<PAGE>   1
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                                WASHINGTON, D.C.
 
                            ------------------------
 
                                  FORM 10-KSB
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
 
        FOR THE TRANSITION PERIOD FROM                TO
                        COMMISSION FILE NUMBER 000-23855
 
                        U.S. PLASTIC LUMBER CORPORATION
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
                            ------------------------
 
<TABLE>
<S>                                            <C>
                    NEVADA                                       87-0404343
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>
 
                            ------------------------
 
          2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
                                 (561) 394-3511
   (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PLACE OF
                                   BUSINESS)
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:  NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
 
<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                    NAME OF EXCHANGE ON WHICH REGISTERED
             -------------------                    ------------------------------------
<S>                                            <C>
        COMMON STOCK, PAR VALUE $.0001                              N/A
</TABLE>
 
     Check here whether the issuer:  (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.  Yes [X]  No [ ]
 
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.  [ ]
 
     The issuer's revenues for its most recent fiscal year was $45,704,940.
 
     The aggregate market value of the voting common equity held by
non-affiliates of the registrant on February 26, 1999 based on the average bid
and asked price on such date, being $8.00 per share, was $110,467,568. The
aggregate market value of the common stock underlying the preferred stock held
by non-affiliates of the registrant on February 26, 1999 was $16,177,728.
 
     The number of shares outstanding of the registrant's common stock as of
February 26, 1999 is 20,299,535.
 
                      DOCUMENTS INCORPORATED BY REFERENCE:
 
     PART III: Portions of the Registrant's definitive Proxy Statement relating
to its 1999 Annual Meeting of Stockholders which will be filed with the
Commission within 120 days after the end of the registrant's fiscal year.
Certain exhibits are incorporated by reference to the Registrants' Registration
Statements on Form SB-2 and Amendments thereto filed with the Securities and
Exchange Commission on February 11, 1998 and July 22, 1998.
 
     Transitional Small Business Disclosure Format (check one):  Yes [ ]  No [X]
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
GENERAL
 
     U.S. Plastic Lumber Corporation (the "Company"), a Nevada Corporation, is a
manufacturer and marketer of recycled plastic lumber products and a provider of
environmental recycling services. It was incorporated in June 1992. In March
1996, when the Company acquired Earth Care Global Holdings, Inc. ("Earth Care")
as a wholly owned subsidiary, through the acquisition of all the issued and
outstanding stock of Earth Care in a reverse merger stock for stock exchange
(the "Acquisition") it changed its name from Educational Storybooks
International, Inc. to U.S. Plastic Lumber Corporation.
 
     The Company has two distinct business lines. One operation, U.S. Plastic
Lumber Ltd., manufactures structural and non-structural plastic lumber and
fabricates a variety of accessory products, such as park and site amenities,
made from 100% recycled high density polyetheylene. As a result of the recent
acquisition of the Eaglebrook companies, the Company now also manufactures a
composite product made from plastic and wood fiber in addition to plastic sheet
products for the packaging industry. The second operation, Clean Earth, Inc.,
provides environmental recycling services including fixed based plants providing
thermal desorption and bioremediation, environmental construction services,
upland disposal of dredge materials, beneficial re-use of industrial wastes, and
on-site recycling services.
 
     Within the plastic lumber division, the Company owns and operates seven
manufacturing, processing and fabrication facilities in the U.S. The primary
product produced in five of these plants is plastic lumber profiles made from
recycled plastic waste. Recycled plastic lumber is manufactured in a variety of
colors, profiles and shapes including standard lumber dimensions and many custom
engineered profiles and shapes. The sixth plant is a fabrication facility which
manufactures value-added products made from the Company's recycled plastic
lumber. The seventh plant is a recycled plastic processing facility which
includes washing, grinding and pelletizing of post consumer and post industrial
plastic waste. The Eaglebrook operation also provides the Company with a plastic
processing facility. Some of this material is used to supply the raw material
needs of the Company's lumber manufacturing facilities. Plastic lumber's
principal intended use is as an environmentally friendly and non-toxic
alternative to pressure treated lumber and rain forest hardwoods, which is
suitable for and provides superior performance in most outdoor applications.
 
     Within the environmental operations, the Company operates three facilities.
The first plant treats and recycles soil that has been contaminated with
petroleum hydrocarbons and similar compounds through a process known as thermal
desorption. The Company's second plant treats and recycles soil through a
process which is bio-organic in nature. Finally, the Company has a plant that
recycles oils, solvents and heavy metal contaminated waste.
 
     U.S. Plastic Lumber Ltd. is comprised of two wholly owned subsidiaries:
Eaglebrook Plastics, Inc. and Eaglebrook Products, Inc.
 
     The Company's plastic lumber operation manufactures plastic lumber from
recycled waste plastic, and in some instances plastic composite lumber with
additives including fiberglass, to produce a high quality, long lasting
alternative to pressure treated lumber that provides superior performance in
outdoor uses and is suitable for most nonstructural and structural applications
and other products with wood fiber as an additive. The Company has a license to
use a patented technology and also owns two patents to manufacture structural
plastic lumber. By producing a high quality recycled plastic lumber product, the
Company conserves natural resources by reducing the need for lumber products
made from wood and at the same time reduces the amount of plastic waste going
into landfills while providing a longer lasting, useful product. The Company's
plastic lumber products are intended as an excellent replacement for pressure
treated lumber, which is injected with toxic chemicals to retard decay and
insect infestation. Plastic lumber is not subject to decay or insect infestation
and so will outlast wood, especially in applications exposed to moisture.
Recycled plastic lumber is environmentally friendly in that it eliminates
potential pollution from leaching of such toxic chemicals into the environment.
 
                                        1
<PAGE>   3
 
     Clean Earth, Inc. operates plants in New Castle, Delaware, Carteret, New
Jersey and Kearny, New Jersey. It also owns an environmental construction
company: Integrated Technical Services, Inc. (ITS), in Winslow, New Jersey.
Clean Earth, Inc. also owns Consolidated Technologies, Inc. (CTI) which provides
beneficial re-use of dredge materials and is an important factor to the
Company's plans to bid on major dredge disposal contracts.
 
     The Company's Clean Earth operation, which offers environmental recycling
services, operates several subsidiaries. Clean Earth of New Castle, Inc. (CENC)
operates a low temperature thermal desorbtion treatment plant that ensures that
contaminated soil is treated in accordance with local, state and federal
regulations. This thermal treatment process removes petroleum hydrocarbons from
the soil and has been recognized by federal and state agencies (including
Delaware, New Jersey, New York, Maryland and Pennsylvania) as a cost effective
technology. Contaminated solids, soils and construction debris are recycled and
reused in construction and industrial applications. The Company's recycling
center in New Castle, Delaware is in a prime location for servicing the
Northeast and Mid-Atlantic regions, where extensive remodeling and rebuilding of
infrastructure and abandoned industrial property is ongoing. This division also
operates Carteret Biocycle Corp., (CBC) a bioremediation plant located in
Carteret, NJ, which also removes petroleum hydrocarbons from soil. The plant is
similar to the CENC facility except that its process involves bio-organic
destruction of petroleum hydrocarbons whereas the CENC facility uses low
temperature thermal desorbtion to remove petroleum hydrocarbons from the soil.
The Clean Earth division also has a subsidiary, S & W Waste, Inc. which is
involved in the recycling and beneficial re-use of industrial wastes. The plant
is a permitted RCRA facility. The remaining environmental recycling
subsidiaries, Integrated Technical Services, Inc. and Consolidated Technologies,
Inc., are involved in beneficial re-use of waste products, upland re-use of
dredge materials in strip mines and brownsfield properties, environmental
construction services, and on-site recycling services.
 
  Forward Looking Statements
 
     When used in this Annual Report, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "projected",
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to economic conditions, changes in laws or
regulations, the Company's history of operating losses, demand for products and
services of the Company, access to capital, dilution, expertise, Year 2000
risks, newly developing technologies, loss of permits, conflicts of interest and
related party transactions, regulatory matters, protection of technology,
environmental concerns, ability to implement Company's growth strategy,
seasonality, operating hazards and insurance coverage, lack of industry
standards, raw material commodity pricing, the ability to receive bid awards,
the effects of competition and the ability of the Company to obtain additional
financing. Such factors, which are discussed in "Risk Factors," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to consolidated financial statements, could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with undue reliance on any such forward-looking statements, which speak only as
of the date made. See "Risk Factors", "Business" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
 
  Subsequent Events
 
     On January 28, 1999, the Company acquired its largest competitor in the
recycled plastic lumber industry, Eaglebrook Plastics, Inc. ("Plastics") and
Eaglebrook Products, Inc. ("Products") with cash, a convertible debenture and
the issuance 1,668,025 shares of the common stock of the Company. Plastics
operates a recycled plastic processing plant including the washing, grinding and
pelletizing of post-consumer and post-industrial plastic waste and providing the
raw material for many of the manufacturing operations of the Company. Products
is a manufacturer of recycled plastic lumber and composite plastic lumber
utilizing an automated continuous flow extrusion process with vacuum calibration
forming technology similar to that in the other manufacturing plants owned by
the Company.
 
     The special products and additional dimensional lumber capacity complement
the Company's existing products and provides the Company with a dominant
manufacturing capacity in the industry. This acquisition
                                        2
<PAGE>   4
 
is important to the Company due to a number of factors: (i) it provides the
Company with the status of being the largest manufacturing of recycled plastic
lumber in the industry; (ii) it provides the Company with a product line that
management of the Company believes will provide the Company with significant
inroads into the alternative wood market, aside from 100% recycled plastic
products; (iii) it provides significant vertical integration aspects relative to
plant consolidation, increased purchasing power and greater efficiency in
operations; (iv) it provides a top-notch management team to manage the entire
plastic lumber division of the Company; (v) it increases the distribution
network of the Company; and the Company believes it will generate strong cash
flow and operating profits. The Eaglebrook companies had gross sales in 1998 of
$22,145,000 before $1,706,000 of intercompany eliminations with operating income
of $1,325,000. See "Recent Sales of Unregistered Securities for the Last Three
Years" for additional information.
 
     On January 7, 1999, the Company executed a contract to acquire the all of
the stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates
a soil remediation facility in Philadelphia, PA which is very similar to the
Company's soil remediation facility in New Castle, DE and has been a competitor
of the Company. AWI provides environmental services which are very similar to
that provided by the Company environmental services division. The Company signed
a Management Contract on January 7, 1999 taking over all responsibility for day
to day management and financial control of SRP and AWI as of that date.
Unaudited sales of SRP and AWI, prior to intercompany eliminations, for year
ended December 31, 1998 were $14,922,000 with unaudited net income of
$2,025,000. The Company finalized its transaction with Brass on or about March
18, 1999. The Company purchased Brass for cash plus 1,000,000 shares of the
Company's common stock plus 1,500,000 warrants to purchase the Company's common
stock.
 
  History and Development of the Company
 
     In March 1996, the Company entered into an Agreement and Plan of
Reorganization with Earth Care Global Holdings, Inc. ("Earth Care"), a
manufacturer and marketer of recycled plastic products. Pursuant to the
Agreement, the Company effected a reverse split of its common stock on a 1 for
16 basis, and then issued 4,196,316 post split shares of its authorized but
previously unissued common stock to acquire all the issued and outstanding stock
of Earth Care in a stock for stock exchange (the "Acquisition") which was
intended to be a tax free reorganization under Section 368(a) of the Internal
Revenue Code. See "Certain Transactions" for additional information.
 
     In April 1996, the Company acquired all of the assets of DuraTech
Industries, a manufacturer of recycled plastic lumber, recycled plastic shapes
and value added products located in Lake Odessa, Michigan since 1986. This
acquisition doubled the Company's recycled plastic lumber sales at that time.
 
     In December 1996, the Company completed a reverse triangular merger with
Clean Earth, Inc.. ("Clean Earth"). Clean Earth has been in operation since
1991, and has treated over 600,000 tons of soil and construction debris that was
contaminated with petroleum hydrocarbon wastes, such as fuels, lubricating oils,
tars and gasoline. Clean Earth, Inc. now operates all of environmental
subsidiaries of the Company. See "Certain Transactions" for additional
information.
 
     In January 1997, the Company acquired Recycled Plastics Industries, Inc.
(RPI), located in Green Bay, Wisconsin. RPI, formed in 1989, is a manufacturer
of specialty profile recycled plastic lumber products. RPI's production process
utilizes an automated continuous flow extrusion process with vacuum calibration
forming technology.
 
     In February 1997, the Company acquired Advanced Remediation and Disposal
Technologies, Inc. (ARDT). ARDT is engaged in environmental construction and
clean up of contaminated industrial sites primarily involving water and soils.
On December 31, 1997, ARDT was merged into another wholly-owned subsidiary of
the Company, Integrated Technical Services, Inc., due to the similarity in
services and proximity of operations to one another.
 
     In March 1997, the Company acquired Environmental Specialty Plastics, Inc.
(ESP), a marketing, fabrication and distribution company of recycled plastic
products in Guasti, California. ESP also manufactures
 
                                        3
<PAGE>   5
 
custom signs out of recycled plastic lumber utilizing in house routing equipment
and is able to personalize site amenities, such as benches, ash urns and picnic
tables, engraving logos and designs into recycled plastic end products. This
acquisition provides the Company with a market presence on the west coast.
 
     In March 1997, the Company acquired Integrated Technical Services, Inc.
(ITS) located in Winslow, New Jersey. ITS is engaged in environmental
construction and clean up of contaminated industrial sites primarily involving
water and soils similar to the operations of ARDT.
 
     In June 1997, the Company acquired EnviroPlastics Corporation ("EPC"), in
Auburn, Massachusetts, which operates a recycled plastic processing plant
including the washing, grinding and pelletizing of post-consumer and
post-industrial plastic waste. A significant portion of the sales of EPC for the
year ended December 31, 1998 were from one major customer, Dupont, with which
EPC has an exclusive contract to provide pelletized, post-consumer feedstock
product.
 
     In June 1997, the Company formed Carteret Biocycle Corp. ("CBC") as a
wholly owned subsidiary of Clean Earth, Inc. CBC has an 80,000 square foot soil
recycling facility, on a 5-acre leased parcel in Carteret, New Jersey. This
facility recycles contaminated soils utilizing a bio-organic technology of
removing contaminants. The plant has the capacity to process approximately
320,000 tons of contaminated soil annually. This is an estimate of the plant's
potential capacity and there can be no assurances that these results may be
achieved or that the plant will operate at full capacity year round. CBC has
entered into a 30 year ground lease with two additional ten year options at a
rental cost of $210,000 per year for the initial 30 year term. CBC
simultaneously entered into a License and Operating Agreement with S D & G
Aggregates, Inc. which holds a license to operate a recycling operation on the
leased premises. CBC also has a right of first refusal to lease an adjacent 17
acre parcel for potential dredge transfer operations in conjunction with CTI's
dredging operations.
 
     In July 1997, the Company formed a joint venture partnership with
Interstate Industrial Corp. of Clifton, New Jersey to bid on dredging and upland
disposal projects. The joint venture company does business as Interstate/U.S.
Plastic Lumber Corp. joint venture.
 
     In November 1997, the Company acquired Waste Concepts, Inc. ("WCI") as a
wholly owned subsidiary of Clean Earth, Inc. WCI is primarily involved in
removing and recycling large volumes of waste products for beneficial reuse as
well as providing construction and permitting services for reuse and disposal of
dredge materials. The Company plans to expand its operations to include large
volume handling of dredge material and incinerator ash.
 
     In January 1998, the Company acquired Green Horizon Environmental, Inc.
("GHI") as a wholly owned subsidiary of Waste Concepts, Inc. GHI is primarily
involved in removing and recycling large volumes of incinerator ash, paper pulp
and sewer sludges for beneficial reuse in strip mines. GHI has also been
actively involved with the beneficial re-use of dredge materials and incinerator
ash and is a critical component of the Company's plans to expand its dredging
operations. It operates in the same market area as Waste Concepts, Inc. See
"Recent Sales of Unregistered Securities for the Last Three Years" for
additional information.
 
     In February and June 1998, the Company acquired an additional interest in
Consolidated Technologies, Inc. ("CTI") having previously been a 25% minority
stockholder as of November, 1997. The Company now owns 100% interest in CTI. CTI
was a start-up company at the time of the initial investment by the Company, but
it has the only permit with the Commonwealth of Pennsylvania to allow it to
dispose of dredge materials mixed with municipal ash to create a grout like
substance used in the reclamation of strip mines. CTI's permits will enable the
Company to bid on dredge projects within reasonable transportation distance from
the strip mine locations in Pennsylvania. See "Certain Transactions" and "Recent
Sales of Unregistered Securities for the Last Three Years" for additional
information.
 
     In March 1998, the Company acquired substantially all of the assets of
Chesapeake Recycled Lumber, Inc. The Company formed Chesapeake Plastic Lumber,
Inc. ("CPL") as a wholly-owned subsidiary of U.S. Plastic Lumber, Ltd. to own
and operate these assets. The assets primarily consist of plastic lumber
manufacturing equipment and an existing customer base. CPL provides the Company
with additional plant capacity and a regional manufacturing plant located in the
Mid-Atlantic market. See "Recent Sales of Unregistered Securities for the Last
Three Years" for additional information.
                                        4
<PAGE>   6
 
     In May 1998, the Company acquired Cycle-Masters, Inc. ("CMI") which owns
and operates a plastic lumber manufacturing facility in Sweetser, Indiana. CMI
provides the Company with additional manufacturing capacity and institutional
sales for our plastic lumber division. See "Recent Sales of Unregistered
Securities for the Last Three Years" for additional information.
 
     In June 1998, the Company acquired GeoCore, Inc. ("GCI") which operates an
environmental services company in New Jersey. GCI provides the Company with
additional remediation services to offer its customer base, including tank
cleaning and remediation services. See "Recent Sales of Unregistered Securities
for the Last Three Years" for additional information.
 
     In June 1998, the Company acquired substantially all of the assets of
Trimax of Long Island, Inc. and Polymerix, Inc. Trimax was a manufacturer of
structural plastic lumber made from recycled plastic and operated in Ronkokoma,
Long Island. Polymerix owned two patents relative to the structural lumber
manufacturing process. These assets were purchased by the Company with the
approval of the U.S. Bankruptcy Court for the Eastern District of New York as
Trimax and Polymerix had filed a bankruptcy petition in January 1998. See
"Recent Sales of Unregistered Securities for the Last Three Years" for
additional information.
 
     In December 1998, the Company acquired S & W Waste, Inc., a RCRA facility
that recycles and provides beneficial re-use of industrial waste and disposes of
contaminated materials. See "Recent Sales of Unregistered Securities for the
Last Three Years" for additional information.
 
     The Company implemented a corporate restructuring as of December 31, 1998
in which it merged many of the subsidiaries together. Recycled Plastic
Industries, Environmental Specialty Products, EnviroPlastics, Earth Care of the
Midwest, Earth Care of Tennessee, Chesapeake Plastic Lumber, and CycleMasters
were merged into U.S. Plastic Lumber Ltd. Within the environmental division,
Green Horizon Environmental was merged into Waste Concepts Inc, then Waste
Concepts Inc and GeoCore were merged into Integrated Technical Services.
Advanced Remediation & Disposal had previously been merged into Integrated
Technical Services.
 
  Corporate Structure
 
     The Company is a holding company for the Company's wholly owned
subsidiaries: (i) U.S. Plastic Lumber Ltd., a Delaware corporation, which has
been formed to act as a holding company for all operating recycled plastic
lumber subsidiaries, (ii) Clean Earth, Inc., a Delaware corporation, is the
holding company which owns all operating environmental recycling subsidiaries,
and (iii) U.S. Plastic Lumber Finance Corporation, a Delaware holding company
established to provide financing to the subsidiaries of the Company. The
following is a list of the Company's indirect subsidiaries:
 
        U.S. Plastic Lumber Ltd. Subsidiaries:
          Eaglebrook Plastics, Inc., an Illinois corporation
          Eaglebrook Products, Inc., an Illinois corporation
 
        Clean Earth Inc. Subsidiaries:
          Clean Earth of New Castle, Inc., a Delaware corporation
         Integrated Technical Services, Inc. a Delaware corporation
         Carteret Biocycle Corp., a Delaware corporation
         Consolidated Technologies, Inc., a Pennsylvania corporation
         S & W Waste, Inc., a New Jersey corporation
         Soil Remediation of Philadelphia, Inc., a Delaware corporation
         Allied Waste, Inc., a Delaware corporation
 
        U.S. Plastic Lumber Finance Corporation Subsidiaries:
          U.S. Plastic Lumber IP Corporation, a Delaware corporation
 
                                        5
<PAGE>   7
 
  Recycled Plastic Lumber Operation
 
     Products
 
     During the past several years, the Company's recycled plastic lumber
division has positioned itself to be a leading manufacturer of recycled plastic
lumber, a newly emerging industry. Recycled plastic lumber is manufactured in a
variety of colors, profiles and shapes including standard lumber dimensions and
a variety of custom engineered profiles and shapes.
 
     The Company's recycled plastic lumber products are primarily made from 100%
recycled, post-consumer and post-industrial plastics and are used for numerous
municipal, commercial and residential applications. With the acquisition of the
Eaglebrook companies, the Company now also manufactures a composite lumber
product consisting of plastic and wood fiber. This non-toxic material is an
environmentally friendly alternative to pressure treated lumber and rare woods
and provides superior performance for most nonstructural, outdoor applications
where traditional wood is subject to moisture damage and rotting. The Company
also produces structural plastic lumber manufactured from a patented process.
Recycled plastic lumber products offer these unique advantages:
 
     - Environmentally friendly and non-toxic
 
     - Virtually maintenance free
 
     - Saves trees and reduces use of exotic rain forest hardwoods
 
     - Can be worked with conventional tools
 
     - Aesthetically pleasing wood-like textured surface
 
     - Splinter proof -- never rots
 
     - Not affected by termites, ants or other wood borers
 
     - No splitting, cracking or chipping
 
     - Holds nails and screws 40% better than wood
 
     - No toxic leaching into soil or groundwater
 
     - Most graffiti easily washes off
 
     Products built with the Company's recycled plastic lumber have the
appearance of freshly stained or painted wood but the longevity and
maintenance-free qualities of plastic. Recycled plastic products are an ideal
replacement for wood, metal and concrete in numerous applications, including
most non-structural exterior functions. Some of the potential applications are:
 
     - Decking, including supporting structures and railings, for residential
       and commercial projects
 
     - Commercial, municipal and residential applications such as park benches,
       picnic tables, trash receptacles, stadium seats, planters, and endless
       other uses
 
     - Trailer, farm equipment and railroad box car flooring
 
     - Industrial applications such as pallets, walkways in chemical plants,
       catwalks on factory roofs, coil cradles and other specialized
       applications
 
     - Sanitary animal pen flooring
 
     - Railroad ties
 
     - Sea pilings and marine bulkheads
 
                                        6
<PAGE>   8
 
     Manufacturing
 
     The Trenton, Tennessee manufacturing facility currently has three closed
mold forming extruders and one continuous flow extruder. The focus of the
production in Tennessee is large dimensional plastic lumber, such as structural
lumber, engineered products such as marine piling cores, retaining wall timbers
and prototype products including the railroad crosstie, highway guardrail posts,
and highway spacer blocks. This facility also produces plastic in assorted
specialty shapes such as bench ends and table legs produced in a mold rather
than an extruder.
 
     The Green Bay, Wisconsin manufacturing facility (approximately 36,000 sq.
ft.) operates seven extruders that utilize a vacuum calibration continuous flow
forming line. This process allows for the manufacture of many special profiles,
in any length, that are not able to be produced with conventional roll forming
or closed mold systems. The facility will also manufacture the Company's
"Carefree Decking Systems"(R), a specialty product used for decks and rail
systems in commercial and residential applications.
 
     The Chicago, Illinois manufacturing facility (approximately 260,000 sq.
ft.) operates twelve extruders that utilize a vacuum calibration continuous flow
forming line. This process allows for the manufacture of many special profiles,
in any length, that are not able to be produced with conventional roll forming
or closed mold systems. This facility also provides processing of post consumer
and post industrial plastics utilized by the Company as raw material. This
facility is the headquarters of all of the plastic lumber operations of the
Company. One of the specialty products developed at this facility is the "Smart
Deck"(R), a composite product, consisting of plastic and wood, used for decks in
commercial and residential applications. The Smart Deck(R) product line was
developed to compete directly with several manufacturers of composite deck
product throughout the country. An addition, a 100% plastic sheet product
DuraPack(R) is manufactured at this facility to service the packaging industry.
 
     The Sweetser, Indiana manufacturing facility currently has three extruders
utilizing continuous flow production. It produces lumber product primarily for
industrial and commercial customers. The product in this facility is often
customized to meet the specifications of an OEM manufacturer.
 
     The Denton, Maryland manufacturing facility currently has three extruders
utilizing continuous flow production. It produces lumber product similar to that
of the Green Bay facility. The plant contains 80,000 square feet providing the
Company with critical space suitable for production capacity expansion in the
event such is needed.
 
