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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, 2001

                                 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 22, 2002
was approximately $2,729,888. (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 22, 2002 was 4,005,608.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant's definitive proxy statement relating
to its scheduled May 23, 2002 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. Commercial operations 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). 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 identifying and developing innovative techniques to address
pollution problems through 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, water and
air.

While the activities of the Company are principally commercial remediation and
waste treatment, 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 internal and external growth. 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.

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 that 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 are the result of the release into the
environment of contaminants ranging from simple hydrocarbons to complex
chlorinated compounds. Generally, the less complex the 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. Over time, the bacteria will 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 disposal or 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,
may be 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 developed commercial in situ capabilities
for destruction of ammonium perchlorate, 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
potentially responsible parties 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 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.

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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 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, which are more
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, the treatment of groundwater leachate on the site
          of a former manufactured gas plant for an electric utility and the
          removal of ammonium perchlorate from groundwater. According to the
          EPA, there are 20 states with confirmed releases in ground or
          surface water. There are 40 states that have confirmed perchlorate
          manufacturers or users based on EPA Information Request responses.

     .    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.
          These systems incorporate proprietary designs and certain features
          for which a patent was awarded in 2001. Examples of applications of
          Envirogen's MBRs include leachate treatment at an
          industrial/municipal wastewater treatment facility and process
          wastewater treatment at fine chemicals production facilities. The
          MBR is very effective in the treatment of high concentration,
          moderate flow-rate streams with complex or difficult to degrade
          compounds and with varying concentrations of different compounds.

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

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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 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 transformed 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
          and 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 $20,000 to
$1.8 million.

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 2001, Envirogen spent
approximately $1.7 million on research and development projects, approximately
$1.4 million of which was funded by third parties.

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.

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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 has also designed and tested 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.

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

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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 2001, the Company completed two
Phase I SBIR projects, and began four other SBIR projects. The completed
projects included a project to produce chiral epoxides for synthesis of
high-value chemicals (patent pending) for the National Institute of Health (the
"NIH"), and a project to use surfactant foams for in situ remediation of
aquifers for the Environmental Protection Agency (the "EPA"). The projects
initiated in 2001 included a Phase II SBIR project for in situ bioremediation
of MTBE-contaminated aquifers for the National Science Foundation. In addition,
the Company was awarded three Phase I SBIR grants in 2001. These include
projects for the NIH to evaluate the molecular biology and biochemistry of MTBE
biodegradation and a project to develop novel hydrolase enzymes for
biocatalytic applications, and a project for the Department of Energy which
involves the development of a biocatalytic process for converting gaseous
alkanes such as propane into more useful products like alcohols and ketones.
Through another DOD/EPA/DOE Strategic Environmental Research and Development
Program ("SERDP"), the Company has continued development of in situ treatment
technology for ammonium perchlorate-contaminated aquifers. The project was
recognized as the "Project of the Year Award" by the SERDP organization. The
Company also initiated another SERDP project in 2001, which involved
immobilization of explosive compounds on practice ranges. The Company continued
its field demonstration in California of its patented in situ MTBE
bioremediation technology funded by the DOD Environmental Security Technology
Certification Program. This project 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 10 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, are intended to lay the scientific groundwork for safer, more
responsive commercial applications. The desired result is a cleaner environment
achieved at a cost that is reasonable for government and industry.

MARKETING

The Company's products and services are marketed to customers by a direct sales
force, independent manufacturer representatives, and 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.

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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 potential use of
genetically-modified bacteria.

Recombinant DNA research conducted with grants from the NIH must comply with
the 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 ("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.

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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 value by using its technologies
and creative approaches 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.

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.

                                      9
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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, air sparging, bioventing, 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 these services or
affect the competitive environment in which Envirogen operates.

EMPLOYEES

As of December 31, 2001, Envirogen had 144 full-time employees, including 86 in
engineering, 16 in research and development, 31 in administration and finance
and 11 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 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 42,200 square feet of office and warehouse space for
its administrative and commercial operations in Illinois, Massachusetts,
Michigan and Wisconsin. Management

                                      10
<PAGE>

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 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 Company's results of
operations, cash flows or financial position.


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.

   Name                  Age                            Position
   ----                  ---                            --------
Robert S. Hillas         53            President, Chief Executive Officer and
                                         Chairman of the Board
Mark J. Maten            44            Vice President Finance and Chief
                                         Financial Officer
David N. Enegess         55            Vice President National Group
Richard W. Schowengerdt  46            Vice President Wisconsin Operations
Stewart H. Abrams        43            Vice President Eastern Operations

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.

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.

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

                                      12
<PAGE>

expertise in construction, engineering, geology and hydrogeology. Mr.
Schowengerdt received a B.S. in hydrology from Michigan Technological
University.

