receive
          -----------
ISOs under the Plan and the class of persons who shall be eligible to receive
NQSOs under the Plan shall be, respectively, the Key Employees of the Company
and/or a Related Corporation and the other Optionees employed by or otherwise
associated with the Company and/or of a Related Corporation. More than one
Option may be granted to an Optionee under the Plan.

                                       49
<PAGE>

     4.   STOCK. Options may be granted under the Plan to purchase up to a
          -----
maximum of three hundred fifty thousand (350,000) shares of the Company's Common
Stock, par value $.01 per share, subject to adjustment as hereinafter provided;
provided, however that no optionee may be granted Options in one calendar year
with respect to more than one half of the total number of shares of the
Company's Common Stock reserved for issuance pursuant to the Plan. Shares
issuable under the Plan may be authorized but unissued shares or reacquired
shares, and the Company may purchase shares required for this purpose, from time
to time, if it deems such purchase to be advisable.

     If any Option granted under the Plan expires or otherwise terminates for
any reason whatever (including, without limitation, the Optionee's surrender
thereof) without having been exercised, the shares subject to the unexercised
portion of such Option shall continue to be available for the granting of
Options under the Plan as fully as if such shares had never been subject to an
Option; provided, however, that (a) if an Option is cancelled, the cancelled
Option is counted against the maximum number of shares for which Options may be
granted to a Key Employee, and (b) if the Option price is reduced after the date
of grant, the transaction is treated as a cancellation of an Option and the
grant of a new Option for purposes of counting the maximum number of shares for
which Options may be granted to a Key Employee.

     5.   GRANTING OF OPTIONS. From time to time until the expiration or earlier
          -------------------
suspension or discontinuance of the Plan, the Committee may, on behalf of the
Company, grant to Optionees under the Plan such Options as it determines are
warranted; provided, however, that grants of ISOs and NQSOs shall be separate
and not in tandem. The granting of an Option under the Plan shall not be deemed
either to entitle the Optionee to, or to disqualify the Optionee from, any
participation in any other grant of Options under the Plan. In making any
determination as to whether an Optionee shall be granted an Option and as to the
number of shares to be covered by such Option, the Committee shall take into
account the duties of the Optionee, his present and potential contributions to
the success of the Company or a Related Corporation, and such other factors as
the Committee shall deem relevant in accomplishing the purposes of the Plan.
Moreover, the Committee may provide in the Option that said Option may be
exercised only if certain conditions, as determined by the Committee, are
fulfilled.

     6.   ANNUAL LIMIT.
          ------------

          a.   ISOs.
               ----

          The aggregate fair market value (determined as of the time the ISO is
granted) of the Common Stock with respect to which ISOs are exercisable for the
first time by a Key Employee during any calendar year (under this Plan and any
other ISO plan of the Company or a Related Corporation) shall not exceed one
hundred thousand dollars ($100,000).

          b.   NQSOs.
               -----

          The annual limits set forth above for ISOs shall not apply to NQSOs.

     7.   TERMS AND CONDITIONS OF OPTIONS. The Options granted pursuant to the
          -------------------------------
Plan shall expressly specify whether they are ISOs or NQSOs. In addition, the
Options granted pursuant to the Plan shall include expressly or by reference the
following terms and conditions, as well as such other provisions not
inconsistent with the provisions of this Plan and, for ISOs granted under this
Plan, the provisions of section 422(b) of the Code, as the Committee shall deem
desirable:

          a.   Number of Shares.
               ----------------

          A statement of the number of shares to which the Option pertains.

                                       50
<PAGE>

          b.   Price.
               -----

          A statement of the Option price which shall be determined and fixed by
the Committee in its discretion but, in the case of an ISO, shall not be less
than the higher of one hundred percent (100%) (one hundred ten percent (110%) in
the case of more than ten percent (10%) stockholders as discussed in (j) below)
of the fair market value of the optioned shares of Common Stock, or the par
value thereof, on the date the ISO is granted and, in the case of an NQSO, shall
not be less than the higher of seventy-five percent (75%) of the fair market
value of the optioned shares of Common Stock, or the par value thereof, on the
date the NQSO is granted.