     During 1998, the fabrication facilities in Mulliken, Michigan and Guasti,
CA housed the assembly process that fabricates most of the value added products
sold by the Company such as picnic tables, park benches and trash receptacles. A
regional sales office is also maintained at these locations. The Michigan
facility will be closed during 1999 due to its proximity to the Chicago facility
acquired by the Company in January, 1999, to streamline costs and increase
efficiency. The Chicago facility also provides fabrication of value added
products on behalf of the Company.
 
     The Company's manufacturing process involves proprietary technologies and
specialized manufacturing equipment that was custom built or modified to the
Company's specifications. The manufacturing process utilizes granulated and/or
densified recycled plastic, which in certain cases, contains additives
formulated for desired end use characteristics of the product. A key advantage
of the process is the ability to utilize plentiful, recycled plastic waste to
create a consistent material that can be extruded into a desired shape. While
the end product maintains many of the desirable properties of traditional wood
materials, it also has superior characteristics such as moisture resistance
which give it an advantage over wood for many applications.
 
     The primary product of the Company's manufacturing process is plastic
lumber in various sizes ranging from  3/8" x 1", to 10" diameter profiles in
various lengths. The Company also markets and sells various engineered or value
added products for specific applications, in which the plastic lumber is used to
make the finished product.
 
     The manufacturing process primarily uses 100% recycled plastic raw material
and consists of three stages. First, the recycled plastic materials received at
the plant are identified and categorized by resin type. These
 
                                        7
<PAGE>   9
 
materials are processed through a series of grinding, densifying and other
operations to a consistent particle size. The ground plastic resins are then
blended with other ingredients such as colorant and UV stabilizers to prepare
specific mixes for the products being produced by the plant. Second, the
plastics are heated, mixed and compounded into a thick molten composite which is
extruded through either closed mold, roll forming or vacuum calibration
finishing lines into specified shapes or profiles using equipment specifically
designed for processing recycled materials. Finally, the extruded products are
cooled in a downstream process, and the resulting profiles are inspected and cut
to specific lengths. The product is then ready to be shipped as plastic lumber
in sizes and shapes corresponding to standard lumber dimensions. The Company
utilizes only recycled polyethylenes and does not use plastics with PVC, toxic
chemicals, insecticide or paint residues. The Company does use other composite
material for manufacturing its structural lumber product line and its Smart
Deck(R) line of products. The Company's manufacturing process produces no
harmful environmental by-products or hazardous waste.
 
     Raw Materials Supply
 
     The Company obtains most of its mixed plastics feedstock through its own
operations or firms who obtain such materials from a large variety of recycling
facilities, including municipal recycling programs as well as plastics discarded
in various industrial and manufacturing processes. The Company is not dependent
on any one source to obtain its supplies. The Company believes the raw material
feedstock is currently purchased from sources that are dependable and adequate
for at least short term and medium term manufacturing requirements. Availability
of raw material has not been a problem for the Company. Generally, the Company
attempts to maintain raw materials inventory sufficient to supply its
manufacturing requirements for approximately two months, and management believes
that suitable alternative sources are available in the event of disruption. In
the past, the Company has not experienced any significant disruptions from a
lack of raw material availability or other supply problems. However, the cost of
recycled plastics has been subject to cyclical market fluctuations over the past
several years based on supply and demand. Therefore, no assurances can be given
that raw materials will always be available at commercially reasonable prices.
The Company is generally of the belief that if significant increases in demand
for recycled plastics of a lasting nature were to occur, the potential supply of
recycled plastics could easily be expanded to meet any lasting increase in
demand. The Company believes that both supply and demand will continue to
increase as public awareness of the need to recycle plastic waste increases.
However, any disruption of supply arrangements or significant lasting increases
in raw materials prices could have a material adverse effect on the Company's
operations.
 
     Research and Development
 
     Extensive testing of recycled plastic lumber has been performed for the
past several years at Rutgers University's Center for Plastics Recycling
Research, Louisiana State University and other research facilities. The Company
has been an active participant along with others in the research and development
process, and the Company has spent in excess of $1,000,000 developing new
products. Since its formation, the Company has also devoted significant efforts
on its own, testing and refining its manufacturing processes, molds and recipes
to improve its finished products.
 
     In May, 1996, after a long period of research and development with the
Company, Rutgers University was granted U.S. Patent Protection for its recycled
plastic composite railroad cross tie and its related manufacturing technology.
These patents are held by Rutgers University, with the Company being the
exclusive worldwide licensee for the sale of this and related products pursuant
to an agreement the Company has with Rutgers University.
 
     The Company is also the owner of two patents purchased in June 1998 with
the assets of Polymerix and Trimax providing the Company with the technology and
process to manufacture a structural plastic lumber product. The Company
continues to evaluate its patents to determine if improvements can be made
providing the Company with additional protection from its competitors.
 
     A group of plastic lumber manufacturers founded the Plastic Lumber Trade
Association (PLTA) to promote the benefits of plastic lumber and create proper
testing standards. PLTA holds committee meetings
 
                                        8
<PAGE>   10
 
three time a year in conjunction with the American Society of Testing &
Materials (ASTM). Complete ASTM standards are being established for plastic
lumber and preliminary test results are now available from the following
institutions:
 
     - Rutgers University's Center for Plastics Recycling Research
     - University of Massachusetts at Lowell, Dept. of Engineering
     - Batelle, Engineering Mechanics Dept.
     - US Army Corps of Engineers Research Laboratories
 
     Several ASTM standards have been developed and approved for plastic lumber
as of July of 1997. Many more are under consideration. This will greatly expand
the potential users who are required to meet specifications and standards known
to the wood industry.
 
     Proprietary Technology
 
     The Company is generally of the belief that maintaining state of the art
technology in its recipes, molds and manufacturing processes and maintaining the
proprietary nature of that technology through trade secrecy is more important to
maintaining a competitive position in the industry than seeking any legal
protections that patents may provide. However, the Company owns two patents on
its structural lumber product and has an exclusive worldwide license on the
Rutgers patent. The two patents were purchased as part of the Polymerix/ Trimax
asset acquisition through the bankruptcy court. The first Trimax patent expires
on July 9, 2008 and the second patent expires on May 18, 2010. The Company has a
patent application pending for process and composition relating to the
manufacture of wood fiber and polymer composite. The Company believes these
patents are important to provide it with a competitive position in the market.
 
     The Company has several license agreements relative to patented
technologies of others. The Rutgers patent expires on August 4, 2015. Our
license agreement with Rutgers has a duration that extends the life of the
patent depending upon the Company maintaining its contract rights thereunder.
The Company has a license with Paul Adam for the manufacturing and commercial
sale of contaminated or impacted dredge material from a wide variety of
industrial waste streams that it uses in it environmental division. The Adam
License extends for the duration of the Adam patent, December 5, 2011, unless
either party seeks to terminate the agreement earlier for reasons set forth in
the License Agreement. The Company also has a non-exclusive license with the
Strandex Corporation to manufacture composite lumber products. The Strandex
License Agreement expires on April 22, 2011. The Company believes these licenses
are important to provide it with a competitive position in the market.
 
     The Company has several registered trademarks and several more currently
pending application for registration. The registered trademarks of the Company
are as follows: Carefree Decking System(R), Smartdeck(R), Clean Earth(R),
Recyclemaid(R), Cyclewood(R) (in Japan only), Trimax(R), Durawood(R),
Durapack(R), RecycleDesign(R), Global Garden(R), SmartTrim(R). The Company has a
variety of trademark applications pending including Duratie(TM) and
Cyclewood(TM). The Company takes an aggressive attitude toward the protection of
its proprietary technology.
 
     Competition
 
     The recycled plastic lumber industry is a young, highly fragmented industry
with over 20 small manufacturers and many more marketers of recycled plastic
lumber. Including the Company, there are approximately 22 members of the Plastic
Lumber Trade Association ("PLTA"). The competition is broken down into two
separate categories: plastic lumber manufacturers using strictly high density
polyethylene and manufacturers that use a mixture of high density and other
polymers to produce a product that is less expensive.
 
     The Company primarily uses only high density polyethylene and additives at
all of its plants. The major competitors in this segment of the market include
NEW Plastics Corp., Luxemburg, Wisconsin and a variety of small "mom and pop"
organizations. The Company attempts to compete with these competitors on the
 
                                        9
<PAGE>   11
 
basis of price, quality and service. Two competitors manufacture commingled
plastic are The Plastic Lumber Company, Inc., Akron, Ohio and Hammer's Plastics
Recycling, Iowa Falls, Iowa.
 
     There are several competitors which manufacture a composite product which
consists of a mixture of wood and plastic. TREX(R), TimberTech and AERT are
competitors of the Company using a plastic composite material made with sawdust
used to manufacture primarily deckboard. TREX(R) has a strong distribution
system in place, and therefore, is the most widely disseminated product of all
of the competitors of the Company. The recent acquisition by the Company of the
Eaglebrook companies will enable the Company to compete directly against the
composite deck manufacturers through the Smart Deck(R) product developed by
Eaglebrook.
 
     The Company believes that its competitive position in the market with the
acquisition of the Eaglebrook companies has increased substantially. In large
part this is due to several factors, including but not limited to, wider
distribution of the Company's products nationally, cross-selling of separate
products to the entire distribution network, increased purchasing power which
can lower the Company's cost basis, and a strong management team with a long
history of success in this industry.
 
     In most of its applications, the recycled plastic lumber manufactured by
the Company will also be in direct competition with conventional wood. At
present, the principal competitive disadvantage of recycled plastic lumber
compared to wood is that it is generally more expensive to purchase. Recycled
plastic lumber is comparable in price to high grade cedar and redwood. Composite
lumber is about 20% less expensive than recycled plastic lumber. Although
recycled plastic lumber and composite lumber can be more expensive to initially
purchase than comparable wood, plastic lumber and composite lumber can
substantially outlast wood, particularly in applications where the lumber is
exposed to the elements, and can therefore be more cost effective in the long
run. The Company also believes that environmental restrictions are presently
impeding forestry operations in United States forests. A second factor impeding
the use of pressure treated wood is the toxic leaching characteristics.
Chemicals injected into pressure treated wood contain hazardous constituents
which are released into the soil and create potentially toxic and hazardous
conditions. Such factors may reduce if not eliminate any price advantage that
pressure treated wood presently has with respect to its initial cost.
 
     Potential Markets
 
     By producing a suitable recycled plastic lumber and composite lumber
product, the Company conserves natural resources, reduces the plastic waste
entering landfills and provides a useful, maintenance-free product that
satisfies this growing market. One of the major markets for recycled plastic
lumber and composite lumber is as a substitute for pressure treated lumber.
There are currently a number of states that have either passed laws or have on
their legislative agenda, restrictions on the use and disposal of pressure
treated lumber. The pressure treating process injects copper, chromium and
arsenic (all carcinogens) into the wood. Pressure treated wood has legislative
restrictions in some states on its disposal methods which require disposal in
toxic waste landfills. Plastic lumber is a safe alternative that is fully
recyclable and maintenance-free. The Company's product consists of both
structural and non-structural profiles.
 
     In July 1994 the Company was selected to participate in a cooperative
venture with Rutgers University, Norfolk & Southern Railroad, Conrail and the US
Army Corps of Engineers Research Laboratories to develop a prototype railroad
crosstie made from recycled commingled plastic. Rutgers University has performed
extensive tests on many formulas and the Company has developed a prototype that
is superior in many ways to the creosote wood crosstie. Norfolk & Southern and
Conrail are currently track testing the new prototype. As of February 1999, the
Company's cross ties have approximately 100 MGT (million gross tons) of service
and are performing without any measured defects. In contrast, creosote wood ties
installed at the same time have experienced noticeable wear.
 
     Presently there are approximately 180,000 miles of railroad track in the
United States, with approximately 3,334 crossties per mile or a total of over
600,000,000 ties in place. In 1995, 18,000,000 crossties were replaced. In
certain applications, the creosote wood crosstie may have an expected useful
life of less than 5 years, creating a large demand for the more durable recycled
plastic crossties that have an estimated useful life in excess of 50 years.
Conditions which shorten creosote wood tie life are moisture, extreme
temperature
                                       10
<PAGE>   12
 
fluctuations and location relative to curves and switches. Railroads know from
extensive experience which locations require highest maintenance and these will
be the initial target areas for the Company's longer lasting polymer crossties.
Based on the replacement rate of 18 million crossties per year, the total
potential market for this segment of the business is approximately $1.5 billion
annually. The foreign market is estimated at 5 to 10 times as large and the
Company believes wood is less available in many foreign countries because it is
a dwindling natural resource in many of foreign countries.
 
     Although the plastic railroad tie is still undergoing testing, sufficient
test data exists which shows the plastic railroad tie is performing well enough
to enable the Company to market its railroad tie product to the railroad
industry. The primary issue in the Company's growth plans regarding the plastic
railroad tie is cost. The Company's current pricing structure is approximately
double the cost of a comparable wood tie. The Company markets its tie on the
basis of life cycle cost savings. There can be no assurances that the Company's
marketing strategy will be successful in creating demand for the Company's
railroad tie product.
 
     The Company is currently in the process of developing new products for a
variety of uses. These new products include component center cores for a
manufacturer of reinforced marine pilings and timbers, structural lumber, stairs
for spas, flooring for farm equipment, railroad ties and many other products.
 
     Marketing Strategies
 
     The business and operations of the Company is itself divided into three
distinct divisions. These are (i) engineered products, including Carefree
Decking(R), Smartdeck(R) systems, fabricated products, marine & government and
OEM/industrial businesses; (ii) packaging sheet division, including DuraPack(R)
plastic slipsheets, tier sheets and other related packaging products; and (iii)
recycled resins division, including post consumer & industrial plastic
processing and trading of engineering grade resins.
 
     The Company employs market focused Sales Specialists and industry specific
representatives to market and sell its products utilizing traditional sources of
sales including but not limited to attending trade shows, select advertising,
cold calling, customer referrals, and the like. The Company also markets and
sells through distributor relationships. The Company is seeking to expand its
distribution network nationwide in certain markets.
 
     The focus of the Company's selling strategy is the high quality,
maintenance-free aspect of its product along with superior customer service. The
Company also focuses on the benefits of its products including such items as
being maintenance free, 100% recycled, environmentally sensitive, aesthetically
pleasing in appearance, free from rot and insect infestation, and durable. The
Company's sales are not dependent upon a few customers, but rather the company
is currently positioned whereby it has broad diversity in its customer base.
 
     The Company has experienced a seasonal slow-down in the winter months
during the past three years but the Company is attempting to reduce the
seasonality of its sales by increasing its marketing efforts in warmer climates
of the U.S. during winter months, by supplying product for custom items which
are not as seasonal and by increasing its industrial sales which tend to be less
seasonal in nature.
 
     Government Regulation and Environmental Matters
 
     Although the recycled plastic and composite lumber operations do not
generate significant quantities of waste materials or hazardous substances
resulting in hazardous emissions, the Company's operations are and will in the
future be subject to numerous existing and proposed laws and regulations
designed to protect the environment from waste materials and particularly
hazardous wastes emissions. The Company is subject to federal, state and local
laws regarding the environment, occupational health and safety and other
regulations applicable to the Company's business. (See Regulation under the
Environmental Recycling Division section for additional discussion of
environmental regulations affecting the Company's business.) The primary
regulations affecting the plastic lumber divisions are air quality emissions
from our manufacturing plants, disposal of solid and liquid wastes, waste water,
and storm water discharge. The Company does not believe that its waste disposal
practices and manufacturing processes will be in violation of any existing or
presently proposed law or regulation or require special handling permits or
procedures or otherwise result in significant
 
                                       11
<PAGE>   13
 
capital expenditures that would have a material adverse effect on operations.
Currently, costs of compliance with regulatory requirements for the plastic
lumber division do not materially impact the financial condition of the Company,
although many times the delays in approving permit modifications can slow the
ability of the Company to quickly adapt to changing market conditions. However,
there can be no assurance that regulatory requirements will not in the future
adversely affect operations or require the introduction of costly additional
manufacturing or waste disposal practices, which could adversely affect the
financial condition of the Company. Additionally, as with manufacturing
practices in general, in the event of a release or threat of release of any
hazardous substance by the Company, such a release could have a material adverse
effect upon the Company whether said release or threat of release is (i)
directly or indirectly caused by the Company or (ii) from any of the properties
owned or leased by the Company or (iii) any associated offsite disposal of the
wastes of the Company or (iv) from prior activities on property now owned or
leased by the Company.
 
  Environmental Recycling Operation
 
     Products & Services
 
     The Company offers a wide array of services in this operation including
soil treatment through either thermal desorption or bioremediation,
environmental construction services, upland disposal of dredge materials,
beneficial re-use of industrial wastes, and on-site recycling services. The
Company is not dependent on a few large customers, but has a broad base of
customers.
 
     Clean Earth of New Castle, Inc. was founded in 1991 to provide a safe, cost
effective and final solution to the environmental problem of dealing with soils
and construction debris contaminated with petroleum hydrocarbons such as diesel
fuel, heating fuel, kerosene, jet fuel and gasoline, by treating such soils so
they can be recycled as clean fill. The treatment process heats the contaminated
soils in a controlled environment to a point that the contaminants are volatized
into a gas phase and then incinerated in an afterburner. In 1995, Clean Earth
modified its plant to recycle products at higher temperatures (up to 1,100
degrees Fahrenheit), and is now capable of treating soils contaminated with
heavier products such as number 6 oil, refinery wastes, waste oils and coal
distillates such as coal tar. The facility is currently seeking two permit
modifications from the Delaware Environment and Natural Resources Commission
("DENRC") to help reduce costs. One permit modification, which is still pending,
is to allow the facility to burn waste oil rather than natural gas in winter
months. Natural gas is at its highest cost in winter months and waste oil is at
its lowest. Switching to waste oil as a fuel in the winter months will enable
more efficient costs translating to improved operating margins. The second
permit modification has already been approved by the DENRC for accepting sewer
sludge into the process. The addition of sewer sludge will significantly reduce
the volume of water consumed by the plant, increase the volume of clean soil,
and generate revenue for the Company.
 
     Carteret Biocycle Corp. was founded in 1997 and opened its facility for
business in the third quarter of 1998. This facility serves a similar function
as Clean Earth of New Castle, Inc., except that its remediates soil contaminated
with petroleum hydrocarbons through a bio-organic process. The operational costs
for this facility are substantially less than thermal desorption, yet the
tipping fee (the fee charged its customers to treat wastes at the facility) for
this facility is similar to its tip fee at the Clean Earth of New Castle
facility. In addition, Carteret Biocycle is strategically located to receive
materials by truck, rail or barge. This location is also well suited to receive
dredge materials from the New York/New Jersey harbor, transferring the dredge
materials to rail and shipping the material for disposition in Pennsylvania
strip mines. The Company believes it has positioned itself to be one of very few
companies able to take advantage of this new market.
 
     The Company's beneficial re-use operation, known as Consolidated
Technologies, Inc. ("CTI"), was acquired in early to mid 1998. CTI oversees the
business of beneficial re-use of industrial wastes including the upland re-use
of dredge materials. The Company believes that this area will provide one of the
most important strategic growth opportunities available to the Company, and in
the environmental industry in general. CTI is an environmental industry group
which was formed with a mission to provide research and operations for the
beneficial re-use of dredged materials from the Raritan Estuary (New York/New
Jersey Harbor) as recyclable fill for the remediation and reclamation of
Pennsylvania strip mines. CTI has experimented with numerous samples of dredge
sediments and has identified proprietary recipes for the creation of engineered
fill
 
                                       12
<PAGE>   14
 
materials through solidification and stabilization of the dredged sediments.
Essentially, these mix designs are formulated from 100 percent waste materials
and industry by-products.
 
     As of September 1997, the federal government has prohibited off-shore
dumping of contaminated dredge material. The Company has positioned itself to
take advantage of this new market opportunity by finding ways to re-use
contaminated dredge material mixed with other products to create a pozzolonic
fill which can be used for cover material and clean fill. One example of this is
the Company has disposal rights granted by the Pennsylvania DEP to utilize
dredge material mixed with coal ash or incinerator ash to produce a grout like
substance suitable to reclaim strip mines. Strip mines represent a very
significant environmental issue for Pennsylvania.
 
     CTI has been successful in the permitting of a 550,000 cubic yard
demonstration project involving the beneficial re-use of treated dredge
materials for the reclamation of an abandoned strip mine known as the Bark Camp
Mine Complex. The Company has entered into a No-Cost Contract with the
Commonwealth of Pennsylvania Department of Environmental Protection (PADEP) to
reclaim a portion of the Bark Camp site with dredge materials and other
industrial by-products. The Company has marketed a turnkey concept for this
demonstration which incorporates everything from the physical dredging
activities in the New York Harbor to the final placement of the engineered fill
product at the Bark Camp Strip Mine site.
 
     The CTI business consists of the dredging, processing and beneficial re-use
of contaminated dredge material removed from harbors as engineered structural
fill material capable of being utilized for development of commercial or
industrial sites, or as fill for reclamation of abandoned strip mines.
 
     The Company believes CTI is strategically positioned to capture a major
share of the New York/New Jersey Harbor dredge disposal market. CTI has obtained
the first and only beneficial re-use permit for utilizing manufactured fill
created from dredge material for abandoned strip mine reclamation in
Pennsylvania.
 
     In addition to its plants, the Company has a subsidiary, Integrated
Technical Services, Inc. which perform services in environmental construction,
on site remediation, beneficial re-use of industrial wastes, UST (underground
storage tanks) removals, landfill capping, on-site stabilization and treatment
of hazardous waste to non-hazardous waste materials, consulting services and
other ancillary environmental services.
 
     Regulatory Matters
 
     All of the Company's principal business activities within the environmental
division are subject to extensive and evolving environmental, health, safety,
and transportation laws and regulations at the federal, state and local levels.
These regulations our administered by the EPA in the United States and various
other federal, state, and local environmental, zoning, health, and safety
agencies in the United States and elsewhere, many of which periodically examine
the Company's operations to monitor compliance with such laws and regulations.
Many of the facilities of the Company operate under permits granted by one or
more federal, state, or local agencies. Obtaining necessary permits to operate
the facilities of the Company are often times difficult, time-consuming,
expensive and may be opposed by local citizens as well as environmental groups.
Once obtained, operating permits are subject to modification and revocation by
the issuing agency. Compliance with current and future regulatory requirements
may require the Company, as well as others in our industry, from time to time,
to make significant capital and operating expenditures. Federal, state, and
local governments have from time to time proposed or adopted other types of
laws, regulations, or initiatives with respect to the environmental services
industry, including laws, regulations, and initiatives to ban or restrict the
international, Interstate, or intrastate shipment of wastes, impose higher taxes
on out-of-state waste shipments than upon in-state shipments, limit the type of
waste that may be disposed of at existing facilities, mandate waste minimization
initiatives, and re- classify certain categories of non-hazardous waste as
hazardous. Such regulations, laws and initiatives can create situations which
have a material adverse effect on the Company's environmental business.
 
     The Company makes a continuing effort to anticipate regulatory, political,
and legal developments that might affect operations, but is not always able to
do so. The Company cannot predict the extent to which any legislation or
regulation that may be enacted, amended, repealed, re-interpreted, or enforced
in the future may
 
                                       13
<PAGE>   15
 
affect its operations. Such actions could adversely affect the Company's
operations for impact the Company's financial condition or earnings.
 
     Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. During the ordinary course of its operations, the Company
may from time to time receive citations or notices from such authorities that a
facility is not in full compliance with applicable environmental or health and
safety regulations. Upon receipt of such citations or notices, the Company will
work with the authorities to address their concerns. Failure to correct the
problems to the satisfaction of the authorities could lead to monetary
penalties, curtailed operations, jail terms, facility closure, or an inability
to obtain permits for additional sites or modifications to permits an existing
sites.
 
     As a result of changing government in the public attitudes in the area of
environmental regulation and enforcement, management anticipates that
continually changing apartments and health, safety, and environmental protection
laws will require the Company and others engaged in the environmental industry
to continually modify and upgrade various facilities including altering methods
of operations and cost that may be substantial. Today, the Company has not had
to expand in material amount to vanity, modify or alter any of its existing
facilities resulting from changes in environmental protection laws. To his
knowledge, the Company is currently in compliance in all material respects with
all applicable federal, state, and local laws, permits, regulations, and orders
affecting its operations or noncompliance would resulting in the material
adverse effect on the Company's financial condition, results of operations or
cash flows. There's no shortage of the Company will not have to expand
substantial amounts for such actions the future.
 
     The Company expects to grow in part by acquisition of additional
environmental facilities. Although the Company conducts due diligence
investigations of the past practices of the businesses that acquires, it can
have no assurance that, through its investigation, it will identify all
potential environmental problems or risks. As a result, the Company may have
acquired, or in the future acquire, facilities that have unknown environmental
problems and related liabilities. The Company seeks to mitigate the foregoing
risks by obtaining environmental representations and indemnities from the
sellers of the businesses that it acquires. However, there can be no assurances
that the Company will be able to rely on any such indemnities if an
environmental liability exists.
 