Stewart H. Abrams was named Vice President Eastern Operations in May 2001. Mr.
Abrams served as Vice President MA/MI/NJ/IL Operations from August 2000 until
May 2001 and prior thereto as Mid-Atlantic Operations Manager since January
1994. Prior to joining the Company in October 1992, Mr. Abrams served most
recently as a Section Manager for BCM Engineers Inc., a large environmental
consulting firm. He is a registered Professional Engineer in New Jersey,
Pennsylvania and New York. Mr. Abrams received a B.A. in Political Science, a
B.S. in Civil Engineering and a Masters in Environmental Sciences from Rutgers
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.

2001                   HIGH          LOW
----                   ----          ---
1st Quarter           $1.38         $0.97
2nd Quarter           $1.18         $0.90
3rd Quarter           $1.45         $0.88
4th Quarter           $1.80         $0.90

2000
----
1st Quarter           $6.25         $1.56
2nd Quarter           $3.94         $2.03
3rd Quarter           $2.63         $1.56
4th Quarter           $2.13         $0.72

The closing price for the Common Stock on February 22, 2002 was $1.13. 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 8, 2002 was 199, 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.

<TABLE>
<CAPTION>
Summary of Operations
                                                    Years Ended December 31,
                              -------------------------------------------------------------------------
                                  2001            2000          1999         1998/(1)/       1997/(2)/
                              ------------    -----------    -----------    -----------    ------------
<S>                            <C>            <C>            <C>            <C>            <C>
Revenues                       $20,437,105    $20,339,401    $24,049,968    $26,220,877    $25,769,509
Costs and expenses              21,487,231     22,585,697     25,601,135     52,541,064     28,885,818
Interest, net                       84,072        193,169        134,765        159,277        210,573
Equity in (loss) income of
   joint ventures                        -              -           (393)        13,688       (210,497)
Other, net                               -          1,966         (7,604)        (3,804)        26,047
                              ------------    -----------    -----------   ------------    ------------
Loss before income taxes          (966,054)    (2,051,161)    (1,424,399)   (26,151,026)    (3,090,186)
Income tax benefit                 480,415              -              -             -               -
                              ------------   ------------    -----------   ------------    ------------
Net loss                      $   (485,639)  $ (2,051,161)   $(1,424,399)  $(26,151,026)   $(3,090,186)
                              ============   ============    ===========   ============    ============

Basic and diluted net
   loss per share                   ($0.12)        ($0.52)         ($.36)        ($6.64)        ($0.93)
                              ============    ===========    ===========   ============    ============

Summary of Financial Position
                                                                December  31,
                              -------------------------------------------------------------------------

                                  2001           2000            1999          1998        1997/(2)/
                              ------------    -----------    -----------    -----------    ------------
Total assets                   $11,759,620    $12,266,296    $16,370,865    $17,945,879    $42,727,012
Working capital                  3,168,634      3,212,674      4,786,503      5,151,482      8,099,057
Long-term obligations                6,057         11,800              -          4,644         12,671
Stockholders' equity             4,701,084      5,111,223      7,093,390      8,461,789     33,992,254
</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.

                                      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 that may cause results to differ
materially from those set forth in these statements. In particular,
unanticipated changes in the economic, competitive, governmental,
technological, marketing or 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 revenue attributable to traditional
remediation services such as soil vapor extraction and air sparging as well as
revenue attributable to advanced biological water treatment systems and
biofilters. 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.

CRITICAL ACCOUNTING POLICIES
----------------------------

The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have
been prepared in conformity with accounting principles generally accepted in
the United States. The preparation of these financial statements requires
management to make estimates and assumptions (see Note 2 to the Company's
Consolidated Financial Statements) that affect the reported amounts of assets
and liability 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.
Management believes the following represents its critical accounting policies.

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
pecentage-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.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. If the Company does not accurately
estimate the resources required or the scope of work to be performed, or does
not manage its projects properly within the planned periods of time or satisfy
its obligations under the contracts, then future margins may be significantly
and negatively affected or losses on existing contracts may need to be
recognized.

                                      16
<PAGE>

Reserves for Claim Adjustments and Warranties

The Company reserves for potential amounts that 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 that 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. 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 provides for 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. If actual
failure rates differ from the Company's estimates, revisions to the estimated
warranty liability may be required.

RESULTS OF OPERATIONS
---------------------

2001 COMPARED TO 2000
---------------------

For the year ended December 31, 2001, the Company's total revenues increased
one half of one percent to $20,437,105 from $20,339,401 in 2000. The net loss
decreased 76% to $485,639 in 2001 from $2,051,161 in 2000, while the basic and
diluted net loss per share was $0.12 in 2001 compared to $0.52 in 2000. The
Company's net loss in 2001 declined from 2000 primarily due to increased
revenue in its commercial operations, improved margins in commercial operations
and the sale of a portion of the Company's State of New Jersey net operating
loss carryforwards under a state tax benefit program, which resulted in a net
tax benefit recognized by the Company of $480,415.

