<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.
                             ---------------------

                                   FORM 10-K

<Table>
<C>          <S>
    [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001



                                   OR




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



             FOR THE TRANSITION PERIOD FROM           TO
</Table>

                        COMMISSION FILE NUMBER 000-23855

                             ---------------------

                           U.S. PLASTIC LUMBER CORP.
             (Exact Name of Registrant as specified 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
              (Address of Principal Executive Offices) (Zip Code)
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
                                 (561) 394-3511

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, PAR VALUE $.0001
                                (Title of Class)

     Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [X]     No [ ]

     Indicate by check mark if disclosure of delinquent files in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or amendment
to this Form 10-K.  [X]

     The aggregate market value of the voting common equity held by
non-affiliates of the registrant on February 28, 2002 based on the closing
market price on such date, of $0.49 per share, was $16,675,141.

     The number of shares outstanding of the registrant's common stock as of
February 28, 2002 is 41,413,315.

     DOCUMENTS INCORPORATED BY REFERENCE: PART III -- Portions of the
Registrant's definitive Proxy Statement relating to its 2002 Annual Meeting of
Stockholders which will be filed with the Commission within 120 days after the
end of the registrant's fiscal year.
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<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     We are a manufacturer and marketer of recycled plastic lumber products and
a provider of environmental recycling services. We were incorporated in Nevada
in June 1992. In March 1996, we acquired Earth Care Global Holdings, Inc. as a
wholly owned subsidiary through the acquisition of all the issued and
outstanding stock of Earth Care Global Holdings, Inc. in a stock for stock
exchange. At the time of this acquisition, we changed our name from Educational
Storybooks International, Inc. to U.S. Plastic Lumber Corp. As used in this
report, the terms "we," "us," "our," the "Company," and "U.S. Plastic Lumber"
mean U.S. Plastic Lumber Corp. and its subsidiaries.

     We have two distinct business segments, the Plastic Lumber division and the
Environmental Recycling division. Please refer to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for segment financial information for the past three
years.

     Clean Earth, Inc. ("Clean Earth"), our wholly-owned subsidiary, operates
our Environmental Recycling division, which includes 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. Clean Earth has a number of subsidiaries
which are listed under "-- Corporate Structure."

     U.S. Plastic Lumber Ltd., our wholly-owned subsidiary, operates the Plastic
Lumber division, which 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 polyethylene, a form of plastic.
We also manufacture a composite decking product made from plastic and wood fiber
in addition to plastic sheet products, cornerboards, and other items for the
packaging industry. U.S. Plastic Lumber Ltd. has one wholly-owned subsidiary,
The Eaglebrook Group, Inc., which operates our Chicago plastic recycling and
manufacturing operations.

     Within the Plastic Lumber division, we operate a total of three
manufacturing, processing, recycling and fabrication facilities throughout the
United States. The primary product produced in two 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. 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.

     Our plastic lumber operation manufactures plastic profiles from recycled
waste plastic, and plastic composite lumber with additives including wood and
fiberglass, to produce a high quality, long lasting alternative to pressure
treated lumber. Plastic lumber provides superior performance in outdoor uses and
is suitable for most nonstructural and structural applications. We have a
license to use a patented technology and also own two patents to manufacture
structural plastic lumber. By producing a high quality recycled plastic lumber
product, we believe that we conserve natural resources through reducing the need
for lumber products made from wood. At the same time we reduce the amount of
plastic waste going into landfills while providing a longer lasting, useful
product. Our plastic lumber products are intended as an excellent replacement
for pressure treated lumber, which often times is treated with toxic chemicals
such as chromated copper arsenate ("CCA") to retard decay and insect
infestation. The Environmental Protection Agency has recently indicated its
intention to phase out CCA within the next several years due to its carcinogenic
properties. Plastic lumber is not subject to decay or insect infestation and
thus will outlast wood, especially in applications exposed to moisture. Recycled
plastic lumber is environmentally friendly because it eliminates potential
pollution from these toxic chemicals leaching into the environment.

     We operate five facilities within the environmental operations of Clean
Earth. Two of our plants treat and recycle soil that has been contaminated with
petroleum hydrocarbons and similar compounds through a process known as thermal
desorption. Our third plant treats and recycles soil through a process which is

                                        1
<PAGE>

bioorganic in nature. Our fourth plant treats and recycles soil through a
chemical treatment and cold mix process. Finally, we have a plant that
consolidates and stabilizes oils, solvents, and heavy metal contaminated waste
for disposal at unrelated companies.

     Clean Earth operates plants in New Castle, Delaware, Philadelphia,
Pennsylvania, Carteret, New Jersey, Hagerstown, Maryland, and Kearny, New
Jersey. Clean Earth also owns two environmental construction companies:
Integrated Technical Services, Inc., in Winslow, New Jersey and Barbella
Environmental Technology, Inc. in Somerville, New Jersey. Clean Earth also owns
Consolidated Technologies, Inc., which provides beneficial re-use of dredge
materials and upland re-use of dredge materials to reclaim strip mines and
brownfield properties.

     Clean Earth offers environmental recycling services and operates several
subsidiaries. Clean Earth of New Castle, Inc. and Clean Earth of Philadelphia,
Inc. operate low temperature thermal desorption treatment plants that ensure
that contaminated soil is treated in accordance with local, state and federal
regulations. This thermal treatment process removes petroleum hydrocarbons from
the soil. Federal and state agencies (including Delaware, New Jersey, New York,
Maryland, and Pennsylvania) have recognized this process as a cost effective
technology. Contaminated solids, soils, and construction debris are recycled and
reused in construction and industrial applications. Our 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 Clean Earth of Carteret, Inc., a bioremediation plant located in
Carteret, New Jersey, which removes petroleum hydrocarbons from soil. The plant
is similar to Clean Earth of New Castle, Inc.'s facility except that Clean Earth
of Carteret Inc.'s process involves bio-organic destruction of petroleum
hydrocarbons whereas Clean Earth of New Castle, Inc.'s facility uses low
temperature thermal desorption to remove petroleum hydrocarbons from the soil.
Clean Earth has a subsidiary, Clean Earth of Maryland, Inc., located in
Hagerstown, Maryland that provides soil recycling services in the
Maryland/Washington D.C. region. Clean Earth also has a subsidiary, Clean Earth
of North Jersey, Inc. ("CENJ"), which is involved in the recycling and
beneficial re-use of industrial wastes. The plant is a permitted Resource
Conservation & Recovery Act facility. The remaining environmental recycling
subsidiaries, Integrated Technical Services, Inc., Barbella Environmental
Technology, Inc., and Consolidated Technologies, Inc., are involved in
beneficial re-use of waste products, upland re-use of dredge materials in strip
mines and brownfield 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 numerous risks and uncertainties,
including but not limited to risks associated with our credit facilities and
liquidity, the ability to obtain adequate financing on commercially acceptable
terms, economic conditions, the affects of rapid growth upon the Company and the
ability of management to effectively respond to such growth, demand for products
and services of the Company, newly developing technologies, regulatory matters,
protection of the Company's proprietary technology, the effects of competition
from entities with greater financial resources than that possessed by the
Company and shareholder dilution.

     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 the 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."

                                        2
<PAGE>

RECENT EVENTS

  CREDIT FACILITIES

     On September 28, 2001 we notified all of the banks which participate in our
Senior Credit Facility (the "lending group") that we would not make the $2.5
million term loan payment due September 30, 2001 without jeopardizing our
business operations, and that we would be in violation of some of the Senior
Credit Facility's financial covenants as of that date.

     On December 12, 2001, the lending group and we executed a Forbearance
Agreement, which is effective as of November 14, 2001. Under the terms of the
Forbearance Agreement, the lenders under the Senior Credit Facility agreed to
accept interest only payments from us and allowed us to defer the September 30,
and December 31, 2001 principal payments until the earlier of February 28, 2002
or the sale of Clean Earth, Inc. Pursuant to the terms of the Forbearance
Agreement, the lenders also agreed not to take any action against us with
respect to the covenant violations as of September 30, 2001 and December 31,
2001. The Forbearance Agreement provided for a forbearance fee of $100,000
payable by us at the termination of the forbearance period. The forbearance
period terminated on February 28, 2002. As of February 28, 2002 we did not make
the required principal payments originally due September 30, and December 31,
2001 in the amount of $2.5 million each. We also did not make the required
interest payments of approximately $215,000 and $197,000 due January 31, and
February 28, 2002 respectively. We are currently in negotiations with the
lending group for a new forbearance agreement which would extend the forbearance
period to May 31, 2002, allowing us time to complete the sale of Clean Earth or
to seek alternatives for refinancing the Senior Credit Facility. The Senior
Credit Facility has additional principal payments in the amount of $2.5 million
due March 31, 2002 and June 30, 2002, with the remaining balance due on July 1,
2002. In the event that the necessary waiver and forbearance are not obtained or
future principal and interest payments cannot be made, the lenders under the
Senior Credit Facility can demand immediate repayment from us of the outstanding
balance on the Senior Credit Facility. As of December 31, 2001 the outstanding
balance on the Senior Credit Facility was $39.9 million, including deferred
fees, penalties and interest.

     On January 3, 2002, we notified all of the participants in our Master
Credit Facility with GE Capital Corporation that we would not be making any
further principal payments until at least April of 2002. In addition, we did not
make the term payment of $1.7 million due January 2, 2002 and, as of September
30, and December 31, 2001, were not in compliance with the tangible net worth
covenant under the Master Credit Facility. Effective February 28, 2002 we, GE
Capital Corp. and the other participants in the Master Credit Facility agreed to
a Forbearance and Modification Agreement which restructures the Master Credit
Facility by allowing us to defer principal payments until April 1, 2002 while
continuing to make interest payments and providing a waiver of the September 30,
and December 31, covenant violations. In accordance with this agreement, we will
be required to make a $500,000 principal payment upon the sale of Clean Earth,
Inc., when and if it takes place. In addition, we will be required to make a $2
million prepayment on the Master Credit Facility upon the earlier of (i) our
obtaining a new revolving credit facility with availability of least $10
million, which would replace the existing revolving credit facility; (ii) our
exercising the purchase option on, and subsequently obtaining a mortgage
against, our Chicago property; or (iii) September 30, 2002. The Forbearance and
Modification Agreement also re-sets the minimum tangible net worth covenant for
March 31, 2002 and adds new covenants for minimum levels of earnings before
interest, taxes, depreciation and amortization ("EBITDA") commencing March 31,
2002 if the proposed sale of Clean Earth does not take place, and June 30, 2002
if the proposed sale of Clean Earth does take place. It also requires us, under
certain circumstances, to grant additional security interest to GE Capital Corp.
and to the other participants in the Master Credit Facility for some of our
property, plant and equipment that these lenders currently have no security
interest in.

     Pursuant to this agreement, commencing on September 1, 2002, the Master
Credit Facility will be restructured to a 48-month term. We will pay a
forbearance fee in connection with the Forbearance and Modification Agreement in
an amount equal to 1% of our obligations under the Master Credit Facility
outstanding as of the date of the proposed sale of Clean Earth. This forbearance
fee will be immediately due and payable if the closing of the sale of Clean
Earth does not occur by June 1, 2002.

                                        3
<PAGE>

     The Master Credit Facility also contains a provision whereby an event which
would accelerate payment terms of the Company's Senior Credit Facility would
also accelerate the payment terms of the Master Credit Facility to the same due
date as the Senior Credit Facility. In addition, defaults under these lending
agreements cause defaults, pursuant to cross default provisions, of our other
agreements, including, but not limited to, other lending agreements, debenture
agreements, lease agreements and others.

     We are also required to retire the $4.0 million convertible debenture
issued to Halifax Fund, L.P., as well as the $5.0 million convertible debenture
payable to Stout Partnership, our largest stockholder, on or before July 1,
2002. The Forbearance and Modification Agreement to the Master Credit Facility
prohibits us from making any payments of principal, interest or any other
amounts due and owing to Halifax Fund, L.P., other than the payment of Halifax'
$4.0 million debenture, Stout Partnership or any future subordinated lender for
one year from the date of the closing of the proposed sale of Clean Earth, if
consummated, unless an equal payment, in addition to all currently scheduled
principal and interest payments, is paid to the participants in the Master
Credit Facility.

     In addition, the $4.0 million convertible debenture contains a provision
which provides that the sale or transfer by us of substantially all of our
assets gives the holder an option to consider the debenture immediately due and
payable and requires us to redeem this debenture at a redemption price equal to
100% of the outstanding principal amount of the debenture or at a premium.

     We currently do not have the financial resources to repay the debt
obligations under the Senior Credit Facility, master Credit Facility, $4 million
convertible debenture and the $5 million convertible debenture as they become
due or in the event that past or future events of default are not waived in
writing and such debt is immediately due without obtaining new debt and/or
equity capital, negotiating different payment terms and/or selling some of our
assets. Our past failures to comply with the terms of our Senior Credit Facility
and Master Credit Facility, as well as the related forbearance agreement and
other debt obligations, and the material financial obligations contained in our
Senior Credit Facility and Master Credit Facility have a material adverse effect
upon our liquidity and capital resources and raise substantial doubt about our
ability to continue as a going concern. See "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

  EXECUTION OF THE PURCHASE AGREEMENT FOR THE SALE OF CLEAN EARTH, INC.

     On December 29, 2001 we entered into a purchase agreement, subsequently
amended on February 12, 2002, and again on March 5, 2002, with New CEI Inc., a
newly created Delaware corporation owned by affiliates of Founders Equity, Inc.
("Founders"), an investment group headquartered in New York, New York. Pursuant
to the purchase agreement, we agreed to sell all of the outstanding capital
stock of Clean Earth, Inc., our wholly-owned subsidiary ("Clean Earth"), which
together with the subsidiaries of Clean Earth comprise our environmental
recycling division, to New CEI Inc, subject to shareholder approval. No
assurances can be given that we will be able to close this transaction or that
we will be successful in selling Clean Earth at all in the event the sale to New
CEI, Inc. is not consummated.

     The purchase price consists of:

     - $45.0 million, of which $44.0 million will be payable at the closing of
       the transaction in cash and $1.0 million will be held in escrow pending
       the outcome of various purchase price adjustments that are part of the
       purchase agreement; and

     - 45,000 shares of the Junior Preferred Stock. The Junior Preferred Stock
       is redeemable upon the earlier of (i) the tenth anniversary of the
       issuance of the Junior Preferred Stock, (ii) a change of control event,
       or (iii) a registered offering of New CEI's securities that results in
       gross proceeds of at least $25.0 million. The Junior Preferred Stock will
       be subordinate to the senior debt of New CEI and the other outstanding
       preferred stock of New CEI.

     Additional adjustments to the purchase price will be made if the $1.0
million escrow is not sufficient to cover the adjustments related to debt and
other obligations outstanding and non-cash working capital. The adjustments, if
any, for a shortfall of escrow in excess of $1.0 million related to debt and
other obligations
                                        4
<PAGE>

outstanding and non-cash working capital will result in a reduction in the
Junior Preferred Stock we will receive from New CEI by 0.02% for each $1,000 of
the shortfall.

     In addition, there may be additional adjustments to the cash portion of the
purchase price based upon a final audited balance sheet to be delivered after
the closing if the amount of outstanding debt and other obligations and non-cash
working capital set forth on the final audited balance sheet differ from the
amounts of such items set forth on the unaudited balance sheet on the closing
date. The $1.0 million escrow will be distributed among the parties accordingly.
If on the closing date, there are any obligations of Clean Earth or any
subsidiary of Clean Earth that an obligee would have the right to accelerate the
date of payment of such obligation of Clean Earth or its subsidiary (a "Clean
Earth Defaulted Obligation"), the cash portion of the purchase price will be
reduced by the amount of the accelerated portion of the Clean Earth Defaulted
Obligation less the amount by which such acceleration has resulted in the
reduction of the cash portion of the purchase price pursuant to the foregoing
adjustments pertaining to working capital and retention of debt.

     If New CEI has received the mezzanine financing of at least $8.0 million
but less than $10.0 million by or at the closing, the cash portion of the
purchase price will be reduced by the amount by which the amount of the
mezzanine financing is less than $10.0 million, but such reduction will not,
unless we, in our sole discretion, agree otherwise, cause the closing date cash
payment to be less than $43.5 million. In addition, we will keep the following
assets and will not transfer these assets as part of the Clean Earth sale
transaction: the claims for payment pursuant to (i) our interest in the joint
venture between Interstate Industrial Corp. and us and (ii) the Quakertown
Foundry Site Agreement between Integrated Technical Services, a subsidiary of
Clean Earth, and the Pennsylvania Department of Environmental Protection.

     The sale of Clean Earth was approved by our board of directors on December
31, 2001. At a special meeting of shareholders held on March 19, 2002,
shareholders approved the sale of Clean Earth pursuant to the terms and
conditions of the purchase agreement dated December 29, 2001 and amendment dated
February 12, 2002. The shareholder approval obtained on March 19, 2002 was only
applicable to the specific purchase agreement voted on at the special meeting
and did not authorize our management or board of directors to pursue alternative
plans for the sale or disposal of Clean Earth. As a result of the proposed sale
of Clean Earth and the requirement to reduce to fair value the carrying amount
of Clean Earth's long-lived assets, we recorded an impairment charge of $13.5
million, as required by Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

     The terms of the purchase agreement, as amended, provide for significant
preconditions to the purchaser's obligation to close the transaction. These
preconditions include, but are not limited to, requirements that the purchaser
obtain $32.0 million of senior debt and $10.0 million of mezzanine financing
prior to closing the transaction. We cannot predict the date as to when all of
these preconditions will be met or whether they will be met at all. . On March
5, 2002 the agreement, which had been terminated by a letter from Founders dated
March 4, 2002, was reinstated and amended to allow Founders additional time to
meet all of the preconditions to closing the transaction, and to extend the date
for which either party to the transaction could terminate the agreement from
March 31, 2002 to April 21, 2002.

     Because the purchaser has not met all of these preconditions as of March
30, 2002, and since the shareholder approval was only applicable to this
specific purchase agreement, we did not account for Clean Earth as a
discontinued operation in our 2001 audited consolidated financial statements. We
are currently working with the purchaser to close this transaction prior to
April 21, 2002.

     We anticipate that we will use the estimated $42.7 million of net proceeds
to be realized from the Clean Earth sale, if consummated, to retire our Senior
Credit Facility in the amount of $39.9 million as of December 31, 2001,
including deferred interest, fees and penalties, as well as some of our other
outstanding indebtedness. If we are unsuccessful in closing this transaction, we
will be working with our senior creditors and a number of potential new lenders
and investors on an alternative plan to refinance the Senior Credit Facility. In
this event, we may be forced to seek protection under the Bankruptcy Code or we
may be forced into a bankruptcy proceeding by these lenders.
                                        5
<PAGE>

     Assuming the completion of the sale of Clean Earth as described in the
purchase agreement and the receipt of the estimated net proceeds of $42.7
million and a new working capital line of credit, we may require additional
capital to repay outstanding indebtedness and fund ongoing operations. We
believe, based on our current financial projections, that assuming the
completion of the sale of Clean Earth, the new line of credit will be adequate
to fund our current level of operations for the balance of fiscal year 2002. We
intend to service our remaining debt through cash flow from operations and a new
working capital line of credit. Our projections for fiscal year 2002 show a
significant improvement in the operating performance of the plastic lumber
division as a result of the completion of our restructuring plan. However, there
can be no assurances that we will meet our projections. If we fail to meet our
projections, it will have a material adverse impact on our liquidity and capital
resources. These projections are based on internal forecasts, including current
backlog of orders; however there can be no assurance that actual results will
meet these projections. Accordingly, the amount of additional funding, if any,
the timing of our need for such funding and our ability to raise the necessary
funds can not be predicted at this time. In the event additional capital is
required, our failure to complete an additional debt or equity financing may
have a material adverse effect on our operations and our ability to continue as
a going concern.

  NASDAQ DELISTING NOTICE

     On February 18, 2002 we received notice from NASDAQ that our stock may be
delisted from the National Market System because it has not maintained a minimum
bid price of $1.00 over the last 30 consecutive trading days. In accordance with
NASDAQ Marketplace Rules, the Company has 90 calendar days, or until May 15,
2002, to regain compliance, or our stock may be delisted from trading on the
National Market System. While our Board of Directors intends to review the
options available to us for regaining compliance with the listing requirements
of the Nasdaq National Market, we will also consider transferring our securities
to The Nasdaq SmallCap Market ("SmallCap Market").