     Generally, under environmental laws, the generator of the waste is
financially and legally responsible for that waste forever, and is strictly
liable for the costs of clean up and disposal of such wastes. Disposing of the
waste in a landfill or mixing it with other materials does not eliminate that
liability. Therefore, proper control and tracking of all wastes materials
handled by the Company is essential for the Company to avoid any liabilities
with respect to such wastes. The Company takes precaution not only to eliminate,
if possible, the liability of its customers, who are the generators of the
contaminated soil and debris, but also to maintain proper control and tracking
of each waste stream. Once the waste has successfully been treated, the
liability is significantly reduced. The product, once treated, is no longer
classified as waste, but is a reusable material.
 
     It may be necessary to expend considerable time, effort and money to keep
the Company in compliance with applicable environmental, zoning, health and
safety regulations. In addition, due to the possibility of unanticipated factual
or regulatory developments, the amounts and timing of future environmental
expenditures and compliance could vary substantially from those currently
anticipated.
 
     Federal Regulations.
 
     The primary U.S. federal statutes affecting the business of the Company are
summarized below.
 
          (1) The Resource Conservation and Recovery Act of 1976, as amended
     ("RCRA") establishes the framework for federal, state, and local government
     cooperation in controlling the management of non-hazardous and hazardous
     solid waste. These regulations established minimum standards for
     environmental facilities and may impose significant liabilities and costs
     upon the Company. The Company does not believe that the cost of complying
     with such standards will have a material adverse effect its operations.
 
          (2) The Comprehensive Environmental Response, Compensation, and
     Liability Act of 1980, as amended ("CERCLA"), among other things, provides
     for the cleanup of sites from which there is a
                                       14
<PAGE>   16
 
     release or threatened release of a hazardous substance into the
     environment. CERCLA imposes joint and several liability for the cost of
     cleanup and for damages to natural resources upon the present and former
     owners or operators of facilities or sites from which there is a release or
     threatened release of hazardous substances to the extent the disposal of
     hazardous substances for which there is a release which occurred during
     their period of ownership or operation. Waste generators and transporters
     also have strict liability under this statute. Liability under CERCLA is
     not dependent upon the intentional disposal of "hazardous wastes"' as
     defined under RCRA. It can be founded upon the release or threatened
     release, even as result of lawful, unintentional, and non-negligent action,
     of any one of more than 700 "hazardous substances," including very small
     quantities of such substances. Therefore, if the Company has transported
     waste material and lawfully disposed of it at a properly licensed facility,
     the Company can still have liability on the CERCLA which can be very
     substantial. The Company does have environmental liability insurance,
     however, there can be no assurances that the amount of should insurance
     would be sufficient to cover costs pursuant to the statute. The Company
     attempts to minimize its exposure under this statute by selecting disposal
     facilities and transporters who the Company believes maintain strict
     compliance its with all environmental laws and who carry environmental
     liability insurance of their own.
 
          (3) The Clean Air Act.  This statute provides for the federal, state
     and local regulation of the emission of air pollutants. These regulations
     impose emission limitations and monitoring and reporting requirements on
     various operations of the Company, including its soil treatment facilities
     and its S&W Waste facility. It is not anticipated by the Company that the
     cost of compliance with this statute will have a material adverse effect on
     the Company.
 
          (4) The Occupational Safety and Health Act of 1970 (the "OSHA Act").
     The Lucia act authorizes the Occupational Safety and Health Administration
     to promulgate occupational safety and health standards. Various of the
     standards, including standards for notices of hazards, safety within the
     workplace, and handling of hazardous substances, may apply to the Company's
     operations.
 
          (5) The Federal Water Pollution Control Act of 1972 (the "Clean Water
     Act") establishes rules for regulating the discharge of pollutants into
     streams, rivers, groundwater, or other surface waters from a variety of
     sources, including hazardous and non-hazardous disposal sites. Runoff from
     the Company's facilities could require the Company to apply for in obtain
     discharge permits, conduct a sampling and monitoring, and, under certain
     circumstances, reduce the quantity of pollutants, if any, in those
     discharges. Generally, the Company would be required to obtain a storm
     water discharge permit even before the time it begins development of a
     facility so, therefore, this statute is likely to affect the construction
     or expansion of existing facility. The Clean Water Act provides civil,
     criminal, and administrative penalties for violation of its provisions.
 
     State and Local Regulation.
 
     The states in which the Company operates have their own laws and
regulations that may be more strict than comparable federal laws and regulations
governing hazardous and non-hazardous waste disposal, water and air pollution,
releases and cleanup of hazardous substances and liability for such matters. The
states also have adopted regulations governing the siting, design, operation,
maintenance, closure, and post closure maintenance of disposal facilities. The
Company's facilities and operations are likely to be subject to many, if not
all, of these types of requirements. There can be no assurance that these laws
and regulations will not have a material adverse effect on the operations or
financial condition of the Company.
 
     Sales and Marketing
 
     As indicated, the environmental recycling operation is involved in a number
of markets, including but not limited to remediation of contaminated soil, coal
tar, upland disposal of dredge materials and the recycling of sewer sludge and
municipal incinerator ash to productive use. Each of these markets is
substantial and the markets are tied together via the contracting services arm
of Clean Earth. These service companies can provide on site clean-up, removal
and transportation of these materials to other divisions of the Company for
recycling and re-use of the products in an environmentally safe manner.
 
                                       15
<PAGE>   17
 
     The Company has recently begun bidding on large contracts to receive dredge
material. Prior to September 1997, contaminated dredge material from harbors was
dumped in the oceans. New federal regulations require upland disposal of this
material. The Company believes every harbor throughout the country will be faced
with how to deal with this issue and abide by these new government regulations.
This market is new, and the Company has the permits in place to provide for
using the dredge materials to reclaim abandoned strip mines as opposed to
disposing of the material in landfills.
 
     The Company is also expanding the capabilities of its facility in Delaware
to process and re-use material such as sewer sludge, for which permitting has
already been obtained, and municipal incinerator ash. These products are
currently landfilled. The Company will process the sewer sludge and recover the
nutrients which will be mixed with the clean soil to provide an improved product
for resale.
 
     The principal sales and marketing advantage that Clean Earth has over its
competitors is a broad range of services allowing customers a one stop shopping
concept -- not only contracting services but also the facilities to process
material. One distinct advantage of the Company is its quality control system.
The Company's comprehensive disclosure and testing systems ensures proper
tracking of material as well as on site testing to insure that only acceptable
material is permitted onto its sites. Rigorous quality control procedures are
essential as they relate to the responsibility and liability in handling of
material not only to the Company but also to its customers.
 
     The Company does experience a seasonal slow down during the winter months
due to the fact that its environmental operations are located in the Northeast
United States, and therefore, adverse weather can impact the Company's
performance.
 
     Competition and Barriers to Entry
 
     Clean Earth has several large competitors which provide similar services
within the northeast and mid-Atlantic states. These competitors include R-3
Technologies in Bristol, Pennsylvania, TPST in Baltimore, Maryland, MART in
Vineland, NJ and SRP in Philadelphia, Pennsylvania. Clean Earth has obtained a
permit to treat coal tar materials from Delaware Natural Resources and
Environmental Commission ("DNREC") and believes that this provides a niche
market as very few competitors have this capability.
 
     There are significant barriers to entry for this line of business. First
and foremost, the siting, permitting and licensing process is time consuming and
costly. Second, there is a large capital investment required to build the plants
and purchase the equipment necessary to operate the facility. Additionally,
contracts must be awarded to obtain the incoming product as well as contracts to
dispose of the material after it has been treated in order to operate an
economically feasible facility. Finally, this type of operation requires
technically trained individuals to operate and ensure that the facility remains
in strict compliance with environmental laws. Some of our competitors are
national companies with greater name recognition, greater economic resources and
significantly larger business size.
 
     Plant Operations
 
     The soil treatment plants and the S & W Waste RCRA facility are operated
with a strict commitment to safety, health and environmental issues coupled with
a rigorous system of controls, which lends credence to the "Certificate of
Destruction and Recycling" issued to each generator.
 
     The Waste Tracking System starts before the contaminated soil is accepted
at the plant gate. A comprehensive disclosure testing and manifesting system
ensures that the solids brought to the facility fall well within the limits of
Clean Earth's permits and treatment capacities. This system mirrors the
procedures of hazardous waste facilities. Furthermore, Clean Earth runs an EOX
test (Extractable Organic Halogens) on every load of material before it is
authorized for unloading in the storage buildings. In addition, management runs
several spot checks with the comprehensive on-site laboratory with respect to:
 
        GC (Gas Chromatographer) for PCB's (Poly Chlorinated Biphenyls)
 
        GC for VOC identification (Volatile Organic Compounds)
 
                                       16
<PAGE>   18
 
        GC with a high temperature desorber for THC (Total Hydrocarbons) and
           Desorption Temperatures EOX analyzer and the screening equipment for
           fines content
 
     These tests enable Clean Earth to determine quickly and efficiently that
the materials that are received are in accordance with their characterization by
the generator. This sizable investment in equipment and personnel protects both
the facility and the customers against the possibility of receiving undesirable
wastes.
 
     The storage buildings at each facility are large, fully enclosed structures
and are built on continuous concrete slabs. Runoffs from the buildings are
collected and checked regularly. The buildings are divided into small
compartments to maintain rigorous separation and tracking of each waste stream
and minimizes commingling. This mitigates the potential liability to a small
quantity in the case an undesirable waste is detected after it has been
accepted. This also ties into the sophisticated waste tracking system that
mobilizes a network of eight micro-computers so as to monitor each load of
material from the time of reception, to the final treatment test results. These
computers function on-line and enables operators to view and analyze, at any
time, all the information relative to a given shipment.
 
     In addition, there is a comprehensive control system with recording devices
that insure compliance with the various permit requirements, Clean Earth further
guarantees the facility's performance by testing the production daily. As
recommended in EPA publication #SW846, Clean Earth composites a sample for every
300 tons of production and tests it for BTEX with a GC and for TPH by the EPA
418 method, using an independent State certified laboratory. For coal tars, the
treated materials are also tested for PAH's (Polynuclear Aromatic Hydrocarbons)
by the EPA 8270 method. It is the Company's belief that this treatment plant is
the first in the industry to control its emissions with a C.E.M. (Continuous
Emissions Monitoring) system. Information is collected minute by minute and
stored on computers for control purposes; this information is available to both
customers and regulators. The property itself is monitored through several
monitoring wells, that are tested quarterly. The test results are reported to
DNREC.
 
     Liability Insurance and Bonding Capabilities
 
     Clean Earth has fully bonded the costs of a closure plan approved by DNREC.
In addition, Clean Earth has secured a total of $7 million of General Liability
and of Environmental Impairment Liability insurance coverages. The waste
generating companies recycled product is also protected with $1 million
single/$2 million aggregate Products and Completed Operations coverage that
includes a five year tail coverage.
 
     The Clean Earth division has also obtained a $50,000,000 performance
capability to enable the environmental remediation companies to participate in
more significant projects.
 
EMPLOYEES
 
     The Company and its subsidiaries employ on a full time basis a total of
approximately 489 persons through the United States. Of this number,
approximately 307 persons are full time permanent employees of the plastic
lumber operations, inclusive of the Eaglebrook companies purchased in January
1999 which has approximately 95 full time permanent employees; and 175 persons
are full time permanent employees in the environmental recycling operations.
There are 7 persons full time permanent employees at the corporate headquarters.
 
RISK FACTORS
 
  Risks Inherent In This Company
 
     Operating Losses.  The Company incurred an operation loss of $291,000 for
the year ended December 31, 1996 and an operating loss of $ 321,000 for the year
ended December 31, 1997. The Company was successful in reporting an operating
profit for the 1998 fiscal year, equal to $1,437,226, but there can be no
assurances that this will continue. The success of operations in the future will
be largely dependent upon the Company's ability to substantially increase its
sales revenue, as to which there is no assurance.
 
                                       17
<PAGE>   19
 
     Access to Capital.  The Company has limited access to capital. There can be
no assurances that the Company will have necessary and appropriate levels of
capital to operate its business. The Company will require additional capital in
connection with the manufacture, marketing and sale of its products. In order to
develop new products, manufacture, market, and sell its new and existing product
line, consolidate existing operations, and otherwise implement its plan of
operations, the Company will be required, among other things, to raise
additional capital. While the Company has existing lines of credit, there can be
no assurance that such debt financing will be available to the Company in the
future or that such debt financing will be available in the amounts required by
the Company or on terms acceptable to the Company. The failure of the Company to
obtain financing in adequate amounts and on acceptable terms could have an
adverse effect on the Company's business, financial condition and results of
operations.
 
     Dilution.  The Company has reserved for issuance a substantial amount of
shares for future issuance. See Capitalization Table in Section entitled "Other
Outstanding Options". In total, on December 31, 1998, the Company had reserved
for future issuance 10,475,545 shares with 18,230,528 shares currently
outstanding. Of the shares reserved, 4,573,686 shares ("Earn Out Shares") are
related to an earn out provision in the Agreement and Plan of Reorganization
with Educational Storybooks International, Inc. dated March 29, 1996. Upon the
reverse merger into the public shell, the parties had agreed to an earn out
bonus in the event net sales or production of 2,000,000 pounds of plastic lumber
per month for three consecutive months, subject to the limitations of the
Agreement and Plan of Reorganization. Upon achieving that sales or production
level as defined therein, the shareholders of Earth Care Global Holdings as of
March 29,1996 and the shareholders of Clean Earth, Inc.(collectively the
"Historical Shareholders") would receive the Earn Out Shares. No additional
assets or cash is placed into the Company in the event such sales or production
goal is achieved, therefore, the dilution from the issuance of these shares will
directly impact all shareholders who purchased stock subsequent to March 29,
1996 and who still hold stock on the date the earn out shares are issued,
assuming the sales or production goal is met and the shares are issued. As of
December 31, 1998, the net tangible book value of the Company was $13,073,793 or
$.72 per share of Common Stock. Net tangible book value per share represents
total tangible assets less total liabilities, divided by the number of shares of
Common Stock outstanding. After pro forma adjustments given to the effect of the
issuance of the Earn Out Shares, the pro forma adjusted net tangible book value
of the Company as of December 31, 1998 would have been $.57 per share. This
represents an immediate dilution of $.15 per share to all stockholders of the
Company who are not Historical Shareholders.
 
     Expertise.  The business of the Company requires much expertise in a wide
variety of functions. There can be no assurance that the Company will be able to
maintain employees with the requisite levels of expertise or that the Company
will be able to attract and keep such employees in the future.
 
     Year 2000 Risks.  Many existing computer programs use only two digits to
identify a year in the date field. In other words, date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000 (the "Year 2000
Issue"). This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process loan or other transactions, send statements or late notices, or
engage in similar normal business activities.
 
     Although the Company currently estimates that its Information Technology
systems will be Year 2000 compliant by the end of 1999, no assurance can be
given that it will meet this time frame. The Company is in the process of
developing a contingency plan in the event its systems are not Year 2000
compliant on a timely basis. The Company's accounting software is Year 2000
compliant. The Company is in the process of conducting an internal audit of its
non-information technology systems (e.g. manufacturing equipment embedded
computer systems) and software to determine what issues, if any, exist. Upon
completion of its internal audit, the Company will evaluate the full scope of
issues, related costs, and available remedies to insure the Company's
non-information systems and those of its major customers and vendors continue to
meet its internal needs. The Company does not anticipate a material financial
impact as a result of the Year 2000 Issue nor does it anticipate any material
financial expenditures to remedy the Year 200 date change within its own
software. Anticipated costs for system and software modifications, if any, will
be expensed as incurred.
                                       18
<PAGE>   20
 
     However, the Company has no control over Year 2000 compliance by the
customers and vendors of the Company. The Company is currently unable to predict
the extent to which Year 2000 issues will affect these third parties, or the
extent to which it would be vulnerable to the failure of these parties to
remediate any Year 2000 issues on a timely basis. If the Company's customers and
vendors are not in Year 2000 compliance, this could provide a material adverse
financial impact to the Company, however, the Company does not believe this is
likely based upon the due diligence it has conducted to date with respect to the
Year 2000 readiness of its major customers and vendors. The Company is in the
process of developing a contingency plan in the event these vendors or customers
are not Year 2000 compliant on a timely basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
 
     Potential Conflicts of Interest/Agreements Not Subject to Arm's Length
Negotiations.  Various conflicts of interest between the Company and the Stout
Partnership may arise, persons serving as directors, officers and employees of
both the Company and the Stout Partnership may have conflicting duties to each.
Mark Alsentzer, August C. Schultes, III and Gary J. Ziegler are all general
partners in the Stout Partnership which owns 5,400,000 shares of the Company's
Common Stock and options to purchase 320,000 additional shares of such stock. In
addition, ownership interests of the Company's directors in the Stout
Partnership could also create or appear to create potential conflicts of
interest when such directors are faced with decisions that could have different
implications for the Company and for the Stout Partnership. Because a majority
of the Board of the Company are also Stout partners, agreements related to
monies provided by the Stout Partners and Schultes, Inc. were not the result of
arm's-length negotiations, although the Company has attempted to have any
agreements with Stout Partners and/or Schultes, Inc. be as similar to terms
negotiated by the Company are comparable contracts with third parties for which
there was substantial arms length negotiations. These agreements may include
terms and conditions that may be more or less favorable to the Company than
terms contained in similar agreements negotiated with third parties. See
"Certain Transactions."
 
     Ability to Implement the Company's Growth Strategy.  The Company's growth
strategy is dependent upon its ability to continue to increase profit margins
through integration of acquisitions, consolidation of plants and operations,
increased consumer acceptance of alternative wood products, and increased
production capacity. Implementation of this strategy will depend in large part
on the Company's ability to: (i) expand through strategic acquisitions of
companies in new and complementary industries; (ii) obtain adequate financing on
favorable terms to fund this growth strategy; (iii) develop and expand its
customer base; (iv) hire, train and retain skilled employees; (v) strengthen
brand identity and successfully implement its marketing campaigns; (vi) continue
to expand in the face of increasing competition; (vii) continue to negotiate the
Company's supply contacts and sales agreements on terms that increase or
maintain the Company's current profit margins; and (viii) create sufficient
demand for plastic lumber and other products. The Company's failure with respect
to any or all of these factors could impair its ability to successfully
implement its growth strategy which could have a material adverse effect on its
results of operations and financial condition.
 
     Environmental Concerns.  In the course of its business, the Company may
acquire or lease in the future, storage facilities or other properties in
connection with the operation of its business. Under various U.S. federal, state
or local environmental laws, ordinances and regulations, a current or previous
owner or operator of real estate may be required to investigate and clean up
hazardous or toxic substances or chemical releases at such property, and may be
held liable to a governmental entity or to third parties for property damage,
personal injury and investigation and cleanup costs incurred by such parties in
connection with the contamination. The liability under such laws has been
interpreted to be joint and several unless the harm is divisible and there is a
reasonable basis for allocation of responsibility. The costs of investigation,
remediation or removal of such substances may be substantial, and the presence
of such substances, or the failure to properly remediate such property, may
adversely affect the ability of the owner or operator to sell or rent such
property or to borrow using such property as collateral. Persons who arrange for
the disposal or treatment of hazardous or toxic substances also may be liable
for the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not the facility is owned or operated by such
person. In addition,
 
                                       19
<PAGE>   21
 
the owner or operator of a contaminated site may be subject to common law claims
by third parties based on damages and costs resulting from environmental
contamination emanating from such property.
 
     Seasonality.  The Company's business is seasonal in nature. Historically,
the Company has generated a substantial portion of its revenues during the
second and third quarters of its fiscal year. If for any reason the Company's
revenues fall below those normally expected during the second and third quarters
of its fiscal year, the Company's business, financial condition, and results of
operations would be adversely affected.
 
  Risks Related to the Nature of the Business
 
     Newly Developing Industry.  The reclamation and recycling of plastic and
the manufacture of plastic lumber for use in construction, and other composite
materials containing recycled plastics, are relatively new industries. There is
a general reluctance in the construction industry to use new materials before
they have been extensively tested, particularly in certain segments which have
exacting performance standards for component materials. In the case of the
Company's recycled plastic lumber and composite materials in particular, such
testing may be extensive for each prospective customer and may require
substantial additional time and resources. In addition, the Company may
experience resistance from prospective customers who are accustomed to more
conventional, non-artificial wood materials. Moreover, the Company may not have
sufficient financial and other resources to undertake extensive marketing and
advertising activities or to afford the cost of the necessary marketing and
sales personnel at such time as it becomes appropriate to broaden its marketing
efforts.
 
     Availability of Raw Materials.  The availability of low-cost raw materials,
namely post-consumer and industrial plastic waste products, is a material factor
in the Company's costs of operations. Historically, suppliers have provided
adequate quantities of such raw materials at favorable costs. The Company
believes that its current sources of raw materials will continue to be available
on commercially reasonably terms. However, unavailability, scarcity or increased
cost of such raw materials would have a material adverse effect upon the
Company's business. The Company purchases most of its raw materials through
generators of post-consumer & industrial recycled plastic materials. Disruption
of these supply sources could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company does not
rely on contractual arrangements with its raw materials suppliers and has no
long-term supply contracts. See "Business -- Plastic Lumber Operation Raw
Material Supply."
 
     Competition and Marketing.  The Company's recycled plastic lumber business
faces competition from other producers of recycled plastic lumber as well as
producers of vinyl and aluminum decking, and traditional wood, especially
pressure treated wood. The Company competes against other makers of recycled
plastic lumber principally on the basis of price and quality as well as the
immediate availability of its product, and competes against other products such
as pressure treated lumber by emphasizing the superior suitability
characteristics of recycled plastic lumber for certain applications, as well as
appealing to the environmental consciousness of consumers. The Company's
environmental recycling operation has several large competitors which provide
similar services throughout the Northeast and Mid Atlantic states. The resources
of the competition, financial and otherwise, may be such that it can be very
difficult for the Company to effectively compete. In some instances, the
competitors of the Company have more revenues, market share, better name
recognition and capital available which can make it difficult for the Company to
compete. There can be no assurances that the Company will be able to effectively
compete in any of its markets. See "Competition", "Plastic Lumber Operation" and
"Environmental Recycling Operation"
 
     Newly Developing Technologies.  The Company's products and services involve
newly developing technologies, and there is no assurance the Company will be
able to compete effectively in developing and marketing such products and
services or in developing or maintaining the know how, technology, and patents
to compete effectively. There is a general lack of public awareness of these
newly developing products and services generally, or as alternatives to more
traditional and well established products. To compete effectively, the Company
must increase public knowledge and acceptance of its products and services and
develop and maintain certain levels of know how and technical expertise, of
which there is no assurance.
 
                                       20
<PAGE>   22
 
     Lack of Industry Standards.  ASTM (American Society for Testing and
Materials) and certain industry trade organizations have established general
standards and methods for measuring the characteristics of specific building
materials. Users of building materials (and frequently, issuers of building
codes) generally specify that the building materials comply with such standards
relative to the proposed applications. Since uniform, recognized standards or
methods have only recently been established for measuring the characteristics of
plastic lumber, potential users may not be aware of this method of judging
whether or not plastic lumber may be suitable for their particular requirements,
without being informed of such standards by the plastic lumber supplier or
otherwise becoming aware of them. The fact that such standards are not well
known for plastic lumber may limit the market potential for the Company's
building materials and make potential purchasers of such building materials
reluctant to use them. The Plastic Lumber Trade Association, of which the
Company is a member, is pursuing increased public awareness of such standards,
but no assurance can be given that public awareness will successfully be
increased or that increased awareness will increase the market for the Company's
products.
 