Commercial operations revenues (net of reserves for ineligible PECFA claims)
increased 2% in 2001 to $19,071,464 from $18,723,719 in 2000. The increased
commercial revenues are due primarily to increased systems related revenue
offset by a decrease in remediation services revenue.

Revenues from corporate research and development services decreased in 2001 by
15% to $1,365,641 from $1,615,682 in 2000. Revenues decreased primarily due to
the timing of work associated with Phase II government projects and to the
fewer number of projects in process in early 2001 as compared to 2000.

Total costs and expenses decreased to $21,487,231 in 2001 from $22,585,697 in
2000. The cost of commercial operations decreased 5% to $15,013,577 during 2001
from $15,773,287 in 2000 due primarily to improved project margins. Research
and development expenses decreased 16% to $1,689,310 during 2001 from
$2,001,165 in 2000 as a result of lower revenue levels. Marketing, general and
administrative expenses decreased 1% to $4,784,344 from $4,811,245 due
primarily to continuing cost-reduction efforts.

Interest income decreased 54% to $94,727 in 2001 from $205,538 in 2000, due
primarily to the decreased average cash available for investment and lower
interest rates.

                                      17
<PAGE>

2000 COMPARED TO 1999
---------------------

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

Commercial operations 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 services 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 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.

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, 2001, the Company had cash and cash equivalents of $2,819,028
and working capital of $3,168,634. Cash and cash equivalents decreased
$1,006,978 from December 31, 2000 to December 31, 2001 due primarily to cash
used in operations of $759,518 and capital expenditures of $242,691.

From December 31, 2000 to December 31, 2001, net accounts receivable increased
by $1,242,716 primarily as a result slower payment of invoices by customers in
2001 than had been experienced in 2000. In the same period, accounts payable
remained approximately the same. At December 31, 2001, the Company had
$3,063,250 in reserve for claim adjustments and warranties, $2,772,737 of which
is available for potential PECFA claim adjustments related to approximately $35
million in unsettled PECFA submittals and $290,513 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>

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
--------------------------------------------------

The Company is party to a note payable as well as various operating leases at
December 31, 2001. These contractual obligations are summarized below. The
Company has no other contractual obligations or commercial commitments at
December 31, 2001.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Contractual Obligations                                     Payment Due by Period
-------------------------------------------------------------------------------------------------------------
                                 Total          2002           2003         2004        2005       Thereafter
<S>                         <C>            <C>            <C>          <C>          <C>         <C>
-------------------------------------------------------------------------------------------------------------
Long term note payable      $    11,369    $   5,312      $   5,580    $     477    $     -     $      -
-------------------------------------------------------------------------------------------------------------
Noncancelable operating
leases                        2,559,267    1,097,163        946,178      515,125         801            0
-------------------------------------------------------------------------------------------------------------
</TABLE>

The contractual obligations relate to office, laboratory and pilot plant
facilities, as well as vehicles and office equipment. All obligations expire
prior to 2006. 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.

OTHER MATTERS
-------------

As of December 31, 2001, the Company had a net operating loss carry forward of
approximately $28 million for federal income tax reporting purposes available
to offset future taxable income, if any, through 2021. 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 July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141, "Business Combinations" ("SFAS 141"),
and 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and establishes specific criteria for the
recognition of goodwill separate from other intangible assets. Under the
provisions of SFAS 142, which will be effective for fiscal years beginning
after December 15, 2001, the cost of certain of the Company's indefinite-lived
intangible assets will no longer be subject to amortization, but instead will
be periodically reviewed for impairment. Upon adoption, the Company does not
expect the earnings and financial position to be impacted by the required
impairment tests of goodwill and other indefinite-lived intangible assets.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). This statement will be effective
for fiscal years beginning after December 15, 2001. SFAS 144 establishes a
single accounting model, based upon the framework established in SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of ", for long-lived assets to be disposed of by sale and to
address significant implementation issues. The implementation of SFAS 144 is
not expected to have any impact on the Company's consolidated results of
operations, financial position and 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, 2001, 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,
                                                                           -------------------------------------
                                                                                 2001                2000
                                                                           -----------------   -----------------
<S>                                                                           <C>                  <C>
ASSETS
Current assets:
   Cash and cash equivalents                                                  $ 2,819,028         $ 3,826,006
   Accounts receivable, net of allowance for doubtful
      accounts of $565,567 in 2001 and $795,852 in 2000                         5,301,239           4,058,523
   Unbilled revenue                                                             1,641,683           2,170,510
   Prepaid expenses and other current assets                                      459,163             300,908
                                                                           -----------------    ----------------
      Total current assets                                                     10,221,113          10,355,947