          The fair market value of the optioned shares of Common Stock shall be
arrived at by a good faith determination of the Committee and shall be (i) the
mean between the highest and lowest quoted selling price, if there is a market
for the Common Stock on a registered securities exchange or in an over the
counter market, on the date of grant, or (ii) the weighted average of the means
between the highest and lowest sales on the nearest date before and the nearest
date after the date of grant, if there are no sales on the date of grant but
there are sales on dates within a reasonable period both before and after the
date of grant, or (iii) the means between the bid and asked prices, as reported
by the National Quotation Bureau on the date of grant, if actual sales are not
available during a reasonable period beginning before and ending after the date
of grant, or (iv) such other method of determining fair market value as shall be
authorized by the Code, or the rules or regulations thereunder, and adopted by
the Committee. Where the fair market value of the optioned shares of Common
Stock is determined under (ii) above, the average of the means between the
highest and lowest sales on the nearest date before and the nearest date after
the date of grant is to be weighted inversely by the respective numbers of
trading days between the date of grant and such sales dates, in accordance with
Treas. Reg. (S) 20.2031-2(b)(1)

     c.   Term

          Subject to earlier termination as provided in Subsections (e), (f),
(g) and (j) below and in Section 9 hereof, the term of each Option shall be not
more than ten (10) years (five (5) years in the case of ISOs granted to more
than ten percent (10%) stockholders as discussed in (j) below) from the date of
grant.

     d.   Exercise.
          --------

          Options shall be exercisable in such installments and on such dates as
the Committee may specify, provided that (i) unless approved by the Stock Option
Committee, in no event shall any Option become exercisable at a rate in excess
of 20% per annum from the date of grant (except that all outstanding Options
shall be immediately exercisable in the case of merger, consolidation, or other
business combination involving the sale or transfer of all (or substantially
all) of the assets of the Company, or other business combination involving the
sale or transfer of all (or substantially all) of the capital stock of the
Company in which the Company is not the surviving entity, or, if it is the
surviving entity, either (a) does not survive as an operating ongoing concern in
substantially the same line of business, or (b) is controlled by persons or
entities previously unaffiliated with the Company), (ii) in the case of new
Options granted to an Optionee in replacement for options (whether granted under
the Plan or otherwise) held by the Optionee, the new Options may be made
exercisable, if so determined by the Committee, in its discretion, at the
earliest date the replaced options were exercisable, but not earlier than three
(3) months from the date of grant of the new Options, and (iii) the Committee
may accelerate the exercise date of any outstanding Options, in its discretion,
if it deems such acceleration to be desirable. Any Option shares, the right to
the purchase of which has accrued, may be purchased at any time up to the
expiration or termination of the Option. Exercisable Options may be exercised,
in whole or in part, from time to time by giving written notice of exercise to
the Company at its principal office, specifying the number of shares to be
purchased and accompanied by payment in full of the aggregate Option price for
such shares. Only full shares shall be issued under the Plan, and any fractional
share which might otherwise be issuable upon exercise of an Option granted
hereunder shall be forfeited.

                                       51
<PAGE>

          The Option price shall be payable (i) in cash or its equivalent, (ii)
in the discretion of the Committee, in Company Common Stock previously acquired
by the Optionee, provided that if such shares of Common Stock were acquired
through exercise of an ISO and are used to pay the Option price of an ISO, such
shares have been held by the Key Employee for a period of not less than the
holding period described in section 422(a)(1) of the Code on the date of
exercise, or if such shares of Common Stock were acquired through exercise of an
NQSO or of an option under a similar plan, such shares have been held by the
Optionee for a period of more than one (1) year on the date of exercise, (iii)
in the discretion of the Committee, in any combination of (i) and (ii) above, or
(iv) in the discretion of the Committee, by delivering a properly executed
notice of exercise of the Option to the Company and a broker, with irrevocable
instructions to the broker promptly to deliver to the Company the amount of sale
or loan proceeds necessary to pay the exercise price of the Option, provided
that the payment procedure specified in this clause (iv) shall not be available
if such payment procedure would result in a violation of section 16(b) of the
Exchange Act.