     Extensive Regulations.  The Company's businesses are subject to extensive
laws and regulations designed to protect the environment from toxic wastes and
hazardous substances or emissions and to provide a safe workplace for its
employees. Under current federal regulations Resource Conservation & Recovery
Act, ("RCRA") & Comprehensive Environmental Responsibility, Compensation &
Liability Act, ("CERCLA"), the generator of toxic or hazardous waste is
financially and legally responsible for that waste forever, and strictly liable
for the clean up and disposal costs. In particular, the business of treating or
otherwise handling toxic or hazardous waste materials is fraught with potential
liability to such handlers if the handling and tracking of such wastes is not
completed properly. The Company believes it is either in material compliance
with all currently applicable laws and regulations or is operating in accordance
with appropriate variances or similar arrangements, but there is no assurance
that it will always be deemed in compliance, nor any assurance that compliance
with current laws and regulations will not require significant capital
expenditures that could have a material adverse effect on its operations. Such
laws and regulations are always subject to change and could become more
stringent in the future. Although state and federal legislation currently
provide for certain procurement preferences for recycled materials, such
preferences for materials containing waste plastics are dependent upon the
eventual promulgation of product or performance standard guidelines by state or
federal regulatory agencies. Such guidelines for recycled plastic building
materials may not be released or, if released, the product performance standards
required by such guidelines may be incompatible with the Company's manufacturing
capabilities. It may be necessary to expend considerable time, effort and money
to keep the Company's existing or acquired facilities in compliance with
applicable environmental, zoning, health and safety regulations and as to which
there may not be adequate insurance coverage. In addition, due to the
possibility of unanticipated factual or regulatory developments, the amounts and
timing of future environmental expenditures and compliance could vary
substantially from those currently anticipated. See "Plastic Lumber
Operation -- Governmental Regulation and Environmental Matters" and
"Environmental Recycling Operation -- Regulatory Matters"
 
     Loss of Permits.  The Company's business, especially the environmental
recycling operation, is dependent upon certain permits and licenses from many
different federal, state, and local agencies. There can be no assurances that
the Company will be able to maintain its permits and licenses in the future or
modify its permits and licenses to be able to compete effectively. See "Plastic
Lumber Operation -- Governmental Regulation and Environmental Matters" and
"Environmental Recycling Operation -- Regulations"
 
     Protection of Technology.  The Company's business involves many proprietary
trade secrets, as well as certain methods, processes and equipment designs for
which the Company has not sought patent protection. Although the Company has
taken measures to safeguard its trade secrets by limiting access to
manufacturing and processing facilities and requiring confidentiality and
nondisclosure agreements with third parties, there is no assurance that its
trade secrets will not be disclosed or that others will not independently
develop comparable or superior technology. Rather than rely on patent
protection, the Company has generally chosen to rely on the unique and
proprietary nature of its processes. The Company has obtained exclusive
worldwide licensing rights with respect to patent technology related to railroad
crossties and the process to manufacture
 
                                       21
<PAGE>   23
 
them, but there is no assurance the Company will be able to maintain such rights
for any specific length of time. See "Plastic Lumber Operation -- Research and
Development" and "Proprietary Technology"
 
     Reliance on Bidding.  The environmental recycling operation consists of
certain subsidiaries which are highly reliant upon contract bidding as a
significant source of revenues. There can be no assurance that the Company will
be successful in obtaining bid work in the future or that if it does obtain bid
work that it will be at suitable profitable margins.
 
     Operating Hazards and Insurance Coverage.  The Company's businesses involve
a variety of operating risks, including risk of fire, explosions, blow outs, and
environmental hazards. The Company's operations could also be disrupted by
hurricanes, floods, fires and other acts of God. Additionally, within the
plastic manufacturing division of the Company, the Company makes products which
it sells to consumers across the country, and as a result, product liability
occurrences can pose a substantial risk. Any of these occurrences could result
in substantial losses to the Company due to injury, loss of life, severe damage,
clean-up responsibilities, regulatory investigation and penalties and suspension
of operations. The Company maintains insurance coverage against some, but not
all, potential risks; however, the re can be no assurance that such insurance
will be adequate to cover all losses or exposure for liability. The Company
cannot predict whether insurance will continue to be available at premium levels
that justify its purchase or whether insurance will continue to be available at
all. The occurrence of an event not covered fully by insurance, could cause the
Company to sustain a material adverse effect upon its business, operating
results and financial condition.
 
ITEM 2.  PROPERTIES
 
     The properties of the Company consist of administrative offices,
manufacturing plants, fabrication and assembly facilities, and sales offices.
All of the properties of the Company are leased with one exception, its property
at the S & W Waste, Inc. facility in Kearny, New Jersey. The Company has options
to purchase on several of the properties it leases.
 
     The primary properties of the Company are as follows:
 
CORPORATE
 
     Boca Raton, Florida:  This location consists of approximately 3,300 sq. ft.
and serves as the Corporate Offices of the Company. There are presently
approximately 15 people employed in this location. The property is in good
condition and is leased. The lease expires in November 2001 and the monthly
rental is $5,067.
 
PLASTIC LUMBER OPERATING FACILITIES
 
     Auburn, Massachusetts:  This location consists of approximately 34,000 sq.
ft. and its function consists of receiving and processing HDPE plastic for use
as raw material for the Company's manufacturing plants and for re-sale to the
marketplace. The process includes sorting, regrinding, washing, and pelletizing
HDPE. The property is in good condition and is leased. The lease is a month to
month tenancy, and the monthly rental is $18,142.
 
     Chicago, Illinois:  This location consists of approximately 260,000 sq. ft.
and is the primary manufacturing facility of the Company. This location is also
the headquarters of the Company's plastic division. It produces plastic and
composite lumber profiles through a continuous extrusion process. It
manufactures the Smart Deck(R) product line. It also processes, sorts, grinds
and washes HDPE, much of it used by the Company as a raw material for its
manufacturing plants. The property is in good condition and is leased with an
option to purchase. The lease expires in January 2009 and the monthly rental is
$39,181 per month.
 
     Green Bay, Wisconsin:  This location consists of approximately 38,000 sq.
ft. This plant is one of the primary manufacturing plants of the Company. It
produces plastic lumber through a continuous extrusion process and manufactures
the Carefree Deck(R) product line. The property is in good condition and is
leased. The lease expires in January 2008, and the monthly rental is $11,875.
 
                                       22
<PAGE>   24
 
     Sweetser, Indiana:  This location consists of approximately 15,600 sq. ft.
and 7.5 acres. The facility manufactures plastic lumber primarily for industrial
and commercial applications through the continuous extrusion process. The
property is in good condition and is leased with an option to purchase. The
lease expires on April 30, 2003 and the monthly rental is currently $2,000 per
month.
 
     Trenton, Tennessee:  This location consists of approximately 90,000 sq. ft.
The plant is also a manufacturer of plastic lumber. It utilizes flow mold
extrusion manufacture plastic lumber and a variety of custom profiles. One line
of this plant is also dedicated to the manufacture of structural lumber, and one
line is dedicated to the manufacture of railroad ties. The property is in good
condition and is leased with an option to purchase. The lease expires in
September 2002 and the monthly rental is $13,491.
 
     Mulliken, Michigan:  This location consists of approximately 16,000 sq. ft.
and is the principal location for fabricating and assembling value added
products, such as but not limited to, park benches, trash receptacles, picnic
tables, and many other items. The property is in good condition and is leased.
The lease expires in May 1999, and the monthly rental is $3,333. The Company is
not currently negotiating to renew this lease as the Company intends to
consolidate its fabrication operations into its new Chicago facility.
 
     Denton, Maryland:  This location consists of approximately 80,000 sq. ft.
It currently has several continuous extrusion lines manufacturing a wide variety
of plastic lumber profiles. The property is in good condition and is leased. The
lease expires in February 2003, and the monthly rental is $6,000.
 
     Guasti, California:  This location consists of approximately 6,000 sq. ft.
This facility houses the western Regional Sales office of the Company as well as
consisting of a Distribution warehouse, a fabrication facility for some
specialty benches and trash receptacles made by the Company and the Company's
plastic sign manufacturing facility. The property is in good condition and is
leased. The lease is a month to month tenancy and the monthly rental is $1,500.
 
ENVIRONMENTAL RECYCLING OPERATING FACILITIES
 
     Norristown, Pennsylvania:  This facility is the corporate and
administrative offices for the environmental recycling services operations of
the Company. The property is in good condition and is leased. The lease expires
in December 1999, and the monthly rental is $4,000.
 
     Blue Bell, Pennsylvania:  This facility serves as an administrative office
for the environmental division consisting of 1,570 sq. ft. The lease expires in
December 1999 and the monthly rental is approximately $2,100.
 
     New Castle, Delaware:  This property consists of 7.5 acres of buildings and
property consisting of the Thermal Desorption soil recycling operation. The
property is in good condition and is leased. The lease expires in August 2003,
and the monthly rental is based upon the volume of tonnage received at the
facility.
 
     Carteret, New Jersey:  This facility became operational in the third
quarter of 1998. This facility consists of approximately 80,000 sq. ft. and five
acres of property. This facility may serve two functions. Currently, it recycles
soil through a bio-organic process and it may be able to receive barges with
dredge material which the Company will process for shipment to upland disposal
facilities and strip mines for beneficial re-use reclamation. The property is in
good condition and is leased with an option to purchase the leased premises and
adjacent property. The lease expires in December 2027, and the monthly rental is
$17,500.
 
     Kearny, New Jersey:  This facility is the administrative offices and
consists of the treatment, storage and disposal facility for the S & W Waste
operations of the Company. It consists of approximately 7 acres and is owned by
the Company. The facility is in good condition.
 
     Winslow, New Jersey:  This facility is the administrative offices for the
Company's environmental construction services company. The property is in good
condition and is leased. This lease has a rental of $2,500 per month.
 
                                       23
<PAGE>   25
 
ITEM 3.  LEGAL MATTERS
 
     From time to time, the Company is involved as plaintiff or defendant in
various legal proceedings arising in the normal course of its business. While
the ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these legal
actions should not have a material effect on the Company's financial position,
results of operations or liquidity.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     During the fourth quarter of fiscal year end 1998, no matters were
submitted to a vote of the security holders, through proxy solicitation or
otherwise.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
MARKET INFORMATION
 
     Transactions in the Company's Common Stock are reported on the NASDAQ Small
Cap Market. The Common Stock of the Company is quoted under the symbol "USPL".
Prior to June 1998, the Company traded sporadically on the OTC Electronic
Bulletin Board under the symbol "ECPL". The following table sets forth the high
and low bid price quotations for each date specified below during the last two
fiscal years.
 
<TABLE>
<CAPTION>
QUARTER ENDED                                              HIGH BID    LOW BID
-------------                                              --------    -------
<S>                                                        <C>         <C>
March 31, 1997...........................................  $6.50       $6.00
June 30, 1997............................................  $6.125      $5.75
September 30, 1997.......................................  $6.00       $6.00
December 31, 1997........................................  $4.875      $4.4375
March 31, 1998...........................................  $7.625      $7.1875
June 30, 1998............................................  $6.9375     $6.0625
September 30, 1998.......................................  $3.375      $3.0625
December 31, 1998........................................  $6.0625     $4.9375
</TABLE>
 
     The above prices represent interdealer quotations, without retail markup,
markdown or commissions, and may not represent actual transactions. As of
February 26, 1999, there were approximately 516 record holders of the Company's
Common Stock and approximately 2,400 beneficial owners listed with CEDE & Co.
 
DIVIDEND POLICY
 
     The Company has not previously paid any cash dividends on its Common Stock
and does not anticipate or contemplate paying dividends on Common Stock in the
foreseeable future. It is the present intention of management of the Company to
utilize all available funds for the development of the Company's business. The
Company does intend to pay stock dividends on its outstanding Series A and B
Preferred Stock in accordance with the terms thereof. Under Nevada corporate
law, no dividends or other distributions may be made which would render the
Company insolvent or reduce assets to less than the sum of its liabilities plus
the amount needed to satisfy outstanding liquidation preferences.
 
RECENT SALES OF UNREGISTERED SECURITIES DURING THE LAST THREE YEARS
 
     Unless otherwise indicated, all share numbers have been adjusted for the
reverse merger stock split of 1 to 16 that occurred in March 1996. Also, unless
otherwise indicated, these securities were issued as restricted securities and
the certificates were stamped with restrictive legends to prevent any resale
without registration under the Securities Act of 1933 (The "Act") or in
compliance with an exemption.
 
     In March 1996, the Company entered into an Agreement and Plan of
Reorganization with Earth Care Global Holdings, Inc. ("Earth Care"), pursuant to
which the Company reverse split its common stock on a
 
                                       24
<PAGE>   26
 
1 for 16 basis, and then issued 4,196,316 post split shares of its authorized
but previously unissued common stock to the shareholders of Earth Care to
acquire all the issued and outstanding stock of Earth Care in a stock for stock
exchange, which was intended to be a tax free reorganization under Section
368(a) of the Internal Revenue Code, and was accounted for, for financial
reporting purposes, as an acquisition by Earth Care of the Company. This
transaction was not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as an offering made to accredited
investors, all of whom were officers and directors of Earth Care and/or
represented that they were otherwise accredited investors.
 
     As a condition precedent to the closing of the Earth Care acquisition, the
Company raised $1,000,000 of capital through an offering of its securities. The
offering was completed and the acquisition closed on or about March 28, 1996.
These transactions were not registered under the Act in reliance on the
exemption from registration in Section 3(b) of the Act, and Rule 504 of
Regulation D promulgated thereunder, in that securities with an aggregate
offering price not exceeding $1,000,000 were offered and sold by an issuer that
was not subject to the reporting requirements of the Securities Exchange Act of
1934, and was not an investment company or a company that had no specified
business purpose.
 
     In April 1996, the Company acquired all of the assets of DuraTech
Industries. The Company issued 24,772 post-split shares of its authorized but
previously unissued common stock to the shareholders of Duratech to acquire all
the issued and outstanding stock of Duratech in a stock for stock exchange which
was intended to be a tax free reorganization under Section 368(a) of the
Internal Revenue Code. This transaction was not registered under the Act in
reliance on the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. This offering made was completed
without any general or public solicitation. In each case the offering was done
to a very limited number of officers, directors and shareholders of the
companies being acquired. The officers, directors and few shareholders had
strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.
 
     In December 1996, the Company formed Clean Earth, Inc. and through it
acquired a wholly owned subsidiary, Clean Earth of New Castle, Inc. The Company
issued 5,400,000 post-split shares of its authorized but previously unissued
common stock to the shareholders of Clean Earth to acquire all the issued and
outstanding stock of Clean Earth in a stock for stock exchange which was
intended to be a tax free reorganization under Section 368(a) of the Internal
Revenue Code. This transaction was not registered under the Act in reliance on
the exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled them
to evaluate the risks and merits of the investment.
 
     In January 1997, the Company acquired Recycled Plastics Industries, Inc.
(RPI), located in Green Bay, Wisconsin. The Company paid cash and issued
1,000,000 shares of its Common Stock to the shareholders of RPI in the
acquisition. This transaction was not registered under the Act in reliance on
the exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled them
to evaluate the risks and merits of the investment.
 
     In February 1997, the Company acquired Advanced Remediation and Disposal
Technologies, Inc. (ARDT). ARDT is engaged in environmental consulting and clean
up of contaminated sites primarily involving water and soils. The Company issued
300,000 shares of its Common Stock to the former shareholders of ARDT. This
transaction was not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made
 
                                       25
<PAGE>   27
 
was completed without any general or public solicitation. In each case the
offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officers, directors and few
shareholders had strong knowledge and experience in business matters as well as
pre-existing business relationships with the Company. The knowledge and
experience of these individuals enabled them to evaluate the risks and merits of
the investment.
 
     During the period from June 1996 through February 1997, the Company has
offered and sold 208,930 shares of Class A Preferred Stock to investors at $20
per share, and raised $4,178,600 in gross proceeds. These transactions were not
registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering. The
securities were sold primarily to officers, directors or other acquaintances who
were familiar with the business of the Company and were able to assess the risks
and merits of the investment.
 
     During 1996, the Company issued a total of 5,565 shares of Common Stock
pursuant to the exercise of outstanding options held by two individuals who were
officers or directors of the Company. In 1997, the Company issued 500 shares to
directors for attendance at meetings. These transactions were not registered
under the Act in reliance on the exemption from registration in Section 4(2) of
the Act, as transactions not involving any public offering.
 
     During February 1997, the Company issued 187,500 shares plus cash and
royalty fees in connection with the licensing agreement with Rutgers University.
These transactions were not registered under the Act in reliance on the
exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering was completed without any general
or public solicitation. The offering was done to a single investor which had
knowledge and experience in business matters to enable them to evaluate the
risks and merits of the investment. This investor also had a pre-existing
business relationship with the Company.
 
     On March 28, 1997, the Company acquired Environmental Specialty Plastics
(ESP), a marketing and distribution company of recycled plastic lumber products
in Guasti, California. The shareholders of ESP received cash plus 25,150 shares
of the Company's common stock (see Footnote 2 of Financial Statements for
additional information). These transactions were not registered under the Act in
reliance on the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. This offering was completed
without any general or public solicitation. In each case the offering was done
to a very limited number of officers, directors and shareholders of the
companies being acquired. The officers, directors and few shareholders had
strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.
 
     On March 31, 1997, the Company acquired Integrated Technical Services, Inc.
(ITS), an environmental consulting and construction company in Winslow, New
Jersey. The stockholders of ITS received as acquisition consideration, cash plus
185,000 shares of the Company's common stock, and an additional 47,572 shares of
common stock for the non-compete agreements (see Footnote 2 of Financial
Statements for additional information). These transactions were not registered
under the Act in reliance on the exemption from registration in Section 4(2) of
the Act, as transactions not involving any public offering. This offering made
was completed without any general or public solicitation. In each case the
offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officers, directors and few
shareholders had strong knowledge and experience in business matters as well as
pre-existing business relationships with the Company. The knowledge and
experience of these individuals enabled them to evaluate the risks and merits of
the investment.
 
     On June 20, 1997, the Company issued 1,111,111 shares of Common Stock to
two investment funds, a partnership, and one accredited private investor. These
transactions were not registered under the Act in reliance on the exemption from
registration in Rule 506 of Regulation D, promulgated under Section 4(2) of the
Act, as transactions not involving any public offering, consisting of sales made
solely to accredited investors. Each entity investor has assets substantially in
excess of $5,000,000 and was not formed for the purpose of investing in the
securities. The natural person who invested has net worth substantially in
excess of $1,000,000.
                                       26
<PAGE>   28
 
     On June 30, 1997, the Company acquired EnviroPlastics Corp., (EPC) a
recycled plastic raw material regrind operation in Auburn, MA. The stockholders
of EPC received 280,000 shares of the Company's common stock as the purchase
price plus 25,000 shares as consideration for non-compete agreements (see
Footnote 2 of Financial Statements for additional information). These
transactions were not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made was completed without any general or public
solicitation. In each case the offering was done to a very limited number of
officers, directors and shareholders of the companies being acquired. The
officers, directors and few shareholders had strong knowledge and experience in
business matters as well as pre-existing business relationships with the
Company. The knowledge and experience of these individuals enabled them to
evaluate the risks and merits of the investment.
 
     On June 30, 1997, the Company issued 150,000 shares to the former
shareholders of DuraTech Industries, Inc. as part of an earn out provision in
the purchase documents of that acquisition. These earn out shares were
accelerated in part in exchange for salary concessions made by the former
shareholders of DuraTech Industries, Inc. These transactions were not registered
under the Act in reliance on the exemption from registration in Section 4(2) of
the Act, as transactions not involving any public offering.
 
     On November 18, 1997, the Company acquired Waste Concepts, Inc. (WCI), an
environmental recycling services company located in Norristown, PA. The
stockholder of WCI received cash at Closing plus 400,000 shares of common stock
of the Company (see Footnote 2 of Financial Statements for additional
information). These transactions were not registered under the Act in reliance
on the exemption from registration in Section 4(2) of the Act, as transactions
not involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled them
to evaluate the risks and merits of the investment.
 
     On January 2, 1998, the Company acquired Green Horizon Environmental, Inc.
(GHI), an environmental recycling services company located in Norristown, PA.
The stockholders of GHI received 50,000 shares of common stock of the Company.
These transactions were not registered under the Act in reliance on the
exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled them
to evaluate the risks and merits of the investment.
 
     On February 6, 1998, the Company acquired an additional twenty five percent
interest in Consolidated Technologies, Inc. (CTI), an environmental recycling
services company located in Norristown, PA. The stockholders of this company
received 35,000 shares of Common Stock of the Company. These transactions were
not registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering. This
offering made was completed without any general or public solicitation. In each
case the offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officers, directors and few
shareholders had strong knowledge and experience in business matters as well as
pre-existing business relationships with the Company. The knowledge and
experience of these individuals enabled them to evaluate the risks and merits of
the investment.
 
     On February 27, 1998, the Company acquired substantially all the assets of
Chesapeake Recycled Lumber, Inc. (CRL), a plastic lumber manufacturing company
located in Denton, MD. The stockholders of CRL received cash at closing plus
97,500 shares of common stock of the Company. These transactions were not
registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering. This
offering made was completed without any general or public solicitation. In each
case the offering was done to a very limited number of officers, directors and
shareholders
 
                                       27
<PAGE>   29
 
of the companies being acquired. The officers, directors and primary shareholder
had strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.
 
     On February 27, 1998, the Company acquired a five percent interest in
Consolidated Technologies, Inc. (CTI), an environmental recycling services
company located in Norristown, PA. The stockholder of this company received
1,500 shares of Common Stock of the Company. These transactions were not
registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering. This
offering made was completed without any general or public solicitation. In each
case the offering was done to a very limited number of officers, directors and
shareholders of the companies being acquired. The officers, directors and few
shareholders had strong knowledge and experience in business matters as well as
pre-existing business relationships with the Company. The knowledge and
experience of this individual enabled him to evaluate the risks and merits of
the investment.
 
     Effective April 30, 1998 the Company acquired 100% of the stock of
Cycle-Masters, Inc. ("CMI"), a manufacturer of plastic lumber in Sweetser,
Indiana. The stockholder of CMI received 200,000 shares of common stock of the
Company. These transactions were not registered under the Act in reliance on the
exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of these individuals enabled him
to evaluate the risks and merits of the investment.
 
     During the period from April 1998 through June 1998, the Company had
offered and sold 211,020 shares of Class B Preferred Stock to investors at $21
per share, and raised $4,431,420 in proceeds. These transactions were not
registered under the Act in reliance on the exemption from registration in
Section 4(2) of the Act, as transactions not involving any public offering. The
securities were sold primarily to accredited investors, officers, directors or
other acquaintances who were familiar with the business of the Company and were
able to assess the risks and merits of the investment.
 
     Effective June 30, 1998 the Company acquired 100% of the stock of Geocore,
Inc. ("GCI") a small environmental services company in northern New Jersey. The
stockholder of GCI received 30,000 shares of common stock of the Company. These
transactions were not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering made was completed without any general or public
solicitation. In each case the offering was done to a very limited number of
officers, directors and shareholders of the companies being acquired. The
officers, directors and few shareholders had strong knowledge and experience in
business matters as well as pre-existing business relationships with the
Company. The knowledge and experience of this individual enabled him to evaluate
the risks and merits of the investment.
 
     On June 30, 1998, the Company acquired the remaining forty-five percent
interest in Consolidated Technologies, Inc. (CTI), an environmental recycling
services company located in Norristown, PA. The stockholder of this company
received 40,000 shares of common stock of the Company with additional shares to
be paid in the event certain performance criteria are met. These transactions
were not registered under the Act in reliance on the exemption from registration
in Section 4(2) of the Act, as transactions not involving any public offering.
This offering made was completed without any general or public solicitation. In
each case the offering was done to a very limited number of officers, directors
and shareholders of the companies being acquired. The officers, directors and
few shareholders had strong knowledge and experience in business matters as well
as pre-existing business relationships with the Company. The knowledge and
experience of this individual enabled him to evaluate the risks and merits of
the investment.
 
     The Company purchased substantially all of the assets of Trimax of Long
Island, Inc. and Polymerix, Inc. ("Trimax") with the approval of the U.S.
Bankruptcy Court. The purchase is effective June 30, 1998 and includes two
patents for the manufacture of structural plastic lumber. Upon approval of the
Bankruptcy Plan
                                       28
<PAGE>   30
 
in December 1998, the Company issued 118,391 shares of common stock. This
offering made was completed without any general or public solicitation. The
Company obtained a "No Action" letter from the Securities and Exchange
Commission regarding the ability of the creditors before the bankruptcy court to
sell the stock being issued pursuant to the Plan without restriction.
 
     On December 31, 1998, the Company acquired the stock of S & W Waste, Inc.
(S & W), an environmental recycling services company located in Kearny, NJ. The
stockholder of this company received 320,000 shares of common stock of the
Company. These transactions were not registered under the Act in reliance on the
exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of this individual enabled him to
evaluate the risks and merits of the investment.
 
     On December 22, 1998 and January 26, 1999, the Company raised $6,500,000 in
the form of convertible securities from Halifax Fund LP and Societe de General
LP. The transaction is structured as a convertible debenture carrying a 5%
coupon. See Exhibits 10.34 and 10.35. As part of the transaction, the Company
has agreed to register Common Stock underlying the Debentures at which point the
investment funds can elect to convert all or any portion of their Debentures
into Common Stock. These transactions were not registered under the Act in
reliance on the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. This offering made was completed
without any general or public solicitation.
 
     On January 28, 1999, the Company acquired the stock of Eaglebrook Plastics,
Inc. and Eaglebrook Products, Inc., a plastic recycling and manufacturing
company located in Chicago, IL. In addition to cash and a convertible debenture,
the stockholders of these companies received 1,668,025 shares of common stock of
the Company. These transactions were not registered under the Act in reliance on
the exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. This offering made was completed without any
general or public solicitation. In each case the offering was done to a very
limited number of officers, directors and shareholders of the companies being
acquired. The officers, directors and few shareholders had strong knowledge and
experience in business matters as well as pre-existing business relationships
with the Company. The knowledge and experience of this individual enabled him to
evaluate the risks and merits of the investment.
 