     To transfer our securities to the SmallCap Market, we must satisfy the
continued inclusion requirements for the SmallCap Market, which makes available
an extended grace period for the minimum $1.00 bid price requirement. If we
submit a transfer application and pay the applicable listing fees by May 15,
2002, initiation of the delisting proceedings will be stayed pending Staff's
review of the transfer application. If the transfer application is approved, we
will be afforded the 180-calendar day grace period, which commences with the
date of the delisting notice or until August 13, 2002. We may also be eligible
for an additional 180-calendar day grace period provided that we meet the
initial listing criteria for the SmallCap Market under Marketplace Rule
4301(c)(2)(A). Furthermore, we may be eligible to transfer back to The Nasdaq
National Market, without paying the initial listing fees, if by February 10,
2003 our bid price maintains the $1.00 per share requirement for 30 consecutive
trading days and we have maintained compliance with all other continued listing
requirements on that market.

  LITIGATION AWARD

     In April 2001, we were served with an arbitration demand from Southern Wood
Services seeking an award of $3,328,000 due to our failure to abide by the terms
of a contract relative to the purchase of wood flour. We utilize wood flour for
the production of our SmartDeck composite product. The arbitration hearing took
place in the first week of August 2001 in Atlanta, Georgia in accordance with
the rules and procedures of the American Arbitration Association. On September
7, 2001, the arbitrators issued an award in favor of Southern Wood Services in
the amount of $1,759,822, inclusive of arbitration costs and expenses. We filed
a motion to vacate the award based on the principle that the award does not
reflect any evidence presented at the hearing nor is the award based on the
current case law on damages in similar cases in the United States.

     On February 28, 2002, a hearing in the Superior Court of DeKalb County,
Georgia, in a civil action, affirmed the arbitration ruling in favor of Southern
Wood Services. Accordingly, we were ordered to pay Southern Wood Services the
amount of the arbitration award, as well as administrative fees and arbitrator's
compensation of $11,225 and $6,064 respectively, plus interest at 12% accruing
retroactive to September 7, 2001. While we will continue to appeal this
decision, we cannot avoid the judgement without posting a financial security
bond. We are unable to post a financial security bond at this time, and have
commenced
                                        6
<PAGE>

negotiations to reach a settlement and payment plan with Southern Wood Services.
No assurances can be given that we will be able to amicably resolve or reach a
settlement and payment plan with Southern Wood Services.

  HISTORY AND DEVELOPMENT OF THE COMPANY

     In March 1996, U.S. Plastic Lumber Corp. was formed when we entered into an
Agreement and Plan of Reorganization with Earth Care Global Holdings, Inc., a
manufacturer and marketer of recycled plastic products. Pursuant to this
Agreement and Plan of Reorganization, we effected a reverse split of our common
stock on a 1 for 16 basis, and then issued 4,196,316 post split shares of our
authorized but previously unissued common stock to acquire all the issued and
outstanding stock of Earth Care in a stock for stock exchange.

     We completed the following acquisitions during the period from 1996 through
2000:

<Table>
<Caption>
                                                                                TYPE OF
COMPANY ACQUIRED           DATE OF ACQUISITION    DESCRIPTION OF BUSINESS     ACQUISITION
----------------           -------------------   -------------------------   --------------
<S>                        <C>                   <C>                         <C>
DuraTech Industries......  April 1996            Manufacture of recycled     Asset Purchase
                                                 plastic Lumber in Lake
                                                 Odessa, Michigan
Clean Earth, Inc.........  December 1996         Treatment of contaminated   Merger
                                                 soil and construction
                                                 debris
Recycled Plastics
  Industries, Inc........  January 1997          Manufacture of specialty    Acquisition
                                                 profile recycled plastic
                                                 plastic lumber products
                                                 in Green Bay, Wisconsin
Advanced Remediation and
  Disposal Technologies,
  Inc....................  February 1997         Environmental               Merger
                                                 construction and clean up
                                                 of contaminated
                                                 Industrial sites
Environmental Specialty
  Plastics, Inc..........  March 1997            Marketing, fabrication      Acquisition
                                                 and distribution of
                                                 recycled plastic products
                                                 in Guasti, California
Integrated Technical
  Services, Inc..........  March 1997            Environmental               Acquisition
                                                 construction and clean up
                                                 of contaminated
                                                 industrial sites in
                                                 Winslow, New Jersey
EnviroPlastics
  Corporation............  June 1997             Processing of recycled      Acquisition
                                                 plastic in Auburn,
                                                 Massachusetts
Interstate Industrial
  Corp...................  July 1997             Dredging and upland         Joint Venture
                                                 disposal Projects in        Partnership
                                                 Clifton, New Jersey
Waste Concepts, Inc......  November 1997         Removal and recycling of    Acquisition
                                                 waste products
Green Horizon
  Environmental, Inc.....  January 1998          Removal and recycle of      Acquisition
                                                 waste products
</Table>

                                        7
<PAGE>

<Table>
<Caption>
                                                                                TYPE OF
COMPANY ACQUIRED           DATE OF ACQUISITION    DESCRIPTION OF BUSINESS     ACQUISITION
----------------           -------------------   -------------------------   --------------
<S>                        <C>                   <C>                         <C>
Consolidated
  Technologies, Inc......  February and June     Disposal of dredge          Acquisition
                           1998                  materials For use in
                                                 strip mines in
                                                 Pennsylvania
Chesapeake Recycled
  Lumber.................  March 1998            Manufacturer of plastic     Asset Purchase
                                                 lumber
Cycle-Masters, Inc.......  May 1998              Manufacture of plastic      Acquisition
                                                 lumber in Sweetser,
                                                 Indiana
GeoCore, Inc.............  June 1998             Environmental services      Acquisition
                                                 company in New Jersey
Trimax of Long Island
  Inc. and Polymerix,
  Inc....................  June 1998             Manufacture of structural   Asset Purchase
                                                 lumber in Ronkokoma, Long
                                                 Island
S&W Waste, Inc...........  December 1998         Recycling and re-use of     Acquisition
                                                 industrial waste
Eaglebrook Plastics, Inc.
  and Eaglebrook
  Products, Inc..........  January 1999          Manufacture of plastic      Merger
                                                 lumber in Chicago,
                                                 Illinois
Brass Investments,
  Inc....................  March 1999            Holding company for Soil    Acquisition
                                                 Remediation of
                                                 Philadelphia, Inc. and
                                                 Allied Waste Services,
                                                 Inc.
Soil Remediation of
  Philadelphia, Inc......  March 1999            Soil remediation in         Acquisition
                                                 Philadelphia,
                                                 Pennsylvania
Allied Waste Services,
  Inc....................  March 1999            Environmental services      Acquisition
                                                 company
Brigadoon Industries,
  Inc....................  April 1999            Manufacture of plastic      Acquisition
                                                 lumber in Ocala, Florida
Barbarella Environmental
  Technologies, Inc......  June 1999             Environmental               Acquisition
                                                 construction and clean-up
                                                 of contaminated
                                                 industrial sites
Eureka Plastics, Inc. and
  EcoSource Plastics,
  Inc....................  September 1999        Environmental               Acquisition
                                                 construction and clean-up
                                                 of contaminated
                                                 industrial sites
Clean Rock Properties,
  Ltd....................  December 1999         Holding company for real    Acquisition
                                                 estate of Clean Rock
                                                 Industries, Inc.
Clean Rock Industries,
  Inc....................  December 1999         Recycling of contaminated   Acquisition
                                                 soils
Baron Enterprises,
  Inc....................  February 2000         Manufacture of tier         Asset Purchase
                                                 sheets and slip sheets
                                                 from recycled plastic
</Table>

                                        8
<PAGE>

CORPORATE STRUCTURE

     We are a holding company for our 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. ("Clean Earth"), a Delaware corporation, the holding company
which owns all operating environmental recycling subsidiaries, and (iii) U.S.
Plastic Lumber Finance Corporation, a Delaware holding company which was
established to provide financing to our subsidiaries. A list of our indirect
subsidiaries is presented below.

  U.S. PLASTIC LUMBER LTD. SUBSIDIARY:
     The Eaglebrook Group, Inc., a Delaware corporation

  CLEAN EARTH, INC. SUBSIDIARIES:
    Advanced Remediation and Disposal of Delaware, Inc., a Delaware corporation
     Allied Waste Services, Inc., a Delaware corporation
     Barbella Environmental Technology, Inc., a New Jersey corporation
     Barbella Environmental Technology of New Jersey, Inc., a Delaware
    corporation
     Clean Earth of Carteret, Inc., a Delaware corporation
     Carteret Asphalt Corporation, a Delaware corporation
     Clean Earth of New Castle, Inc., a Delaware corporation
     Clean Earth of Maryland, Inc., a Maryland corporation
     Clean Rock Properties, Ltd., a Maryland corporation
     Consolidated Technologies, Inc., a Pennsylvania corporation
     Integrated Technical Services, Inc. a Delaware corporation
     Clean Earth of North Jersey, Inc., a New Jersey corporation
     Clean Earth of Philadelphia, Inc., a Delaware corporation

  U.S. PLASTIC LUMBER FINANCE CORPORATION SUBSIDIARY:
     U.S. Plastic Lumber IP Corporation, a Delaware corporation

     The sale of Clean Earth, if consummated, includes the transfer of all
licenses and trademarks relating to the assets, business and operations of Clean
Earth from U.S. Plastic Lumber IP Corporation to Clean Earth. U.S. Plastic
Lumber IP Corporation has entered into several license agreements regarding
manufacture of soil, water dredging and other matters directly benefiting the
business of Clean Earth. U.S. Plastic Lumber IP Corporation also owns two
trademarks: "Clean Earth" and "Integrated Technical Services" which benefit
Clean Earth.

RECYCLED PLASTIC LUMBER OPERATION

     The plastic lumber division is comprised of U.S. Plastic Lumber Ltd. and
its subsidiary, The Eaglebrook Group, Inc. These entities will comprise our
remaining business if the sale of Clean Earth is consummated.

     Products.  During the past several years, we believe our 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.

     Our recycled plastic lumber products are made using a substantial quantity
of recycled, post-consumer, and post-industrial plastics and are used for
numerous municipal, commercial, and residential applications. We also
manufacture a composite lumber product consisting of plastic and wood fiber. Our
products are primarily manufactured for the building products industry, custom
commercial and industrial uses, and the packaging/shipping industry. Our
products are manufactured using a non-toxic material that is an environmentally
friendly alternative to pressure treated lumber and rain forest woods and
provides superior performance for most nonstructural, outdoor applications where
traditional wood is subject to moisture

                                        9
<PAGE>

damage and rotting. We also produce structural plastic lumber manufactured from
a patented process. We believe that our products offer these unique advantages:

     - Environmentally friendly and non-toxic

     - Virtually maintenance free

     - Conservation of trees and reduce 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 woodborers

     - Not affected by moisture

     - 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 our 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 include:

     - Decking systems and platforms, including supporting structures and
       railings, for residential and commercial projects

     - Packaging products such as cornerboards used in shipping produce
       worldwide or slipsheets used in material handling applications

     - Commercial, municipal, and residential applications such as park benches,
       picnic tables, trash receptacles, stadium seats, planters, landscaping
       ties, and similar 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

     - Original Equipment Manufacture custom profiles

     Distribution varies by the type of product. Original Equipment Manufacture,
transportation, and packaging products are sold directly to end-users. Our
decking and railing systems are primarily distributed through a two-step
distribution process. We sell to a building supply company who, in turn,
distributes to mass merchants, lumber yards, and others. For products that we
fabricate, such as park benches, trash receptacles, and others, they are
primarily distributed directly to end-users or in response to government
bidding. We are not dependent upon a single customer or a few customers for the
sale of these products. No single customer accounts for 10% or more of our
consolidated revenues.

     Manufacturing and Recycling Facilities.  The Chicago, Illinois
manufacturing facility (approximately 400,000 sq. ft.) currently operates twenty
nine extruders that utilize a vacuum calibration continuous flow forming
manufacturing line. This process allows for the manufacture of many special
profiles, in any length,
                                        10
<PAGE>

that cannot be produced with conventional roll forming or closed mold systems.
One of the primary products produced at this facility is our 100% polyethylene
deckboard, one of three components to our "Carefree Xteriors"(R) product line
portfolio. In addition, a plastic slipsheet product, DuraPack(R), and other
packaging products are manufactured at this facility to service the packaging
industry. This facility also produces fabricated products for marine and
government applications and products for Original Equipment Manufacturers, as
well as providing processing of post consumer and postindustrial plastics, which
we utilize as raw material. We intend to expand our production capacity at this
facility using equipment from some of our smaller operations, which during the
current year will be consolidated into our regional facilities.

     The Ocala, Florida manufacturing facility currently operates a total of
eleven extruders utilizing continuous flow production. One of the specialty
products developed at this facility is a composite deckboard, consisting of
plastic and wood, used for decks in commercial and residential applications. The
composite product line was developed to compete directly with several
manufacturers of composite deck product throughout the country. Four extruders
in this facility are used to manufacture this composite product as another
component to our "Carefree Xteriors"(R) product line portfolio. This facility
also produces cornerboards, a product for our packaging division, for the
produce shipping industry worldwide. The facility consists of approximately
140,000 sq. ft. on 37 acres of land, and also produces our structural lumber and
railroad tie product lines.

     Our Denver, Colorado facility currently has two extruders and consists of
approximately 44,800 sq. ft. This facility only produces slipsheets and tier
sheets for our packaging division, which product is sold to the beverage
industry.

     As a result of management's restructuring of plastic lumber operations,
which commenced in the fourth quarter of 2000, we consolidated some of our
smaller plants, including those located in Sweetser, Indiana, Green Bay,
Wisconsin, Vernon, California, Fontana, California, Trenton, Tennessee, Denton,
Maryland and Reidsville, North Carolina into our regional hub facilities. As a
result, we will have closed or idled seven of our smaller facilities by the end
of the first quarter of 2002. In addition, on October 1, 2001, we sub-leased two
other facilities dedicated to recycling operations located in Auburn,
Massachusetts and Chino, California. See "Management's Discussion of Financial
Condition and Results of Operations -- Restructuring and Asset Impairment
Charges."

     Our manufacturing process involves proprietary technologies and specialized
manufacturing equipment that was custom built or modified to our specifications.
The manufacturing process utilizes granulated and/or densified recycled plastic,
which in some cases, contains additives formulated for desired end use
characteristics of the product. A key advantage of the process is the ability to
utilize 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 and insect resistance, which give it an
advantage over wood for many applications.

     The primary product of our manufacturing process is plastic profiles in
various sizes ranging from 3/8" x 1", to 10" diameter profiles in various
lengths and a variety of packaging related products such as cornerboard, slip
sheets and tier sheets. We also market and sell various engineered or value
added products for specific applications, in which our plastic lumber is used to
make the finished product.

     The manufacturing process, which uses a substantial quantity of recycled
plastic raw material, consists of three stages. First, the recycled plastic
materials received at the plant are identified and categorized by resin type.
These 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 that the plant produced. 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 packaged for shipping. We
utilize only recycled polyethylenes and do not use plastics with PVC, toxic
chemicals, insecticide, or paint residues. We use composite materials for
manufacturing our structural lumber product
                                        11
<PAGE>

line and our composite deckboard line of products. Our manufacturing process
produces no harmful environmental by-products or hazardous waste.

     Raw Materials Supply.  We obtain our mixed plastics feedstock through our
own operations or from firms who obtain these materials from a large variety of
recycling facilities, including municipal recycling programs, as well as
plastics discarded in various industrial and manufacturing processes. We are not
dependent on any one source to obtain our supplies. We believe the raw material
feedstock is currently purchased from sources that are dependable and adequate
for at least short term and medium term manufacturing requirements. Generally,
we attempt to maintain raw material inventory sufficient to supply our
manufacturing requirements for approximately one to two months. Due to our
liquidity problems, we have occasionally experienced brief disruptions in
availability of raw materials and other supplies. In addition, 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.
We are 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. We believe 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 our operations.

     Research and Development.  We are the only manufacturer of 100% recycled
plastic lumber that has received a successful evaluation report from BOCA
Evaluation Services, Inc., indicating compliance of our Carefree Decking(R) and
Carefree(R) Guardrail System with national building code requirements. BOCA
Evaluation Services, Inc. is a national testing organization that evaluates
building products. Qualified third party laboratories determine compliance with
national building code standards. We are in the process of applying for
evaluation reports for products manufactured by us. We have not incurred any
significant research and development expenditures during the last three years.

     Proprietary Technology.  We are generally of the belief that maintaining
state of the art technology in our formulations, 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,
we own two patents on our structural lumber product and have a worldwide license
on the Rutgers patent. We purchased the two patents 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. We have a patent application pending for process and composition relating
to the manufacture of wood fiber and polymer composite. We believe these patents
are important because they provide us with a competitive position in the market.

     We have 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 us
maintaining our contract rights with Rutgers. We have 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 we use in our
environmental division. The Adam license extends for the duration of the Adam
patent, December 5, 2011, unless either party to the license seeks to terminate
the agreement earlier for reasons set forth in the License Agreement. We also
have a non-exclusive license with the Strandex Corporation to manufacture
composite lumber products. The Strandex License Agreement expires on April 22,
2011.

     We have several registered trademarks and several more currently pending
application for registration. Our registered trademarks are as follows: Carefree
Decking System(R), Carefree Xteriors(R), Smartdeck(R), Clean Earth(R),
Integrated Technical Services(R), Recyclemaid(R), Cyclewood(R), Trimax(R),
Durawood(R), Durapack(R), RecycleDesign(R), Global Garden(R), SmartTrim(R),
Duratie(R), CrushGuard(R) and GripGuard(R). We take an aggressive attitude
toward the protection of our proprietary technology and trademarks.

     Competition and Barriers to Entry.  The recycled plastic lumber industry is
a young, highly fragmented industry with over 20 small manufacturers and many
more marketers of recycled plastic lumber. The
                                        12
<PAGE>

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 and wood fiber to produce a
less expensive composite product.

     We primarily use only high-density polyethylene and additives at all of our
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.
We attempt to compete with these competitors on the basis of price, quality, and
service. Two competitors who manufacture commingled plastic are The Plastic
Lumber Company, Inc., Akron, Ohio and Hammer's Plastics Recycling, Iowa Falls,
Iowa.

     Several competitors exist that manufacture a composite product that
consists of a mixture of wood and plastic. TREX(R), TimberTech, Louisiana
Pacific and AERT are our competitors who use a plastic composite material made
with sawdust used to manufacture primarily deckboard. TREX(R) has a strong
distribution system in place and has the most widely disseminated product of all
of our competitors. We compete directly against the composite deck manufacturers
through our Smart Deck(R) product.

     We believe that our competitive position in the market has increased
substantially over the last twelve months. In large part this is due to several
factors, including wider distribution of our products nationally, cross-selling
of separate products to the entire distribution network, centralized purchasing
which can lower our cost basis and an experienced management team.

     We manufacture recycled plastic lumber which will be in direct competition
with conventional wood in most of its applications. At present, the principal
competitive disadvantage of recycled plastic lumber compared to wood is that
recycled plastic lumber 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. Recycled
plastic lumber and composite lumber can be more expensive to initially purchase
than comparable wood, but recycled plastic lumber and composite lumber can be
more cost effective because they can substantially outlast wood, particularly in
applications where the lumber is exposed to the elements. We also believe 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 that are released into the soil and create
potentially hazardous conditions, which the U.S. Environmental Protection Agency
has recently taken action to address, by phasing out these chemicals. These
factors may reduce, if not eliminate, any price advantage that pressure treated
wood presently has with respect to its initial cost.

     There are significant barriers to entry for this line of business. First
and foremost, the technology and cost of development of a successful product is
time consuming and costly. Second, there is a large capital investment required
to build the plants, purchase the equipment necessary to operate the facilities,
and market the product on a national level. In order to penetrate the market
successfully, a company needs to establish a national presence with the ability
to produce in sufficient volumes to attract major distributors. This type of
operation requires technically trained individuals to operate and ensure that
the facility remains in strict compliance with our formulas and quality control
procedures to maintain product consistency on a national basis.