          In the event such Option price is paid, in whole or in part, with
shares of Common Stock, the portion of the Option price so paid shall be equal
to the "fair market value" on the date of tender, as such "fair market value" is
determined in Subsection (b) above, of the Common Stock so tendered in payment
of such Option price.

          e.   Termination of Employment.
               -------------------------

          If an Optionee's employment by the Company (and Related Corporations)
is terminated by either party prior to the expiration date fixed for this Option
for any reason other than death or disability, such Option may be exercised, to
the extent of the number of shares with respect to which the Optionee could have
exercised it on the date of such termination, by the Optionee at any time prior
to the earlier of (i) the expiration date specified in such option, or (ii) 30
days after the date of the Optionee's termination of employment, or (iii) an
accelerated termination date of the option determined by the Committee, in its
discretion, except that such accelerated termination date shall not be earlier
than the date of the Optionee's termination of employment.

          For purposes of this Plan, in the case of an Optionee who is a
director or a scientific advisory board member of the Company or a Related
Corporation but who is not an employee of the Company or a Related Corporation,
such Optionee's "employment" with the Company and all related Corporations shall
be deemed to terminate when such Optionee ceases to be a director or a
scientific board member of the Company and all Related Corporations, and is no
longer providing ongoing consulting or advisory services to the Company and all
Related Corporations. For purposes of this Plan, in the case of an Optionee who
is a consultant to the Company or a Related Corporation, such Optionee's
"employment" with the Company and all Related Corporations shall be deemed to
terminate when such Optionee is no longer providing ongoing consulting or
advisory services to the Company and all Related Corporations.

          f.   Exercise upon Disability of Optionee.
               ------------------------------------

          If an Optionee shall become disabled (within the meaning of section
22(e)(3) of the Code) during his employment and, prior to the expiration date
fixed for his Option, his employment is terminated as a consequence of such
disability, such Option may be exercised, to the extent of the number of shares
with respect to which the Optionee could have exercised it on the date of such
termination, or to any greater extent permitted by the Committee, by the
Optionee at any time prior to the earlier of (i) the expiration date specified
in such Option, or (ii) an accelerated termination date determined by the
Committee, in its discretion, except that such accelerated termination date
shall not be earlier than the date of the Optionee's termination of employment
by reason of disability, and in the case of ISOs, such date shall not be later
than one (1) year after such termination of employment. In the event of the
Optionee's legal disability, such Option may be so exercised by the Optionee's
legal representative.

                                       52
<PAGE>

          g.   Exercise upon Death of Optionee.
               -------------------------------

          If an Optionee shall die during his employment and prior to the
expiration date fixed for his Option, or if an Optionee whose employment is
terminated by reason of Optionee's disability (as described in Subsection (f)
above) shall die following his termination of employment but prior to the
earliest of (i) the expiration date fixed for his Option, or (ii) the expiration
of the period determined under Subsection (f) above, or (iii) in the case of an
ISO, three (3) months following termination of employment, such Option may be
exercised, to the extent of the number of shares with respect to which the
Optionee could have exercised it on the date of his death, or to any greater
extent permitted by the Committee, by the Optionee's estate, personal
representative or beneficiary who acquired the right to exercise such option by
bequest or inheritance or by reason of the death of the Optionee, at any time
prior to the earlier of (i) the expiration date specified in such Option or (ii)
an accelerated termination date determined by the Committee, in its discretion,
except that such accelerated termination date shall not be later than one (1)
year after the date of death.

          h.   Non-Transferability.
               -------------------

          No Option shall be assignable or transferable by the Optionee
otherwise than by will or by the laws of descent and distribution, and during
the lifetime of the Optionee, the Option shall be exercisable only by him or by
his guardian or legal representative. If the Optionee is married at the time of
exercise and if the Optionee so requests at the time of exercise, the
certificate or certificates shall be registered in the name of the Optionee and
the Optionee's spouse, jointly, with right of survivorship.

          i.   Rights as a Stockholder.
               -----------------------

          An Optionee shall have no rights as a stockholder with respect to any
shares covered by his Option until the issuance of a stock certificate to him
for such shares.