     On January 7, 1999, the Company executed a contract to acquire the all of
the stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates
a soil remediation facility in Philadelphia, PA which is very similar to the
Company's soil remediation facility in New Castle, DE and has been a competitor
of the Company. AWI provides environmental services which are very similar to
that provided by the Company environmental services division. The Company signed
a Management Contract on January 7, 1999 taking over all responsibility for day
to day management and financial control of SRP and AWI as of that date.
Unaudited sales of SRP and AWI, prior to intercompany eliminations, for year
ended December 31, 1998 were $14,922,000 with unaudited operating income of
$2,025,000. The Company finalized the transaction with Brass on or about March
18, 1999. The Company purchased Brass for cash plus 1,000,000 shares of common
stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to purchase common
stock of the Company. These transactions were not registered under the Act in
reliance on the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. This offering made was completed
without any general or public solicitation. In each case the offering was done
to a very limited number of officers, directors and shareholders of the
companies being acquired. The officers, directors and few shareholders had
strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of this
individual enabled him to evaluate the risks and merits of the investment.
 
                                       29
<PAGE>   31
 
     Securities issued in all of the foregoing transactions were issued as
restricted securities and the certificates were stamped with restrictive legends
to prevent any resale without registration under the Act or in compliance with
an exemption.
 
     Pursuant to Section 701(f) of Regulation S-K of the Exchange Act, the
Company is providing the following information with respect to the use of
proceeds from the Form SB-2 Registration Statement declared effective by the SEC
on February 28, 1998, File No. 333-22949. The offering terminated on May 19,
1998 at which point the Company filed a post effective amendment no. 1 to the
Form SB-2 Registration Statement de-registering 33,523 shares of Common Stock,
par value $.0001. The class of securities registered were Common Stock of the
Company, par value $.0001. The amount of shares registered was 950,000 shares at
a price of $2.50 per share for an aggregate offering price of $2,375,000. A
total of 916,477 shares were registered raising the Company a total of
$2,291,192.50. The Company expended $300,000 in legal, accounting, printing and
other costs in connection with this registration. There was no underwriter
expense or any direct or indirect payments to any officer, director or
affiliate. The net offering proceeds to the Company was $1,991,192.50. The net
offering proceeds were used for general working capital purposes and funding the
acquisition of Cycle Masters Inc.
 
EARN-OUT SHARES AND OPTIONS
 
     Pursuant to various agreements entered into between the Company and the
former shareholders of acquired companies, up to a total of 4,749,186 shares of
the Company's Common Stock is subject to the right of such shareholders to
receive such stock under certain conditions relating to earnings, sales or
production levels reached by the Company, certain subsidiaries of the Company or
by the entities of which these person were formerly shareholders.
 
     The Earth Care Historical Shareholders are entitled to receive on a pro
rata basis an aggregate of 2,000,000 additional shares of the Company's common
stock at any time prior to December 31, 2000, in the event production or net
sales of at least 2,000,000 pounds of plastic lumber product per month for three
consecutive months, subject to the limitations of the Agreement and Plan of
Reorganization entered into by Earth Care and Educational Storybooks
International, Inc. in December 1995. See "Risk Factors -- Dilution".
 
     The Clean Earth Historical Shareholders are entitled to receive on a pro
rata basis an aggregate of 2,573,686 additional shares of the Company's common
stock at any time prior to December 31, 2000, in the event the Earth Care
Historical Shareholders obtain their additional shares pursuant to the terms of
the above mentioned Agreement and Plan of Reorganization. See "Risk
Factors -- Dilution".
 
     The stockholder of Waste Concepts, Inc. (WCI) has been provided with the
right to earn additional shares of the Company's stock equal to 20,000 shares
over the next four years in the event WCI meets certain operating income levels
during each of those years.
 
     The stockholder of Integrated Technical Services, Inc. (ITS) has been
provided with the right to earn additional shares of the Company's stock equal
to 23,000 shares over the next year in the event ITS meets certain operating
income levels during the 1999 fiscal year.
 
     The stockholders of Consolidated Technologies, Inc. (CTI), whose interest
was purchased by the Company, have the right to earn additional shares based
upon meeting certain performance objectives by June 1, 1999. These former
stockholders of CTI have the right to earn 132,500 shares of the Company on a
cumulative basis.
 
     There are numerous members of the management of the Company and its
subsidiaries who have been granted options subject to each manager meeting
certain performance criteria.
 
     The Table below sets forth the capitalization structure of the Company as
of December 31, 1998.
 
                                       30
<PAGE>   32
 
OTHER OUTSTANDING OPTIONS
 
     The Company has reserved 117,895 shares of the Company's common stock for
issuance upon exercise of an option held by a former creditor of Earth Care (the
"Magellan Option"). The option is exercisable no later than June 30, 1999 at an
exercise price of $1.77 per share. In the event the Magellan Option is not
exercised in whole or in part, then those shares reserved for the Option shall
be issued on a pro rata basis to the persons who are the historical shareholders
of the Company at no cost, in proportion to the shares they owned.
 
     On or about December 12, 1997, the Board of Directors granted options to
Stout Partnership providing it the right to purchase 320,000 shares at an
exercise price of $2.25 per share. This grant was in consideration of Stout
Partnership and each of the individual members of the partnership personally
guaranteeing a revolving discretionary line of credit in the amount of
$4,000,000 on behalf of the Company with PNC Bank of Delaware. In addition to
the personal guarantees, the individual members of the partnership pledged
$2,000,000 in cash or securities to PNC Bank on behalf of the Company. August C.
Schultes III and Gary J. Ziegler, both directors of the Company, are individual
partners in Stout Partnership. Mark S. Alsentzer, Chairman and President of the
Company is also an individual partner in Stout Partnership.
 
     On or about September 16, 1998 the Company granted 10,000 options to a
consultant at an exercise price of $3.50 per share as a result of his assisting
the Company in raising money.
 
     On or about December 22, 1998, the Company granted 50,000 warrants to each
Halifax Fund LP and Societe de General LP at an exercise price of $7.21 per
share as part of the consideration of a $4,000,000 investment made in the
Company by convertible securities.
 
CAPITALIZATION
(As of December 31, 1998)
 
<TABLE>
<S>                                                        <C>
Primary Shares:
  Common Stock (5,626,145 shares are freely tradable)....  18,230,528
Fully Diluted:
  Series A Preferred Shares (convert @ 7:1 common).......   1,596,084
  Series B Preferred Shares (convert @ 7:1)..............   1,082,879
  Convertible debentures.................................     756,001
  Warrants and Options...................................   2,291,395
  Earn Out shares........................................     175,500
  Historical Shareholder earn out........................   4,573,686
                                                           ----------
          Subtotal.......................................  10,475,545
          Fully Diluted Equity...........................  28,706,073
</TABLE>
 
     On or about January 26, 1999, the Company granted 37,500 warrants to
Halifax Fund LP and 25,000 warrants to Societe de General LP at an exercise
price of $7.21 per share as part of the consideration of a $2,500,000 investment
made in the Company by convertible securities.
 
     On or about January 10, 1999, the Company granted options to purchase
127,500 shares of its Common Stock to Columbine Financial Solutions, Inc. as
consideration for assisting the Company in financial public relations and
raising money. The exercise price on 85,000 of these options is $5.00 per share
and the remaining 42,500 options have an exercise price of $7.50 per share.
 
     Upon the closing of the purchase of Brass, the Company granted 1,500,000
warrants to Louis Paolino, Jr. The warrants were part of the merger
consideration.
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     The following discussion is intended to assist in the understanding of the
Company's financial position and results of operations for the years ended
December 31, 1998 and 1997. This discussion should be read in conjunction with
consolidated financial statements and notes thereto which are included elsewhere
herein.
 
                                       31
<PAGE>   33
 
BUSINESS SEGMENTS
 
     The Company has two distinct business segments-manufacturing plastic lumber
and environmental recycling. The Plastic Lumber Division manufactures structural
and non-structural plastic lumber and a variety of accessory products such as
park and site amenities, made from 100% recycled high density polyethylene. The
structural plastic lumber is manufactured under processes that are protected by
patents.
 
     The Environmental Recycling Division provides environmental recycling
services including environmental construction services, upland disposal of
dredge materials, beneficial re-use of industrial wastes, and on-site recycling
services. The Division also operates two plants providing thermal desorption and
bioremediation of soil brought to the plants by third parties as well as its
sister environmental service companies.
 
BUSINESS COMBINATIONS
 
     The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations. See Note 2 to the consolidated financial
statements for summaries of the business combinations completed in 1998 and
1997. See Eaglebrook and Brass Acquisitions in 1999 below.
 
     The Company continues to seek acquisition candidates that can be vertically
integrated into either the recycled plastic lumber or environmental recycling
operations. In the recycled plastic lumber operation, targeted companies include
manufacturers and distributors of recycled plastic products as well as raw
material regrind operations. In the environmental recycling operation, targeted
companies include soil recycling companies and construction companies involved
in on-site clean up and companies with specialized technologies for beneficial
reuse of dredge material, ash and biosolids.
 
SEASONALITY
 
     The Company experiences a seasonal slow down during the winter months
because its environmental operations are located in the Northeast United States
where adverse weather and normal ground freezing can impact the Company's
performance. Additionally, sales of certain plastic lumber products slow
significantly in the winter months.
 
              COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
 
     The following table sets forth revenue, with percentages of total revenue,
and costs of sales, depreciation, selling, general and administrative expenses
and amortization, along with percentages of the applicable segment revenue, for
each of the Company's two business segments.
 
<TABLE>
<CAPTION>
                                                           1998        %       1997        %
                                                          -------    -----    -------    -----
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                       <C>        <C>      <C>        <C>
Sales:
  Plastic Lumber........................................  $15,720     34.4    $ 8,130     32.9
  Environmental Recycling...............................   29,985     65.6     16,609     67.1
                                                          -------    -----    -------    -----
  Total revenue.........................................   45,705    100.0     24,739    100.0
Cost of Sales:
  Plastic Lumber........................................   10,943     69.6      7,110     87.5
  Environmental Recycling...............................   22,583     75.6     12,161     73.2
Depreciation:
  Plastic Lumber........................................      851      5.4        288      3.5
  Environmental Recycling...............................      649      2.2        220      1.3
  Corporate.............................................       12      0.0         12      0.0
</TABLE>
 
                                       32
<PAGE>   34
 
<TABLE>
<CAPTION>
                                                           1998        %       1997        %
                                                          -------    -----    -------    -----
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                       <C>        <C>      <C>        <C>
Selling, General and Administrative:
  Plastic Lumber........................................    4,258     27.1      1,661     20.4
  Environmental Recycling...............................    3,019     10.1      1,899     11.4
  Corporate.............................................    1,339      2.9      1,440      5.8
Amortization:
  Plastic Lumber........................................      264      1.7        104      1.3
  Environmental Recycling...............................      188      0.4         17      0.1
  Corporate.............................................      162      0.4        148      0.6
                                                          -------    -----    -------    -----
          Total Operating Expenses......................   44,268     96.9     25,060    101.3
          Total Operating Income (Loss).................    1,437      3.1       (321)    (1.3)
Operating Income (Loss) by Segment
  Plastic Lumber........................................     (596)    (3.8)    (1,033)   (12.7)
  Environmental Recycling...............................    3,546     11.8      2,312     13.9
  Corporate.............................................   (1,513)    (3.3)    (1,600)    (6.5)
                                                          -------    -----    -------    -----
          Total Operating Income........................  $ 1,437      3.1    $  (321)    (1.3)
</TABLE>
 
CONSOLIDATED SALES AND OPERATING INCOME
 
     The Company recognized significant increases in both sales and operating
income for 1998 compared to 1997. Sales increased 85% for 1998 to $45,705,000
from $24,739,000 in 1997. Of the $20,966,000 increase in consolidated revenues,
approximately $11,489,000 was attributable to acquisitions completed after June
30, 1997, $4,555,000 to the start up of dredging operations in 1998, $1,803,000
to the start up of the CBC facility July 1, 1998 and the remaining $3,119,000 to
internal growth.
 
     Consolidated operating income increased by $1,758,000 to $1,437,000 for
1998 compared to a loss of $321,000 in 1997. The increase in operating income
was primarily due to businesses acquired in 1998, the entrance into the
beneficial reuse of dredge material market in the second quarter of 1998 and
improved Plastic Lumber plant utilization.
 
SALES BY SEGMENT
 
     Plastic Lumber Division sales increased by $7,590,000 or 93% to $15,720,000
in 1998 compared to $8,130,000 in 1997. Sales by the original plastic lumber
companies and companies acquired before January 31, 1997 increased $1,759,000 to
$9,889,000 for 1998 from $8,130,000 for 1997. This 22% increase in "same plant"
sales is attributable to establishing a network of "stocking" distributors and
selling to the mass merchant market in 1998. The remaining $5,831,000 of the
increase in Plastic Lumber sales was due to the 1998 acquisitions of CPL, CMI
and the assets of Trimax and the July 1, 1997 acquisition of EPC.
 
     Environmental Recycling Division sales for 1998 were $29,985,000, an
increase of $13,376,000 or 81% over the $16,609,000 for 1997. The acquisitions
of WCI, GHE and Geocore, Inc., which the Company acquired after November of
1997, contributed approximately $5,658,000 or 42% of the total increase. The
recently constructed CBC facility, which began treating contaminated soils
bio-organically in June 1998, added sales of $1,803,000 or 14% of the increase.
The entrance of CTI and the Company's Joint Venture into the beneficial reuse of
dredge material market during the second quarter of 1998 generated $4,555,000 or
34% of the increase. The remaining $1,360,000 or 10% of the sales increase came
from internal growth due to the vertical integration of newly acquired
companies.
 
GROSS PROFIT
 
     Consolidated gross profit increased $5,726,000 or 115% to $10,686,000 for
1998 compared to $4,960,000 in 1997. The gross profit as a percent of revenue
improved by 3.4 percentage points from 20.0% in 1997 to 23.4% in 1998. The
increase was attributed to acquisitions in both business segments subsequent to
June 30,
 
                                       33
<PAGE>   35
 
1997 and to the start up of dredging operations in 1998. Business units in both
Divisions continued to eliminate and consolidate duplicative operating expenses
during 1998, however, 1998 results include certain non-recurring expenses
associated with the unit combinations.
 
     Plastic Lumber Division acquisitions in 1998 accounted for $1,670,000 or
52% of the $3,211,000 increase in Plastic Lumber Division gross profit in 1998.
Approximately $618,000 or 19% of the increase in gross profit came from
including a full year for EPC compared with only 6 months of EPC operations
included in 1997. The remaining $923,000 or 29% of the increase came from the
original Plastic Lumber operations and expanded plant capacity at these
facilities.
 
     Environmental Recycling Division acquisitions after November 30, 1997
accounted for $1,248,000 or 50% of the $2,515,000 increase in gross profit in
1998 over 1997. The opening of the CBC facility in late June 1998 contributed
$1,049,000 of gross profit and the new dredging operations contributed $648,000
to gross profit for 1998. The soil remediation and environmental construction
service companies' gross profit was $428,000 lower in 1998 due to delays in the
commencement dates of certain contracts in the $10 million backlog of
environmental construction service contracts.
 
     Cost of sales (including depreciation) as a percent of Plastic Lumber sales
improved significantly from 81% in 1997 to 75% in 1998. Profitability improved
at all of the Lumber plants as a result of implementing manufacturing
efficiencies in the Tennessee flow mold facility and tripling the capacity of
the Wisconsin facility. The Plastic Lumber Division expects continued
improvement in gross profit margins in 1999 from several sources: the Eaglebrook
acquisition in January 1999: the national distribution network for residential
products; the anticipated "BOCA certification" of the CareFree decking product
("BOCA certification" provides automatic approval by local building inspectors);
the expansion into industrial products; the addition of patented structural
lumber to the product offerings; and the further development of railroad ties.
 
     Environmental Recycling Division cost of sales (including depreciation and
amortization of site development costs) increased as a percent of sales from 75%
in 1997 to 78% in 1998. The higher gross margins from Environmental Recycling
Division acquisitions was more than offset by the lower gross profit margins on
environmental construction contracts. The Environmental Recycling Division
expects to improve gross profit levels in environmental construction services
and an even greater gross margin contribution from a full year's operations from
the CBC facility in 1999.
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("S,G&A")
 
     Consolidated SG&A expenses increased $3,616,000 or 72% to $8,616,000 for
1998 from $5,000,000 in 1997. However, as a percentage of consolidated sales,
SG&A expenses improved from 20% for 1997 to 19% in 1998. Efficiencies in the
Environmental Recycling Division only partially offset Plastic Lumber costs
incurred to establish a national sales distribution network. Corporate
administrative expenses improved to 2.9% of sales in 1998 from 5.8% in 1997
despite making several acquisitions in 1998.
 
     Plastic Lumber SG&A expenses increased $2,597,000 or 156% in 1998 compared
to $1,661,000 in 1997. Acquisitions made since the beginning of 1997 accounted
for $605,000 or 23% of the Plastic Lumber increase. Plastic Lumber SG&A as a
percent of sales increased from 20% in 1997 to 27% in 1998. The Plastic Lumber
Division incurred significant expenses developing and maintaining a national
sales distribution network and a centralized customer service center. These
expenses included adding a Vice President of Sales, regional sales and product
line managers as well as personnel for customer service. The Plastic Lumber
Division also incurred significant trade show and travel expenses to increase
the Company's sales coverage and to integrate acquired manufacturing operations
with existing manufacturing plants. The Plastic Lumber Division also continued
to invest in research and engineering to commercialize the structural lumber and
railroad tie product lines.
 
     Environmental Recycling Division SG&A expenses improved from 11.4% of
related revenue in 1997 to 10.1% in 1998, despite making several acquisitions
and starting up the dredging operations.
 
                                       34
<PAGE>   36
 
INTEREST EXPENSE
 
     Interest expense increased $918,000 to $1,225,000 in 1998 over the $307,000
in 1997. The increase is the result of increased borrowings from the bank lines
of credit for working capital and to finance acquisitions, the start up of
dredging operations and additional Plastic Lumber plant capacity. It also
includes debt service assumed from businesses acquired during 1997 and 1998 and
$272,000 of amortization of deferred financing costs of increasing the line of
credit at PNC Bank in December of 1997 and obtaining the new credit agreement
with a division of Southern Pacific Bank in October 1998.
 
     Total notes payable and capital leases increased by $13,125,000 or 253%
from $5,179,000 at December 31, 1997 to $18,304,000 at December 31, 1998.
Excluding the $272,000 amortization of deferred financing costs, interest
expense increased by $646,000 or 210%. Interest expense did not increase in the
same proportion as the debt increase because a disproportionate share of the
total debt increase came in the second half of 1998.
 
DEPRECIATION AND AMORTIZATION
 
     Depreciation expense increased $990,000 or 190% in 1998 compared to 1997
reflecting the significant increase in plant and equipment from both
acquisitions and continued capital investments. Amortization expense increased
$347,000 in 1998 over 1997 due to goodwill from the numerous acquisitions
completed in the second half of 1997 and first half of 1998 and from CTI's
dredge site development costs.
 
                        LIQUIDITY AND CAPITAL RESOURCES
 
     Cash and cash equivalents totaled $901,970 at December 31, 1998 a decrease
of $268,150 from the $1,170,120 at December 31, 1997. Cash used in operating
activities was $6,251,592. The significant increase in revenues during the
second half of 1998 resulted in a significant increase in accounts receivable
and Plastic Lumber inventories. The Company used its revolving credit agreements
to finance the increase in accounts receivable and inventories and to pay down
accounts payable and accrued expenses of acquired companies.
 
     Cash used in investing activities was primarily for capital expenditures.
The Environmental Recycling Division made capital expenditures in 1998 for
property, plant and equipment totaling $4,385,000 including $2,503,000 for the
Carteret Biocycle facility, $689,000 for dredge material handling and mixing
equipment, $550,000 for environmental construction service equipment and
$586,000 to improve its Delaware soil remediation plant and soil handling
equipment. The Plastic Lumber Division made machinery and equipment purchases
totaling $2,831,000 primarily to expand capacity at the Maryland Wisconsin,
Indiana and Tennessee manufacturing facilities, to provide recycled plastic
washing facilities in its Massachusetts plant and to establish structural lumber
and railroad tie production lines in its Tennessee facility. The Company also
used a total of $3,885,197 to acquire companies with plant & equipment valued at
$6,387,000. The Company used its credit agreements to fund $2,045,000 of
permitting and development of the dredge soil reclamation site and $1,230,000 of
working capital needed to start up the dredging operations of both Consolidated
Technologies and the Joint Venture.
 
     Cash provided by financing activities totaled $19,153,471, including
$8,724,972 of net additional bank and equipment financings, $3,956,000 of net
proceeds from the issuance of 5% convertible subordinated debentures (see Note 6
to Consolidated Financial Statements) and $6,472,499 net proceeds from equity
financings. In addition, the Company assumed $2,774,105 of debt owed by 7
acquired companies and incurred $954,952 of additional debt to make the
acquisitions.
 
     Proceeds from new bank and capital lease equipment borrowings totaled
$16,134,000 including $13,499,000 under the new credit facility with a division
of Southern Pacific Bank ("SPB"). The $672,000 of costs paid out to obtain the
SPB credit agreement is being amortized over the agreement's 5 year term. The
proceeds of the SPB loans were used to pay off $8,300,000 outstanding under the
PNC Bank revolving credit agreement and approximately $770,000 of various
equipment loans. During the first ten months of 1998 the Company had borrowed an
additional $7,270,000 under its revolving credit agreement with PNC Bank.
 
                                       35
<PAGE>   37
 
     During 1998 the Company also borrowed $778,000 from an equipment leasing
company, $736,000 from an insurance premium financing company, $550,000 from a
state of Pennsylvania development commission and $571,000 from various equipment
financing companies at favorable interest rates. Repayments of various
non-affiliated notes payable, capital leases and credit agreements totaled
$12,160,112, including $8,300,000 to PNC Bank, $2,060,000 on other loans
outstanding at December 31, 1997, $552,000 on the new bridge and term loans with
SPB, $362,000 on the Premium finance loan and $710,000 on debt assumed in
acquisitions. The Company also paid back the entire $1,956,810 it owed to
affiliates at December 31, 1997.
 
     Equity financings in 1998 included $2,291,000 of proceeds from the exercise
of Series A warrants and $4,431,420 from a Private Placement of 211,020 shares
of Series B Preferred Stock for $21 per share. The Series B Preferred Stock has
a cumulative 10% stock dividend and each preferred share is convertible into
seven common shares. (See Note 7 to the consolidated financial statements.) The
Company incurred expenses totaling $483,788 to register the common stock
underlying the warrants and the Series B convertible preferred stock.
 
     In January 1998, the Company obtained a $4,000,000 increase in its line of
credit from PNC Bank to $5,500,000 with repayment originally due on June 30,
1999. The line was secured by certain assets of the Company and the personal
guarantees of members of the Stout Partnership (See Certain Transactions). In
the second and third quarters of 1998 the PNC line was increased to $8,400,000
and the term was extended to September 30, 1999. As of October 9, 1998, the
Company had borrowed a total of $8,300,000 against the PNC line of credit when
it was paid off with proceeds from the SPB credit facility.
 
     In October 1998 the Company completed negotiations on a $30 million credit
facility with a division of Southern Pacific Bank (See Note 5 to the
consolidated financial statements). In October 1998 the Company used this line
to payoff the aforementioned PNC Bank line and $690,000 of notes payable secured
by equipment at six subsidiary locations. In addition the Company drew down a
$2,000,000 bridge loan payable over 18 months. On March 1, 1999 the $1,440,000
balance on the bridge loan was converted into a real estate loan with payments
of $6,000 per month and a balloon payment due October 10, 2003. On December 31,
1998 the Company executed a $490,000 term loan with SDPB to repay certain loans
owed by S&W Waste, Inc. As of December 31, 1998 the Company had loans totaling
$12,946,683 outstanding under the SPB agreement.
 
     The additional unused portion of the SPB line will be used to expand
existing operations, increase working capital and to finance acquisitions. An
additional $175,000 of financing cost is due on June 9, 1999 to make the full
$30 million available to borrow against eligible assets pursuant to the terms of
the SPB agreement.
 
     The Company will require additional working capital for the environmental
recycling operations, especially for the dredging opportunities being pursued by
the Company. Although, there are no material commitments in place currently for
capital expenditures, the Company also anticipates requiring additional working
capital to expand and upgrade its plastic lumber manufacturing facilities as
sales levels increase and as the structural lumber and railroad tie products
begin to take hold within their markets. The Company also anticipates using
working capital to fund research and development costs with respect to its new
products.
 