     Potential Markets.  By producing a suitable recycled plastic lumber and
composite lumber product, we conserve natural resources, reduce the plastic
waste entering landfills, and provide 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. The
pressure treating process injects Chromated Copper Arsenate "CCA" (all
carcinogens) into the wood. The United States Environmental Protection Agency
recently announced that it intends to phase out the use of pressure treated
lumber containing chromated copper arsenate over the next two to three years
because of the use of carcinogens in the pressure treating process. In addition,
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. We believe this phase out of pressure treated lumber containing
arsenic, which represents approximately 90% of pressure treated lumber currently
manufactured provides an excellent opportunity for us. We are unable to predict
the potential
                                        13
<PAGE>

response by the pressure treated lumber industry to the Environmental Protection
Agency announcement. Although the Environmental Protection Agency has determined
to ban pressure treated lumber, the Environmental Protection Agency has decided
upon a two year phase out period that is intended to provide manufacturers time
to convert their plants to the alternative treatments that currently exist.
Assuming a nonarsenic alternative to pressure treated lumber is developed, there
is a significant question in the market place as to the cost of this
alternative. As a result, we believe that this announcement provides an
opportunity for us for two reasons. We believe that we have the largest
available production capacity for plastic lumber and that our plastic lumber
product will be price competitive with any new product developed. As a result,
we believe the Environmental Protection Agency announcement will have a
meaningful impact on sales growth over the next several years. Pressure treated
wood has legislative restrictions in some states on its disposal in toxic waste
landfills. Plastic and composite lumber is a safe alternative that is fully
recyclable and maintenance-free. Home Depot, Inc. and Lowes Inc., leading home
improvement retailers whom carry our decking product in some of their stores,
have announced during the last year that they will curtail purchases of hardwood
lumber that are having an adverse environmental impact. Our product consists of
both structural and non-structural profiles, which are an excellent substitute
for many exterior uses for traditional wood lumber.

     We have developed a prototype railroad crosstie made from commingled
plastic which has been subjected to extensive testing over the last several
years. This prototype is superior in many ways to the creosote wood crosstie.
Our cross ties have approximately 500 MGT (million gross tons) of service and
are performing without any measurable defects. In contrast, creosote wood ties
installed at the same time have experienced noticeable wear.

     Presently, approximately 180,000 miles of class one railroad track are
being utilized in the United States, with approximately 3,334 crossties per mile
or a total of over 600,000,000 ties in place. In 1999, 15,000,000 crossties were
replaced in the United States, 93% of which were wood ties, and 65,000,000 cross
ties were replaced worldwide. In 1999, the worldwide market for replacing
crossties was approximately $2.5 billion. In some 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. Moisture, extreme temperature
fluctuations, and location relative to curves and switches are some conditions
which shorten creosote wood tie life. Railroads know from extensive experience
which locations require highest maintenance. These locations will be the initial
target areas for our longer lasting polymer crossties.

     Sufficient test data shows that the plastic railroad tie performs well
enough to enable us to market our railroad tie product to the railroad industry.
The primary issue in our growth plans regarding the plastic railroad tie is
cost. Our current pricing structure is approximately double the cost of a
comparable wood tie. We market our tie on the basis of life cycle cost savings.
We cannot assure you that our marketing strategy will succeed in creating demand
for our railroad tie product.

     During the last twelve months, we have also introduced, several products
specified for original equipment manufacturers. Some of these products are
gaining wide acceptance in such diverse industries such as the door, hot tub,
beverage, trucking and roll or sheet steel industries. Durability of our product
and reduced life cycle costs have been the primary factor in growing sales in
each of these segments of our business.

     Marketing Strategies.  Our business and operations are divided into two
distinct divisions: (i) building products, all of which are now marketed under
the Carefree Xteriors(R) name, which include high density polyethylene ("HDPE"),
composite and structural lumber products; and (ii) engineered products,
including fabricated products, railroad ties, marine & government, and Original
Equipment manufacture "OEM"/industrial businesses; packaging products, including
DuraPack(R) plastic slipsheets, tier sheets, corner board, and other related
packaging products. We continue to use the Smart Deck(R) name for selling
through a specific distributor.

     We employ market focused Sales Specialists and industry specific
representatives to market and sell our products. We utilize traditional sources
of sales including attending trade shows, select advertising, cold

                                        14
<PAGE>

calling, and customer referrals. We also market and sell through distributor
relationships. We are seeking to expand our distribution network nationwide in
some markets.

     We focus our selling strategy on the high quality, maintenance-free aspect
of our product along with our superior customer service. We also focus on the
benefits of our products. Benefits include being maintenance free, 100%
recycled, environmentally sensitive, aesthetically pleasing in appearance, free
from rot and insect infestation, and durable. Our sales are not dependent upon a
few customers, but rather we currently have a broad base of customers.

     We have historically experienced a seasonal slow-down in the winter months
during the past three years, but we are attempting to reduce the seasonality of
our sales. We can do this by increasing our 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 our industrial products 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, our 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. We are subject to federal, state and local laws
regarding the environment, occupational health and safety, and other regulations
applicable to our business. See "-- Environmental Recycling
Division -- Regulatory Matters" for additional discussion of environmental
regulations affecting our business. The primary regulations affecting the
plastic lumber divisions are air quality emissions from our manufacturing
plants, disposal of solid and liquid wastes, wastewater, and storm water
discharge. We do not believe that our 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 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 our financial condition,
although many times the delays in approving permit modifications can delay our
ability to quickly adapt to changing market conditions. Consequently, we cannot
assure you that regulatory requirements will not in the future adversely affect
our operations or require the introduction of costly additional manufacturing or
waste disposal practices, which could adversely affect our financial condition.
Additionally, as with manufacturing practices in general, if we release any
hazardous substance, such a release could have a material adverse effect whether
we (i) directly or indirectly cause the release; or (ii) the release comes from
any of our owned or leased properties; or (iii) the release comes from any
associated offsite disposal of our wastes; or (iv) the release comes from prior
activities on our owned or leased property.

ENVIRONMENTAL RECYCLING OPERATION

     The environmental recycling division is comprised of Clean Earth and its
subsidiaries. The sale of Clean Earth, if it takes place, will include the sale
of Clean Earth and its subsidiaries. After the completion of the sale of Clean
Earth, our current stockholders will no longer have any ownership interest in
the future operations of Clean Earth and the assets associated with Clean Earth
will no longer be available for distribution in the event that we are forced to
declare bankruptcy.

     The environmental recycling division offers a wide array of services
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. We have
a broad base of customers, and we are not dependent upon a single customer or a
few customers for the sale of these services. No single customer accounts for
more than 10% of our consolidated revenues in this operation.

     Clean Earth of New Castle, Inc. and Clean Earth of Philadelphia, Inc.
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. This solution is to treat these 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 of New Castle, Inc.
modified its plant to recycle products at higher
                                        15
<PAGE>

temperatures (up to 1,100 degrees Fahrenheit). Clean Earth of New Castle, Inc.
is now capable of treating soils contaminated with heavier products such as
number six 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 to help reduce costs. One
permit modification allows 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 generally less expensive. Switching to waste oil as a fuel in the
winter months enables more efficient costs, which translates to improved
operating margins. The Delaware Environment and Natural Resources Commission is
also reviewing for approval a second permit modification for accepting sewer
sludge into the process. The addition of sewer sludge significantly reduces the
volume of water which the plant consumes, increases the volume of clean soil,
and generates additional revenue for us. There can be no assurances that such
permit modifications will be obtained.

     Clean Earth of Carteret, Inc. was founded in 1997 and opened its facility
for business in the third quarter of 1998 in Carteret, New Jersey. This facility
serves a similar function as Clean Earth of New Castle, Inc., except that it
remediates soil contaminated with petroleum hydrocarbons through a bioorganic
process. This facility's operational costs are substantially less than thermal
desorption, yet the tipping fee (the fee it charges its customers to treat
wastes at the facility) is similar to the tipping fee at the Clean Earth of New
Castle, Inc. facility. In addition, Clean Earth of Carteret, Inc. is
strategically located to receive materials by truck, or rail. 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.

     We also acquired Clean Earth of Maryland, Inc., a soil recycling facility,
in December 1999 which is located in Hagerstown, Maryland. Clean Earth of
Maryland, Inc. operates in the soil recycling market in the New York to
Washington D.C. corridor. Our beneficial re-use operation, known as Consolidated
Technologies, Inc., was acquired in early to mid 1998. Consolidated
Technologies, Inc. oversees the business of beneficial re-use of industrial
wastes including the upland re-use of dredge materials. Consolidated
Technologies, Inc. has experimented with numerous samples of dredge sediments
and has identified proprietary formulations for the creation of engineered fill
materials through solidification and stabilization of the dredged sediments.
Essentially, these mix designs are formulated from 100 percent waste materials
and industry by-products.

     In September 1997, the federal government prohibited offshore dumping of
contaminated dredge material. The Clean Earth operation may take advantage of
this market opportunity by finding alternative 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. For example, we have disposal rights
which the Pennsylvania Department of Environmental Protection granted 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. Consolidated Technologies,
Inc. has a permit for a 550,000 cubic yard demonstration project involving the
beneficial re-use of treated dredge materials for the reclamation of an
abandoned strip mine in Pennsylvania known as the Bark Camp Mine Complex. We
have entered into a No-Cost Contract with the Commonwealth of Pennsylvania
Department of Environmental Protection to reclaim a portion of the Bark Camp
site with dredge materials and other industrial by-products. This demonstration
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. Approximately 536,000 tons have been placed through December
31, 2001.

     Consolidated Technologies, Inc.'s 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. Consolidated Technologies, Inc. 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.

     Clean Earth has two subsidiaries, Integrated Technical Services, Inc. and
Barbella Environmental Technology, Inc., which perform services in environmental
construction, on-site remediation, beneficial re-use of industrial wastes,
underground storage tank removals, landfill capping, on-site stabilization and
treatment of

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hazardous waste to non-hazardous waste materials, consulting services, and other
ancillary environmental services.

     Regulatory Matters.  All of our 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. The United States Environmental Protection Agency and various
other federal, state, and local environmental, zoning, health, and safety
agencies in the United States and elsewhere administer these regulations. Many
of these agencies periodically examine our operations to monitor compliance with
these laws and regulations. Many of our facilities operate under permits granted
by one or more federal, state, or local agencies. We have found that the
procedures to obtain the necessary permits are often times difficult,
time-consuming, expensive, and may be opposed by local citizens as well as
environmental groups. Once obtained, the issuing agency may modify or revoke the
operating permits. We, as well as others in our industry, may be required, from
time to time, to make significant capital and operating expenditures in order to
comply with current and future regulatory requirements. Federal, state, and
local governments, from time to time, propose or adopt 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 categories of non-hazardous waste as hazardous.
These regulations, laws, and initiatives can create situations which have a
material adverse effect on our environmental business.

     We make a continuing effort to anticipate regulatory, political, and legal
developments that might affect operations, but we cannot always do so. We cannot
predict the extent to which any legislation or regulation that may be enacted,
amended, repealed, re-interpreted, or enforced in the future may affect our
operations. These actions could adversely affect our operations or impact our
financial condition or earnings. Governmental authorities may enforce compliance
with regulations and permit conditions and obtain injunctions or impose fines in
case of violations. During the ordinary course of our operations, we may, from
time to time, receive citations or notices from these authorities that a
facility is not in full compliance with applicable environmental or health and
safety regulations. Upon receipt of these citations or notices, we 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 for existing sites.

     As a result of changing government and changing public attitudes in the
area of environmental regulation and enforcement, management anticipates that
continually changing health, safety, and environmental protection laws will
require us, 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. To date, we have not had to expend material
amounts to modify or alter any of our existing facilities resulting from changes
in environmental protection laws. To our knowledge, we are currently in
compliance in all material respects with all applicable federal, state, and
local laws, permits, regulations, and orders affecting our operations. We cannot
assure you that we will not have to expend substantial amounts for these actions
in the future.

     We have grown in part by acquisition of additional environmental
facilities. Although we conduct due diligence investigations of the past
practices of the businesses that we acquire, we cannot assure you that, through
its investigation, we identified all potential environmental problems or risks.
As a result, we may have acquired facilities that have unknown environmental
problems and related liabilities. In order to mitigate the foregoing risks, we
obtained environmental representations and indemnities from the sellers of the
businesses that we acquired. However, we cannot assure you that we will be able
to rely on these 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 these wastes. Disposing of the
waste in a landfill or mixing it with other materials does not eliminate that
liability. Proper control and tracking of all waste materials which are handled
is essential for avoiding any liabilities with respect to these

                                        17
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wastes. We take precautions not only to eliminate, if possible, the liability of
our 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, generally, a
reusable material.

     In order to keep in compliance with applicable environmental, zoning,
health, and safety regulations we may need to expend considerable time, effort
and money. 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.

     State and Local Regulation.  The states in which we operate 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 the liability for
these matters. These states have also adopted regulations governing the siting,
design, operation, maintenance, closure, and post closure maintenance of
disposal facilities. Our facilities and operations are likely to be subject to
many, if not all, of these types of requirements. We cannot assure you that
these laws and regulations will not have a material adverse effect on our
operations or financial condition.

     Sales and Marketing.  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 for beneficial re-use. These markets are
substantial. These 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 of our divisions for recycling and
beneficial re-use of the products in an environmentally safe manner.

     We have 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. We believe most harbors throughout the United States will be faced
with this issue and will be required to abide by these new government
regulations. This market is new, and we have permits in place to provide for
using the dredge materials to reclaim abandoned strip mines as opposed to
disposing of the material in landfills.

     We are also expanding the capabilities of our facilities in Delaware and
Philadelphia to process and re-use material such as sewer sludge, for which
permitting has already been obtained, and municipal incinerator ash. We
currently landfill these products. We 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 through not only contracting services but also the facilities to process
material. One distinct advantage we have is our quality control system. Our
comprehensive disclosure and testing systems ensure proper tracking of material
as well as on site testing to insure that only acceptable material is permitted
onto our sites. Rigorous quality control procedures are essential as they relate
to the responsibility and liability in handling of material not only to us, but
also to our customers.

     We do experience a seasonal slow-down during the winter months due to the
fact that our environmental operations are located in the Northeast United
States where adverse weather can impact our performance.

     Competition and Barriers to Entry.  Clean Earth has several large
competitors that provide similar services within the northeast and Mid-Atlantic
States. These competitors include R-3 Technologies in Bristol, Pennsylvania,
TPST in Baltimore, Maryland, and MART in Vineland, NJ. Clean Earth has obtained
a permit to treat coal tar materials from Delaware Natural Resources and
Environmental Commission. We believe that this provides a niche market because
very few competitors have this capability. We also compete in the Environmental
Services arena with IT Group, Inc., Roy F. Weston, and Sevenson Environmental
Services, Inc. Significant entry barriers exist for this line of business.
First, the siting, permitting, and licensing process is time consuming and
costly. Second, a large capital investment is required to build the plants and
purchase the equipment necessary to operate the facility.

                                        18
<PAGE>

     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 CENJ Waste Resource
Conservation & Recovery Act facility are operated with a strict commitment to
safety, health, and environmental issues coupled with a rigorous system of
controls. This commitment provides credibility to the "Certificate of
Destruction and Recycling" issued to each waste generator.

     The Waste Tracking System, which is applicable to all of our plants, 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 Extractable Organic Halogens test 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:

     - Gas Chromatographer for Poly Chlorinated Biphenyls;

     - Gas Chromatographer for Volatile Organic Compounds identification; and

     - Gas Chromatographer with a high temperature desorber for Total
       Hydrocarbons and Desorption Temperatures Extractable Organic Halogens
       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. We regularly collect and check the
run-offs from the buildings. We have divided the buildings into small
compartments to maintain rigorous separation and tracking of each waste stream
and to minimize commingling. This mitigates the potential liability to a small
quantity if undesirable waste is detected after it has been accepted. This also
ties into the sophisticated waste tracking system that mobilizes a network of
eight microcomputers 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 enable operators to view and analyze, at any time, all the information
relative to a given shipment.

     In addition, a comprehensive control system exists at each of our plants
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 Environmental Protection Agency
publication #SW846, Clean Earth composites a sample for every 300 tons of
production and tests it for BTEX with a Gas Chromatographer and for TPH by the
Environmental Protection Agency 418 method, using an independent State certified
laboratory. For coal tars, the treated materials are also tested for Polynuclear
Aromatic Hydrocarbons by the Environmental Protection Agency 8270 method. We
believe that this treatment plant is the first in the industry to control its
emissions with a 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. All of our properties
are monitored through several monitoring wells. These monitoring wells are
tested quarterly. The test results are reported to the appropriate state agency.

     Liability Insurance and Bonding Capabilities.  Clean Earth has fully bonded
the costs of a closure plan approved by the Delaware Environmental and Natural
Resources Commission. In addition, Clean Earth has secured a total of $10.0
million of Contractors' Pollution Legal Liability and $10.0 million of
Environmental Impairment Liability insurance coverages. The waste recycling
companies' product is also protected with $1.0 million single/$2.0 million
aggregate Products and Completed Operations coverage, which is part of the
Company's overall general liability policy.

                                        19
<PAGE>

     The environmental recycling division has also obtained a $75 million
performance bond capability to enable the environmental remediation companies to
participate in more significant projects.

     Federal Regulations.  The primary U.S. federal statutes affecting both our
environmental recycling and our plastic lumber businesses are summarized below:

          1. The Resource Conservation & Recovery Act of 1976, as amended,
     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.
     We do not believe that the cost of complying with these standards will have
     a material adverse effect on our operations.

          2. The Comprehensive Environmental Response, Compensation, and
     Liability Act of 1980, as amended, provides for the cleanup of sites from
     where there is a release or threatened release of a hazardous substance
     into the environment. This statute 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 occurred
     during their period of ownership or operation. Waste generators and
     transporters also have strict liability under this statute. Liability under
     this statute is not dependent upon the intentional disposal of hazardous
     wastes as defined under the Resource Conservation & Recovery Act. 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 these substances.
     Therefore, if we have transported waste material and lawfully disposed of
     it at a properly licensed facility, we can still have liability under this
     statute which can be very substantial. Since Clean Earth may be deemed to
     be a responsible party under the Comprehensive Environmental Response
     Compensation and Liability Act, we have purchased an environmental
     liability insurance policy and have established a reserve to resolve
     potential liabilities that may be imposed upon Clean Earth. No assurance is
     made as to whether such reserve and insurance will be adequate should a
     claim arise under this statute. We attempt to minimize our exposure under
     this statute by selecting disposal facilities and transporters who we
     believe maintain strict compliance with all environmental laws and who
     carry environmental liability insurance of their own.

          3. The Clean Air Act provides for the federal, state, and local
     regulation for the emission of air pollutants. These regulations impose
     emission limitations and monitoring and reporting requirements on our
     various operations, including our soil treatment facilities and our CENJ
     facility. We do not anticipate that the cost of compliance with this
     statute will have a material adverse effect on us, however, we cannot
     assure you that we will be successful in maintaining compliance with this
     statute.

          4. The Occupational Safety and Health Act of 1970 authorizes the
     Occupational Safety and Health Administration to promulgate occupational
     safety and health standards. Various provisions of this statute, including
     provisions of this statute for notices of hazards, safety within the
     workplace, and handling of hazardous substances, may apply to our
     operations.

          5. The Federal Water Pollution Control Act of 1972 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 our facilities
     could require us to apply for and obtain discharge permits, conduct a
     sampling and monitoring, and reduce the quantity of pollutants, if any, in
     those discharges. This statute is likely to affect the construction or
     expansion of existing facilities because we would be required to obtain a
     storm water discharge permit even before the time we begin

EMPLOYEES

     As of December 31, 2001, the Company and its subsidiaries employed on a
full time basis a total of approximately 630 employees through the United
States. Of this number, approximately 322 employees are full time regular
employees of the plastic lumber operations; and 298 persons are full time
regular employees in the environmental recycling operations. There are 10 full
time regular employees at the corporate headquarters.
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<PAGE>

                                  RISK FACTORS

     In considering whether to acquire our common stock, you should consider
carefully the risks associated with the ownership of our common stock. These
risks are described in detail below. You should consider carefully these risk
factors, together with all of the other information in this report.