Property and equipment, net                                                       761,375             957,335
Intangible assets, net                                                            619,945             768,141
Other assets                                                                      157,187             184,873
                                                                           -----------------    ----------------
    Total assets                                                              $11,759,620         $12,266,296
                                                                           =================    ================
LIABILITIES
Current liabilities:
   Accounts payable                                                           $ 2,527,091         $  2,508,738
   Accrued expenses and other liabilities                                       1,065,403            1,064,653
   Reserve for claim adjustments and warranties                                 3,063,250            3,210,622
   Deferred revenue                                                               391,423              354,222
   Current portion of long-term note payable                                        5,312                5,038
                                                                           -----------------    ----------------
     Total current liabilities                                                  7,052,479            7,143,273

Long-term note payable, net of current portion                                      6,057               11,800
                                                                           -----------------    ----------------
     Total liabilities                                                          7,058,536            7,155,073
                                                                           -----------------    ----------------
Commitments and contingencies (see Note 10)

STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value (2,000,000 shares
  authorized; none issued)
Common stock, $.01 par value (50,000,000 shares
  authorized; 4,015,525 and 3,982,353 issued at
  December 31, 2001 and 2000, respectively)                                         40,155              39,824
Additional paid-in capital                                                      59,871,287          59,796,118
Accumulated deficit                                                            (55,204,408)        (54,718,769)
Less:  Treasury stock, at cost (9,917 shares at
  December 31, 2001 and 2000)                                                       (5,950)             (5,950)
                                                                           -----------------    ----------------
    Total stockholders' equity                                                   4,701,084           5,111,223
                                                                           -----------------    ----------------
    Total liabilities and stockholders' equity                                $ 11,759,620        $ 12,266,296
                                                                           =================    ================
</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,
                                                 --------------------------------------------------
                                                    2001                 2000              1999
                                                 ------------       --------------     ------------
<S>                                              <C>                <C>               <C>
Revenues:
  Commercial operations                          $ 19,071,464       $  18,723,719      $ 21,114,503
  Research and development services                 1,365,641           1,615,682         2,935,465
                                                 ------------       --------------     ------------

     Total revenues                                20,437,105          20,339,401        24,049,968
                                                 ------------       --------------     ------------

Cost of commercial operations                      15,013,577          15,773,287        17,973,543
Research and development costs                      1,689,310           2,001,165         2,981,959
Marketing, general and administrative expenses      4,784,344           4,811,245         4,645,633
                                                 ------------       --------------     ------------

     Total costs and expenses                      21,487,231          22,585,697        25,601,135
                                                 ------------       --------------     ------------
Other income (expense):
  Interest income                                      94,727             205,538           148,531
  Interest expense                                    (10,655)            (12,369)          (13,766)
  Equity in loss of joint venture                          -                   -               (393)
  Other, net                                               -                1,966            (7,604)
                                                 ------------       --------------     ------------
     Other income, net                                 84,072             195,135           126,768
                                                 ------------       --------------     ------------

Loss before income taxes                             (966,054)         (2,051,161)       (1,424,399)

Income tax benefit                                    480,415                  -                 -
                                                 ------------       --------------     ------------
Net loss                                         $   (485,639)      $  (2,051,161)      $(1,424,399)
                                                 ============       ==============     ============

Basic and diluted net loss per share                   ($0.12)             ($0.52)           ($0.36)
                                                 ============       ==============     ============

Weighted average number of shares of
   Common Stock used in computing basic
   and diluted net loss per share                   3,995,209           3,969,785         3,965,951
                                                 ============       ==============     ============
</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, 2001, 2000 and 1999

<TABLE>
<CAPTION>

                                          Common Stock           Additional                          Treasury Stock
                                     ---------------------         Paid-in          Accumulated   ---------------------
                                       Shares      Amount          Capital           Deficit        Shares     Amount
                                     ----------  ---------     ---------------   ---------------  ----------  ---------
<S>                                  <C>          <C>            <C>              <C>              <C>         <C>
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)

Net loss                                                                              (485,639)
Deferred fees                                                         75,500
Issuance under Deferred Fee Plan        33,172        331               (331)
                                     ----------  ---------     ---------------   ---------------  ----------  ---------
Balance at December 31, 2001         4,015,525    $40,155        $59,871,287      ($55,204,408)    (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,
                                                                             -----------------------------------------------
                                                                                  2001             2000            1999
                                                                            ---------------   -------------   --------------
<S>                                                                          <C>              <C>              <C>
Cash flows from operating activities:
 Net loss                                                                     $  (485,639)     $(2,051,161)    $ (1,424,399)
 Adjustments to reconcile net loss to cash used in operating activities:
  Depreciation and amortization                                                   586,109          725,601          796,792
  Provision for claim adjustments and warranties                                  279,985          146,782          393,148
  Provision for doubtful accounts                                                (117,256)         131,042          312,280
  Deferred fees                                                                    75,500           66,000           56,000
  Equity in loss of joint venture                                                       -                -              393
  Other                                                                                38           (1,966)           7,604