ACQUISITION OF BRASS IN 1999
 
     On January 7, 1999, the Company executed a contract to acquire all of the
stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). The Company
signed a Management Contract taking over all responsibility for day to day
management and financial control of SRP and AWI on January 7, 1999. Unaudited
sales of SRP and AWI, prior to intercompany eliminations, for the year ended
December 31, 1998 were $14,922,000 with unaudited operating income of
$2,025,000. The Company purchased Brass for cash plus 1,000,000 shares of
restricted common stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to
purchase common stock of the Company. The real estate and accounts receivable of
Brass will secure loans to fund the cash portion of the purchase price.
 
                                       36
<PAGE>   38
 
ACQUISITION OF EAGLEBROOK IN 1999
 
     On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook") located in Chicago,
Illinois. The Company purchased Eaglebrook for cash plus 1,668,025 shares of
restricted common stock, $4,000,000 of convertible secured debentures and
150,000 options to purchase Company stock. The unaudited sales of Eaglebrook
were $22,145,000 before $1,706,000 of intercompany eliminations and the
unaudited combined operating income was $1,325,000 for the year ended December
31, 1998.
 
ISSUANCE OF ADDITIONAL CONVERTIBLE SUBORDINATED DEBENTURES IN 1999
 
     On January 27, 1999 the Company issued an additional $2,500,000 of
Convertible Subordinated debentures to the same debenture holders with
substantially the same terms as the $4,000,000 issued on December 22, 1998 (See
Notes 6 and 13 to the Financial Statements). The proceeds were used in the
purchase of Eaglebrook.
 
LOANS FROM RELATED PARTIES
 
     On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company. The loan bears interest at 10% and matures in 18 months. The
proceeds were used in the purchase of Eaglebrook. The Stout Partnership borrowed
the $5,000,000 from PNC Bank and the individual partners have personally
guaranteed the loan.
 
     In January 1999 the Company borrowed $1,500,000 from a company owned by one
of the directors and his family. The loan bears interest at 1% over prime and
matures in 12 months. The proceeds were used in the Eaglebrook acquisition.
 
                        RECENT ACCOUNTING PRONOUNCEMENTS
 
     In June 1998 SFAS 133 was issued by the Financial Accounting Standards
Board establishing accounting and reporting standards for derivative instruments
and hedging activities. The Company does not have any derivative instruments or
use any hedging activities. Accordingly, adoption of this standard will not
affect the company's financial position or results of operations.
 
                                YEAR 2000 ISSUE
 
     Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (the "Year 2000 Issue"). The accounting software used by the Company is
Year 2000 compliant (meaning it recognizes dates in the Year 2000 and beyond) at
most subsidiary operations. The Company anticipates upgrading the accounting
software in those remaining subsidiaries in mid 1999. The Company does not
anticipate a material financial impact as a result of the Year 2000 Issue nor
does it anticipate any material financial expenditure to remedy the Year 2000
date change within its own software. In fact, the Company expenditures to date
on investigating and remedying Year 2000 issues has been insignificant.
 
     The Company is nearly complete in the process of conducting an internal
audit of its computer systems and software to determine what issues, if any,
exist. Upon completion of its internal audit, the Company will evaluate the full
scope of issues, related costs, and available remedies to insure the Company's
systems continue to meet its internal needs. Anticipated costs for system and
software modifications will be expensed as incurred. The Company is also in the
process of conducting an internal audit of its non-information technology
systems (e.g. manufacturing equipment embedded computer systems) to determine
what, if any, issues may exist in those systems.
 
     However, the Company has no control over Year 2000 compliance by the
customers and vendors of the Company. If the Company's customers and vendors are
not in Year 2000 compliance, this could provide a


                                       37
<PAGE>   39
 
material adverse financial impact to the Company. The Company has made inquiry
to all of its major customers and suppliers in an attempt to assess the Year
2000 readiness of its major customers and suppliers. The results of this inquiry
have not revealed any issues that the Company believes can have a material
adverse effect on the financial condition of the Company.
 
                                       38
<PAGE>   40
 
ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants..........    39
Consolidated Balance Sheets as of December 31, 1998 and
  1997......................................................    40
Consolidated Statements of Operations for the Years Ended
  December 31, 1998 and 1997................................    41
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 1998 and 1997....................    42
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1998 and 1997................................    43
Notes to Consolidated Financial Statements..................    44
</TABLE>
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
To U.S. Plastic Lumber Corp.:
 
     We have audited the accompanying consolidated balance sheets of U.S.
Plastic Lumber Corp. (a Nevada Corporation) and subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of U.S. Plastic
Lumber Corp. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
 
ARTHUR ANDERSEN LLP
 
Miami, Florida,
  February 19, 1999.
 
                                       39
<PAGE>   41
 
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
                                         ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................  $   901,970    $ 1,170,120
Accounts receivable, net....................................   12,334,903      6,940,288
Inventories.................................................    4,869,006      1,502,658
Prepaid expenses and other assets...........................    1,278,402        220,728
                                                              -----------    -----------
          Total current assets..............................   19,384,281      9,833,794
Property, plant and equipment, net..........................   17,890,636      5,775,424
Acquired intangibles, net...................................    9,553,642      7,009,244
Other assets................................................    5,376,403        552,914
                                                              -----------    -----------
          Total assets......................................  $52,204,962    $23,171,376
                                                              ===========    ===========
 
                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................  $ 4,229,972    $ 3,788,714
Notes payable and capital leases, current portion...........    3,635,300      2,404,607
Notes payable, affiliates...................................           --      1,956,810
Accrued expenses............................................    1,564,944      1,737,518
Other current liabilities...................................    1,097,762        420,084
                                                              -----------    -----------
          Total current liabilities.........................   10,527,978     10,307,733
Notes payable and capital leases, net of current portion....   14,669,104        817,011
Deferred income taxes.......................................      130,281        580,433
Minority interest...........................................      250,164             --
Convertible subordinated debentures, net of discount........    3,555,556             --
                                                              -----------    -----------
          Total liabilities.................................   29,133,083     11,705,177
                                                              -----------    -----------
 
STOCKHOLDERS' EQUITY:
10% Convertible preferred stock, par value $.001; authorized
  5,000,000 shares; issued and outstanding 382,709 shares
  and 208,930 shares, respectively (aggregate liquidation
  preference of $7,808,877 and $4,178,600, respectively)....          383            209
Common stock par value $.0001, authorized 50,000,000 shares;
  issued and outstanding 18,230,528 shares and 15,621,599
  shares, respectively......................................        1,823          1,562
Additional paid-in capital..................................   24,669,247     12,573,026
Accumulated deficit.........................................   (1,599,574)    (1,108,598)
                                                              -----------    -----------
          Total stockholders' equity........................   23,071,879     11,466,199
                                                              -----------    -----------
          Total liabilities and stockholders' equity........  $52,204,962    $23,171,376
                                                              ===========    ===========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       40
<PAGE>   42
 
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                 1998           1997
                                                              -----------    -----------
<S>                                                           <C>            <C>
Sales, net..................................................  $45,704,940    $24,739,381
Cost of goods sold..........................................   35,019,270     19,779,872
                                                              -----------    -----------
  Gross profit..............................................   10,685,670      4,959,509
Selling, general and administrative expenses................    9,248,444      5,280,813
                                                              -----------    -----------
  Operating income (loss)...................................    1,437,226       (321,304)
Interest income.............................................       40,801         50,879
Interest expense............................................   (1,225,158)      (307,636)
Minority interest in joint venture and subsidiary...........     (262,659)      (131,897)
Gain on sale of assets......................................      105,588             --
                                                              -----------    -----------
  Income (loss) before income taxes.........................       95,798       (709,958)
Income tax benefit..........................................           --         (4,329)
                                                              -----------    -----------
  Net income (loss).........................................       95,798       (705,629)
Preferred stock dividends earned............................     (677,078)      (409,705)
                                                              -----------    -----------
  Net loss attributable to common stockholders..............  $  (581,280)   $(1,115,334)
                                                              ===========    ===========
Loss per share-basic and diluted............................  $      (.03)   $      (.08)
                                                              ===========    ===========
Weighted average common shares outstanding-basic and
  diluted...................................................   16,876,651     14,053,862
                                                              ===========    ===========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       41
<PAGE>   43
 
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     YEARS ENDED DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                    CONVERTIBLE
                                  PREFERRED STOCK       COMMON STOCK       ADDITIONAL
                                  ----------------   -------------------    PAID-IN-     ACCUMULATED
                                  SHARES    AMOUNT     SHARES     AMOUNT     CAPITAL       DEFICIT        TOTAL
                                  -------   ------   ----------   ------   -----------   -----------   -----------
<S>                               <C>       <C>      <C>          <C>      <C>           <C>           <C>
Balance at December 31, 1996....   74,970    $ 75    11,672,349   $1,167   $ 4,436,758   $   (98,229)  $ 4,339,771
Sale of Series A preferred
  stock.........................  119,000     119            --       --     2,379,881            --     2,380,000
Preferred stock dividends.......   14,960      15            --       --       304,725      (304,740)           --
Business acquisitions...........       --      --     2,190,150      219     2,277,262            --     2,277,481
Sale of common stock............       --      --     1,111,111      111     2,499,889            --     2,500,000
Common stock issued under
  earnout agreements............       --      --        28,500        3        63,087            --        63,090
Exercise of nonemployee stock
  options.......................       --      --       202,589       20       358,565            --       358,585
Licensing agreement.............       --      --       187,500       19        93,731            --        93,750
Noncompete agreements...........       --      --        72,572        7        80,681            --        80,688
Dura Tech agreement.............       --      --       150,500       15        75,235            --        75,250
Other issuances.................       --      --         6,328        1         3,212            --         3,213
Net loss........................       --      --            --       --            --      (705,629)     (705,629)
                                  -------    ----    ----------   ------   -----------   -----------   -----------
Balance at December 31, 1997....  208,930     209    15,621,599    1,562    12,573,026    (1,108,598)   11,466,199
Business acquisitions and
  earnout agreements............       --      --       952,875       96     3,455,857            --     3,455,953
Sale of Series B preferred
  Stock.........................  211,020     211            --       --     4,431,209            --     4,431,420
Exercise of options and
  warrants......................       --      --     1,044,372      105     2,524,762            --     2,524,867
Costs of issuing common and
  preferred shares..............       --      --            --       --      (483,788)           --      (483,788)
Shares and value of options
  issued to directors and the
  Stout Partnership.............       --      --         4,400       --       512,685            --       512,685
Shares, warrants and options
  issued in connection with
  convertible debentures........       --      --       114,800       11       548,949            --       548,960
Debenture proceeds allocated to
  10% conversion discount.......       --      --            --       --       444,444            --       444,444
Other issuances.................       --      --        29,030        3        75,338            --        75,341
Conversion of Preferred to
  Common........................  (66,207)    (66)      463,452       46            20            --            --
Preferred stock dividends.......   28,966      29            --       --       586,745      (586,774)           --
Net income......................       --      --            --       --            --        95,798        95,798
                                  -------    ----    ----------   ------   -----------   -----------   -----------
Balance at December 31, 1998....  382,709    $383    18,230,528   $1,823   $24,669,247   $(1,599,574)  $23,071,879
                                  =======    ====    ==========   ======   ===========   ===========   ===========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       42
<PAGE>   44
 
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     YEARS ENDED DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                  1998           1997
                                                              ------------    -----------
<S>                                                           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)...........................................  $     95,798    $  (705,629)
                                                              ------------    -----------
Adjustments to reconcile net income to net cash (used in)
  operating activities:
  Depreciation..............................................     1,511,209        520,888
  Amortization of all intangibles and dredge site
     development costs......................................       614,829        268,279
  Amortization of deferred financing costs..................       272,366             --
  Minority interest in Joint Venture and subsidiary.........       262,659        131,897
  Provision for doubtful accounts...........................       100,769        219,053
  Gain on sale of assets....................................       105,588             --
  Payments of state income taxes............................      (242,441)            --
  Compensation expense related to common shares issued......       170,678         63,090
  Changes in operating assets and liabilities, net of
     acquisitions:
     Accounts receivable....................................    (3,104,811)    (1,388,682)
     Inventories............................................    (2,632,092)      (575,126)
     Prepaid expenses and other current assets..............    (1,035,010)      (100,166)
     Other assets...........................................      (404,491)      (373,466)
     Accounts payable.......................................      (953,868)      (874,589)
     Other liabilities......................................       263,940         91,281
     Accrued expenses.......................................    (1,276,715)       269,242
                                                              ------------    -----------
          Total adjustments.................................    (6,347,390)    (1,748,299)
                                                              ------------    -----------
          Net cash used in operating activities.............    (6,251,592)    (2,453,928)
                                                              ------------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures for property and equipment...........    (7,239,396)    (2,625,356)
  Capital expenditures for dredge disposal site permits and
     costs..................................................    (2,045,436)            --
  Cash paid for acquisitions, net of cash received..........    (3,885,197)    (1,595,000)
                                                              ------------    -----------
          Net cash used in investing activities.............   (13,170,029)    (4,220,356)
                                                              ------------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sales of common stock.......................            --      2,503,213
  Proceeds from exercise of warrants........................     2,291,193             --
  Proceeds from sales of preferred stock....................     4,431,420      2,380,000
  Costs of issuing warrants and preferred stock.............      (483,788)            --
  Proceeds from issuance of convertible debentures..........     4,000,000             --
  Proceeds from stock option exercises......................       233,674        358,585
  Advances (repayment of) due to affiliates, net............    (1,956,810)     1,700,000
  Proceeds from notes payable and capital leases............    23,513,840      1,379,987
  Payment of deferred financing and convertible debenture
     issue costs............................................      (715,946)            --
  Payments of notes payable and capital leases..............   (12,160,112)    (1,331,671)
                                                              ------------    -----------
          Net cash provided by financing activities.........    19,153,471      6,990,114
                                                              ------------    -----------
Net change in cash and cash equivalents.....................      (268,150)       315,830
Cash and cash equivalents, beginning of period..............     1,170,120        854,290
                                                              ------------    -----------
Cash and cash equivalents, end of period....................  $    901,970    $ 1,170,120
                                                              ============    ===========
</TABLE>
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                       43
<PAGE>   45
 
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
NATURE OF OPERATIONS
 
     U.S. Plastic Lumber Corp. and its subsidiaries (collectively the "Company")
are engaged in the manufacturing of recycled plastic lumber and other products
and environmental remediation services, including recycling of soils which have
been exposed to hydrocarbons and the beneficial reuse of dredge materials. The
Company's plastic lumber customers are located throughout the United States. The
Company's environmental remediation, dredge and soil recycling customers are
located primarily in the Northeastern United States.
 
PRINCIPLES OF CONSOLIDATION
 
     The accompanying consolidated financial statements include the accounts of
U.S. Plastic Lumber Corp. and its wholly-owned subsidiaries U.S. Plastic Lumber,
LTD, Clean Earth, Inc., Carteret Biocycle Corp. ("CBC"), Clean Earth of New
Castle, Consolidated Technologies, Inc. ("CTI"), Integrated Technical Services,
Inc. ("ITS") and S&W Waste, Inc. (See subsidiary mergers effective December 31,
1998 in Note 2). All significant intercompany balances and transactions have
been eliminated in consolidation.
 
     In July 1997, the Company and Interstate Industrial Corp. ("IIC") formed a
50/50 joint venture dredging business. The joint venture had minor operations in
1997 incurring a loss of $263,794. The Company manages the day to day dredging
operations and has consolidated 100% of the assets, liabilities and results of
operations of the joint venture after the Company obtained majority control
effective April 1, 1998. A summary of the 1998 operations of the Joint Venture
follows:
 
<TABLE>
<S>                                                             <C>
Revenues....................................................    $3,062,903
Operating costs and expenses................................     2,298,779
                                                                ----------
Operating income............................................       764,124
Minority interest...........................................      (382,062)
                                                                ----------
Company's portion of income before income taxes.............    $  382,062
                                                                ==========
</TABLE>
 
     The Company provided 100% of the funds to finance the joint venture's
operations and all of its cash advances will be returned before any funds are
distributed to IIC. The IIC minority interest in the net income of the joint
venture since inception totaling $250,164 is shown as minority interest in the
accompanying consolidated balance sheet at December 31, 1998. The $119,403
minority interest in the CTI losses prior to June 30, 1998 are combined with the
$382,062 minority interest in the IIC joint venture in the statement of
Operations.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
 
CASH EQUIVALENTS
 
     The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
 
                                       44
<PAGE>   46
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
INVENTORIES
 
     Inventories are valued at the lower of cost or market, cost being
determined by the first-in, first-out method.
 
PROPERTY AND EQUIPMENT
 
     Property and equipment are stated at cost. Depreciation is computed for
financial statement purposes by the use of the straight-line method over the
estimated useful lives of the assets. Accelerated methods of computing
depreciation are used for tax purposes. Upon sale or retirement, the cost and
related accumulated depreciation of such assets are removed from the accounts
and any resulting gain or loss realized is credited or charged to income during
the period. Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals, improvements and betterments are capitalized.
 
ACQUIRED INTANGIBLES
 
     The excess of cost over the fair value of net assets of businesses acquired
is amortized on a straight-line basis over a period of twenty years.
Amortization expense for acquired intangibles was $468,449 in 1998 and $268,279
in 1997. Accumulated amortization of acquired intangibles excluding the Trimax
patents was $716,039 at December 31, 1998 and $268,279 at December 31, 1997.
 
     It is the Company's policy to evaluate the excess of cost over the net
assets of businesses acquired based on an evaluation of such factors as the
occurrence of a significant adverse event or change in the environment in which
the business operates or if the expected undiscounted future net cash flows are
less than the carrying amount of the asset. An impairment loss would be recorded
in the period such determination is made.
 
OTHER ASSETS
 
     The Company incurred $2,045,436 of costs in 1997 and 1998 to permit and
develop dredge material disposal sites in strip mines in Pennsylvania. The costs
are being amortized over the total number of yards currently permitted for
disposal including $71,071 of amortization in 1998. The $358,478 value assigned
to the Trimax patents acquired in 1998 is being amortized over 15 years
including $25,000 of amortization in 1998. Other assets are summarized as
follows at December 31, 1998:
 
<TABLE>
<S>                                                             <C>
Dredge disposal permits and site development, net...........    $1,974,365
Deferred credit agreement financing costs, net..............       799,425
Deferred convertible debenture costs, net...................       686,280
Deposits....................................................       392,223
Patents, net................................................       333,478
Other.......................................................     1,190,632
                                                                ----------
                                                                $5,376,403
                                                                ==========
</TABLE>
 
REVENUE RECOGNITION
 
     Revenues from the Company's plastic lumber division are recognized at the
date the products are shipped. Revenues from the environmental recycling
division are recognized when services are performed or upon treatment and
certification for disposal of contaminated soil.
 
                                       45
<PAGE>   47
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company provides for estimated losses on doubtful accounts. The
following is a summary of activity of the Company's allowance accounts:
 
<TABLE>
<CAPTION>
                                                          1998         1997
                                                        ---------    --------
<S>                                                     <C>          <C>
Balance, beginning of year............................  $ 475,030    $148,744
Provision for doubtful accounts.......................    100,769     219,053
Write-offs............................................   (265,700)    (47,662)
Allowance of acquired entities........................    150,808     154,895
                                                        ---------    --------
Balance, end of year..................................  $ 460,907    $475,030
                                                        =========    ========
</TABLE>
 
STOCK-BASED COMPENSATION
 
     The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." In accounting for
stock-based transactions with nonemployees, the Company records compensation
expense when these types of options are issued. As permitted by SFAS No. 123,
the Company accounts for stock-based compensation granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
 
INCOME TAXES
 
     The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax liabilities and assets are determined
based on the difference between the financial statement basis and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to be settled or realized.
 
ADVERTISING COSTS
 
     Advertising costs are charged to operations as incurred and were
approximately $106,022 and $81,068 in 1998 and 1997, respectively.
 
CONCENTRATIONS OF CREDIT RISK
 
     Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade receivables. The Company maintains its cash and cash equivalents with
various financial institutions which are primarily located in the Eastern United
States. At December 31, 1998, the Company had bank balances of approximately
$1,270,000 (including issued but not cleared checks) in excess of amounts
insured by federal deposit insurance. Trade receivables are concentrated
primarily in the Northeastern United States. The Company does not require
collateral from its customers.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     Financial instruments include cash and cash equivalents, receivables,
accounts payable, due to affiliates, notes payable and convertible subordinated
debentures. The carrying amounts reported in the consolidated balance sheet for
these financial instruments approximate their fair value.
 
LOSS PER SHARE
 
     Basic income or loss per share is computed by dividing net income or loss
less preferred stock dividends by the weighted-average number of shares actually
outstanding. Diluted income or loss per share attributable to common
stockholders further considers the impact of common stock equivalents to the
extent that they are
 
                                       46
<PAGE>   48
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
dilutive. The Company's basic and diluted loss per share are the same for both
1998 and 1997 because the common stock equivalents are anti dilutive. See Notes
6 and 7 for potentially dilutive securities.
 
COMPREHENSIVE INCOME
 
     During the years ended December 31, 1998 and 1997 the Company did not have
any changes in its stockholders equity resulting from non-owner sources.
Accordingly, comprehensive income as set forth in SFAS No. 130 was equal to the
net loss amounts presented in the statements of operations.
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
     Cash paid during the year totaled $849,585 and $302,305 for interest in the
years ended December 31, 1998 and 1997, respectively, and $242,441 for income
taxes in 1998 (none paid in 1997).
 
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
     See Notes 2, 5, 6, 7, 11 and 13 for information regarding common shares,
stock options, stock warrants and debt issued for acquisitions, non compete
agreements, licensing agreement, earnout agreements, the convertible
subordinated debentures and loan guarantees by the Stout partners.
 
2.  ACQUISITIONS
 
1997 ACQUISITIONS
 
     The Company acquired three companies in the plastic lumber business and
three companies in the environmental services business in 1997. The $3,872,481
total purchase price for all six acquisitions consisted of 2,190,150 shares of
common stock valued at an aggregate of $2,277,481 and cash payments totaling
$1,595,000. Several of the acquisitions include non compete agreements and
earnout provisions based on achieving specified profitability levels for key
employees and former owners.
 
     A summary of the allocation of the $3,872,481 aggregate purchase price of
the 1997 acquisitions to net assets acquired follows:
 
<TABLE>
<S>                                                             <C>
Working capital (deficit)...................................    $  (675,752)
Long-term assets............................................      2,813,281
Long-term debt assumed......................................     (1,965,040)
Deferred tax liabilities....................................       (815,885)
Acquired intangibles........................................      4,515,877
                                                                -----------
Aggregate purchase price....................................    $ 3,872,481
                                                                ===========
</TABLE>
 
1998 ACQUISITIONS
 
     In January 1998 the Company acquired Green Horizon Environmental, Inc.
("GHE"), an environmental services company located in Norristown, Pennsylvania.
 
     In February 1998, the Company acquired 55% of the stock of Consolidated
Technologies, Inc. ("CTI"), an environmental recycling services company located
in Norristown, Pennsylvania.
 
     On February 28, 1998 the Company acquired substantially all of the assets
of Chesapeake Plastic Lumber, Inc. ("CPL"), a manufacturer of plastic lumber in
Denton, Maryland.
 
     Effective April 30, 1998 the Company acquired 100% of the stock of
Cycle-Masters, Inc. ("CMI"), a manufacturer of plastic lumber in Sweetser,
Indiana.
 
                                       47
<PAGE>   49
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Effective June 30, 1998 the Company acquired 100% of the stock of Geocore,
Inc. ("GCI") a small environmental services company in northern New Jersey.
 
     Effective June 30, 1998 the Company acquired the remaining 45% of CTI. The
$119,403 minority interest in the CTI losses prior to June 30, 1998 are combined
with the minority interest in the joint venture with IIC in the statement of
Operations.
 
     Effective June 30, 1998 the Company purchased substantially all of the
assets of Trimax of Long Island, Inc. and Polymerix, Inc. ("Trimax") through the
U.S. Bankruptcy Court. The Trimax purchase includes two patents for the
manufacture of structural plastic lumber.
 
     On December 30, 1998 the Company acquired 100% of S&W Waste, Inc. ("S&W"),
a RCRA facility that recycles and beneficially re-uses industrial wastes and
disposes of contaminated materials, located in northern New Jersey.
 
     The total purchase price of $8,517,273 for all of the 1998 acquisitions
consisted of 952,875 shares of USPL common stock valued at an aggregate of
$3,535,660, cash payments of $3,705,000, issuance of debt totaling $954,952,
costs totaling $303,868 and $17,793 assigned to options granted to a former
owner. Several of the acquisitions include non compete agreements, stock options
and earnout provisions based on achieving specified profitability levels for key
employees and former owners.
 