WE CURRENTLY DO NOT HAVE THE FINANCIAL RESOURCES TO REPAY OUR DEBT OBLIGATIONS
AS THEY BECOME DUE OR IN THE EVENT THAT PAST OR FUTURE EVENTS OF DEFAULTS ARE
NOT WAIVED IN WRITING AND SUCH DEBT IS IMMEDIATELY DUE WITHOUT OBTAINING NEW
DEBT AND/OR EQUITY CAPITAL, NEGOTIATING DIFFERENT PAYMENT TERMS AND/OR SELLING
SOME OF OUR ASSETS. THE MATERIAL FINANCIAL OBLIGATIONS CONTAINED IN OUR DEBT
AGREEMENTS HAVE A MATERIAL ADVERSE EFFECT UPON THE COMPANY'S LIQUIDITY AND
CAPITAL RESOURCES AND RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A
GOING CONCERN.

     Our liquidity and our ability to meet our financial obligations and
maintain our current operations in 2002 and beyond will be dependent on, among
other things, our ability to refinance our Senior Credit Facility, meet our
payment obligations under, achieve and maintain compliance with the financial
covenants in all of our debt agreements and provide financing for working
capital.

     The Company is highly leveraged, and during 2000 and 2001 incurred
substantial losses from operations, primarily resulting from the significant
expenses incurred in its plastic lumber division. The Company's accumulated
deficit and working capital deficit totaled approximately $61.0 million and
$60.5 million respectively as of December 31, 2001. The Company's obligations to
make payments under and maintain compliance with the covenants in its Senior
Credit Facility and Master Credit Facility are material financial commitments.

     On September 28, 2001, we notified all of the banks which participate in
our Senior Credit Facility that due to lower than expected sales at our plastic
lumber division we would not make the $2.5 million term loan payment due
September 30, 2001. In addition, we were not in compliance with various
covenants under our Senior Credit Facility as of September 30, 2001.
Substantially all of our assets have been pledged as collateral with respect to
the Senior Credit Facility. Effective November 14, 2001, we entered into a
forbearance agreement with the participating banks whereby the lenders under the
Senior Credit Facility agreed to accept interest only payments from us and
allowed us to defer the September 30, and December 31, 2001 principal payments
until the earlier of February 28, 2002 or the sale of Clean Earth. Pursuant to
the terms of the forbearance agreement, the lenders also agreed not to take any
actions against us with respect to the covenant violations as of September 30
and December 31, 2001. The forbearance period terminated on February 28, 2002.
As of February 28, 2002 we did not make the required principal payments
originally due September 30, and December 31, 2001 in the amount of $2.5 million
each. We also did not make the required interest payments of approximately
$215,000 and $197,000 due January 31, and February 28, 2002 respectively. In
addition, on March 11, 2002 we informed the lenders under the Senior Credit
Facility that we could not make the $2.5 million principal payment due March 31,
2002. We also have an additional $2.5 million principal payment due June 30,
2002 and the outstanding balance of the Senior Credit Facility is due in its
entirety on July 1, 2002. At December 31, 2001, amounts outstanding under the
Senior Credit Facility totaled approximately $39.9 million, including accrued
interest, fees and penalties.

     We are negotiating with the senior lenders under the Senior Credit Facility
for an extension of the forbearance period in connection with our failure to
make the September 30 and December 31, 2001 principal payments on February 28,
2002 and our interest payments due January 31, 2002 and February 28, 2002.
Although the failure to make these principal and interest payments constitute
events of default under the Senior Credit Facility and the forbearance
agreement, the lenders that are party to the Senior Credit Facility have yet to
take any action against us, including declaration of default. We believe that an
extension of the forbearance period may provide us with sufficient time to close
the Clean Earth sale transaction or find an alternative means to refinance the
Senior Credit Facility. In the event that the necessary waiver and forbearance
are not obtained or future principal and interest payments cannot be made, the
lenders under the Senior Credit Facility can demand immediate repayment from us
for the outstanding balance on the Senior Credit Facility.

                                        21
<PAGE>

     On January 3, 2002, we notified all of the participants in the Master
Credit Facility that we would not be making any further principal payments until
at least April of 2002. In addition, we did not make the term payment of $1.7
million due January 2, 2002 and, as of September 30, and December 31, 2001, we
were not in compliance with the tangible net worth covenant under the Master
Credit Facility, largely due to the restructuring and asset impairment charges
recorded in the third quarter of 2001. See "-- Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "-- We have a
history of losses and if we are not able to achieve and maintain profitability,
the market price of our common stock could decrease."

     On February 28, 2002 the Company, GE Capital Corp. and the other
participants in the Master Credit Facility agreed to and signed a Forbearance
and Modification Agreement which restructures the Master Credit Facility by
allowing us to defer principal payments until April 1, 2002 while continuing to
make interest payments and providing a waiver of the September 30, and December
31, covenant violations. In accordance with the agreement, we will be required
to make a $500,000 principal payment upon the sale of Clean Earth, Inc., if it
takes place. In addition, we will be required to make a $2 million prepayment on
the Master Credit Facility upon the earlier of (i) our obtaining a new revolving
credit facility with availability of least $10 million to replace our current
revolving credit facility; (ii) our exercising the purchase option on, and
subsequently obtaining a mortgage against, our Chicago property; or (iii)
September 30, 2002. The Forbearance and Modification Agreement also re-sets the
minimum tangible net worth covenant for March 31, 2002 and adds new covenants
for minimum levels of EBITDA commencing March 31, 2002 if the proposed sale of
Clean Earth does not take place, and June 30, 2002 if the proposed sale of Clean
Earth does take place. It also requires us, under certain circumstances, to
grant additional security interest to GE Capital Corp. and to the other
participants in the Master Credit Facility for some of our property, plant and
equipment for which these lenders currently have no security interest.

     Pursuant to this agreement, commencing on September 1, 2002, the Master
Credit Facility will be restructured to a 48-month term. We will pay a
forbearance fee in connection with the Forbearance and Modification Agreement in
an amount equal to 1% of our obligations under the Master Credit Facility
outstanding as of the date of the proposed sale of Clean Earth. This forbearance
fee will be immediately due and payable if the closing of the sale of Clean
Earth does not occur by June 1, 2002. The Master Credit Facility also contains a
provision whereby an event which would accelerate payment terms of our Senior
Credit Facility would also accelerate the payment terms of the Master Credit
Facility to the same due date as the Senior Credit Facility. The Senior Credit
Facility has a similar provision with respect to the Master Credit Facility. At
December 31, 2001, amounts outstanding under the Master Credit Facility totaled
approximately $11.4 million. In addition, defaults under these lending
agreements cause defaults, pursuant to cross default provisions, of our other
agreements, including, but not limited to, other lending agreements, debenture
agreements, lease agreements and others.

     Our obligations to make payments under and maintain compliance with the
covenants in our Senior Credit Facility and Master Credit Facility are material
financial commitments. Beginning April 1, 2002, combined principal and interest
payments on our Master Credit Facility will be approximately $250,000 per month.
Under the terms of the forbearance agreement currently being discussed with the
participants in our Senior Credit Facility, we will have interest payments,
including interest in arrears, due on April 1, 2002 and on April 30, 2002 of
approximately $300,000 each. After April 30, 2002, monthly commitments for
interest will be approximately $200,000 until the Senior Credit Facility is
either retired or refinanced.

     We are also required to retire the $4.0 million convertible debenture
issued to Halifax Fund, L.P., as well as the $5.0 million convertible debenture
payable to Stout Partnership, our largest stockholder, on or before July 1,
2002. Several members of our board of directors and a member of our management
are affiliated with Stout Partnership. In addition, we may be required to redeem
the $4.0 million convertible debenture upon completion of the sale of Clean
Earth (see "Recent Events" and note 3 to the Consolidated Financial Statements).
The $4.0 million convertible debenture contains a provision which provides that
the sale or transfer by the Company of substantially all of its assets (the sale
of Clean Earth is considered to be the sale of substantially all of the
Company's assets) gives the holder an option to consider the debenture
immediately due and payable and requires us to redeem this debenture at a
redemption price equal to 100% of the
                                        22
<PAGE>

outstanding principal amount of the debenture or at a premium. The holder of a
significant portion of our convertible debentures has a second lien on
substantially all of the assets of the Company. The Forbearance and Modification
Agreement to the Master Credit Facility prohibits us from making any payments of
principal, interest or any other amounts due and owing to Halifax Fund, L.P.,
other than the payment of Halifax' $4.0 million debenture, Stout Partnership or
any future subordinated lender for one year from the date of the closing of the
proposed sale of Clean Earth, if consummated, unless an equal payment, in
addition to all currently scheduled principal and interest payments, is paid to
the participants in the Master Credit Facility.

     We currently do not have the financial resources to repay our debt
obligations under the Senior Credit Facility, Master Credit Facility, $4 million
convertible debenture and the $5 million convertible debenture as they become
due or in the event that past or future events of default are not waived in
writing and such debt is immediately due without obtaining new debt and/or
equity capital, negotiating different payment terms and/or selling some of our
assets. Our current and past failures to comply with the terms of our Senior
Credit Facility and Master Credit Facility, as well as the related forbearance
agreement and other debt obligations, and the material financial obligations
currently contained in its Senior Credit Facility and Master Credit Facility
have a material adverse effect upon the Company's liquidity and capital
resources and raise substantial doubt about the Company's ability to continue as
a going concern.

     Our independent certified public accountants have included an explanatory
paragraph in their audit report with respect to our consolidated financial
statements as of December 31, 2001. This explanatory paragraph states that our
recurring losses from operations, accumulated deficit of $61.0 million, working
capital deficit of $60.5 million and our inability to make principal and
interest payments on our senior debt raise substantial doubt about our ability
to continue as a going concern. Furthermore, the factors leading to and the
existence of the explanatory paragraph in the report of independent certified
public accountants may adversely affect our relationship with potential
investors, lenders, customers and suppliers and have an adverse effect on our
ability to obtain additional financing.

     We intend to use the proceeds from the sale of Clean Earth, if consummated,
to retire our entire Senior Credit Facility, as well as the convertible
debenture that requires redemption upon the sale of substantially all of our
assets. If the sale is completed, we believe our remaining assets and business
will be sufficient to allow us to raise the necessary capital to fund our
operations and meet our debt and other obligations in 2002. However, there can
be no assurances that we will be successful in closing the sale of Clean Earth
under the terms of the current purchase agreement, or at all. If the Company is
not successful in completing the sale of Clean Earth, we will be required to
seek other alternatives for refinancing our capital structure which could
include raising additional equity, selling some of our assets or restructuring
the Senior Credit Facility. There can be no assurances that these courses of
action will be successful. Our failure to refinance our capital structure would
require us to significantly curtail our operations.

     We also entered into the common stock purchase agreement with Fusion
Capital in which Fusion Capital has agreed to purchase $6.0 million of our
common stock, subject to increase at our discretion by an additional $6.0
million. However, because we did not file a registration statement with the SEC
to register these shares for resale prior to October 31, 2001, Fusion Capital
now has the option to terminate this agreement, and we currently have no
intention of utilizing this agreement.

FOLLOWING THE SALE OF CLEAN EARTH, IF CONSUMMATED, WE MAY NEED ADDITIONAL
CAPITAL TO FUND OUR OPERATIONS AND TO REPAY OUTSTANDING DEBT. IF WE CANNOT
OBTAIN THIS CAPITAL, WHEN AND IF NEEDED, WE WILL HAVE TO SIGNIFICANTLY CURTAIL
OUR OPERATIONS AND IT WILL RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE
AS A GOING CONCERN.

     We currently estimate that the net proceeds from the sale of Clean Earth
will not be sufficient to repay all of our outstanding indebtedness. Assuming
the completion of the Clean Earth Sale Transaction on or before April 30, 2002
and the application of $42.7 million of estimated net proceeds to repay a
portion of our outstanding indebtedness, we would have approximately $25.0
million of debt outstanding, exclusive of any borrowings that would take place
under a new $8.0 million working capital credit line we would receive upon

                                        23
<PAGE>

completion of the sale. As a result, we may require additional capital to fund
our operations and repay outstanding indebtedness. If we require additional
capital, we will need to seek external debt or equity financing following the
completion of the Clean Earth sale transaction. Although we anticipate that we
will have limited lines of credit available to us after the sale of Clean Earth,
these sources of funds or other financing may not be available for us in the
future in light of our financial condition and the pledge of substantially all
of our assets to secure indebtedness following the Clean Earth sale transaction,
or may not be available in amounts we require to operate our business. Currently
all of our assets are subject to liens or pledged as collateral to the existing
senior lenders and other purchase money lenders. Additionally, Halifax Fund, LP
has a second lien position on all assets. We anticipate that, after the Clean
Earth sale transaction, all assets will remain subject to liens or pledged on
similar terms with the same lenders. Finally, in light of our financial
condition, we may be unable to obtain additional sources of financing on terms
acceptable to us. Our failure to obtain additional capital to finance our
working capital needs and repay our debt obligations in adequate amounts and on
acceptable terms will negatively impact our business, financial condition and
liquidity and raises substantial doubt about our ability to continue as a going
concern. As a result we may be forced to seek protection under the bankruptcy
code, or we may be forced into a bankruptcy proceeding by these lenders.

AS A RESULT OF THE SIGNIFICANT PRECONDITIONS TO THE PURCHASER'S OBLIGATION TO
CONSUMMATE THE SALE OF CLEAN EARTH, NO ASSURANCE CAN BE GIVEN AS TO WHETHER WE
WILL BE ABLE TO CLOSE THIS TRANSACTION OR SELL CLEAN EARTH AT ALL IF THE SALE TO
NEW CEI, INC. IS NOT COMPLETED.

     On December 29, 2001 we entered into a purchase agreement with New CEI,
Inc. which provided for the sale of Clean Earth. The terms of the purchase
agreement, as amended, provide for significant preconditions to the purchaser's
obligation to close the transaction. These preconditions include, but are not
limited to, the purchaser's ability to obtain $32.0 million of senior debt and
$10.0 million of mezzanine financing prior to closing the transaction. We cannot
predict the date as to when all of these preconditions will be met or whether
they will be met at all. On March 5, 2002 the agreement was amended to allow New
CEI, Inc. additional time to meet all of the preconditions to closing the
transaction, and to extend the date for which either party to the transaction
could terminate the agreement from March 31, 2002 to April 21, 2002. As a
result, no assurances can be given that we will be able to close this
transaction or that we will be successful in selling Clean Earth at all in the
event the sale to New CEI, Inc. is not consummated.

     If we are unsuccessful in completing the sale of Clean Earth, we may be
unable to cure our liquidity crisis and we may not have sufficient capital to
fund our operations and may be unable to meet our debt payment obligations,
absent an additional debt or equity financing. See "We currently do not have the
financial resources to repay our debt obligations as they become due or in the
event that past or future events of defaults are not waived in writing and such
debt is immediately due without obtaining new debt and/or equity capital,
negotiating different payment terms and/or selling some of our assets. The
material financial obligations contained in our debt agreements have a material
adverse effect upon the Company's liquidity and capital resources and raise
substantial doubt about our ability to continue as a going concern."

WE CANNOT GIVE YOU ANY ASSURANCE OF OUR ABILITY TO COMPLETE THE SALE OF CLEAN
EARTH, AND EVEN IF WE ARE SUCCESSFUL IN DOING SO, WE CANNOT GIVE YOU ANY
ASSURANCE OF OUR ABILITY TO CONTINUE AS A GOING CONCERN SUBSEQUENT TO THE
CLOSING OF THE PROPOSED CLEAN EARTH SALE TRANSACTION.

     If the Clean Earth transaction is consummated, we will continue our
business relative to the plastic lumber division. If we complete sale of Clean
Earth under the terms approved by our stockholders, we will continue our
operations of the plastic lumber division. Our plastic lumber division has had a
history of substantial losses and mixed operating results (see -- "We have a
history of losses and if we are not able to achieve and maintain profitability,
the market price of our common stock could decrease."). The plastic lumber
division, through much of its history, has been able to rely on the profits and
cash flow generated by the environmental recycling division operated by Clean
Earth in order to maintain its operations and grow its business. Although we
believe that due to the estimated pay-off of $42.7 million of our outstanding
indebtedness, including our term loan with our senior lenders as well as other
debt with the proceeds from the

                                        24
<PAGE>

sale of Clean Earth and the increased production capacity built over the last
two years, we should be in an improved position to increase our margins, grow
our sales, and deliver value to our stockholders, we can give you no assurances
that the sale of Clean Earth will be consummated on the terms in the purchase
agreement and if consummated, will enable us to accomplish any of these goals or
even to continue as a going concern. Notwithstanding the completion of the Clean
Earth Sale Transaction and the receipt of the estimated net proceeds of $42.7
million and the new revolving line of credit, we may require additional capital
to repay outstanding indebtedness and fund ongoing operations.

WE MAY NOT HAVE SUFFICIENT FUNDS TO REDEEM CERTAIN OF OUR CONVERTIBLE DEBENTURES
IF WE COMPLETE THE SALE OF CLEAN EARTH.

     We may be required to redeem certain of our convertible debentures upon
completion of the Clean Earth sale transaction. The convertible debentures
contain a provision which provides that the sale or transfer by us of
substantially all of our assets gives the holders an option to consider the
debentures immediately due and payable and require us to redeem these debentures
at a redemption price equal to 100% of the outstanding principal amount of the
debentures or at premium. We currently do not have the financial resources to
retire these debt obligations. If we are unable to redeem these debentures,
renegotiate the terms of the debentures or obtain a waiver of the provision in
the debenture which would cause this debt to be due and payable, the holders
will be entitled to seek the remedies of specific performance, injunctive relief
or equitable remedies in addition to any other remedies available at law or in
equity.

WE HAVE A HISTORY OF LOSSES AND IF WE ARE NOT ABLE TO ACHIEVE AND MAINTAIN
PROFITABILITY, THE MARKET PRICE OF OUR COMMON STOCK COULD DECREASE.

     We incurred operating losses during much of our history. Our accumulated
deficit totaled approximately $61.0 million as of December 31, 2001. We reported
operating losses in our plastic lumber division in excess of $8 million in both
2001 and 2000, exclusive of restructuring and asset impairment charges of $11.5
million and $3.4 million respectively. We also incurred a consolidated operating
loss for fiscal 2001 of $34.6 million, inclusive of restructuring and asset
impairment charges, and a consolidated net loss of $48.2 million for fiscal
2001.

     In September of 2001, we announced the closing of three of our plastic
lumber manufacturing facilities and the leasing of two of our resin processing
plants to third parties. We also recorded an acquired intangibles impairment
charge related to our environmental recycling division in the fourth quarter of
2001 in the amount of $13.5 million. The following is a summary of restructuring
and asset impairment charges we recorded in the third and fourth quarters of
2001:

<Table>
<S>                                                            <C>
Write-down for equipment impairment.........................   $ 8,694,000
Write-down for acquired intangible impairment...............   $14,616,000
Lease termination, severance and other exit costs...........   $ 1,656,000
                                                               -----------
  Total restructuring and asset impairment charges..........   $24,966,000
                                                               ===========
</Table>

     We recorded a significant loss in the third and fourth quarter of 2001 as a
result of these charges. The third quarter charges of $11.5 million were
composed of approximately $10.0 million of non-cash charges and $1.5 million of
charges that will require cash expenditures over the next twelve months. The
fourth quarter impairment charge of $13.5 million was a non-cash charge.

     If we are not able to restore our profitability, which will depend largely
on our ability to substantially increase sales, reduce fixed operating costs,
and limit the growth of overhead and direct expenses, the market price of our
common stock could decrease and our business and operations could be negatively
impacted. See "-- We currently do not have the financial resources to repay our
debt obligations as they become due or in the event that past or future events
of defaults are not waived in writing and such debt is immediately due without
obtaining new debt and/or equity capital, negotiating different payment terms
and/or selling some of our assets. The material financial obligations contained
in our debt agreements have a material adverse effect

                                        25
<PAGE>

upon the Company's liquidity and capital resources and raise substantial doubt
about our ability to continue as a going concern." for further information on
our failure to meet some of the financial covenants contained in our Senior
Credit Facility and Master Credit Facility.

IF OUR COMMON STOCK IS DELISTED FROM THE NASDAQ NATIONAL MARKET, YOUR ABILITY TO
RESELL YOUR SHARES WOULD BE REDUCED AND THE MARKET PRICE OF THE SHARES COULD
DECREASE.