 Changes in operating assets and liabilities:
   Accounts receivable                                                         (1,125,460)       1,716,516          109,238
   Unbilled revenue                                                               528,827          958,237          899,436
   Prepaid expenses and other current assets                                     (158,255)         200,263          395,297
   Restricted cash                                                                      -                -          309,300
   Other assets                                                                    27,686           35,736           22,679
   Accounts payable                                                                18,353       (1,683,285)         750,909
   Accrued expenses and other liabilities                                             750          122,390         (282,596)
   Reserve for claim adjustments and warranties                                  (427,357)        (532,296)        (947,145)
   Deferred revenue                                                                37,201         (188,187)        (216,651)
                                                                            --------------    -------------   --------------
   Net cash (used in) provided by operating activities                           (759,518)        (354,328)       1,182,285
                                                                            --------------    -------------   --------------

Cash flows from investing activities:
 Capital expenditures                                                            (242,691)        (343,990)        (245,485)
 Proceeds from the dissolution of joint venture                                         -                -          174,653
 Proceeds from sale of property and equipment                                         700            1,966           15,838
                                                                            --------------    -------------   --------------
   Net cash used in investing activities                                         (241,991)        (342,024)         (54,994)
                                                                            --------------    -------------   --------------

Cash flows from financing activities:
 Debt repayment                                                                    (5,469)          (3,971)               -
 Capital lease principal repayments                                                     -           (4,644)          (7,222)
 Net proceeds from exercise of stock options                                            -            2,994                -
                                                                            ---------------   -------------   --------------
   Net cash used in financing activities                                           (5,469)          (5,621)          (7,222)
                                                                            ---------------   -------------   --------------

Net (decrease) increase in cash and cash equivalents                           (1,006,978)        (701,973)       1,120,069

Cash and cash equivalents at beginning of year                                  3,826,006        4,527,979        3,407,910

                                                                            ---------------   -------------   -------------
Cash and cash equivalents at end of year                                      $ 2,819,028      $ 3,826,006     $  4,527,979
                                                                            ===============   =============   =============

Supplemental disclosures of cash flow information:
--------------------------------------------------
 Cash paid for interest                                                       $    10,609      $    12,421     $     20,925
                                                                            ===============   =============   =============
 Cash paid (refunded) for income taxes                                        $     1,720      $    (1,565)    $     (7,264)
                                                                            ===============   =============   =============

</TABLE>

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.

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 revenue attributable to traditional
     remediation services such as soil vapor extraction and air sparging as
     well as revenue attributable to advanced biological water treatment
     systems and biofilters. 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 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. Under the provisions of SFAS 142, which will become effective
     for the Company on January 1, 2002, the cost of the Company's
     indefinite-lived intangible assets will no longer be subject to
     amortization, but instead will be periodically reviewed for impairment.

     RESERVES FOR CLAIM ADJUSTMENTS AND WARRANTIES

     The Company reserves for potential amounts that 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
     that 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, 2001, the Company had
     $2,772,737 in reserves with respect to potential ineligible claims
     related to approximately $35 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 $290,513 in reserves at December 31, 2001 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, 2001 of
     $20,279 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, 2001.

     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 the net loss by the
     weighted average number of common shares outstanding during the period.
     Diluted per share amounts are computed by dividing the net loss 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
     714,158, 615,777 and 499,719 shares of common stock that were outstanding
     at December 31, 2001, 2000 and 1999, respectively, were not included in
     diluted per share calculations, as their effect would be antidilutive.

                                       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 13).

     IMPACT OF THE FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards Nos. 141, "Business Combinations"
     ("SFAS 141"), and 142, "Goodwill and Other Intangible Assets" ("SFAS
     142"). SFAS 141 requires that the purchase method of accounting be used
     for all business combinations initiated after June 30, 2001, and
     establishes specific criteria for the recognition of goodwill separate
     from other intangible assets. Under the provisions of SFAS 142, which
     will be effective for fiscal years beginning after December 15, 2001, the
     cost of certain of the Company's indefinite-lived intangible assets will
     no longer be subject to amortization, but instead will be periodically
     reviewed for impairment. Upon adoption, the Company does not expect the
     earnings and financial position to be impacted by the required impairment
     tests of goodwill and other indefinite-lived intangible assets.

     In August 2001, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 144, "Accounting for the Impairment
     or Disposal of Long-Lived Assets" ("SFAS 144"). This statement will be
     effective for fiscal years beginning after December 15, 2001. SFAS 144
     establishes a single accounting model, based upon the framework
     established in SFAS 121, "Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to be Disposed of ", for long-lived
     assets to be disposed of by sale and to address significant
     implementation issues. The implementation of SFAS 144 is not expected to
     have any impact on the Company's consolidated results of operations,
     financial position and cash flow.