          j.   Ten Percent Stockholder.
               -----------------------

          If the Key Employee owns more than ten percent (10%) of the total
combined voting power of all shares of stock of the Company or of a Related
Corporation at the time an ISO is granted to him, the Option price for the ISO
shall be not less than one hundred ten percent (110%) of the fair market value
of the optioned shares of Common Stock on the date the ISO is granted, and such
ISO, by its terms, shall not be exercisable after the expiration of five (5)
years from the date the ISO is granted. The conditions set forth in this
Subsection (j) shall not apply to NQSOs.

          k.   Listing and Restriction of Shares.
               ---------------------------------

          Each Option shall be subject to the requirement that, if at any time
the Committee shall determine, in its discretion, that the listing, registration
or qualifications of the shares covered thereby upon any securities exchange or
under any state or federal law, or the consent or approval of any governmental
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the purchase of shares thereunder, or that
action by the Company or by the Optionee should be taken in order to obtain an
exemption for any such requirement, no such Option may be exercised, in whole or
in part, unless and until such action shall have been effected, obtained, or
taken under conditions acceptable to the Committee. Without limiting the
generality of the foregoing, each Optionee or his legal representative or
beneficiary may also be required to give satisfactory assurance that shares
purchased upon exercise of an Option are being purchased for investment and not
with a view to distribution, and certificates representing such shares may be
legended accordingly.

                                       53
<PAGE>

          l.   Withholding and Use of Shares to Satisfy Tax Obligations.
               --------------------------------------------------------

          The obligation of the Company to deliver shares of Common Stock upon
the exercise of any Option shall be subject to applicable federal, state and
local tax withholding requirements.

          If the exercise of any Option is subject to the withholding
requirements of applicable federal tax laws, the Committee, in its discretion
(and subject to such withholding rules ("Withholding Rules") as shall be adopted
by the Committee), may permit the Optionee to satisfy the federal withholding
tax, in whole or in part, by electing to have the Company withhold (or by
returning to the Company) shares of Common Stock, which shares shall be valued,
for this purpose, at their fair market value on the date the amount of tax
required to be withheld is determined (the "Determination Date"). Such election
must be made in compliance with and subject to the Withholding Rules, and the
Company may not withhold shares in excess of the number necessary to satisfy the
minimum federal income tax withholding requirements. In the event shares of
Common Stock acquired under the exercise of an ISO are used to satisfy such
withholding requirement, such shares of Common Stock must have been held by the
Key Employee for a period of not less than the holding period described in
section 422(a)(1) of the Code on the Determination Date. In the event shares of
Common Stock acquired through exercise of an NQSO or of an option under a
similar plan are used to satisfy such withholding requirements, such shares must
have been held by the Optionee for a period of more than one (1) year on the
Determination Date.

     8.   OPTION INSTRUMENTS - OTHER PROVISIONS. Options granted under the Plan
          -------------------------------------
shall be evidenced by written documents ("Option Agreements") in such form as
the Committee shall, from time to time, approve, which Option Agreements shall
contain such provisions, not inconsistent with the provisions of the Plan for
NQSOs granted pursuant to the Plan, and such conditions, not inconsistent with
the provisions of the Plan and section 422(b) of the Code for ISOs granted
pursuant to the Plan, as the Committee shall deem advisable, and which Option
Agreements shall specify whether the Option is an ISO or NQSO. Each Optionee
shall enter into, and be bound by, such Option Agreements, as soon as
practicable after the grant of an Option.

     9.   CAPITAL ADJUSTMENTS. The number of shares which may be issued under
          -------------------
the Plan, as stated in Section 4 hereof, and the maximum number of shares with
respect to which options may be granted to any Key Employee under the Plan as
stated in Section 4 hereof, and the number of shares issuable upon exercise of
outstanding Options under the Plan (as well as the Option price per share under
such outstanding Options), shall, subject to the provisions of section 424(a) of
the Code, be proportionately adjusted, as may be deemed appropriate by the
Committee, to reflect any stock dividend, stock split, share combination, or
similar change in the capitalization of the Company.