     In order to maintain the listing of our common stock on the Nasdaq National
Market, we are required to meet specified maintenance standards including the
receipt of stockholder approval in connection with the issuance of more than 20%
of our outstanding common stock and the maintenance of a minimum bid price of
$1.00. On September 6, 2001, we were notified by the Nasdaq National Market that
the bid price of our common stock fell below $1.00 for 30 consecutive trading
days. In addition, the significant decrease in our stock price and the removal
of the floor conversion price on one of our subordinated debenture agreements
could result in the issuance of shares in excess of the 20% requirement set
forth in Nasdaq rules. On September 27, 2001, the Nasdaq Stock Market
implemented a moratorium on the minimum bid and public float requirements for
continued listing in Nasdaq until January 2, 2002. However, On February 18, 2002
we received another notice from NASDAQ that our stock may be delisted from the
National Market System because it has not maintained a minimum bid price of
$1.00 over the last 30 consecutive trading days. In accordance with the NASDAQ
Marketplace Rules, the we have 90 calendar days, or until May 15, 2002, to
regain compliance. If we are delisted, we would likely lose some of the market
makers making a market in our stock, as well as coverage by our existing
analysts, which would reduce your ability to resell our shares. Further, our
efforts to seek new analyst coverage would be significantly impaired and the
market price for shares of our common stock could decrease. See "-- We currently
do not have the financial resources to repay our debt obligations as they become
due or in the event that past or future events of defaults are not waived in
writing and such debt is immediately due without obtaining new debt and/or
equity capital, negotiating different payment terms and/or selling some of our
assets. The material financial obligations contained in our debt agreements have
a material adverse effect upon the Company's liquidity and capital resources and
raise substantial doubt about our ability to continue as a going concern."

     If our common stock is delisted from the Nasdaq National Market, trading in
our common stock may be subject to regulations promulgated by the SEC applicable
to "penny stocks." The SEC defines a "penny stock" to be an equity security not
traded on a national securities exchange or Nasdaq that has a market price of
less than $5.00 per share, subject to exemptions. For any transaction involving
a penny stock, unless exempt, the rules require delivery, prior to a transaction
in a penny stock, of a disclosure schedule prepared by the SEC relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to the broker-dealer and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stock. If our common stock is subject to the rules on penny stocks, the
market liquidity for our common stock could be materially and adversely
affected. Any disruption in the liquid market of our common stock could limit
our access to the equity markets in the future and could have a materially
adverse effect on our business, financial conditions and results of operations.

THE FAILURE OF OUR PLASTIC LUMBER PRODUCTS TO PERFORM OVER THEIR WARRANTY
PERIODS, WHICH FOR SOME PRODUCTS MAY BE AS LONG AS 50 YEARS, COULD RESULT IN
DECREASES IN OUR OPERATING INCOME AND STOCK PRICE.

     Our plastic lumber products are fairly new, have not been on the market for
long periods of time, and may be used in applications for which we may have no
knowledge or limited experience. Our plastic lumber products may be used in
applications that we have little or no historical track record to measure our
potential liability as it relates to product warranty or product liability
issues. During fiscal 2000, our gross profit declined primarily due to returns
of a product by a major customer. Although we believe we have addressed the
issues that resulted in these returns and have established an accrued liability
that we believe is sufficient to handle product warranty and liability issues,
based upon our historical experience to date, there can be no assurance that our
current accrual will be sufficient. If our products fail to perform over the
extended warranty periods,

                                        26
<PAGE>

which for some products on a limited basis are as long as 50 years, we may not
have the ability to adequately protect ourselves against this potential
liability, which could reduce our operating income and our stock price.

IF WE ARE UNABLE TO ATTRACT AND KEEP EMPLOYEES WITH THE REQUISITE LEVELS OF
EXPERTISE, IT COULD NEGATIVELY IMPACT OUR ABILITY TO CONDUCT BUSINESS BY
REDUCING REVENUES OR INCREASING OPERATING EXPENSES.

     Our business requires a significant amount of expertise in a wide variety
of functions. We may not be able to maintain employees with the requisite levels
of expertise or to attract and keep these employees in the future. Our failure
to attract and keep employees with the requisite levels of expertise could
negatively impact our ability to conduct business by reducing revenues or
increasing operating expenses.

SEVERAL OF OUR DIRECTORS, OFFICERS, AND EMPLOYEES ARE AFFILIATED WITH ENTITIES
WHICH ARE SIGNIFICANT STOCKHOLDERS OF OURS, WHICH COULD RESULT IN A CONFLICT OF
INTEREST.

     Several of our directors, officers, and employees are affiliated, through
ownership or otherwise, with the Stout Partnership, which is a significant
stockholder, or other entities that have an equity interest in us. See
"Transactions with Related and Certain Other Parties." When our directors who
are affiliated with these entities are faced with decisions where we have
interests adverse to those entities, a conflict of interest could arise. Since a
majority of our directors are affiliated with those entities, agreements related
to monies provided by some of those entities may not have been the result of
arm's-length negotiations and may include terms and conditions that may be less
favorable to us than terms contained in similar agreements negotiated with third
parties.

IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY, OUR BUSINESS MAY
SUFFER WHICH COULD RESULT IN A DECREASE IN OUR STOCK PRICE.

     The success of our growth strategy depends on our ability to continue to
increase profit margins by increasing revenues and decreasing operating costs
through:

     - Consolidation of plants and operations;

     - Reduced costs of operations;

     - Increased consumer acceptance of alternative wood products;

     - An increased distribution network;

     - Increased sales; and

     - Ability to finance growth.

     Our ability to implement this strategy will depend in large part on whether
we are able to:

     - Obtain adequate financing on favorable terms to fund this growth
       strategy;

     - Develop and expand our customer base;

     - Hire, train, and retain skilled employees;

     - Strengthen brand identity and successfully implement our marketing
       campaigns;

     - Continue to expand in the face of increasing competition;

     - Continue to negotiate our supply contracts and sales agreements on terms
       that increase or maintain our current profit margins; and

     - Create sufficient demand for plastic lumber and other products.

     Our inability to implement any or all of these strategies could result in
an increase in our losses and our stock price could decrease.

                                        27
<PAGE>

AS A RESULT OF OUR ACQUISITION OR LEASE OF REAL ESTATE, WE MAY BECOME LIABLE FOR
THE REMEDIATION AND/OR REMOVAL OF HAZARDOUS OR TOXIC SUBSTANCES FROM THAT REAL
ESTATE WHICH COULD RESULT IN A DECREASE IN OUR OPERATING INCOME AND STOCK PRICE.

     From time to time, we acquire or lease storage facilities or other
properties in connection with the operation of our business. Under various U.S.
federal, state, or local environmental laws, ordinances, and regulations, we
could be required to investigate and clean up hazardous or toxic substances or
chemical releases at properties we acquire or lease. We could also be held
liable to a governmental entity or to third parties for property damage,
personal injury, and investigation and cleanup costs incurred by those parties
in connection with any contamination. The costs of investigation, remediation,
or removal of hazardous or toxic substances may be substantial, and the presence
of those substances, or the failure to properly remediate a property, may
adversely affect our ability to sell or rent a property or to borrow using a
property as collateral. In addition, we could be subject to common law claims by
third parties based on damages and costs resulting from environmental
contamination emanating from these properties, which could result in a decline
in our stock price.

THE SEASONAL NATURE OF OUR BUSINESS COULD HURT OUR REVENUES, WHICH COULD RESULT
IN A DECREASE IN OUR STOCK PRICE.

     Our business is seasonal in nature. Historically, we have generated a
substantial portion of our revenues and profits during the second and third
quarters of our fiscal year. If for any reason our revenues fall below those
normally expected during the second and third quarters of our fiscal year, our
stock price could decrease.

TERRORIST ACTIVITIES AND RESULTING MILITARY AND OTHER ACTIONS COULD ADVERSELY
AFFECT OUR BUSINESS AND THE PRICE OF OUR COMMON STOCK.

     Terrorist attacks in New York and Washington, D.C. in September of 2001
disrupted commerce and caused major instability in financial markets throughout
the United States. The continued threat of terrorism within the United States
and the military action and heightened security measures in response to the
threat may cause significant disruption to commerce throughout the country and
instability in the financial markets. To the extent that the disruptions result
in delays or cancellations of customer orders, a general decrease in spending on
our products and services, or a general decline in economic conditions, our
ability to effectively market, manufacture or ship our products, our business
results of the operations and stock price could be materially and adversely
affected. We are unable to predict whether the threat of terrorism or the
responses to it will result in any long-term commercial disruptions or if the
threat or responses will have any long-term material adverse effect on our
business, results of operations, financial condition, or the price of our common
stock.

BECAUSE OUR PLASTIC LUMBER PRODUCTS ARE RELATIVELY NEW, WE MAY ENCOUNTER
RESISTANCE FROM PROSPECTIVE CUSTOMERS WHICH COULD RESULT IN DECREASED REVENUES
AND A DECLINE IN OUR STOCK PRICE.

     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. A general reluctance exists in the
construction industry to use new products before they have been extensively
tested, particularly in segments of the construction industry that have exacting
performance standards for component materials. In the case of our recycled
plastic lumber and composite materials in particular, this testing may be
extensive for each prospective customer and may require substantial additional
time and resources. In addition, we may experience resistance from prospective
customers who are accustomed to more conventional, non-artificial wood
materials. Moreover, we 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 when it becomes appropriate to
broaden our marketing efforts.

                                        28
<PAGE>

IF WE ARE NOT ABLE TO OBTAIN OUR RAW MATERIALS AT COMMERCIALLY REASONABLE TERMS,
OUR EARNINGS MAY BE REDUCED WHICH COULD RESULT IN A DECREASE IN OUR STOCK PRICE.

     The availability of low-cost raw materials, namely post-consumer and
industrial plastic waste products, is a material factor in our costs of
operations. In 2000, we experienced significant cost increases relative to
increases in energy related prices which caused our raw material costs to
increase substantially during 2000 and part of 2001. Although material costs
recently decreased, the unavailability, scarcity, or increased cost of these raw
materials could continue to affect our profitability. We purchase most of our
raw materials through generators of post-consumer and industrial recycled
plastic materials. We do not rely on contractual arrangements with our raw
materials suppliers and we have no long-term supply contracts. Disruption of our
supply sources could reduce our earnings and result in a decrease in our stock
price.

IF WE ARE UNABLE TO DEVELOP NEW TECHNOLOGIES, WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY, OUR BUSINESS COULD SUFFER AND OUR STOCK PRICE COULD DECREASE.

     Our products and services involve newly developing technologies and we may
be unable to compete effectively in developing and marketing new products and
services or in developing or maintaining the know-how, technology, and patents
to compete effectively. The public is unaware of these newly developing products
and services generally, or as alternatives to more traditional and
well-established products. To compete effectively, we must increase public
knowledge and acceptance of our products and services and develop and maintain
appropriate levels of know-how and technical expertise. Our failure to develop
new technologies could have an adverse effect on our ability to compete and our
business could suffer causing a decrease in our stock price.

A LACK OF UNIFORM STANDARDS EXISTS IN THE PLASTIC LUMBER INDUSTRY IN WHICH WE
OPERATE THAT COULD RESTRICT THE GROWTH OF PLASTIC LUMBER PRODUCTS AND LIMIT THE
MARKET FOR THESE PRODUCTS, WHICH COULD RESULT IN DECREASED REVENUES AND A
DECLINE IN OUR STOCK PRICE.

     The American Society for Testing and Materials and other 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 the 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 these standards by
the plastic lumber supplier or otherwise becoming aware of them. The fact that
these standards are not well known for plastic lumber may limit the market
potential for our building materials and make potential purchasers of these
building materials reluctant to use them and result in decreased revenues and a
decline in our stock price.

BECAUSE THE INDUSTRIES IN WHICH WE OPERATE ARE SUBJECT TO EXTENSIVE REGULATION,
THE COST OF COMPLYING WITH THOSE REGULATIONS, OR THE LIABILITY FOR NOT
COMPLYING, COULD BECOME SUBSTANTIAL WHICH COULD REDUCE OUR REVENUES AND RESULT
IN A DECREASE IN OUR STOCK PRICE.

     Our 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 employees. Under current federal
regulations, the Resource Conservation & Recovery Act, and Comprehensive
Environmental Responsibility, Compensation, and Liability Act, 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 handlers if the handling and
tracking of wastes is not completed properly. We believe we are either in
material compliance with all currently applicable laws and regulations or that
we are operating in accordance with appropriate variances or similar
arrangements, but we cannot be sure that we will always be deemed in compliance,
nor can we be sure that compliance with current laws and regulations will not
require significant capital expenditures that could have a material adverse
effect on our operations. These laws and regulations are subject to change and
could become more stringent in the future. Although state and federal
                                        29
<PAGE>

legislation currently provide for procurement preferences for recycled
materials, the preferences for materials containing waste plastics are dependent
upon the eventual promulgation of product or performance standard guidelines by
state or federal regulatory agencies. The guidelines for recycled plastic
building materials may not be released or, if released, the product performance
standards required by those guidelines may be incompatible with our
manufacturing capabilities. It may be necessary to expend considerable time,
effort and money to keep our 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.

IF WE ARE NOT ABLE TO MAINTAIN OUR PERMITS AND LICENSES NECESSARY TO CONDUCT OUR
BUSINESS, OUR REVENUES AND STOCK PRICE COULD BE REDUCED.

     Our business, especially our environmental recycling operation, depends on
our maintaining permits and licenses from many different federal, state, and
local agencies. Due to changing requirements of these agencies, we may be unable
to maintain our permits and licenses in the future or that we will be able to
modify our permits and licenses, if necessary, to be able to compete
effectively. If we are not successful in maintaining the permits and licenses
necessary to conduct our business, our revenues and stock price could be
reduced.

BECAUSE WE RELY SIGNIFICANTLY ON OUR TRADE SECRETS, OUR INABILITY TO PROTECT
THESE TRADE SECRETS COULD RESULT IN REDUCED REVENUES AND A DECREASE IN OUR STOCK
PRICE.

     Our businesses involve many proprietary trade secrets, including methods,
processes, and equipment designs for which we have not sought patent protection.
Rather than rely on patent protection, we have generally chosen to rely on the
unique and proprietary nature of our processes. If our trade secrets are
disclosed or if our competitors independently develop comparable or superior
technology, our revenues and stock price could decline.

     We have obtained licensing rights with respect to patent technology related
to manufacturing railroad crossties and structural lumber, but we may be unable
to maintain those rights for any length of time. We will seek protection against
known infringement of our patents, but our efforts may be unsuccessful.
Additionally, our patents may not adequately protect us from similar technology
being developed with different formulations or from use of our technology in
countries in which we do not have patent protection.

IF WE ARE NOT ABLE TO SUCCESSFULLY OBTAIN BID WORK AT SUITABLE PROFITABLE
MARGINS, OUR OPERATING INCOME WILL DECREASE AND OUR STOCK PRICE MAY DECLINE.

     Our environmental recycling operation consists of subsidiaries which are
highly reliant upon contract bidding as a significant source of revenues. We may
not be successful in obtaining bid work in the future or if we do obtain bid
work, it may not be at suitable profitable margins. Our failure to successfully
obtain bid work at suitable profitable margins may result in a decrease in our
operating income and stock price.

THE OCCURRENCE OF AN EVENT NOT FULLY COVERED BY INSURANCE COULD REDUCE OUR
OPERATING INCOME OR OUR REVENUES WHICH COULD RESULT IN A DECREASE IN OUR STOCK
PRICE.

     Our business could be disrupted by a variety of occurrences, including:

     - Terrorist activities or military responses;

     - Fires, explosions, or blowouts;

     - Environmental hazards;

     - Hurricanes, floods, fires, or other acts of God; or

     - Product liability occurrences.

                                        30
<PAGE>

     Any of these occurrences could result in substantial losses due to:

     - Injury;

     - Loss of life;

     - Severe damage;

     - Clean-up responsibilities;

     - Regulatory investigation; or

     - Penalties and suspension of operations.

     We maintain insurance coverage against some, but not all, potential risks,
however, our insurance may not be adequate to cover all losses or exposure for
liability or continue to be available at premium levels that justify its
purchase, or continue to be available at all. If an event occurs which is not
fully covered by insurance, our revenues and stock price could be reduced.

A SUBSTANTIAL INCREASE IN INTEREST RATES COULD INCREASE OUR COST OF FUNDS,
REDUCE OUR OPERATING INCOME, AND RESULT IN A DECREASE IN OUR STOCK PRICE.

     A substantial portion of our outstanding indebtedness is at variable
interest rates. Our interest expense, excluding amortization of deferred
financing costs, amortization of debt discounts, beneficial conversion features,
fees and penalties, on our indebtedness during 2001 was approximately $7.3
million, of which approximately $6.0 million pertains to indebtedness with
variable interest rates. We currently do not engage in any hedging activities
with respect to our interest rate risk. Because of our variable rate debt,
interest expense will increase by approximately $553,000 for each 1% increase in
interest rates. As a result, a substantial increase in interest rates could
increase our cost of borrowed money, which could reduce our cash flow and
earnings and result in a decrease in stock price.

WE MAY BE UNABLE TO COMPETE EFFECTIVELY IN THE INDUSTRIES IN WHICH WE OPERATE
WHICH WOULD REDUCE OUR REVENUES AND OUR STOCK PRICE.

     All of our businesses operate in highly competitive industries. For
example, our 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 pressured treated wood. We compete
against other makers of recycled plastic principally upon the basis of price and
quality, as well as the immediate availability of the product. We compete
against other products such as pressure treated lumber by emphasizing the
superior suitability characteristics of plastic lumber for some of the
applications, as well as appealing to the environmental consciousness of
consumers.

     Our environmental recycling operations face competition from several large
competitors that provide similar services throughout the northeast and
Mid-Atlantic States. The resources of these competitors, financial or otherwise,
are such that it is very difficult for us to effectively compete. In some
instances, our competitors have more revenues, larger market share, better name
recognition and more available capital which could make it difficult for us to
compete. In addition, the environmental industry is changing as a result of
rapid consolidation and our future success may be affected by those changes. Our
failure to compete successfully in either the plastic lumber or the
environmental industry could reduce our revenues and our stock price.

SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT OUR STOCK
PRICE AND OUR ABILITY TO RAISE FUNDS NECESSARY TO CONTINUE AS A GOING CONCERN
AND TO GROW OUR BUSINESS IN NEW STOCK OFFERINGS.

     There were 39,611,392 shares of our common stock outstanding as of December
31, 2001 and 41,413,315 shares of our common stock outstanding as of February
28, 2002. In addition, we will issue common stock in connection with our
outstanding convertible debt and convertible securities or in other
transactions. Future sales of substantial amounts of our common stock in the
public market, or the perception that these sales

                                        31
<PAGE>

could occur, could adversely affect prevailing market prices of our common stock
and could impair our ability to raise capital through future offerings of equity
securities. The sale by selling stockholders of significant amounts of shares at
any given time could cause the trading price of our common stock to decline.

ANTI-TAKEOVER PROVISIONS MAY MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE
CONTROL OF US, COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND
COULD REDUCE THE AMOUNT THAT STOCKHOLDERS MIGHT RECEIVE IF WE ARE SOLD.

     "Anti-takeover" provisions contained in Nevada law and in our articles of
incorporation, bylaws, and contracts could make it more difficult for a third
party to acquire control of us, even if that change in control would be
beneficial to stockholders. These provisions could adversely affect the market
price of our common stock and could reduce the amount that stockholders might
receive if we are sold. These anti-takeover provisions include the following:

     - Our articles of incorporation give our board of directors the authority
       to issue shares of preferred stock without stockholder approval. Any
       preferred stock could have rights, preferences, and privileges that could
       adversely affect the voting power and the other rights of the holders of
       our common stock.

     - Our bylaws provide for staggered terms for the members of the board of
       directors, with each board member serving a staggered three-year term.

     - Our employee stock option plan provides that options to purchase our
       common stock will immediately become exercisable upon a change in
       control.

ANY DECREASE IN OUR STOCK PRICE WOULD RESULT IN THE ISSUANCE OF A GREATER NUMBER
OF SHARES UPON THE CONVERSION OF THE DEBENTURES ISSUED TO ONE OF OUR
STOCKHOLDERS RESULTING IN ADDITIONAL DILUTION TO OUR STOCKHOLDERS AND CREATING
ADDITIONAL DOWNWARD PRESSURE ON OUR STOCK PRICE.

     On June 15, 2001, we sold a debenture in the principal amount of $4.0
million and a warrant to purchase 250,000 shares of our common stock at an
exercise price of $2.00 per share to Halifax Fund, L.P. The debenture is due on
July 1, 2002. The principal amount of the debenture bore interest at a rate of
18% per year through August 14, 2001. Because we did not prepay the debenture by
August 15, 2001, Halifax:

     - increased the interest rate to 25%;

     - is entitled to convert the debenture into common stock; and

     - received an additional warrant to purchase 250,000 shares at an exercise
       price of $1.08 per share.