     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 6).

                                       27
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              ------------------

3.   PROPERTY AND EQUIPMENT
     ----------------------

     Property and equipment, net at December 31, 2001 and 2000 consisted of the
     following:

                                                 2001                   2000
                                             -----------            -----------
     Computer equipment                       $  843,628             $  761,116
     Acquired computer software                  560,431                557,630
     Vehicles                                     58,109                 63,109
     Laboratory and field equipment            2,820,748              2,783,805
     Equipment and vehicles under
        capital leases                           598,975                598,975
     Furniture and office equipment              688,315                675,228
     Leasehold improvements                      608,972                599,538
     Construction in progress                     67,573                  4,850
                                             -----------            -----------
                                               6,246,751              6,044,251
     Less: Accumulated depreciation and
        amortization                           5,485,376              5,086,916
                                             -----------            -----------
                                              $  761,375             $  957,335
                                             ===========            ===========

     Accumulated amortization on equipment under capital leases amounted to
     $598,975 at December 31, 2001 and 2000. Depreciation expense amounted to
     $424,876, $520,124, and $548,786 for the years ended December 31, 2001,
     2000 and 1999, respectively. Amortization expense on equipment under
     capital leases and leasehold improvements amounted to $13,037, $15,902,
     and $22,698 for the years ended December 31, 2001, 2000 and 1999,
     respectively. No interest has been capitalized in 2001, 2000 or 1999.

4.   INTANGIBLE ASSETS
     -----------------

     Intangible assets, net at December 31, 2001 and 2000 consisted of the
     following:

                                                 2001                  2000
                                            ------------           ------------
     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            1,266,366              1,118,170
                                            ------------           ------------
                                             $   619,945            $   768,141
                                            ============           ============

     Amortization expense for intangible assets amounted to $148,196,
     $189,575, and $225,308 for the years ended December 31, 2001, 2000 and
     1999, respectively.

                                       28
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              ------------------

5.   ACCRUED EXPENSES AND OTHER LIABILITIES
     --------------------------------------

     Accrued expenses and other liabilities at December 31, 2001 and 2000
     consisted of the following:

                                                  2001                 2000
                                              ------------         ------------
     Salaries, benefits and payroll taxes      $   694,070          $   607,006
     Taxes                                         272,189              245,992
     Joint venture distribution                      2,996              103,938
     Professional fees                              78,300               92,063
     Other                                          17,848               15,654
                                              ------------         ------------
                                               $ 1,065,403          $ 1,064,653
                                              ============         ============

6.   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 years ended December 31, 2001 and 2000 was
     a decrease of $878,229 and an increase of $2,180,225, respectively.

     Temporary differences and carryforwards which give rise to deferred tax
     assets and liabilities at December 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                            2001                    2000
                                         Deferred Tax            Deferred Tax
                                      Assets (Liabilities)    Assets (Liabilities)
                                    --------------------      --------------------
     <S>                            <C>                       <C>
     Accrued liabilities               $  1,148,970                $  1,210,328
     Contract reserve                        49,474                      54,910
     Depreciation                           135,767                     122,133
     Amortization                           139,396                     127,198
     Bad debts                              192,293                     270,590
     Net operating loss - federal         9,573,242                   9,352,828
     State taxes                          2,472,281                   3,451,665
     Tax credits                            297,187                     297,187
                                       -------------               ------------
        Total                            14,008,610                  14,886,839
     Valuation allowance - federal      (11,536,329)                (11,435,174)
     Valuation allowance - state         (2,472,281)                 (3,451,665)
                                       -------------               -------------
     Total net deferred taxes          $          0                $          0
                                       =============               =============
</TABLE>

     As of December 31, 2001, the Company had a net operating loss carryforward
     of approximately $28,000,000 for Federal income tax purposes which is
     available to offset future taxable income, if any, between the years
     2002 and 2021. 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.

     In 2001, under a program in place in the State of New Jersey, the Company
     sold a portion of its available New Jersey net operating loss tax
     benefits related to losses incurred in prior years. The net amount
     received by the Company was $480,415 and is presented as an income tax
     benefit on the statement of operations for the period ended December 31,
     2001.

                                       29
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              ------------------

7.   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
     cumulative deferred fees of $141,000 for 117,069 shares of common stock
     at December 31, 2001, $114,000 for 75,982 shares of common stock at
     December 31, 2000 and $56,000 for 42,083 shares of common stock at
     December 31, 1999. The Company issued 33,172 and 5,137 shares of common
     stock to former non-employee directors from their stock accounts in 2001
     and 2000, respectively.

8.   OPTIONS AND WARRANTS
     --------------------

     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
     Compensation 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, 2001, there were 225,250 additional
     options available for grant under the 2000 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, 2001, there were 16,362 additional options available for
     grant under the 1993 Plan.