     10.  AMENDMENT OR DISCONTINUANCE OF THE PLAN.
          ---------------------------------------

     (a)  General. The Board from time to time may suspend or discontinue the
          -------
Plan or amend it in any respect whatsoever, except that the following amendments
shall require stockholder approval (given in the manner set forth in Section
10(b) below):

          (i)  With respect to ISOs, any amendment which would: (A) change the
     class of employees eligible to participate in the Plan, (B) except as
     permitted under Section 9 hereof, increase the maximum number of shares of
     Common Stock with respect to which ISOs may be granted under the Plan, or
     (C) extend the duration of the Plan under Section 15 hereof with respect to
     any ISOs granted hereunder; and

          (ii) With respect to Options, any amendment which would require
     stockholder approval pursuant to Treas. Reg.(S)1.162-27(e)(4)(vi) or any
     successor thereto.

                                       54
<PAGE>

Notwithstanding the foregoing, no such suspension, discontinuance or amendment
shall materially impair the rights of any holder of an outstanding Option
without the consent of such holder.

     (b)  Stockholder Approval Requirements. The approval of stockholders must
          ---------------------------------
comply with all applicable provisions of the corporate charter, bylaws, and
applicable state law prescribing the method and degree of stockholder approval
required for the issuance of corporate stock or options. If the applicable state
law does not prescribe a method and degree of stockholder approval in such case,
the approval of stockholders must be effected:

                    (i)   By a method and in a degree that would be treated as
          adequate under applicable state law in the case of an action requiring
          stockholder approval (i.e., an action on which stockholders would be
          entitled to vote if the action were taken at a duly held stockholders'
          meeting); or

                    (ii)  By a majority of the votes cast at a duly held
          stockholders' meeting at which a quorum representing a majority of all
          outstanding voting stock is, either in person or by proxy, present and
          voting on the plan.

     11.  RIGHTS. Neither the adoption of the Plan nor any action of the Board
          ------
or the Committee shall be deemed to give any individual any right to be granted
an Option, or any other right hereunder, unless and until the Committee shall
have granted such individual an Option, and then his rights shall be only such
as are provided by the Option Agreement.

     Any Option under the Plan shall not entitle the holder thereof to any
rights as a stockholder of the Company prior to the exercise of such Option and
the issuance of the shares pursuant thereto. Further, notwithstanding any
provisions of the Plan or the Option Agreement with an Optionee, the Company
shall have the right, in its discretion, to retire an Optionee at any time in
accordance with its policies or otherwise to terminate his employment at any
time in accordance with its policies for any reason whatsoever.

     12.  APPLICATION OF FUNDS. The proceeds received by the Company from the
          --------------------
sale of Common Stock pursuant to Options granted under the Plan shall be used
for general corporate purposes. Any cash received in payment for shares upon
exercise of an Option to purchase Common Stock shall be added to the general
funds of the Company and shall be used for its corporate purposes. Any Common
Stock received in payment for shares upon exercise of an Option to purchase
Common Stock shall become treasury stock.

     13.  EFFECTIVE DATE. This Plan shall become effective on May 18, 2000 (the
          --------------
date the Plan was approved by the stockholders).

     14.  NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall
          --------------------------------
impose no obligation upon an Optionee to exercise such Option.

     15.  TERMINATION OF THE PLAN. Unless earlier terminated as provided in the
          -----------------------
Plan, the Plan and all authority granted hereunder shall terminate absolutely at
12:00 midnight on February 28, 2010, which date is within ten (10) years after
the date the Plan was adopted by the Board, and no Options hereunder shall be
granted thereafter. Nothing contained in this Section 15, however, shall
terminate or affect the continued existence of rights created under Options
issued hereunder and outstanding on February 28, 2010, which by their terms
extend beyond such date.

     16.  GOVERNING LAW. With respect to any ISOs granted pursuant to the Plan
          -------------
and the Option Agreements thereunder, the Plan, such Option Agreements and any
ISOs granted pursuant thereto shall be governed by the applicable Code
provisions to the maximum extent possible. Otherwise, the laws of the State of
Delaware shall govern the operation of, and the rights of Optionees under, the
Plan, the Option Agreements and any Options granted thereunder.

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