     As a result of our failure to prepay the debenture, the debenture became
convertible into common stock at a conversion price that fluctuates based on the
market price of our common stock. Under the terms of this debenture, Halifax
Fund, L.P. may require us to repay this debt with a portion of the proceeds of
the Clean Earth Sale Transaction.

     On February 2, 2000, we sold Halifax a debenture in the principal amount of
$7.5 million and a warrant to purchase 200,000 shares of our common stock at an
exercise price of $10.09125 per share (subject to adjustment). As of February
28, 2002, Halifax has converted $2,540,494 of the debenture. In addition,
$201,764 of interest incurred on the debenture during 2001 was paid in kind,
adding to the amount of the debenture available for conversion. As of February
28, 2002 the aggregate principal amount remaining on the debenture was
$5,161,270. The remaining principal amount of the debenture is convertible into
common stock at the lowest trading price during the four trading days preceding
the conversion, never to exceed $9.6525 per share.

                                        32
<PAGE>

     The table below illustrates that a lower market price of our common stock
will result in a larger number of shares being issued to Halifax upon conversion
of its debentures and exercise of its warrants:

<Table>
<Caption>
                                                                               PERCENTAGE OF
                                                     NUMBER OF SHARES       OUTSTANDING COMMON
                                                      ISSUABLE UPON         STOCK ISSUABLE UPON
                                                      CONVERSION OF            CONVERSION OF
                                      CONVERSION      DEBENTURES AND      DEBENTURES AND EXERCISE
COMMON STOCK PRICE                     PRICE(2)    EXERCISE OF WARRANTS       OF WARRANTS(3)
------------------                    ----------   --------------------   -----------------------
<S>                                   <C>          <C>                    <C>
$0.50(1)............................    $ 0.50          19,022,540                 31.5
$0.375..............................    $0.375          25,130,053                 37.8
$0.25...............................    $ 0.25          37,345,080                 47.4
$0.125..............................    $0.125          73,990,160                 64.1
</Table>

---------------

(1) Represents the closing price of our common stock as listed on the Nasdaq
    National Market on February 22, 2002.

(2) For purposes of this table, we have assumed that the conversion price is
    equal to the corresponding market price in the adjacent column, but the
    actual purchase price may be higher or lower.

(3) Based on 41,413,315 shares outstanding as of February 28, 2002. Includes the
    number of shares issuable upon the conversion of debentures and exercise of
    warrants.

     As a result of the conversion price of the debentures fluctuating based on
the trading price of our common stock, Halifax' conversion of its debentures can
result in dilution to the ownership interest of other holders of our common
stock. Such dilution will become more significant if the trading price of our
common stock decreases and the dilution could create additional downward
pressure on our stock price.

     With respect to the common stock convertible from the June 15, 2001
debenture, Halifax does not have the right to acquire in excess of 19.99% of our
outstanding shares of common stock if our stockholders do not approve such
issuance pursuant to the marketplace rules of the Nasdaq Stock Market. If this
limitation is exceeded, Halifax may request that we redeem the remaining
outstanding principal amount of the debenture in excess of 19.99% for a price
equal to 120% of the outstanding principal amount of the debenture.

THE STATED VALUE OF THE JUNIOR PREFERRED STOCK THAT WOULD BE RECEIVED FROM THE
CLEAN EARTH SALE IS ARBITRARY AND MAY NOT REFLECT THE ACTUAL VALUE OF THE JUNIOR
PREFERRED STOCK.

     If the Clean Earth sale transaction is consummated under the current terms
of the purchase agreement, we will be issued 45,000 shares of the Junior
Preferred Stock of the purchaser. The stated value of the Junior Preferred Stock
is set at $4.5 million and carries a dividend rate equal to 5% per year paid in
the form of additional Junior Preferred Stock. The stated value of the Junior
Preferred Stock has been set at $100 per share. This stated value was
arbitrarily determined by the purchaser and us and does not reflect the actual
value of the Junior Preferred Stock.

WE MAY NOT RECEIVE ANY VALUE FOR THE JUNIOR PREFERRED STOCK.

     The Junior Preferred Stock is redeemable at the earlier of (i) the tenth
anniversary of the issuance of the Junior Preferred Stock, (ii) a change of
control event, or (iii) a registered offering of the purchaser's securities
resulting in gross proceeds of at least $25.0 million. There can be no assurance
that we will receive any value for the Junior Preferred Stock because it assumes
that the purchaser will be successful in continuing the operations of Clean
Earth as a going concern until the date of redemption of the Junior Preferred
Stock. Additionally, should the purchaser be successful in operating Clean Earth
as a profitable business, we will not benefit from an increase in value of Clean
Earth since we have no rights to convert the Junior Preferred Stock to common
stock of the purchaser. In addition, since this stock was issued in a private
transaction, restrictions on resale imposed by federal and state securities laws
will limit our ability to resell these shares.

                                        33
<PAGE>

THE VALUE OF OUR OWNERSHIP INTEREST IN THE PURCHASER DEPENDS, IN PART, UPON THE
PURCHASER'S ABILITY TO PROFITABLY OPERATE CLEAN EARTH'S BUSINESS.

     The purchaser has limited experience managing an environmental recycling
company and may fail to manage Clean Earth effectively thus limiting Clean
Earth's potential. There is no assurance the purchaser will be able to
successfully and profitably manage an environmental recycling company. The new
management may not have the skills to market Clean Earth's services, to manage
future growth or obtain funds to fund growth and/or operations and their
inexperience in these areas may detract from Clean Earth's business.

     The success or failure of the purchaser's management, their operating
ability, market conditions, industry trends, ability to finance their working
capital needs, integrate operations, compete effectively, deal with regulatory
impacts, may affect the value of the Junior Preferred Stock. Neither we nor the
purchaser can predict the outcome or impact of the success or failure of each of
these events in the future.

THE PURCHASER'S STOCK IS NOT TRADED ON ANY PUBLIC MARKET.

     The purchaser is neither a reporting company under the Exchange Act nor is
any of its stock traded in a public market or private market. Our equity
interest, in the form of the Junior Preferred Stock is not readily marketable
and are subject to restrictions on transfer under applicable state and federal
securities laws. In addition, we can give you no assurance that we will be able
to sell the Junior Preferred Stock even if the purchaser is successful in
carrying on the business of Clean Earth.

THE CLEAN EARTH SALE TRANSACTION COULD LEAD TO DOWNWARD PRESSURE ON OUR STOCK
PRICE.

     If we consummate the sale of Clean Earth, the sale of Clean Earth could
cause our stockholders to elect to sell the shares of our common stock held by
them, which could cause the trading price of our common stock to decrease.
Furthermore, a perception that the Clean Earth sale transaction may lead to
downward pressure on the trading price of our common stock could provide an
incentive for selling our common stock which could also adversely affect the
trading price of our common stock. See "-- IF OUR COMMON STOCK IS DELISTED FROM
THE NASDAQ NATIONAL MARKET, YOUR ABILITY TO RESELL YOUR SHARES AT OR ABOVE THE
PURCHASE PRICE WOULD BE REDUCED AND THE MARKET PRICE OF THE SHARES COULD
DECREASE."

                    DIRECTORS AND OFFICERS OF THE REGISTRANT

     The following table sets forth our directors and executive officers, their
ages, terms of office and all positions as of December 31, 2001. Directors are
divided into classes which are elected for staggered terms of three years, and
serve until the annual meeting of the year in which the terms expire, or until
their successors are duly elected by the shareholders and qualify. Officers
serve generally pursuant to employment agreements,

                                        34
<PAGE>

and, if no written agreement exists, then until the next annual meeting of the
Board of Directors or until their successor is elected.

<Table>
<Caption>
                                          DIR. SINCE
NAME OF DIRECTOR/OFFICER      AGE(1)    (TERM EXPIRES)     POSITIONS WITH THE COMPANY
------------------------      ------   ----------------   ----------------------------
<S>                           <C>      <C>                <C>
Mark S. Alsentzer...........    47       May 1994 (2004)  Chairman, President & Chief
                                                          Executive Officer
August C. Schultes, III.....    55       Feb 1997 (2004)  Director
Roger N. Zitrin.............    54       Nov 1996 (2003)  Director
Kenneth Ch'uan-K'ai Leung...    57      July 1999 (2003)  Director
Gary J. Ziegler.............    54       Feb 1997 (2002)  Director
Michael T. McCann...........    38                   --   Chief Operating Officer
John W. Poling..............    56                   --   Chief Financial Officer
Bruce C. Rosetto............    43                   --   Secretary/Executive Vice
                                                          President and General
                                                          Counsel
Michael D. Schmidt..........    53                   --   Treasurer and Vice President
                                                          of Finance
</Table>

---------------

(1) As of December 31, 2001.

DIRECTORS

     The following is a description of the biographical information of each of
our directors for the last five years:

     Mark S. Alsentzer.  Mr. Alsentzer has been our President and Chief
Executive Officer since December 1996 and Chairman since January 2000. Mr.
Alsentzer has served as a director since May 1994. From 1980 to 1992, Mr.
Alsentzer served as President of Stout Environmental, Inc., a full service
hazardous waste environmental service company. 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, an environmental company sold to Waste Management in 1991. Mr.
Alsentzer founded Clean Earth, Inc., our wholly-owned subsidiary and a leading
recycler of contaminated soil and debris located in the northeast, which we sold
in March of 2002. Mr. Alsentzer was Chief Executive Officer of Clean Earth from
1993 to 1996. Mr. Alsentzer has a B.S. degree in Chemical Engineering from
Lehigh University and an M.B.A. from Farleigh Dickinson University.

     Roger N. Zitrin.  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 graduated from Rutgers
College of Medicine and Dentistry.

     August C. Schultes III.  Mr. Schultes has served as a director since
February 1997. Since 1991, Mr. Schultes has been the Chairman of the Board and
Chief Executive Officer 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 locations in New Jersey for over seventy-five years. He is also the
Chairman of the Board and Chief Executive Officer 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 Chief Executive Officer of Stout Environmental, Inc.,
a full service hazardous waste environmental company, which was merged with
Republic Industries. Mr. Schultes graduated from Penn State University and has a
B.S. degree in Civil Engineering.

                                        35
<PAGE>

     Gary J. Ziegler.  Mr. Ziegler has served as a director since February 1997.
Since 1992, Mr. Ziegler has been 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 graduated from Clemson
University with a B.S. degree in Civil Engineering.

     Kenneth Ch'uan-K'ai Leung.  Mr. Leung has served as a director since July
1999. Mr. Leung heads the Corporate Finance Department of Sanders Morris Harris,
Inc. in New York City and is the Chief Investment Officer of Environmental
Opportunities Funds I and II. Prior to joining Sanders Morris Harris in 1995,
Mr. Leung was a Managing Director at Smith Barney from 1978 to 1994. He has been
an Institutional Investor "All Star" analyst for twenty-one years and has been
involved in many of the major environmental service investment banking
transactions over the last sixteen years. Mr. Leung was a Vice President at F.
Eberstadt & Co. from 1974 to 1978 and an Assistant Treasurer at Chemical Bank
from 1967 to 1974. Mr. Leung holds an M.B.A. in Finance from Columbia University
and a B.A. degree in History from Fordham College. He also serves on the Board
of Directors of Zahren Alternative Power Corp., Capital Environmental Resource
Inc., Avista Resources, Inc., Synagro Technologies, Inc. and Northstar Passenger
Services Ltd. Sanders Morris Harris, Inc. is the investment banking firm which
rendered the fairness opinion in connection with our sale of Clean Earth, Inc.

     The following is a description of our officers who are not also directors:

     Michael T. McCann was named Chief Operating Officer in February 2002. Mr.
McCann joined the Company in July 1999 and has been primarily responsible for
managing the engineering plastics division of U.S. Plastic Lumber Ltd.,
inclusive of sales and operational responsibilities. As Senior Vice President of
Engineered Products. Mr. McCann led his division, through internal growth and
acquisition, from $4.5 million in sales to $25 million in sales within three
years. He was also responsible for profit and loss in his division, senior sales
management for all divisions, acquisitions and new product development. Prior to
joining USPL, Mr. McCann was President of Brigadoon Industries, Inc., an
extrusion manufacturer of recyclable plastic profiles for the produce industry.
He served as President of Brigadoon Industries, Inc. from November 1993 until
its acquisition by USPL on June 30, 1999. From January 1990 to June of 1993, he
served as President of Surface Concepts of South Florida (a commercial floor
covering products distributor), in which his primary function was full P&L
responsibility, including multi-site operations, sales and vendor recruiting and
management.

     John W. Poling is our Chief Financial Officer, a position he has held since
1999. Mr. Poling is responsible for our overall financial reporting and SEC
reporting, accounting operations and accounting controls. Prior to joining us in
early 1999, Mr. Poling was Vice President of Finance at Eastern Environmental
Services, Inc. from 1996 to 1999. Mr. Poling has held senior financial positions
in publicly-held environmental services companies since 1979, and served as Vice
President and Treasurer of Smith Technology Inc. from 1994 to 1996, Vice
President, Finance and Chief Financial Officer of Envirogen, Inc. from 1993 to
1994, President of Tier Inc. from December 1992 to September 1993, and Vice
President -- Finance and Chief Financial Officer of Roy F. Weston, Inc. from
1989 to 1992. Mr. Poling received a B.S. degree in Accounting from Rutgers
University.

     Bruce C. Rosetto is Executive Vice President and General Counsel/Secretary,
a position he has held since 1997. Mr. Rosetto joined us in January 1997 and his
primary responsibilities are acting as General Counsel, providing management
support and performing the functions as corporate secretary. Mr. Rosetto was a
partner in a New Jersey law firm, Paschon, Feurey, and Rosetto from 1982 to
1986. In 1986, Mr. Rosetto became Chairman and Chief Executive Officer of
Consolidated Waste Services of America, Inc., a fully integrated environmental
company. Mr. Rosetto built 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 Chief Executive Officer of Hemo Biologics International, Inc., a
biologic products company. He graduated from LaSalle University in 1979 with a
B.A.

                                        36
<PAGE>

Degree in Political Science, and from Villanova University School of Law in
1982, with a J.D. degree. He is currently a member of both the Florida and New
Jersey Bars.

     Michael D. Schmidt is Treasurer and Vice President of Finance, positions he
has held since 1997. Mr. Schmidt joined us in December 1997. Mr. Schmidt has
over 20 years of public and private accounting experience including ten years in
the environmental industry. Prior to joining us, 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 B.S. degree in Business Administration from Rowan University and is a
Certified Public Accountant in the State of New Jersey.

ITEM 2.  PROPERTIES

     Our properties consist of administrative offices, manufacturing plants,
fabrication and assembly facilities, and sales offices. All of our properties
are leased with the exception of the properties at the CENJ facility in Kearny,
New Jersey, the facility in Philadelphia, Pennsylvania, the facility in
Hagerstown, Maryland and the facility in Ocala, Florida. We have options to
purchase on several of the properties we lease.

     Our primary properties as of February 28, 2002 were as follows:

CORPORATE OFFICE

     Boca Raton, Florida:  This location consists of approximately 3,300 sq. ft.
and serves as our corporate offices. There are presently approximately 10 people
employed in this location. The property is in good condition and we lease it.
The monthly rental is $5,067 and the lease expired in February of 2002. We have
extended the lease on this property through February of 2003.

PLASTIC LUMBER OPERATING FACILITIES

     Chicago, Illinois:  This location consists of approximately 400,000 sq. ft.
This location is the headquarters of our plastic division. It produces plastic
and composite lumber profiles through a continuous extrusion process. It
manufactures the 100% plastic deckboard as part of the "Carefree Xteriors"(R)
product line. It also processes, sorts, grinds and washes HDPE, much of it used
by us as a raw material for its manufacturing plants. It also produces products
for our OEM and Packaging businesses. We lease this property with an option to
purchase. The lease expires in January 2009 and the monthly rental is $42,398
per month.

     Ocala, Florida:  This property consists of approximately 143,200 sq. ft and
we own it. The facility is used for manufacturing, as a distribution warehouse
and for recycling of resins for use as raw material.

     Denver, Colorado:  We obtained this 44,800 sq. ft. location with the
acquisition of Baron Enterprises, Inc. and we use it to manufacture plastic slip
and tier sheets. Our lease on this property expires August 31, 2005 and the
monthly rent is $12,133 per month.

FACILITIES LEASED TO THIRD PARTIES:

     Auburn, Massachusetts:  This location consists of approximately 34,000 sq.
ft. The property is in good condition and we currently sublease it to a third
party raw material processor.

     Chino, California:  This location consists of approximately 33,571 sq. ft.
This facility is used for recycling of resins, in part, used as raw material in
our manufacturing operations. We currently sublease this property to a third
party raw material processor.

ENVIRONMENTAL RECYCLING OPERATING FACILITIES

     Mt.  Laurel, New Jersey: This office consists of approximately 3,000 sq.
ft. and is the headquarters for the Environmental Services Division. Our lease
on this property expires in October 2004 and the monthly rental is approximately
$5,130.

                                        37
<PAGE>

     Hatfield, Pennsylvania:  This facility serves as an administrative office
for Consolidated Technologies, Inc. consisting of approximately 4,000 sq. ft.
The lease expires in February 2003 and the monthly rental is approximately
$2,800.

     New Castle, Delaware:  This property consists of 7.5 acres of buildings and
property consisting of the Thermal Desorption soil recycling operation. The
lease on this property expires in August 2003, and the basis for the monthly
rental is the volume of tonnage received at the facility.

     Philadelphia, Pennsylvania:  This property consists of 9 acres with a
building of approximately 27,900 sq. ft. The property, which we own, consists of
a Thermal Desorption soil recycling operation.

     Hagerstown, Maryland:  This property consists of 13.67 acres and contains
buildings totaling approximately 33,000 sq. ft. The property, which we own,
consists of a soil recycling plant.

     Carteret, New Jersey:  This facility consists of approximately 80,000 sq.
ft. and five acres of property and is leased. This facility recycles soil
through a bioorganic process. The lease on this property expires in December
2027, and the monthly rental is $18,050.

     Kearny, New Jersey:  This facility is the administrative offices and
treatment, storage and disposal facility for our S&W Waste operations. It
consists of approximately 7 acres and we own it. Somerville, New Jersey: This
facility is an administrative office for our environmental construction services
company. This lease has a rental of $2,730 per month. We currently lease the
premises on a month-to-month basis.

     Winslow, New Jersey:  This facility is an administrative office for our
environmental construction services company. Our lease on this property has a
rental of $2,500 per month and expires on February 2002. We are currently
leasing this property on a month to month basis while we negotiate for an
extension of the lease with the owner of the property.

     Merrick, New York:  This facility is an administrative office for our
environmental construction services company. This lease has a rental of $2,640
per month. We currently lease the premises on a month-to-month basis.

ITEM 3.  LEGAL MATTERS

     In April 2001, we were served with an arbitration demand from Southern Wood
Services seeking an award of $3,328,000 due to our failure to abide by the terms
of a contract relative to the purchase of wood flour. We utilize wood flour for
the production of our SmartDeck composite product. The arbitration hearing took
place in the first week of August 2001 in Atlanta, Georgia in accordance with
the rules and procedures of the American Arbitration Association. On September
7, 2001, the arbitrators issued an award in favor of Southern Wood Services in
the amount of $1,759,822, inclusive of arbitration costs and expenses. We filed
a motion to vacate the award based on the principle that the award does not
reflect any evidence presented at the hearing nor is the award based on the
current case law on damages in similar cases in the United States.

     On February 28, 2002, a hearing in the Superior Court of DeKalb County,
Georgia, in a civil action, affirmed the arbitration ruling in favor of Southern
Wood Services. Accordingly, we were ordered to pay Southern Wood Services the
amount of the arbitration award, as well as administrative fees and arbitrator's
compensation of $11,225 and $6,064 respectively, plus interest at 12% accruing
retroactive to September 7, 2001. As a result, we have accrued $1,844,299 at
December 31, 2001 in connection with this ruling. While we will continue to
appeal this decision, we cannot avoid the judgement without posting a financial
security bond. We are unable to post a financial security bond at this time, and
have commenced negotiations to reach a settlement and payment plan with Southern
Wood Services. No assurances can be given that we will be able to amicably
resolve or reach a settlement and payment plan with Southern Wood Services.