     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, 2001, there were no additional options available
     for grant under the 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.

     Following is a summary of the stock option transactions for 1999, 2000
     and 2001:

<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, 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
                                           -----------
     Granted                                 123,670         $ 1.13                               $ 0.86
     Forfeited/Expired                       (32,542)        $ 5.12
     Exercised                                     -              -
                                           -----------
     Balance December 31, 2001               597,089         $ 3.39        $ 0.94 - $35.28
                                           -----------
     Exercisable at December 31, 1999        105,572         $ 8.79
     Exercisable at December 31, 2000        162,918         $ 6.95
     Exercisable at December 31, 2001        244,017         $ 5.24
</TABLE>

                                       31
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              ------------------

     The following table summarizes the information about stock options
     outstanding at December 31, 2001:

<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              2001         Life (Years)          Price           2001               Price
     ---------------------------------------------------------------------------------------------------------
     <S>                          <C>               <C>             <C>              <C>               <C>
     $  0.94 to $  1.63           278,270           8.36            $  1.35           42,050           $  1.46
     $  2.13 to $  4.84           199,867           7.04            $  2.42          116,848           $  2.42
     $  6.54 to $ 14.28            92,364           6.09            $  7.05           59,031           $  7.33
     $ 16.92 to $ 23.28            23,088           4.37            $ 17.33           22,588           $ 17.34
     $ 30.00 to $ 35.28             3,500           0.54            $ 31.51            3,500           $ 31.51
     ---------------------------------------------------------------------------------------------------------
     $  0.94 to $ 35.28           597,089           7.37            $  3.39          244,017           $  5.24
     ---------------------------------------------------------------------------------------------------------
</TABLE>

     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>
                                                2001          2000          1999
                                             -----------  -----------   ------------
     <S>                                     <C>          <C>           <C>
     Pro forma net loss                      ($ 839,164)  ($2,314,129)  ($1,630,168)
     Pro forma basic and diluted net loss
        per share                              ($0.21)       ($0.58)       ($0.41)
</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  $353,525, $262,968, and $205,769
     for 2001, 2000 and 1999, 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:

                                   2001              2000                1999
                             ----------------   ----------------   ------------
     Dividend yield                 0                  0                  0
     Expected volatility         83.8               64.3               63.8
     Risk free interest rate  4.89%-5.29%        5.18%-6.63%        4.71%-5.88%
     Expected option lives    6.5 years           6.5 years          6.5 years

                                       32
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              ------------------

     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 expired in May 2001.

9.   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 10.

10.  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 2006. 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, 2001.

     Future minimum payments under noncancelable operating leases consisted of
     the following at December 31, 2001:

                                          Operating
                                            Leases
                                         ----------
     2002                                $1,097,163
     2003                                   946,178
     2004                                   515,125
     2005                                       801
     2006                                         -
     Thereafter                                   -
                                         ----------
     Total minimum lease payments        $2,559,267
                                         ==========
     Rent expense for operating leases was $1,148,439, $1,224,649, and
     $1,408,315 for the years ended December 31, 2001, 2000 and 1999,
     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

                                       33
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              ------------------

     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, 2001, the Company had no
     obligations under the royalty agreement.

     LITIGATION

     The Company was 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. The matter was resolved in the Company's favor in May
     2001.

     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.

11.  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 $126,035, $126,609, and $142,247 for the years ended
     December 31, 2001, 2000 and 1999, respectively. There was no contribution
     expense related to the profit sharing plan. The Company does not maintain
     other pension or post retirement benefit plans.

12.  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, 2001 and
     2000, substantially all of the Company's cash and cash equivalents were
     held in these money market accounts.

                                       34
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                ----------------

     The Company earns revenues under contracts for various federal
     government agencies. Revenue recognized under these contracts for the
     years ended December 31, 2001, 2000 and 1999 was $2,010,494, $1,886,415,
     and $2,673,745, respectively. In 2001, a substantial amount are from
     commercial operations contracts. Historically, these revenues are
     primarily from research and development contracts.

13.  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.

                                       35
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                ---------------

     Information about reported segments for the years ended December 31,
     2001, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                    Research and
                                    Commercial      Development
                                    Operations        Services            Other         Total
                                    ----------      ------------       ----------   ------------
     2001
     -----
     <S>                            <C>             <C>              <C>            <C>
     Revenues                       $ 19,071,464    $ 1,365,641                     $ 20,437,105
     Segment profit (loss)             4,057,887       (323,669)     ($4,219,857)       (485,639)
     Depreciation and amortization       332,783         57,210           47,920         437,913

     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
</TABLE>

     The following table presents the details of "Other" segment for the years
     ended December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>

                                                     2001             2000              1999
                                                 -------------     -------------   -------------
     <S>                                          <C>              <C>              <C>
     Marketing, general and
      administrative expenses                     ($4,784,344)     ($4,811,245)     ($4,645,633)
     Interest income                                   94,727          205,538          148,531
     Interest expense                                 (10,655)         (12,369)         (13,766)
     Income tax benefit                               480,415                -                -
     Equity in (loss) income of joint-venture               -                -             (393)
     Other, net                                             -            1,966           (7,604)
                                                 -------------     -------------    -------------
                                                  ($4,219,857)     ($4,616,110)     ($4,518,865)
                                                 =============     =============    =============
</TABLE>

     No customer accounted for more than 10% of the Company's revenues in
     2001, 2000 or 1999.