     A summary of the allocation of the aggregate purchase price of the 1998
acquisitions follows:
 
<TABLE>
<S>                                                             <C>
Working capital (deficit)...................................    $  (846,926)
Long-term assets............................................      7,101,976
Net deferred tax assets.....................................        333,303
Long-term debt..............................................     (1,535,609)
Acquired intangibles........................................      3,464,529
                                                                -----------
Aggregate purchase price....................................    $ 8,517,273
                                                                ===========
</TABLE>
 
     All of the acquisitions in 1997 and 1998 have been accounted for as
purchases. Accordingly, the results of operations of the acquired companies are
included in the Consolidated Financial Statements for periods subsequent to the
date of acquisition. The excess of the aggregate purchase price over the
estimated fair value of the net assets acquired has been recorded as acquired
intangibles and is being amortized on a straight-line basis over a period of
twenty years from the effective date of each acquisition (15 years for the
$358,478 assigned to the Trimax patents).
 
     Effective December 31, 1998 all of the companies in the Plastic Lumber
division were merged into U.S. Plastic Lumber, LTD and Waste Concepts, Inc., GHE
and GCI were merged into ITS.
 
     The unaudited pro forma combined results of operations of the Company and
all of its subsidiaries for the years ended December 31, 1998 and 1997, after
giving effect to certain pro forma adjustments as if the acquisitions had taken
place on January 1, 1997, are as follows:
 
<TABLE>
<CAPTION>
                                                       1998           1997
                                                    -----------    -----------
<S>                                                 <C>            <C>
Net sales.........................................  $54,280,394    $44,751,710
                                                    ===========    ===========
Net income (loss).................................  $   297,452    $(1,809,460)
                                                    ===========    ===========
Net loss attributable to common stockholders......  $  (379,626)   $(2,219,165)
                                                    ===========    ===========
Net loss per share-basic and diluted..............  $      (.02)   $      (.14)
                                                    ===========    ===========
Weighted average shares used in computation.......   17,405,486     15,530,628
                                                    ===========    ===========
</TABLE>
 
                                       48
<PAGE>   50
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The foregoing unaudited pro forma results of operations reflect adjustments
for amortization of goodwill, depreciation on re-valued buildings and equipment
and interest on cash paid to the sellers. Per share amounts are calculated after
preferred dividends are subtracted from net income. They do not purport to be
indicative of the results of operations which actually would have resulted had
the acquisitions occurred at January 1, 1997 or of future results of operations
of the consolidated entities.
 
3.  INVENTORIES
 
     Inventories consist of the following at December 31, 1998 and 1997:
 
<TABLE>
<CAPTION>
                                                         1998          1997
                                                      ----------    ----------
<S>                                                   <C>           <C>
Raw materials.......................................  $1,046,926    $  574,463
Finished goods......................................   3,822,080       928,195
                                                      ----------    ----------
                                                      $4,869,006    $1,502,658
                                                      ==========    ==========
</TABLE>
 
4.  PROPERTY AND EQUIPMENT
 
     Property and equipment consist of the following at December 31, 1998 and
1997:
 
<TABLE>
<CAPTION>
                                     USEFUL LIVES        1998           1997
                                    --------------    -----------    -----------
<S>                                 <C>               <C>            <C>
Land..............................                    $ 2,600,000    $        --
Buildings.........................  30 to 40 years      3,515,923      1,146,948
Machinery and equipment...........   7 to 20 years     16,015,112      7,806,148
Leasehold improvements............   Life of lease        360,365        134,063
Furniture and office equipment....         5 years        673,450        407,446
                                                      -----------    -----------
                                                       23,164,850      9,494,605
Less -- accumulated
  depreciation....................                     (5,274,214)    (3,719,181)
                                                      -----------    -----------
                                                      $17,890,636    $ 5,775,424
                                                      ===========    ===========
</TABLE>
 
     Depreciation expense was $1,511,209 and $520,888 for the years ended
December 31, 1998 and 1997, respectively.
 
5.  NOTES PAYABLE AND CAPITAL LEASES
 
LINE OF CREDIT AND NEW CREDIT FACILITY
 
     In January 1998, the Company obtained a $4,000,000 increase in its
revolving line of credit bringing the total line of credit to $5,500,000. To
obtain this increase the Stout partners, consisting of the Company's Chairman
and two directors, pledged assets and guaranteed the line. In exchange for this
guarantee the Company granted 320,000 non-employee stock options, exercisable at
$2.25 per share, to the Stout Partnership. The $400,000 value of such options is
being amortized as interest over the original 18 month term of the line of
credit. On August 13, 1998 the Bank added $2,000,000 to the line, bringing the
total line to $7,500,000, and extended the maturity date to September 30, 1999.
The line was increased to $8,400,000 in October before it was repaid from
proceeds of the new credit agreement. (See Note 13 for continuing loan from
Stout Partnership.)
 
     In October 1998 the Company negotiated a five year line of credit for
$30,000,000 with a division of Southern Pacific Bank ("SPB"). The draws on the
line are collateralized by specific equipment and/or inventory and eligible
accounts receivable. The line bears interest at 1% over prime on inventory and
receivable loans, 1.25% over prime on equipment loans and 2% over prime on real
estate loans. The prime rate
 
                                       49
<PAGE>   51
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
was 7.75% on December 31, 1998. Loans secured by specific equipment are payable
over terms up to 7 years in equal monthly installments with the unpaid balance
due in October 2003. The total costs of obtaining the line aggregating
approximately $850,000 are being amortized over the five year term of the
agreement as interest expense.
 
     In the fall of 1998 the Company made net draws of $13,008,766 including
$4,883,766 secured by accounts receivable and inventory, $6,125,000 secured by
specific equipment and a $2,000,000 bridge loan which, subsequent to year end,
converted to a real estate loan. The proceeds were used to payoff the PNC Bank
line and approximately $770,000 of loans secured by specific equipment at six
subsidiary locations. Certain equipment loans were left in place for various
business reasons. On December 30, 1998 an additional $490,000 equipment loan was
taken out in connection with the purchase of S&W.
 
     Notes payable and capital leases consist of the following at December 31,
1998 and 1997:
 
<TABLE>
<CAPTION>
                                                       1998           1997
                                                    -----------    -----------
<S>                                                 <C>            <C>
Line of credit, bearing interest at 9% due
  December 31, paid in October 1998...............  $        --    $   600,000
Non interest bearing money purchase mortgage note
  payable in monthly installments of $18,939
  through December 31, 2009 including interest
  imputed at 8.5%, collateralized by the S&W
  facility........................................    1,620,637             --
Premium finance agreement payable in monthly
  installments of $63,383 through May 31, 1999
  including interest at 7.12%.....................      311,352             --
Bridge loan converted to Real Estate Loan under
  the loan agreement with SPB on March 1, 1999
  payable in monthly installments of $6,000 with a
  balloon payment due October 10, 2003, bearing
  interest at 2% over prime, collateralized by the
  CBC facility....................................    1,666,667             --
Equipment term loans under loan agreement with
  SPB, due in monthly installments of $78,750 and
  a balloon payment due October 9, 2003, bearing
  interest at prime plus 1.25%, collateralized by
  equipment of certain subsidiaries of the
  Company.........................................    6,396,250             --
Capital lease payable in monthly installments of
  $15,470 through July 24, 2003 including interest
  at 8.58%, collateralized by certain plastic
  lumber equipment................................      717,462             --
Note payable in monthly installments through April
  1, 2002, bearing interest at 7.565%,
  collateralized by all assets at the Auburn, MA
  facility........................................      318,382        387,772
Notes payable to government agency, payable in
  monthly installments totaling $9,505, including
  interest at 5% to 5.5%..........................      486,184             --
Non interest bearing note with customer, payable
  at $.01 per pound of plastic shipped to the
  customer (approximately 700,000 pounds per
  month)..........................................      239,663        300,000
Receivables and Inventory loans under loan
  agreement with SPB, interest payments due
  monthly at prime plus 1%, collateralized by
  substantially all accounts receivable and
  $1,667,000 of inventories of subsidiaries of the
  Company.........................................    4,883,766             --
Other notes payable, bearing interest ranging from
  7.5% to 10.5%, repaid in 1998...................           --      1,869,635
</TABLE>
 
                                       50
<PAGE>   52
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                       1998           1997
                                                    -----------    -----------
<S>                                                 <C>            <C>
Note payable to sellers of CMI, bearing interest
  at 8.5%, due on May 31, 1999....................      436,605             --
Note payable to seller of S&W, bearing interest at
  prime, plus 1%, repaid on February 2, 1999......      500,000             --
Other notes and capital leases payable monthly,
  maturing from November 8, 2000 to October 9,
  2003, with interest ranging from 6% to 11.75%,
  collateralized by various equipment of
  subsidiaries of the Company.....................      727,436         64,211
                                                    -----------    -----------
Total notes payable and capital leases............   18,304,404      3,221,618
Less current portion..............................   (3,635,300)    (2,404,607)
                                                    -----------    -----------
Long-term portion.................................  $14,669,104    $   817,011
                                                    ===========    ===========
</TABLE>
 
     Notes payable and capital leases mature as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING                                                 AMOUNTS
-----------                                               -----------
<S>                                                       <C>
1999....................................................  $ 3,635,300
2000....................................................    1,666,923
2001....................................................    1,597,968
2002....................................................    1,530,468
2003....................................................    8,797,126
2004 and later..........................................    1,076,619
                                                          -----------
                                                          $18,304,404
                                                          ===========
</TABLE>
 
6.  CONVERTIBLE SUBORDINATED DEBENTURES
 
     On December 22, 1998 the Company issued $4,000,000 of subordinated
debentures convertible into common stock at the lower of $5.29 or 90% of the
lowest trading price in the four days preceding the conversion date. The
$444,444 allocated to the 10% discount on conversion was recorded as additional
paid-in-capital and will accrete to the debentures outstanding as additional
interest expense over the period to the earliest conversion date. The conversion
price is adjustable downward if, in the one year period ending December 22,
1999, the Company issues convertible securities or common stock at a more
favorable price than the debenture conversion price. The 5% per annum debenture
interest is payable 1.25% per quarter starting April 1, 1999. The Company issued
the debenture holders warrants to purchase 100,000 shares of common stock for
$7.215 per share at any time before December 22, 2003. See Note 13 for issuance
of additional $2,500,000 debentures subsequent to year end.
 
     The Debentures mature on December 22, 2003, however, beginning on June 22,
1999 the debenture holders have the right to force the Company to redeem up to
$1,000,000 of debentures at a 10% premium (i.e. $1,100,000 for $1,000,000 of
debentures). In addition the debenture holders can require the Company to redeem
100% of the debentures at a 30% premium if the Company fails to register the
underlying shares with the Securities and Exchange Commission before August 19,
1999. The Company intends to register the shares underlying the debentures
before August 19, 1999 and keep the registration statement effective until
December 22, 2001 as required by the debenture agreement.
 
     The debenture holders can force the Company to issue up to $1,500,000 of
debentures on the same terms at any time until December 22, 2001. This "Call"
right is in addition to the $2,500,000 of debentures issued in January 1999 (See
Note 13). The Company can compel the debenture holders to purchase an additional
$500,000 of debentures between June 22, 1999 and December 22, 1999. However, the
maximum total
 
                                       51
<PAGE>   53
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
debentures that can be issued is $8,000,000. The Company must issue additional
warrants in the same proportion (2.5%) as any additional debentures are issued.
 
     The Company incurred costs totaling $688,116 related to the $4,000,000
debentures including $197,600 assigned to the 100,000 warrants. These costs are
being amortized as additional interest expense over the five year term of the
debentures. The unamortized balance is included in other assets. If the
debentures are converted into common stock the unamortized balance will be
charged to additional paid-in-capital.
 
7.  CAPITAL STOCK
 
SERIES A CONVERTIBLE PREFERRED STOCK
 
     In 1996 and 1997 the Company sold 193,970 shares of the Company's Series A
Preferred Stock for total gross proceeds of $3,879,400. The shares are nonvoting
and have a 10% cumulative stock dividend payable semiannually. The dividend is
payable only in Series A Preferred Stock. No cash dividends will be paid. Each
share is convertible into seven shares of the Company's Common Stock at the
option of the stockholder or mandatorily on the date a registration statement,
which would yield the Company $10 million in proceeds, is declared effective by
the Securities and Exchange Commission ("SEC"). In the event of any liquidation,
after payment of debts and other liabilities, the holders of Series A Preferred
Stock will be entitled to receive, before the holder of any of the Common Stock,
the stated value of $20 per share plus any unpaid dividends. The Series A
Preferred Stock can be redeemed at any time at the sole option of the Company
for $25 per share. In 1998 approximately 2,431 Series A shares were converted
into 17,017 common shares.
 
     Semi annual 5% stock dividends were declared as of March 31 and September
30 each year for a total of 21,511 and 14,960 Series A shares in 1998 and 1997,
respectively. At December 31, 1998 approximately 228,012 Series A shares are
outstanding.
 
SERIES B CONVERTIBLE PREFERRED STOCK
 
     In the summer of 1998 the Company issued 211,020 shares of Series B
Preferred Stock to accredited investors. The Series B shares have substantially
the same rights and features as the Series A Preferred shares except that the
stated and liquidation value of the Series B shares is $21.00 per share.
 
     A 5% stock dividend of 7,455 Series B shares was declared as of September
30, 1998 for the pro rata portion of the six month period that the Series B
preferred shares were outstanding. In 1998 approximately 63,776 Series B shares
were converted into 446,432 common shares. At December 31, 1998 approximately
154,697 Series B shares are outstanding.
 
EMPLOYEE STOCK OPTIONS
 
     The Company has granted stock options to key employees and directors. The
option price at the date of grant is determined by the Board of Directors and is
generally tied to the market price of the Company's freely trading shares. The
term for exercising the stock options is generally ten years. Stock options
granted by the
 
                                       52
<PAGE>   54
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Company generally vest ratably over a period of three years. Employee stock
option activity in 1998 is as follows:
 
<TABLE>
<CAPTION>
                                                                        NUMBER OF
                                                   WEIGHTED AVERAGE      OPTIONS
                                                    EXERCISE PRICE     OUTSTANDING
                                                   ----------------    -----------
<S>                                                <C>                 <C>
Outstanding at December 31, 1996.................       $4.26             307,000
  Granted........................................        3.47           1,220,000
  Exercised......................................          --                  --
  Canceled.......................................        4.33            (177,000)
                                                        -----           ---------
Outstanding at December 31, 1997.................       $3.54           1,350,000
  Granted........................................        3.65             536,000
  Exercised......................................          --                  --
  Canceled.......................................        4.43            (215,000)
                                                        -----           ---------
Outstanding at December 31, 1998.................       $3.46           1,671,000
                                                        =====           =========
Options exercisable at December 31, 1998.........       $3.41           1,207,334
                                                        =====           =========
</TABLE>
 
     Additional information regarding options outstanding at December 31, 1998
follows:
 
<TABLE>
<CAPTION>
                           OUTSTANDING                   EXERCISABLE
    RANGE OF       ---------------------------   ---------------------------
EXERCISE PRICES                    WEIGHTED                      WEIGHTED
----------------                   AVERAGE                       AVERAGE
 LOW       HIGH     NUMBER      EXERCISE PRICE    NUMBER      EXERCISE PRICE
------    ------   ---------    --------------   ---------    --------------
<S>       <C>      <C>          <C>              <C>          <C>
$2.25     $4.00    1,533,500        $3.30        1,109,833        $3.23
 4.50      7.22      137,500         5.24           97,501         5.42
-----     -----    ---------        -----        ---------        -----
$2.25     $7.22    1,671,000        $3.46        1,207,334        $3.41
=====     =====    =========        =====        =========        =====
</TABLE>
 
     The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting method in
SFAS 123 had been used in accounting for employee stock options for the years
ended December 31, 1998 and 1997.
 
<TABLE>
<CAPTION>
                                                       1998          1997
                                                     ---------    -----------
<S>                                                  <C>          <C>
As reported results of operations:
  Net income (loss)................................  $  95,798    $  (705,629)
                                                     =========    ===========
  Net loss attributable to common stockholders.....  $(581,280)   $(1,115,334)
                                                     =========    ===========
  Net loss per share basic and diluted.............  $    (.03)   $      (.08)
                                                     =========    ===========
Pro forma results of operations:
  Net loss.........................................  $(100,822)   $  (759,558)
                                                     =========    ===========
  Net loss attributable to common stockholders.....  $(777,900)   $(1,169,263)
                                                     =========    ===========
  Net loss per share basic and diluted.............  $    (.06)   $      (.08)
                                                     =========    ===========
</TABLE>
 
     For purposes of the above disclosure, the determination of the fair value
of stock options granted in 1998 and 1997 was based on the following: (i) a risk
free interest rate of 7.5%; (ii) expected option lives of seven
 
                                       53
<PAGE>   55
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
years; (iii) expected volatility in the market price of the Company's common
stock of 75%; and (iv) no expected dividends on the underlying common stock.
 
NONEMPLOYEE STOCK OPTIONS
 
     Magellan Finance Corporation ("Magellan"), a stockholder, was originally
granted options to purchase up to 353,684 shares of the Company's common stock
at $1.77 per share. Magellan exercised 117,895 of the options in 1997 and
another 117,895 options in September 1998. The remaining 117,894 options expire
on June 30, 1999. If Magellan does not exercise its option to purchase the
shares, then the Company is obligated to issue the shares to certain USPL
stockholders at no cost.
 
     The Stout Partnership was granted 320,000 options at $2.25 per share in
January 1998 in exchange for enabling the Company to obtain a line of credit by
providing guarantees (see Notes 5 and 13). In 1998 options for a total of 37,500
shares at a $3.50 exercise price were granted to outside directors. A total of
$100,000 was recorded as compensation expense and added to additional
paid-in-capital for these nonemployee director options. Options for 20,000
shares with a $5 exercise price were also granted in one of the 1998
acquisitions and options for 10,000 shares with a $3.50 price were granted in
connection with the convertible debentures.
 
     Nonemployee stock option activity in 1998 and 1997 is summarized as
follows:
 
<TABLE>
<CAPTION>
                                                                        NUMBER OF
                                                   WEIGHTED AVERAGE      OPTIONS
                                                    EXERCISE PRICE     OUTSTANDING
                                                   ----------------    -----------
<S>                                                <C>                 <C>
Outstanding at December 31, 1996.................       $1.81            463,379
  Granted........................................          --                 --
  Exercised......................................        1.77           (202,589)
  Canceled.......................................        2.50             (5,000)
                                                        -----           --------
Outstanding at December 31, 1997.................       $1.83            255,790
  Granted........................................        2.55            387,500
  Exercised......................................        1.80           (122,895)
  Canceled.......................................          --                 --
                                                        -----           --------
Outstanding at December 31, 1998.................       $2.37            520,395
                                                        =====           ========
Stock options exercisable........................       $2.54            402,500
                                                        =====           ========
</TABLE>
 
STOCK WARRANTS
 
     The Company previously issued 950,000 of Series A and 950,000 Series B
warrants to purchase the Company's common stock at $2.50 and $4.50 per share,
respectively. The Company received $2,291,193 from the exercise of 916,477
Series A warrants in 1998. The 33,523 unexercised Series A warrants expired on
June 30, 1998. None of the Series B warrants were exercised and all 950,000 of
the Series B warrants expired in the third quarter of 1998.
 
     The Company issued the debenture holders warrants to purchase 100,000
shares of common stock for $7.215 per share at any time before December 22,
2003. Warrants to purchase 62,500 shares for $7.215 per share will be issued in
1999 as a result of the issuance of $2,500,000 of convertible debentures in
January 1999 (see Notes 6 and 13).
 
EARNOUT AGREEMENT
 
     The Company has earnout agreements with certain shareholders that provide
for 4,573,686 shares of the Company's Common Stock to be reserved for issuance
if certain sales/production goals for plastic lumber product are achieved prior
to December 31, 2000 as set forth in the March 29, 1996 Agreement and Plan of
 
                                       54
<PAGE>   56
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Reorganization between Earth Care Global Holdings, Inc. and Educational
Storybooks International, Inc. The additional shares, if any, will be issued at
their then current fair value and allocated to acquired intangibles as an
additional cost of the reverse merger of Earth Care Global Holdings, Inc. with
USPL and the subsequent reverse merger of USPL with Clean Earth Inc. ("CEI") in
1996.
 
STOCK RESERVED
 
     At December 31, 1998, common stock was reserved for the following:
 
<TABLE>
<S>                                                             <C>
Shares contingently issuable to USPL and CEI shareholders...     4,573,686
Conversion of Series A and B Preferred Stock................     2,678,963
Non employee stock options..................................       520,395
Employee stock options......................................     1,671,000
Shares contingently issuable under other earnout
  provisions................................................       175,500
Warrants issued to convertible debenture holders............       100,000
Convertible debentures......................................       756,001
                                                                ----------
                                                                10,475,545
                                                                ==========
</TABLE>
 
8.  EMPLOYEE BENEFIT PLANS
 
     The Company has defined contribution 401(k) and profit sharing plans that
cover substantially all employees who have met the eligibility requirements.
Employees may contribute up to the maximum allowable under current regulations
to the 401(k). There are no employee contributions to the profit sharing plan.
The Company's contribution to each plan is at the discretion of the Company. The
Company contributed $5,772 to one of the plans during 1998 (none in 1997).
 
9.  INCOME TAXES
 
     The provision for income taxes includes federal and state taxes currently
payable and those deferred because of temporary differences between financial
statement and tax basis of assets and liabilities. The components of the
provision for income taxes (benefit) included in the consolidated statements of
operations is as follows:
 
<TABLE>
<CAPTION>
                                                         1998         1997
                                                       ---------    ---------
<S>                                                    <C>          <C>
Current:
  Federal............................................  $      --    $      --
  State..............................................    148,000      164,923
                                                       ---------    ---------
                                                         148,000      164,923
                                                       ---------    ---------
Deferred:
  Federal............................................    (14,828)     (95,839)
  State..............................................   (133,172)     (73,413)
                                                       ---------    ---------
                                                        (148,000)    (169,252)
                                                       ---------    ---------
                                                       $      --    $  (4,329)
                                                       =========    =========
</TABLE>
 
                                       55
<PAGE>   57
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The provision for income taxes differed from the amount obtained by
applying the federal statutory income tax rate to pre-tax accounting income
(loss), as follows:
 
<TABLE>
<CAPTION>
                                                         1998         1997
                                                       ---------    ---------
<S>                                                    <C>          <C>
Tax at statutory rate of 34%.........................  $  32,571    $(241,386)
State taxes, net of Federal benefit..................      9,786       60,397
Nondeductible goodwill...............................    155,601       88,720
Increases (decreases) in valuation reserves..........   (169,252)     124,788
Other................................................    (28,706)     (36,848)
                                                       ---------    ---------
  Income tax benefit.................................  $      --    $  (4,329)
                                                       =========    =========
</TABLE>
 
     Deferred taxes primarily represent the impact of businesses acquired in
1998 and 1997 that formerly accounted for Federal income taxes on a cash basis
and differences between the fair market value and tax basis of equipment owned
by acquired companies. At December 31, 1998 the Company had Federal and state
net operating loss carryforwards of approximately $6,000,000 and $4,300,000,
respectively, that expire in 2002 through 2012. For financial reporting purposes
a valuation allowance of $2,300,000 has been established to offset the net
deferred tax assets related to these carryforwards. If realized in the future,
most of the benefit of these carryforwards will be recorded as a reduction of
acquired intangible assets.
 
     In 1998 the Company reduced the valuation reserves on deferred tax assets
of Companies acquired in 1996 and 1997. Accordingly, net deferred tax
liabilities and the related acquired intangibles were reduced by $150,000.
Deferred tax assets of acquisitions in 1998 also reduced the net deferred tax
liability.
 
10.  RELATED PARTY TRANSACTIONS
 
     In 1997 and 1998, the Company borrowed up to $2,400,000 under a $2,500,000
line of credit agreement from a company controlled by a member of the Board of
Directors and his family. The line of credit bears interest at prime plus 1% and
expires on June 30, 1999. No balance was outstanding at December 31, 1998 (See
Note 13) and $1,956,810 was outstanding at December 31, 1997. The Company paid
$171,849 and $90,938 in interest on this line in 1998 and 1997, respectively.
 
11.  COMMITMENT AND CONTINGENCIES
 
OPERATING LEASES
 
     The Company leases office space, equipment, manufacturing facilities, and
land under non-cancelable operating leases that expire at various dates through
2028. Future minimum payments are as follows for the years ending December 31:
 
<TABLE>
<CAPTION>
                                                                TOTAL
                                                              ----------
<S>                                                           <C>
1999........................................................  $  968,000
2000........................................................     858,000
2001........................................................     758,000
2002........................................................     710,000
2003........................................................     589,000
Thereafter..................................................   5,501,000
                                                              ----------
          Total.............................................  $9,384,000
                                                              ==========
</TABLE>
 
     The Company leases approximately 7.5 acres of land at its soil recycling
facility at a rental of $1.00 per ton of soil received with a minimum rental of
$50,000 per year. Rent expense under this lease was $219,986 and $192,223 in
1998 and 1997, respectively. The lease was renewed for five years in 1998 and
contains two
                                       56
<PAGE>   58
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
five-year renewal options. The lessor has the right and option at the time of
renewal to require the Company to purchase the property at a purchase price of
$100,000 per acre subject to annual escalation based on the Consumer Price Index
from inception of the lease.
 