     In December 1998, we purchased Clean Earth of North Jersey, Inc. ("CENJ",
then known as S&W Waste, Inc.) in a stock purchase transaction. Pursuant to such
purchase, we could be responsible for liabilities resulting from matters wherein
CENJ has been named as a potentially responsible party ("PRP") in matters
involving the possible disposal of hazardous waste at specific disposal sites.
CENJ is currently named as a PRP in the following matters: Bayonne Barrel & Drum
Site, Spectron, Inc. and Four County Landfill-
                                        38
<PAGE>

Operable Unit #2. We currently have an accrual of approximately $324,000 on our
balance sheet for estimated liabilities related to these matters. We believe
this accrual is sufficient to cover the aggregate liability that may be incurred
in these matters; however, there can be no assurances that this accrual will be
sufficient.

     From time to time, we are involved as plaintiff or defendant in various
other legal proceedings arising in the usual course of our business. While the
ultimate outcome of these various legal proceedings cannot be predicted with
certainty, it is the opinion of our management that the resolution of these
legal actions should not have a material effect on our financial position,
results of operations or liquidity.

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

     During the fourth quarter of the fiscal year ended December 31, 2001, no
matters were submitted to a vote of the security holders, through proxy
solicitation or otherwise. On March 19, 2002, at a Special Meeting of
Stockholders, stockholders of record as of the close of business on February 13,
2002 representing a majority of outstanding shares of our common stock voted to
ratify the sale of our wholly-owned subsidiary, Clean Earth, Inc. in accordance
with the terms as set forth in the proxy statement mailed to all shareholders.
See "Business -- Recent Events -- Execution of the Purchase Agreement for the
Sale of Clean Earth, Inc."

                                    PART II

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

MARKET INFORMATION

     Our common stock is currently traded on the Nasdaq National Market System
under the symbol "USPL." Prior to June 1998, we traded sporadically on the OTC
Electronic Bulletin Board under the symbol "ECPL." On February 18, 2002 we
received notice from the NASDAQ National Market advising that our stock may be
delisted because the price of our common stock has failed to maintain a minimum
bid price of $1 over the last 30 consecutive trading days. In accordance with
MarketPlace Rules, we have 90 calendar days, or until May 15, 2002, to regain
compliance. If we are unable to demonstrate compliance on or before May 15,
2002, Nasdaq staff will provide us with written notification that our securities
will be delisted. While there are several options available that could permit us
to regain compliance with Nasdaq listing requirements and our Board of Directors
intend to review these options, we will also consider transferring our
securities to The Nasdaq SmallCap Market.

     The following table sets forth the high and low sales prices of our common
stock for the periods indicated. On December 31, 2001, the closing price of the
common stock on the Nasdaq National Market System was $0.37.

<Table>
<Caption>
QUARTER ENDED                                                  HIGH     LOW
-------------                                                 ------   -----
<S>                                                           <C>      <C>
March 31, 2000..............................................  $10.68   $7.00
June 30, 2000...............................................  $ 9.37   $3.00
September 30, 2000..........................................  $ 5.00   $3.00
December 31, 2000...........................................  $ 3.96   $0.84
March 31, 2001..............................................  $ 2.25   $0.81
June 30, 2001...............................................  $ 1.43   $0.61
September 30, 2001..........................................  $ 1.40   $0.30
December 31, 2001...........................................  $ 0.63   $0.22
</Table>

     As of February 28, 2002, there were 810 holders of record and approximately
11,100 beneficial holders of our common stock.

                                        39
<PAGE>

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. 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 SECURITIES DURING THE LAST THREE YEARS

     In the three years preceding the filing of this report, we have issued the
following securities that were not registered under the Securities Act of 1933,
as amended (the "Act"):

     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 was completed without any general
or public solicitation. In each case the offering was made to a very limited
number of officers, directors and shareholders of the company 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 23, 1999, the Company acquired all of the outstanding 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 purchased
Brass for cash plus 2,000,000 shares of common stock and granted 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 was completed without any general or public
solicitation. In each case the offering was made to a very limited number of
officers, directors and shareholders of the company 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 April 1, 1999, the Company signed a Management Contract with Brigadoon
Industries, Inc., ("Brigadoon") taking over all responsibility for day-to-day
management and financial control as of that date and entitling the Company to
all net profits or losses after April 1, 1999. Brigadoon manufactures corner
boards from recycled plastic for use by the packaging industry. The Company
acquired 100% of the stock of Brigadoon on June 30, 1999. The Company also
purchased a 140,000 sq. ft. facility situated on approximately 39 acres in
Ocala, Florida. The Ocala plant will house expanded operations of Brigadoon plus
a large number of new extruders to manufacture other products for the plastic
lumber division. 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 made
to a very limited number of officers, directors and shareholders of the company
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.

                                        40
<PAGE>

     On June 25, 1999, the Company acquired 100% of the stock of Barbella
Environmental Technology, Inc. ("BET"), an environmental remediation and
construction service company located in Somerville, New Jersey for 810,000
shares of Company stock. The Company incurred merger costs totaling $595,000 in
the BET transaction that were written off in the second quarter of 1999. 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 made to a very limited number of
officers, directors and shareholders of the company 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 September 28, 1999, the Company acquired 100% of the stock of Eureka
Plastics of California, Inc. ("Eureka") and Ecosource Corporation ("Ecosource"),
for 236,600 shares and 392,000 shares, respectively, of Company stock in
unrelated transactions. Both of these companies recycle and process plastics in
Southern California. The Company incurred $ 810,000 of costs related to these
mergers that were written off in the third quarter of 1999. This offering was
completed without any general or public solicitation. In each case the offering
was made to a very limited number of officers, directors and shareholders of the
company 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 December 14, 1999, the Company acquired 100% of the stock of Clean Rock
Industries, Inc. and Clean Rock Properties, Ltd. for 422,164 shares. Clean Rock
Industries, Inc. is a soil recycling facility located in Hagerstown, Maryland.
Clean Rock Properties, Ltd. is a holding company that owns the real estate upon
which this business operates. 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 made
to a very limited number of officers, directors and shareholders of the company
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 2000, the Company issued 632,833 shares to the shareholders in
settlement of the earnout agreements related to the Company's merger with Clean
Earth, Inc. in 1996. 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 made
to a very limited number of officers, directors and shareholders of the company
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 2, 2000, the Company raised $7,500,000 in the form of a
subordinated convertible debenture issued to Halifax Fund, L.P. This private
placement transaction was not registered under the Act in reliance upon the
exemption from registration in Section 4(2) of the Act, as a transaction not
involving a public offering. This offering was completed without any general or
public solicitation; the offering was made to a shareholder of the Company. The
shareholder had strong knowledge and experience in business matters as well as
pre-existing business relationships with the Company. The knowledge and
experience of shareholder enabled it to evaluate the risks and merits of the
investment.

     On February 10, 2000, the Company acquired certain assets and certain
liabilities of Baron Enterprises for 202,376 shares of common stock. Baron
manufactures slipsheets and tier sheets for material handling systems within the
beverage industry. At the time of the Closing, Baron had two facilities, one in
Denver, Colorado and the other in Reidsville, North Carolina. We recently closed
the Reidsville facility and moved the assets to our Chicago facility as part of
our plan to consolidate smaller plants into our regional hubs. These

                                        41
<PAGE>

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 made to a very limited number of
officers, directors and shareholders of the company 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 September of 2000 the Company issued 1,187,285 shares of its Series D
Preferred Stock. The Series D Preferred Stock pays a quarterly cash dividend at
an annual rate of 15%, with the initial dividend payable on March 31, 2001. Each
share of Series D Preferred Stock is convertible into one share of the Company's
common stock at the option of the holder, subject to the rights of the Company.
In addition, if the common stock of the Company is trading at an average closing
price of $3.50 per share or higher for 20 consecutive trading days at any time
prior to March 1, 2002, the Company has the right to require conversion of the
Series D Preferred Stock into common stock. Otherwise, the Series D Preferred
Stock automatically converts into common stock on March 1, 2002. The net
proceeds of $4.1 million from the issuance of Series D Preferred Stock were used
for general corporate purposes. 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 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 1, 2002, all outstanding shares of Series D Preferred Stock were converted
into an equal number of shares of our common stock.

     From November 2000 through March 2001, the Company issued 1,714,285 shares
of its Series E Preferred Stock to the Stout Partnership, our largest
shareholder. Several members of our board of directors and a member of our
management are affiliated with Stout Partnership. The Series E Preferred Stock
pays a monthly cash dividend at an annual rate of 10%, with the initial dividend
payable on January 15, 2001. Each share of Series E Preferred Stock is
convertible into one share of the Company's common stock. The Series E Preferred
Stock automatically converts into common stock on March 31, 2002. The net
proceeds of $3 million from the issuance of Series E Preferred Stock were used
for general corporate purposes. 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 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 December 7, 2000, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion Capital
agreed to purchase up to $6.0 million of the Company's common stock subject to
increase, at the Company's discretion, by an additional $6.0 million, subject to
certain conditions. As of March 31, 2002, no shares have been purchased by
Fusion Capital under this agreement. On March 2, 2001 under the terms of the
common stock purchase agreement, Fusion Capital Fund II, LLC was issued 200,000
shares of the Company's common stock as a commitment fee. Unless an event of
default occurs, these shares must be held by Fusion Capital until the common
stock purchase agreement has been terminated. On August 31, 2001 the common
stock purchase agreement was amended whereby the Company granted Fusion Capital
warrants to purchase 100,000 shares of the Company's common stock at an exercise
price of $1.00 per share in exchange for Fusion Capital's agreement to revise
the terms under which Fusion Capital could terminate the agreement.

     In the second quarter of 2001, Halifax Fund, L.P. converted $2,191,494 of
principal and $23,801 of accrued interest related to the $7.5 million 5%
convertible debenture issued in February of 2000 into 2,134,743 shares of the
Company's common stock.

     On July 3, 2001, the Company issued 476,191 shares of common stock to ZLP
Master Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology
Fund, LTD. at a purchase price of $1.05 per

                                        42
<PAGE>

share. The Company also issued 35,000 shares of common stock to a third party as
a fee in connection with the above transaction. This private placement
transaction was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. This offering was completed without any general or public
solicitation. The shareholders had strong knowledge and experience in business
matters and the knowledge and experience of these individuals enabled them to
evaluate the risks and merits of the investment. Net proceeds after issuance
costs of approximately $983,000 were used for general corporate purposes.

     In October of 2001 the Company issued an aggregate of 1,334,000 shares in
several private placements at an average price of $0.60 per share. This private
placement transaction was not registered under the Act in reliance upon the
exemption from registration in Section 4(2) of the Act, as a transaction not
involving any public offering. This offering was completed without any general
or public solicitation. The shareholders had strong knowledge and experience in
business matters and the knowledge and experience of these individuals enabled
them to evaluate the risks and merits of the investment. Net proceeds after
issuance costs of approximately $752,000 were used for general corporate
purposes.

     In December of 2001 the Company issued 45,000 shares of common stock in
connection with a license agreement with Rutgers University. 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.
These offerings were completed without any general or public solicitation. The
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 shareholders enabled them to evaluate the risks and merits
of the investment.

     In addition to the above, the Company issued 57,475 shares of common stock
for miscellaneous reasons, including settlements of litigation and directors'
compensation. 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. These offerings were completed without any
general or public solicitation. The 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 shareholders enabled
them to evaluate the risks and merits of the investment.

OPTIONS AND WARRANTS

     There are numerous members of the management, directors, employees and
consultants of the Company and its subsidiaries who have been granted options in
2001 to purchase 523,450 shares of common stock subject to the terms for vesting
and exercise prices. As of December 31, 2001, options to purchase 3,919,000
shares of common stock were outstanding.

     On June 1, 2001, the Company granted 250,000 warrants to purchase the
Company's common stock to the Stout Partnership at an exercise price of $1.50
per share. The warrants were granted in consideration of the Stout Partnership
extending the maturity date of its $5,000,000 convertible debenture to July 1,
2002 and because some of the assets of the Company were not disposed of as of
June 1, 2001. August C. Schultes, III and Gary J. Ziegler are individual
partners in Stout Partnership and also serve as directors to the Company. Mark
S. Alsentzer is Chairman and CEO of the Company as well as an individual partner
in Stout Partnership.

     On June 15, 2001 the Company granted 250,000 warrants to Halifax Fund L.P.
at an exercise price of $2.00 per share in connection with their purchase of a
$4,000,000 convertible debenture purchased from the Company on that date. In
addition, because the Company failed to retire the debenture prior to August 15,
2001, and a sale/leaseback of some of the Company's assets was not consummated
in accordance with the terms of the debenture, the Company issued to Halifax an
additional 250,000 warrants at an exercise price of $1.08 per share on August
15, 2001.

     On July 3, 2001 the Company granted Zimmer Lucas Partners LLC 238,095
warrants in connection with their purchase of 952,381 shares of the Company's
common stock in a private placement transaction.

                                        43
<PAGE>

     In August of 2001 the Company granted a total of 175,000 warrants in
exchange for investment banking and financial consulting services to be incurred
over a prospective one-year period. The exercise price of the warrants range
from $1.07 to $1.40.

     On August 31, 2001 the Company amended the Common Stock Purchase Agreement
entered into with Fusion Capital Fund II, LLC on December 7, 2000 and granted
Fusion 100,000 warrants at an exercise price of $1.00 per share in connection
with the amendment.

     On October 23, 2001 the Company issued 375,200 warrants, at an exercise
price of $0.60 per share, to the participants in the October 2001 private
placement described above.

     As of December 31, 2001 warrants to purchase 2,828,295 shares of common
stock were outstanding.

     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. These offerings were completed without any
general or public solicitation. The option and warrant holders had strong
knowledge and experience in business matters as well as pre-existing business
relationships with the Company. The knowledge and experience of these holders
enabled them to evaluate the risks and merits of the investment.

ITEM 6.  SELECTED FINANCIAL DATA

     The information below was derived from the audited consolidated financial
statements included in this report and in reports previously filed with the SEC.
This information should be read together with these financial statements and the
notes to the financial statements. For more information regarding this financial
data, see the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section also included in this report.

<Table>
<Caption>
                                                 YEARS ENDED DECEMBER 31,
                                    --------------------------------------------------
                                      2001       2000       1999      1998      1997
                                    --------   --------   --------   -------   -------
                                          (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>        <C>        <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
  Sales, net......................  $174,050   $173,744   $138,545   $72,794   $24,739
  Operating (loss) income.........   (34,610)    (5,867)    10,238     1,688      (321)
  (Loss) earnings before
     extraordinary item...........   (48,163)   (11,447)     3,149       304      (706)
  Net (loss) earnings.............   (48,163)   (12,475)     3,149       304      (706)
  Net (loss) earnings per common
     share -- Diluted:
  (Loss) earnings before
     extraordinary item...........  $  (1.34)  $  (0.36)  $   0.09   $ (0.02)  $ (0.05)
  Net (loss) earnings.............  $  (1.34)  $  (0.39)  $   0.09   $ (0.02)  $ (0.05)
  Weighted average common shares
     outstanding -- Diluted.......    36,974     34,297     30,199    18,737    14,054
BALANCE SHEET DATA (AT END OF
  PERIOD):
  Cash and cash equivalents.......  $    912   $  2,211   $  1,808   $ 3,053   $ 1,170
  Working capital (deficit).......   (60,525)    10,965     12,189    10,422      (474)
  Total assets....................   161,669    200,411    166,311    63,336    23,171
  Long-term debt, including
     current maturities...........    71,583     78,162     54,690    26,170     3,222
  Stockholders' equity............    43,185     85,742     83,010    24,588    11,466
</Table>

                                        44
<PAGE>

ITEM 7.  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, 2001, 2000 and 1999. This discussion should be read in conjunction
with the consolidated financial statements and notes thereto provided under Part
II, Item 8 of this Annual Report on Form 10-K.

BUSINESS SEGMENTS

     We have 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 and products for original equipment manufacturers, made from
recycled high density polyethylene and in some instances, composite materials.
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 five plants. Two plants
utilize a thermal desorption process, one uses an organic process and one uses a
chemical treatment and cold mix process to recycle contaminated soil brought to
the plants by third parties as well as their sister environmental service
companies. We also have a plant that consolidates and stabilizes oils, solvents
and heavy metal contaminated waste for disposal by unrelated companies. We are
not dependent upon a single customer or a few customers for either segment of
our business. No single customer accounts for sales equal to or greater than 10%
of our consolidated revenues.

PURCHASE AGREEMENT TO SELL CLEAN EARTH, INC.

     On December 29, 2001 we entered into a purchase agreement, subsequently
amended on February 12, and March 5, 2002, to sell 100% of the capital stock of
Clean Earth, our wholly-owned subsidiary, which together with its subsidiaries
comprise our environmental recycling division, to New CEI Inc, subject to
shareholder approval. New CEI Inc. is a newly created Delaware corporation owned
by affiliates of Founders Equity, Inc., an investment group headquartered in New
York, New York ("Founders"). No assurances can be given that we will be able to
close this transaction or that we will be successful in selling Clean Earth at
all in the event the sale to New CEI, Inc. is not consummated.

     Under the terms of the purchase agreement, the purchase price will consist
of:

     - $45.0 million, of which $44.0 million will be payable at the closing and
       $1.0 million will be held in escrow pending the outcome of several
       purchase price adjustments pursuant to the terms of the purchase
       agreement; and

     - 45,000 shares of the Junior Preferred Stock of New CEI, Inc. The Junior
       Preferred Stock is redeemable upon the earlier of (i) the tenth
       anniversary of the issuance of the Junior Preferred Stock, (ii) a change
       of control event, or (iii) a registered offering of New CEI's securities
       that results in gross proceeds of at least $25.0 million. The Junior
       Preferred Stock will be subordinate to the senior debt of New CEI and the
       other outstanding preferred stock of New CEI.

     Additional adjustments to the purchase price will be made if the $1.0
million escrow is not sufficient to cover the adjustments related to debt and
other obligations outstanding and non-cash working capital. The adjustments, if
any, for a shortfall of escrow in excess of $1.0 million related to debt and
other obligations outstanding and non-cash working capital will result in a
reduction in the Junior Preferred Stock we will receive from New CEI by 0.02%
for each $1,000 of the shortfall.

     In addition, there may be additional adjustments to the cash portion of the
purchase price based upon a final audited balance sheet to be delivered after
the closing if the amount of outstanding debt and other obligations and non-cash
working capital set forth on the final audited balance sheet differ from the
amounts of such items set forth on the unaudited balance sheet on the closing
date. The $1.0 million escrow will be distributed among the parties accordingly.
If on the closing date, there are any obligations of Clean Earth or any
subsidiary of Clean Earth that an obligee would have the right to accelerate the
date of payment of such
                                        45
<PAGE>

obligation of Clean Earth or its subsidiary (a "Clean Earth Defaulted
Obligation"), the cash portion of the purchase price will be reduced by the
amount of the accelerated portion of the Clean Earth Defaulted Obligation less
the amount by which such acceleration has resulted in the reduction of the cash
portion of the purchase price pursuant to the foregoing adjustments pertaining
to working capital and retention of debt.

     If New CEI has received the mezzanine financing of at least $8.0 million
but less than $10.0 million by or at the closing, the cash portion of the
purchase price will be reduced by the amount by which the amount of the
mezzanine financing is less than $10.0 million, but such reduction will not,
unless we, in our sole discretion, agree otherwise, cause the closing date cash
payment to be less than $43.5 million.

     In addition, the claims for payment pursuant to (i) our ownership interest
in the joint venture between Interstate Industrial Corp. and us (ii) the
Quakertown Foundry Site Agreement between Integrated Technical Services, a
subsidiary of CEI, and the Pennsylvania Department of Environmental Protection
were not included as part of the purchase agreement. The net book value of these
assets were approximately $1,640,000 as of December of 2001.

     On March 19, 2002 a special meeting of the Company's stockholders was held
whereby the stockholders approved the sale transaction, pursuant to the terms
and conditions of the purchase agreement dated December 29, 2001 and amendment
dated February 12, 2002. The shareholder approval obtained on March 19, 2002 was
applicable only to the specific purchase agreement with Founders and did not
authorize our management or board of directors to pursue alternative plans for
the sale or disposal of Clean Earth. As a result of the proposed sale of Clean
Earth and the requirement to reduce to fair value the carrying amount of Clean
Earth's long-lived assets, we recorded an impairment charge of $13.5 million, as
required by Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of."