     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.

                                       36
<PAGE>

                                ENVIROGEN, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               ----------------

14.  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 for the year ended December 31, 1999.

15.  SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
     -------------------------------------------------

     Maintenance and repairs expense for the years ended December 31, 2001,
     2000 and 1999 was $153,742, $139,953, and $109,600, respectively.

16.  QUARTERLY FINANCIAL  DATA (Unaudited)
     -------------------------------------

     The following is a summary of the quarterly results of operations for the
     years ended December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                    First            Second          Third          Fourth
                                    Quarter          Quarter         Quarter        Quarter
                                   --------          -------         -------        -------
     2001
     ----
     <S>                         <C>             <C>              <C>             <C>
     Revenues                    $ 4,822,796     $ 5,051,224      $ 5,381,047     $ 5,182,038
     Net loss                       (166,060)       (117,726)        (152,334)        (49,519)
     Basic and diluted net
       loss per share                 ($0.04)         ($0.03)          ($0.04)         ($0.01)

     2000
     ----
     Revenues                    $ 4,431,445     $ 5,385,078      $ 4,857,528     $ 5,665,350
     Net loss                       (541,896)       (464,547)        (769,830)       (274,888)
     Basic and diluted net
       loss per share                 ($0.14)         ($0.12)          ($0.19)         ($0.07)
</TABLE>

                                       37
<PAGE>

                                                                     Schedule II

                                Envirogen, Inc.
                        Valuation and Qualifying Accounts
                  Years Ended December 31, 2001, 2000 and 1999

<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, 2001:

  Allowance for doubtful accounts            $   795,852     $ (117,256)    $113,029  (a)    $   565,567
  Tax valuation allowance                     14,886,839       (878,229)                      14,008,610
  Reserve for claim adjustments
    and warranties                             3,210,622        279,985      427,357  (b)      3,063,250

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
--------------------------------------------------------------------------------------------------------
</TABLE>

(a)  Uncollectible accounts written-off to the allowance account
(b)  Actual write-offs and cash payments

                                       38
<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, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, 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, 2002
                                       39
<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 23, 2002, 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.

                                       40
<PAGE>

                                    PART IV

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

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

1.   Financial Statements:
     ---------------------

     Consolidated Balance Sheets as of December 31, 2001 and 2000..........20

     Consolidated Statements of Operations for the years ended
     December 31, 2001, 2000 and 1999......................................21

     Consolidated Statements of Changes in Stockholders' Equity
     for the years ended December 31, 2001, 2000 and 1999..................22

     Consolidated Statements of Cash Flows for the years ended
     December 31, 2001, 2000 and 1999......................................23

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

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

     II.  Valuation and Qualifying Accounts................................38

     Report of Independent Auditors........................................39

     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:
     ---------

     Exhibit No.                   Description                         Location
     ----------                    -----------                         --------

     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))

                                       41
<PAGE>

     Exhibit No.                   Description                         Location
     ----------                    -----------                         --------

     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/*/............................(9)(Exh. 10.7)

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

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

     24       Powers of Attorney..............................(1)

                                       42
<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.
     (9)      Incorporated by reference to the indicated exhibit to the
              Company's Report on Form 10-K for the year ended December
              31, 2000.

     /*/      Indicates a management contract or compensatory plan or
              arrangement.

     (b)      Reports on Form 8-K

              None

                                       43
<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 22, 2002                                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 22nd day of March, 2002.

     Signature                              Title
     ---------                              ------

  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 W. Dunlap/*/      Director
-----------------------
  Robert W. Dunlap

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

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

  William C. Smith/*/      Director
-----------------------
  William C. Smith

/*/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

                                       44
<PAGE>

                                  EXHIBIT INDEX

     Exhibit No.                          Description
     -----------                          -----------

     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/*/, (9) (Exh. 10.7)

     21       Subsidiaries of the Company, (1)

     23.1     Consent of Ernst & Young LLP, (1)

     24       Powers of Attorney, (1)

                                       45
<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.
     (9)      Incorporated by reference to the indicated exhibit to the
              Company's Report on Form 10-K for the year ended December
              31, 2000.
     /*/      Indicates a management contract or compensatory plan or
              arrangement.

                                      46