     The Company currently leases approximately 5 acres of land under the CBC
facility. The lease term is 30 years with two renewal options Rent expense for
all operating leases for the years ended December 31, 1998 and 1997 was
approximately $1,013,000 and $563,000, respectively.
 
EMPLOYMENT AGREEMENTS
 
     At December 31, 1998, the Company had employment agreements with certain
officers and key employees. Salaries and benefits expense recorded under the
Agreements totaled approximately $1,714,000 and $792,000 during years ended
December 31, 1998 and 1997, respectively. Future minimum payments under these
employment agreements are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,                                         AMOUNT
------------------------                                       ----------
<S>                                                            <C>
       1999.................................................   $1,864,000
       2000.................................................    1,659,000
       2001.................................................    1,053,000
       2002.................................................      303,000
       2003.................................................       46,000
                                                               ----------
                                                               $4,925,000
                                                               ==========
</TABLE>
 
COVENANT NOT TO COMPETE
 
     The Company had a covenant not to compete agreement requiring payments of
$2.00 per ton of soil received for processing. Payments under the covenant not
to compete totaled $187,008 and $384,446 for 1998 and 1997, respectively. The
requirement to make payments ended on August 31, 1998.
 
LEGAL PROCEEDINGS
 
     The Company is subject to claims and legal actions that arise in the
ordinary course of its business. The Company believes that the ultimate
liability, if any, with respect to these claims and legal actions, will not have
a material effect on the financial position or results of operations of the
Company.
 
LICENSING AGREEMENT
 
     During February of 1997, the Company entered into a licensing agreement
with Rutgers University for the rights to commercially develop, manufacture and
sell a composite building material from recycled waste. In exchange for $10,000
in cash and 187,500 shares of the Company's common stock, the Company received
an exclusive license to use this material for certain applications, including
railroad ties, marine pilings and building materials. The total consideration
was valued at $103,750 and has been recorded as a component of other assets in
the consolidated balance sheet. This agreement is in effect for at least ten
years from the date of the initial product sales and requires the Company to pay
a maintenance fee and a 3% royalty fee. Such fees are subject to certain minimum
future payment thresholds, as follows:
 
                                       57
<PAGE>   59
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                       MAINTENANCE    ROYALTY
                                                           FEE          FEE
                                                       -----------    --------
<S>                                                    <C>            <C>
1999.................................................   $ 10,000      $ 40,000
2000.................................................     10,000        60,000
2001.................................................     10,000        60,000
2002.................................................     10,000        60,000
2003.................................................     10,000        60,000
Thereafter...........................................     50,000       300,000
                                                        --------      --------
                                                        $100,000      $580,000
                                                        ========      ========
</TABLE>
 
     The Company had minimal initial product sales in 1998 and paid $21,667 of
maintenance and prorated royalty fees in 1998 after the initial shipments of
railroad ties were made to potential customers for testing.
 
ROYALTY AGREEMENT
 
     Carteret Biocycle, Inc. ("CBC") has a license and operating agreement with
SD&G Aggregates, Inc. ("SD&G") to conduct remediation of contaminated soils. The
Company pays SD&G a royalty of 2% of CBC's sales. CBC commenced operations in
July 1998 and recorded royalty expense of $ 33,360 in 1998.
 
SIGNIFICANT CUSTOMERS
 
     The Plastic Division had sales to one customer of $4,117,000 in 1998 and
$2,590,000 in 1997.
 
12.  SEGMENT REPORTING
 
     The Company's sales generating operations are conducted through its Plastic
Lumber Division and its Environmental Recycling Division. Separate monthly
consolidated financial statements are prepared for each division. There are no
intersegment or foreign revenues. The corporate administrative expenses consist
of the executive officers of the Company and include the legal, accounting and
enterprise wide cash management functions and public company expenses.
Substantially all of the debt and related interest expense is also retained at
corporate. The corporate administrative and interest expenses are not allocated
to the two Divisions for management reports. The operating income of each of the
Divisions is the principal measurement tool used to manage the two segments.
 
                                       58
<PAGE>   60
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The operating results of each segment and the reconciliation of each
element to the consolidated statement of operations for each of the years ended
December 31, 1998 and 1997 follows (in thousands):
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Revenues:
  Environmental recycling................................  $29,985    $16,609
  Plastic lumber.........................................   15,720      8,130
                                                           -------    -------
                                                           $45,705    $24,739
                                                           =======    =======
Operating income (loss):
  Environmental recycling................................  $ 3,546    $ 2,312
  Plastic lumber.........................................     (596)    (1,033)
  Corporate..............................................   (1,513)    (1,600)
                                                           -------    -------
                                                           $ 1,437    $  (321)
                                                           =======    =======
Depreciation and amortization:
  Environmental recycling................................  $   837    $   237
  Plastic lumber.........................................    1,115        392
  Corporate..............................................      174        160
                                                           -------    -------
                                                           $ 2,126    $   789
                                                           =======    =======
</TABLE>
 
     Information with respect to assets and capital expenditures of the segments
and reconciliation to the financial statements is set forth below (in
thousands):
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Segment assets at December 31:
  Environmental recycling................................  $26,761    $ 8,058
  Plastic lumber.........................................   22,915     15,113
  Corporate..............................................    2,529         --
                                                           -------    -------
                                                           $52,205    $23,171
                                                           =======    =======
Capital expenditures for the years ended December 31:
  Environmental recycling................................  $ 4,385    $ 1,499
  Plastic lumber.........................................    2,831      1,126
  Corporate..............................................       23         --
                                                           -------    -------
                                                           $ 7,239    $ 2,625
                                                           =======    =======
</TABLE>
 
13.  SUBSEQUENT EVENTS
 
ACQUISITION OF BRASS
 
     On January 7, 1999, the Company executed a contract to acquire all of the
stock of Brass Investment Co. ("Brass"), which owns all the stock of Soil
Remediation of Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates
a soil remediation facility in Philadelphia, PA similar to the Company's soil
remediation facility in New Castle, DE and has been a competitor of the Company.
AWI provides environmental services similar to the Company's environmental
services division. The Company signed a Management Contract on January 7, 1999
taking over all responsibility for day to day management and financial control
of SRP and AWI as of that date. Unaudited sales of SRP and AWI, prior to
intercompany eliminations, for the year ended December 31, 1998 were $14,922,000
with unaudited operating income of
 
                                       59
<PAGE>   61
                U.S. PLASTIC LUMBER CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$2,025,000. The Company finalized its transaction with Brass in March 1999. The
Company purchased Brass for cash plus 1,000,000 shares of restricted common
stock plus granted 1,500,000 warrants to Louis Paolino, Jr. to purchase common
stock of the Company. The real estate and accounts receivable of Brass will
secure loans to fund the cash portion of the purchase price. The acquisition of
Brass will be accounted for as a purchase.
 
ACQUISITION OF EAGLEBROOK
 
     On January 28, 1999 the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. ("Eaglebrook"), located in Chicago,
Illinois. Eaglebrook processes HDPE for use as a raw material and produces
plastic lumber similar to the Company's. Eaglebrook also produces composite
lumber through a continuous extrusion process. The Company purchased Eaglebrook
for cash plus 1,668,025 shares of restricted common stock, $4,000,000 of
convertible secured debentures and 150,000 options to purchase common stock. The
acquisition of Eaglebrook will be accounted for as a purchase.
 
     The Company will lease the 260,000 square foot Chicago facility from the
sellers for ten years at a monthly rental of $39,181 with an option to purchase
the facility for $3,000,000. The Sellers all signed three year employment
contracts and will manage the Company's Plastic Lumber Division.
 
     The unaudited sales of both Eaglebrook companies were $22,145,000, before
$1,706,000 of intercompany eliminations, and the unaudited operating income was
$1,325,000 for the year ended December 31, 1998.
 
ISSUANCE OF CONVERTIBLE SUBORDINATED DEBENTURES
 
     On January 26, 1999 the Company issued an additional $2,500,000 of
Convertible Subordinated debentures to the same debenture holders with
substantially the same terms as the $4,000,000 issued on December 22, 1998 (see
Note 6). The debenture holders can demand repayment of the $2,500,000 only
during the first quarter of 2000. The proceeds were used in the purchase of
Eaglebrook.
 
LOANS FROM RELATED PARTIES
 
     On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company. The loan bears interest at 10% and matures in 18 months. The
proceeds were used in the purchase of Eaglebrook. The Stout Partnership borrowed
the $5,000,000 from PNC Bank and the individual partners have personally
guaranteed the loan. In January 1999 the Company borrowed $1,500,000 from a
company owned by one of the directors and his family (see Note 10). The loan
bears interest at 1% over prime and matures in 12 months. The proceeds were used
in the Eaglebrook acquisition.
 
                                       60
<PAGE>   62
 
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     The information contained in the Proxy Statement under the caption "Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure"
relating to the 1999 Annual Meeting is incorporated herein by reference.
 
                                    PART III
 
ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth the directors and executive officers of the
Company, their ages, terms of office and all positions. Directors are divided
into classes which are elected for staggered terms of four years, and serve
until the annual meeting of the year in which the terms expire, or until their
successors are duly elected by the stockholders and qualify. Officers and other
employees serve at the will of the Board of Directors.
 
<TABLE>
<CAPTION>
NAME OF DIRECTOR/OFFICER             AGE   DIRECTOR SINCE (TERM EXPIRES) POSITIONS WITH THE COMPANY
------------------------             ---   --------------------------------------------------------
<S>                                  <C>   <C>
Mark S. Alsentzer..................  43    May 1994 (2000) Chairman, President & Chief Executive
                                             Officer/Director
Roger Zitrin.......................  50    November 1996 (2002) Director
August C. Schultes III.............  52    February 1997 (2000) Director
Gary J. Ziegler....................  51    February 1997 (1999) Director
Bruce C. Rosetto...................  41    Secretary/GeneralCounsel
Michael D. Schmidt.................  50    Treasurer/Chief Financial Officer
</TABLE>
 
     The following is a description of the biographical information of each of
the Company's directors for the last five years unless otherwise indicated:
 
     MARK S. ALSENTZER, Chairman, Director, President & CEO; Mr. Alsentzer has
served as a director since May 1994. As former President of Stout Environmental,
Inc. Mr. Alsentzer developed that company from $2 million to $90 million in
revenues and 46 to 700 employees. In 1992, Stout Environmental merged with
Republic Industries, where Mr. Alsentzer remained as Vice President of Republic
Environmental Systems, Inc. In addition, Mr. Alsentzer was Director of Cemtech,
a company which grew from $3 to $21 million and was sold to Waste Management in
1991. Mr. Alsentzer founded Clean Earth, which is currently a wholly owned
subsidiary of the Company and a leading recycler of contaminated soil and debris
located in the northeast. Mr. Alsentzer has a B.S. in Chemical Engineering from
Lehigh University and an MBA from Farleigh Dickenson University.
 
     ROGER N. ZITRIN, Director; Dr. Zitrin has served as a director since
November 1996. Dr. Zitrin was the founder and President of the Heart Association
of Palm Beach County where he was a practicing physician specializing in
cardiology until he retired in 1992. He is presently acting as an independent
investor and investment advisor. Dr. Zitrin is the founder of Florida Medical
Laser Corp. and Gold Coast Specialty Lab and co-founder of Physicians Cardiac
Imaging. He is presently acting as financial advisor to Gold Coast Ventures,
Inc. and serving as a Board member of Associated Home Health. Dr. Zitrin is a
graduate of Rutgers College of Medicine and Dentistry.
 
     AUGUST C. SCHULTES III, Director; Mr. Schultes has served as a director
since February 1997. Mr. Schultes is Chairman of the Board and CEO of A.C.
Schultes, Inc., a contracting and service organization specializing in water
well drilling, water and waste water treatment, and pump and motor repair
services with offices in Maryland, Delaware and two (2) locations in New Jersey
for over seventy-five years. He is also the Chairman of the Board and CEO of
Life Care Institute, a medical diagnostic center with facilities to perform
stress tests, CAT scans, MRI scans and physical therapy located in New Jersey.
He was also the founder, Chairman of the Board and CEO of Stout Environmental,
Inc., a full service hazardous
 
                                       61
<PAGE>   63
 
waste environmental company. Mr. Schultes is a graduate of Penn State University
and has a BS in Civil Engineering.
 
     GARY J. ZIEGLER, Director; Mr. Ziegler has served as a director since
February 1997. Mr. Ziegler is President of Consultants and Planners, Inc., which
provides operating services to several water utility companies in New Jersey.
Mr. Ziegler is a Professional Engineer and Professional Planner in New Jersey, a
Professional Engineer in Maryland, Pennsylvania, Ohio and New York and a member
of the American Society of Civil Engineers and the National Society of
Professional Engineers. He was President of W.C. Services, Inc. and Vice
President of Stout Environmental, Inc. Mr. Ziegler is a graduate of Clemson
University with a BS degree in Civil Engineering.
 
     The following is a description of the Company's officers who are not also
directors:
 
     BRUCE C. ROSETTO, Age 41, Vice President and General Counsel/Secretary; Mr.
Rosetto joined the Company in January, 1997 and his primary responsibilities are
acting as General Counsel to the Company, mergers and acquisitions, SEC
reporting investor relations and performing the functions as corporate
secretary. Mr. Rosetto was a partner in a New Jersey law firm; Paschon, Feurey,
and Rosetto from 1982-86. In 1986, Mr. Rosetto became Chairman and CEO of
Consolidated Waste Services of America, Inc., a fully integrated environmental
company, building that company primarily through mergers and acquisitions into
one of the largest privately owned environmental companies in New Jersey until
its acquisition by USA Waste Services. In 1994, he became Chairman and CEO of
Hemo Biologics International, Inc., a biologic products company. He graduated
from LaSalle University in 1979 with a BA Degree in Political Science, and from
Villanova University School of Law in 1982, with a JD Degree. He is currently a
member of the Florida and New Jersey Bar.
 
     MICHAEL SCHMIDT, Age 50, Treasurer and Chief Financial Officer; Mr. Schmidt
joined the Company in December 1997 and is responsible for the Company's overall
financial direction and SEC reporting, accounting operations and accounting
controls. Mr. Schmidt has over 20 years of public and private accounting
experience including 10 years in the environmental industry. Prior to joining
the Company, Mr. Schmidt served as Chief Financial Officer of Republic
Environmental Systems, Inc., a publicly traded company and a leading
environmental service provider, headquartered in Blue Bell, Pennsylvania, a
position he held for approximately ten years. Mr. Schmidt has a Bachelor of
Science in Business Administration from Rowan University and is a Certified
Public Accountant in the State of New Jersey.
 
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     The information contained in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" relating to the 1999 Annual
Meeting is incorporated herein by reference.
 
ITEM 10.  EXECUTIVE COMPENSATION
 
     The information contained in the Proxy Statement under the caption
"Executive Compensation" relating to the 1999 Annual Meeting is incorporated
herein by reference.
 
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information contained in the Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management" relating to the
1999 Annual Meeting is incorporated herein by reference.
 
ITEM 12.  CERTAIN TRANSACTIONS
 
     The information contained in the Proxy Statement under the caption "Certain
Transactions" relating to the 1999 Annual Meeting is incorporated herein by
reference.
 
                                       62
<PAGE>   64
 
                                    PART IV
 
ITEM 13.  EXHIBITS AND REPORTS
 
EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                               DOCUMENT
-------                             --------
<C>       <S>
     2.1  Agreement & Plan of Reorganization [Earth Care/Educational
          Storybooks] (Incorporated by reference from Exhibit 2.1 to
          the Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on March 7, 1997)
     3.1  Articles of Incorporation [Front Street] (Incorporated by
          reference from Exhibit 3.1 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
     3.2  Articles of Amendment [Front Street] (Incorporated by
          reference from Exhibit 3.2 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
     3.3  Articles of Amendment [Educational Storybooks] (Incorporated
          by reference from Exhibit 3.3 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
     3.4  Articles of Amendment [Educational Storybooks] (Incorporated
          by reference from Exhibit 3.4 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
     3.5  Articles of Merger [Educational Storybooks and U.S. Plastic
          Lumber Corp.] (Incorporated by reference from Exhibit 3.5 to
          the Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on March 7, 1997)
     3.6  By-Laws (Incorporated by reference from Exhibit 3.6 to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on March 7, 1997)
     4.1  Common Stock Specimen Certificate (Incorporated by reference
          from Exhibit 4.1 to the Company's Registration Statement on
          Form SB-2 (File No. 333-22949) filed with the SEC on March
          7, 1997)
     4.2  Warrant Agreement (Incorporated by reference from Exhibit
          4.2 to the Company's Registration Statement on Form SB-2
          (File No. 333-22949) filed with the SEC on March 7, 1997)
     4.3  Series A Warrant Certificate (Incorporated by reference from
          Exhibit 4.3 to the Company's Registration Statement on Form
          SB-2 (File No. 333-22949) filed with the SEC on March 7,
          1997)
     4.4  Series B Warrant Certificate (Incorporated by reference from
          Exhibit 4.4 to the Company's Registration Statement on Form
          SB-2 (File No. 333-22949) filed with the SEC on March 7,
          1997)
    10.1  Jeanell Sales Corp. Acquisition Agreement (Incorporated by
          reference from Exhibit 10.1 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
    10.2  Duratech Acquisition Agreement (Incorporated by reference
          from Exhibit 10.2 to the Company's Registration Statement on
          Form SB-2 (File No. 333-22949) filed with the SEC on March
          7, 1997)
    10.3  Clean Earth Acquisition Agreement (Incorporated by reference
          from Exhibit 10.3 to the Company's Registration Statement on
          Form SB-2 (File No. 333-22949) filed with the SEC on March
          7, 1997)
    10.4  RPI Acquisition Agreement (Incorporated by reference from
          Exhibit 10.4 to the Company's Registration Statement on Form
          SB-2 (File No. 333-22949) filed with the SEC on March 7,
          1997)
    10.5  ARDT Acquisition Agreement (Incorporated by reference from
          Exhibit 10.5 to the Company's Registration Statement on Form
          SB-2 (File No. 333-22949) filed with the SEC on March 7,
          1997)
</TABLE>
 
                                       63
<PAGE>   65
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                               DOCUMENT
-------                             --------
<C>       <S>
    10.6  Employment Agreement -- Mark Alsentzer (Incorporated by
          reference from Exhibit 10.6 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
    10.7  Employment Agreement -- Harold Gebert (Incorporated by
          reference from Exhibit 10.7 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
    10.8  Employment Agreement -- David Farrow (Incorporated by
          reference from Exhibit 10.8 to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on March 7, 1997)
    10.9  Rutgers Licensing Agreement (Incorporated by reference from
          Exhibit 10.9 to the Company's Registration Statement on Form
          SB-2 (File No. 333-22949) filed with the SEC on March 7,
          1997)
    10.10 ESP Acquisition Agreement (Incorporated by reference from
          Exhibit 10.10 of Amendment One to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on August 26, 1997)
    10.11 ITS Acquisition Agreement (Incorporated by reference from
          Exhibit 10.11 of Amendment One to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on August 26, 1997)
    10.12 EPC Acquisition Agreement (Incorporated by reference from
          Exhibit 10.12 of Amendment One to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on August 26, 1997)
    10.13 IIC/USPL Joint Venture Agreement (Incorporated by reference
          from Exhibit 10.13 of Amendment One to the Company's
          Registration Statement on Form SB-2 (File No. 333-22949)
          filed with the SEC on August 26, 1997)
    10.14 S D & G License and Operating Agreement (Incorporated by
          reference from Exhibit 10.14 of Amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.15 Ground Lease Agreement (Carteret Biocycle) (Incorporated by
          reference from Exhibit 10.15 of Amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.16 Lease Agreement (Brock Mgt/Earth Care TN) (Incorporated by
          reference from Exhibit 10.16 of amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.17 Lease Agreement (APEC/Earth Care Midwest) (Incorporated by
          reference from Exhibit 10.17 of Amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.18 Lease Agreement (Plastic Properties LLC/RPI) (Incorporated
          by reference from Exhibit 10.18 of amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.19 Lease Agreement (Dalphon Sr./Clean Earth) (Incorporated by
          reference from Exhibit 10.10 of Amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.20 Lease Agreement (Glades Twin Plaza/Earth Care) (Incorporated
          by reference from Exhibit 10.20 of Amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.21 Lease Agreement (Consol. Realty/EPC) (Incorporated by
          reference from Exhibit 10.21 of Amendment One to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on August 26, 1997)
    10.22 Lease Agreement (Waste Concepts, Inc.) (Incorporated by
          reference from Exhibit 10.22 of Amendment Two to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on January 9, 1998)
</TABLE>
 
                                       64
<PAGE>   66
 
<TABLE>
<CAPTION>
EXHIBIT
  NO.                               DOCUMENT
-------                             --------
<C>       <S>
    10.23 Lease Agreement (Earth Care Partners of Tennessee)
          (Incorporated by reference from Exhibit 10.22 of Amendment
          Two to the Company's Registration Statement on Form SB-2
          (File No. 333-22949) filed with the SEC on January 9, 1998)
    10.24 WCI Acquisition Agreement (Incorporated by reference from
          Exhibit 10.22 of Amendment Two to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on January 9, 1998)
    10.25 CTI Stock Purchase Agreement (Incorporated by reference from
          Exhibit 10.22 of Amendment Two to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on January 9, 1998)
    10.26 Employment Agreement -- Steven Sands (Incorporated by
          reference from Exhibit 10.22 of Amendment Two to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on January 9, 1998)
    10.27 Employment Agreement -- Bruce Rosetto (Incorporated by
          reference from Exhibit 10.22 of Amendment Two to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on January 9, 1998)
    10.28 ICC/USPL Joint Venture II (Incorporated by reference from
          Exhibit 10.22 of Amendment Two to the Company's Registration
          Statement on Form SB-2 (File No. 333-22949) filed with the
          SEC on January 9, 1998)
    10.29 PNC Bank of Delaware -- Promissory Note (Incorporated by
          reference from Exhibit 10.22 of Amendment Two to the
          Company's Registration Statement on Form SB-2 (File No.
          333-22949) filed with the SEC on January 9, 1998)
    10.30 Letter Employment Agreement -- Michael D. Schmidt
          (Incorporated by reference from Exhibit 10.30 of the Form
          10KSB filed on March 31, 1998)
    10.31 Eaglebrook Plastics, Inc. Stock Purchase Agreement
          (Incorporated by reference from Exhibit 10.31 of the Form 8K
          filed on February 10, 1999)
    10.32 Eaglebrook Plastics, Inc. Stock Purchase Agreement
          (Incorporated by reference from Exhibit 10.32 of the Form 8K
          filed on February 10, 1999)
    10.33 Coast Business Credit Loan and Security Agreement; Amendment
          to Loan and Security Agreement; Second Amendment to Loan and
          Security Agreement; Third Amendment to Loan and Security
          Agreement; and Fourth Amendment to Loan and Security
          Agreement
    10.34 Convertible Debenture Purchase Agreements with Halifax Fund,
          L.P. and Societe Generale, L.P. dated December 22, 1998
    10.35 Convertible Debenture Purchase Agreement with Halifax Fund,
          L.P. and Societe Generale, L.P. dated January 26, 1999
    10.36 1999 Employee Stock Option Plan
    10.37 1999 Non-Employee Director Stock Option Plan
    21.1  List of subsidiaries
    27    Financial Data Schedule
</TABLE>
 
                                       65
<PAGE>   67
 
                                   SIGNATURES
 
     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                          U.S. Plastic Lumber Corporation
 
                                          By:     /s/ MARK S. ALSENTZER
                                            ------------------------------------
                                            Mark S. Alsentzer, Chairman of the
                                              Board,
                                            Chief Executive Officer and
                                              President
 
Date: March 26, 1999
 
     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
 
<TABLE>
<S>                                                          <C>
 
/s/ MARK S. ALSENTZER                                        Date: March 26, 1999
-----------------------------------------------------
Mark S. Alsentzer, Chairman of the Board, Chief
Executive Officer and President
 
/s/ MICHAEL D. SCHMIDT                                       Date: March 26, 1999
-----------------------------------------------------
Michael D. Schmidt, Chief Financial Officer Treasurer
 
/s/ AUGUST C. SCHULTES III                                   Date: March 26, 1999
-----------------------------------------------------
August C. Schultes III, Director
 
/s/ GARY J. ZIEGLER                                          Date: March 26, 1999
-----------------------------------------------------
Gary J. Ziegler, Director
 
/s/ ROGER N. ZITRIN                                          Date: March 26, 1999
-----------------------------------------------------
Roger N. Zitrin, Director
</TABLE>
 
                                       66