     The terms of the purchase agreement, as amended, provide for significant
preconditions to the purchaser's obligation to close the transaction. These
preconditions include, but are not limited to, requirements that the purchaser
obtain $32.0 million of senior debt and $10.0 million of mezzanine financing
prior to closing the transaction. We cannot predict the date as to when all of
these preconditions will be met or whether they will be met at all. On March 5,
2002 the agreement, which had been terminated by a letter from Founders dated
March 4, 2002, was reinstated and amended to allow Founders additional time to
meet all of the preconditions to closing the transaction, and to extend the date
for which either party to the transaction could terminate the agreement from
March 31, 2002 to April 21, 2002.

     We anticipate that we will use the estimated $42.7 million of net proceeds
to be realized from the Clean Earth sale, if consummated, to retire our Senior
Credit Facility in the amount of $39.9 million as of December 31, 2001,
including deferred interest, fees and penalties, as well as some of our other
outstanding indebtedness. If we are unsuccessful in closing this transaction, we
will be working with our senior creditors and a number of potential new lenders
and investors on an alternative plan to refinance the Senior Credit Facility. In
this event, we may be forced to seek protection under the Bankruptcy Code or we
may be forced into a bankruptcy proceeding by these lenders.

     Assuming the completion of the sale of Clean Earth as described in the
purchase agreement and the receipt of the estimated net proceeds of $42.7
million and a new working capital line of credit, we may require additional
capital to repay outstanding indebtedness and fund ongoing operations. We
believe, based on our current financial projections, that assuming the
completion of the sale of Clean Earth, the new line of credit will be adequate
to fund our current level of operations for the balance of fiscal year 2002. We
intend to service our remaining debt through cash flow from operations and a new
working capital line of credit. Our projections for fiscal year 2002 show a
significant improvement in the operating performance of the plastic lumber
division as a result of the completion of our restructuring plan. However, there
can be no assurances that we will meet our projections. If we fail to meet our
projections, it will have a material adverse impact on our liquidity and capital
resources. These projections are based on internal forecasts, including current
backlog of orders; however there can be no assurance that actual results will
meet these projections. Accordingly, the amount of additional funding, if any,
the timing of our need for such funding and our ability to raise the necessary
funds

                                        46
<PAGE>

can not be predicted at this time. In the event additional capital is required,
our failure to complete an additional debt or equity financing may have a
material adverse effect on our operations and our ability to continue as a going
concern.

     Because the purchaser has not met all of these preconditions as of March
30, 2002 and since the shareholder approval was applicable only to the specific
purchase agreement, we did not account for Clean Earth as a discontinued
operation in our 2001 audited consolidated financial statements. We are
currently working with the purchaser to close this transaction prior to April
21, 2002. Although we believe we have taken all of the actions required of us to
consummate this transaction, the outcome is still uncertain due to outstanding
conditions precedent to closing which are still unmet. While we fully intend to
complete the planned sale of Clean Earth in accordance with the terms of the
purchase agreement, we continue to consider our liquidity, capital resources,
revenue and cost forecasts and other forward-planning activities as if the
transaction will not take place.

LIQUIDITY AND CAPITAL RESOURCES

     Our liquidity and ability to meet our financial obligations and maintain
our current operations in 2002 and beyond will be dependent on, among other
things, our ability to refinance our Senior Credit Facility, meet the payment
obligations under, achieve and maintain compliance with the financial covenants
in all of our debt agreements and provide financing for working capital.

     Capital requirements relating to the implementation of our business plan
have been and will continue to be significant. We believe that our ability to
generate cash from operations is dependent upon, among other things, increased
demand for our products and services and the successful and continuous
development of cost effective manufacturing processes, direct marketing and
product distribution capabilities. There can be no assurance that we will have
sufficient capital resources to permit us to continue implementation of our
business plan.

     We are highly leveraged, and during 2000 and 2001 we incurred substantial
losses from operations, primarily resulting from the significant expenses
incurred in our plastic lumber division and $13.5 million of acquired intangible
impairment charges in our environmental recycling division. Our accumulated
deficit and working capital deficit totaled approximately $61.0 million and
$60.5 million respectively as of December 31, 2001. Our obligations to make
payments under and achieve and maintain compliance with the covenants in our
Senior Credit Facility and Master Credit Facility are material financial
commitments.

     On September 28, 2001, we notified all of the banks which participate in
our Senior Credit Facility that due to lower than expected sales at our plastic
lumber division we would not make the $2.5 million term loan payment due
September 30, 2001 without jeopardizing our business operations. In addition, we
were not in compliance with various covenants under our Senior Credit Facility
as of September 30, 2001. Substantially all of the assets of the Company have
been pledged as collateral with respect to the Senior Credit Facility. Effective
November 14, 2001, we entered into a forbearance agreement with the
participating banks whereby the lenders under the Senior Credit Facility agreed
to accept interest only payments from us and allowed us to defer the September
30, and December 31, 2001 principal payments until the earlier of February 28,
2002 or the proposed sale of Clean Earth. Pursuant to the terms of the
forbearance agreement, the lenders also agreed not to take action against us
with respect to the covenant violations as of September 30 and December 31,
2001. The forbearance period terminated on February 28, 2002. As of February 28,
2002 we did not make the required principal payments under the forbearance
agreement that were originally due September 30, and December 31, 2001 in the
amount of $2.5 million each. We also did not make the required interest payments
of approximately $215,000 and $197,000 due January 31, and February 28, 2002
respectively. In addition, on March 11, 2002 we informed the lenders under the
Senior Credit Facility that we could not make the $2.5 million principal payment
due March 31, 2002. We also have an additional $2.5 million principal payment
due June 30, 2002 and the outstanding balance of the Senior Credit Facility is
due in its entirety on July 1, 2002. At December 31, 2001, amounts outstanding
under the Senior Credit Facility totaled approximately $39.9 million, including
accrued interest, fees and penalties.

                                        47
<PAGE>

     We are negotiating with the senior lenders under the Senior Credit Facility
for an extension of the forbearance period in connection with our failure to
make the September 30, and December 31, 2001 principal payments on February 28,
2002, the interest payments due January 31, and February 28, 2002 and the $2.5
million principal payment due March 31, 2002. Although the failure to make these
principal and interest payments constitute events of default under the Senior
Credit Facility and the forbearance agreement, the lenders that are party to the
Senior Credit Facility have yet to take any action against us, including
declaration of default. We believe that if we could obtain an extension of the
forbearance period, it may provide us with sufficient time to complete the sale
of Clean Earth or find an alternative means to refinance the Senior Credit
Facility. In the event that the necessary waiver and forbearance are not
obtained or future principal and interest payments cannot be made, the lenders
under the Senior Credit Facility can demand immediate repayment from us of the
outstanding balance on the Senior Credit Facility, which further raises
substantial doubt about our ability to continue as a going concern.

     On January 3, 2002, we notified all of the participants in our Master
Credit Facility with GE Capital Corporation that we would not be making any
further principal payments until at least April of 2002. In addition, we did not
make the term payment of $1.7 million due January 2, 2002 and, as of September
30, and December 31, 2001, we were not in compliance with the tangible net worth
covenant under the Master Credit Facility. On February 28, 2002 the Company, GE
Capital Corp. and the other participants in the Master Credit Facility agreed to
and signed a Forbearance and Modification Agreement which restructures the
Master Credit Facility by allowing us to defer principal payments until April 1,
2002 while continuing to make interest payments and providing a waiver of the
September 30, and December 31, covenant violations. In accordance with this
agreement, we will be required to make a $500,000 principal payment upon the
proposed sale of Clean Earth, Inc., if it takes place. In addition, we will be
required to make a $2 million prepayment on the Master Credit Facility upon the
earlier of (i) our obtaining a new revolving credit facility with availability
of at least $10 million to replace our current revolving credit facility; (ii)
our exercising the purchase option on, and subsequently obtaining a mortgage
against, our Chicago property; or (iii) September 30, 2002. The Forbearance and
Modification Agreement also re-sets the minimum tangible net worth covenant for
March 31, 2002 and adds new covenants for minimum levels of EBITDA commencing
March 31, 2002 if the proposed sale of Clean Earth does not take place, and June
30, 2002 if the proposed sale of Clean Earth does take place. It also requires
us, under certain circumstances, to grant additional security interest to GE
Capital Corp. and to the other participants in the Master Credit Facility for
some of our property, plant and equipment that these lenders currently have no
security interest in.

     Pursuant to this agreement, commencing on September 1, 2002, the Master
Credit Facility will be restructured to a 48-month term. We will pay a
forbearance fee in connection with the Forbearance and Modification Agreement in
an amount equal to 1% of our obligations under the Master Credit Facility
outstanding as of the date of the proposed sale of Clean Earth. This forbearance
fee will be immediately due and payable if the closing of the sale of Clean
Earth does not occur by June 1, 2002. The Master Credit Facility also contains a
provision whereby an event which would accelerate payment terms of our Senior
Credit Facility would also accelerate the payment terms of the Master Credit
Facility to the same due date as the Senior Credit Facility. The Senior Credit
Facility has a similar provision with respect to the Master Credit Facility. At
December 31, 2001, amounts outstanding under the Master Credit Facility totaled
approximately $11.4 million. In addition, defaults under these lending
agreements cause defaults, pursuant to cross default provisions, of our other
agreements, including, but not limited to, other lending agreements, debenture
agreements, lease agreements and others.

     We are also required to retire our $4.0 million convertible debenture
issued to Halifax Fund, L.P. ("Halifax"), as well as the $5.0 million
convertible debenture payable to Stout Partnership, our largest stockholder, on
or before July 1, 2002. Several members of our board of directors and a member
of our management are affiliated with Stout Partnership. In addition, we may be
required to redeem the $4.0 million convertible debenture upon completion of the
proposed sale of Clean Earth, Inc. The $4.0 million convertible debenture
contains a provision which provides that the sale or transfer by us of
substantially all of our assets (the sale of Clean Earth is considered to be the
sale of substantially all of our assets) gives the holder an option to consider
the debenture immediately due and payable and require us to redeem this
debenture at a

                                        48
<PAGE>

redemption price equal to 100% of the outstanding principal amount of the
debenture or at a premium. Halifax has a second lien on substantially all of our
assets. The Forbearance and Modification Agreement to the Master Credit Facility
prohibits us from making any payments of principal, interest or any other
amounts due and owing to Halifax Fund, L.P., other than the payment of Halifax'
$4.0 million debenture, Stout Partnership or any future subordinated lender for
one year from the date of the closing of the proposed sale of Clean Earth, if
consummated, unless an equal payment, in addition to all currently scheduled
principal and interest payments, is paid to the participants in the Master
Credit Facility.

     We currently do not have the financial resources to repay our debt
obligations under the Senior Credit Facility, Master Credit Facility, $4 million
convertible debenture and the $5 million convertible debenture as they become
due or in the event that current or future events of default are not waived in
writing and such debt is immediately due without obtaining new debt and/or
equity capital, negotiating different payment terms and/or selling some of our
assets. Our current and past failures to comply with the terms of our Senior
Credit Facility and Master Credit Facility, as well as the related forbearance
agreement and other debt obligations, and the material financial obligations
currently contained in our Senior Credit Facility and Master Credit Facility,
have a material adverse effect upon the Company's liquidity and capital
resources and raise substantial doubt about our ability to continue as a going
concern.

     Our independent certified public accountants have included an explanatory
paragraph in their report with respect to our consolidated financial statements
at December 31, 2001. The paragraph states that our recurring losses from
operations, accumulated deficit of $61.0 million, working capital deficit of
$60.5 million and our inability to make principal and interest payments on our
Senior Credit Facility raise substantial doubt about our ability to continue as
a going concern. Furthermore, the factors leading to and the existence of the
explanatory paragraph in the report may adversely affect our relationship with
potential investors, lenders, customers and suppliers and have an adverse effect
on our ability to obtain additional financing.

     As previously discussed, on December 29, 2001 we entered into an agreement
to sell 100% of the capital stock of Clean Earth, Inc. to a newly created
corporation owned by Founders Equity, Inc. No assurances can be given that we
will be able to close this transaction or that we will be successful in selling
Clean Earth at all in the event this transaction is not consummated. If we are
successful in completing this sale transaction, we will pay down our entire
Senior Credit Facility, as well as the $4.0 million convertible debenture that
requires redemption upon the sale of substantially all of our assets. We believe
that we will have the available cash necessary to retire this debenture in its
entirety if this transaction takes place. While there can be no assurances, we
believe that this sale transaction, if consummated, is crucial to allowing us to
reorganize our capital structure and cure our liquidity crisis. If the sale
transaction described above is completed, we believe our remaining assets and
business will be sufficient to allow us to raise the necessary capital to fund
our operations and meet our debt and other obligations in 2002.

     If we are not successful in completing the proposed sale of Clean Earth, we
will be required to seek other alternatives for refinancing our capital
structure which could include raising additional equity, selling some of our
assets or restructuring the Senior Credit Facility. There can be no assurances
that this course of action will be successful. Our failure to refinance our
capital structure would require us to significantly curtail our operations and
would raise substantial doubt about our ability to continue as a going concern.
In this event, we may be forced to seek protection under the Bankruptcy Code or
we may be forced into a bankruptcy proceeding by these lenders.

     Net cash provided by operating activities for the year ended December 31,
2001 was approximately $3,984,000 as compared to net cash used in operating
activities of approximately $7,685,000 for the prior year,

                                        49
<PAGE>

an increase of $11,669,000. The following table summarizes the different
components of cash provided by (used in) operating activities for the years
ended December 31, 2001 and 2000.

     Dollar amounts in thousands:

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Net loss....................................................  $(48,163)  $(12,475)
Non-cash charges............................................    40,507     12,363
Decrease (Increase) in accounts receivable..................     2,207    (11,439)
Decrease (Increase) in inventories..........................     4,057     (1,992)
Changes in other working capital............................     5,376      5,858
                                                              --------   --------
Net cash provided by (used in) operating activities.........  $  3,984   $ (7,685)
                                                              ========   ========
</Table>

     Non cash charges consist primarily of depreciation expense, amortization of
intangibles, deferred income tax provision (benefit), amortization of deferred
financing costs and discounts on convertible debentures, beneficial conversion
features, non-cash restructuring and asset impairment charges and the write-down
of a claim receivable, discussed in Results of Operations below.

     Net cash used in investing activities for the year ended December 31, 2001
was approximately $3,029,000 as compared to approximately $24,336,000 for the
year ended December 31, 2000. The decrease is due primarily to a significant
reduction in capital expenditures at the plastic lumber division, whose major
capital expansion was completed in 2000.

     Net cash used in financing activities during 2001 totaled approximately
$2,255,000, as compared to cash provided by financing activities of
approximately $32,424,000 during the prior year. In 2000 we received new
financing of $45,000,000 from our current Senior Credit Facility while paying
down the previously existing credit facility. We also received $14,600,000 in
equipment financing in 2000 from our Master Credit Facility. In addition, during
2000 we issued convertible subordinated debentures and preferred stock, net of
issuance costs of $13,546,000 compared to 2001 where we issued $6,735,000 of in
preferred stock, common stock and convertible debentures.

     At December 31, 2001 we had a working capital deficit of approximately
$60,525,000, as compared to net working capital of approximately $10,965,000 at
December 31, 2000. We had cash and cash equivalents on hand in the amount of
$912,000 at December 31, 2001.

     On February 2, 2000 we issued a 5% $7,500,000 convertible subordinated
debenture (the "Fiscal 2000 Debenture"), which is convertible into shares of our
common stock. The original conversion price of the Fiscal 2000 Debenture was the
lower of $9.65 or the lowest trading price of our common stock during the four
trading days prior to the conversion date, but not less than $8.25 (the "minimum
floating conversion price"). The convertible debenture includes a provision
that, in the event that the market price of the common stock of the Company is
less than $8.25 for ten consecutive trading days after the first anniversary of
the issuance of the debenture, the holder of the debenture may give notice to us
which would require us to, at our option, (a) repurchase the debenture for a
cash price equal to 110% of the outstanding principal amount of the debenture
plus accrued interest, or (b) reset the minimum floating conversion price to
zero (which changes the conversion price to the market price upon conversion,
not to exceed $9.6525). The right of the debenture holder to convert the
debenture to common stock is limited in that the holder may not convert the
debenture if upon such conversion the holder will become a beneficial owner of
more than 9.9% of the total issued and outstanding shares of our common stock.
If the holder elects to convert and the entire debenture cannot be converted due
to this limitation, we must settle in cash that portion of the debenture which
cannot be converted to stock when the debenture matures in February of 2005, at
110% of the sum of the outstanding balance of the debenture that is in excess of
the limitation and accrued but unpaid interest and default payments.

     On February 20, 2001 the holder of the Fiscal 2000 Debenture exercised its
option to have us repurchase the debenture for cash at 110% of the outstanding
principal balance plus accrued interest or reset the

                                        50
<PAGE>

minimum floating conversion price to zero. We elected not to repurchase the
debenture and the minimum floating conversion price was effectively reset to
zero. During 2001 the holder of the Fiscal 2000 Debenture converted $2,191,494
of the debenture and $23,801 of unpaid interest into 2,134,742 shares of common
stock at prices ranging from $1.00 to $1.05 per share. Also during 2001, the
balance of the Fiscal 2000 Debenture increased by $201,764 resulting from
interest that was paid in kind. As of December 31, 2001 the outstanding balance
on the Fiscal 2000 Debenture was $5,583,579, net of unamortized discounts.

     During the first quarter of 2002 the holder of the Fiscal 2000 Debenture
converted an additional $697,000 of principal and $5,105 of unpaid interest into
1,903,031 shares of common stock. We will record a beneficial conversion feature
of approximately $323,000 in connection with these conversions.

     On June 15, 2001, we issued a convertible subordinated debenture due May
31, 2002 in the principal amount of $4.0 million (the "Fiscal 2001 Debenture")
and a warrant to purchase 250,000 shares of our common stock, at an initial
purchase price of $2.00 per share to Halifax Fund, LP ("Halifax"). Halifax paid
us $4.0 million for these securities. The principal amount of the Fiscal 2001
Debenture paid interest at a rate of 18% per year through August 14, 2001. On
August 9, 2001, the Fiscal 2001 Debenture agreement was amended to change the
due date from May 31, 2002 to July 1, 2002.

     We have the option at any time and, upon five business day's notice, to
repurchase all or any part of the Fiscal 2001 Debenture. At August 15, 2001, we
did not repurchase the Fiscal 2001 Debenture, nor did we consummate a
sale/leaseback transaction on some of our assets under the terms described in
the Fiscal 2001 Debenture Purchase Agreement. As a result, Halifax may convert
the principal amount plus accrued interest and any default payments on the
Fiscal 2001 Debenture into shares of our common stock. The conversion price of
the common stock under the Fiscal 2001 Debenture is a price per share equal to
the average of the lowest trading prices of the common stock on the principal
trading market for the common stock during any three trading days during the
twenty-two trading days immediately prior to the conversion date. Because the
Fiscal 2001 Debenture was not repurchased by August 15, 2001 and the
sale/leaseback was not completed, in accordance with the terms of the Fiscal
2001 Debenture we: (i) issued to Halifax for no consideration another Warrant to
purchase 250,000 shares of our common stock at a purchase price per share equal
to 120% of the closing market price of such stock on August 15, 2001, which was
$0.90 per share and, (ii) increased the interest rate from 18% to 25%. As of
December 31, 2001 the outstanding balance on the Fiscal 2001 convertible
debenture was $3,579,144, net of unamortized discounts.

     As part of the financing, we also granted a subordinate lien on all of our
assets to Halifax through a Security Agreement, which also secures our
obligations under the Fiscal 2000 Debenture due February 5, 2005 and the $1.0
million stated value of the our Series D Convertible Preferred Stock previously
sold to Halifax. In addition, the Fiscal 2001 Debenture Purchase Agreement with
Halifax required that the shares and associated warrants underlying the Fiscal
2001 Debenture be registered within 90 days of the June 15, 2001 closing date of
the agreement. The Fiscal 2001 Debenture Purchase Agreement provides that the
Company pay in cash a default payment of 2.5% of the sum of the outstanding
principal amount of the Fiscal 2001 Debenture plus the accrued interest for each
thirty day period that the shares are not registered. As of December 31, 2001 we
had not filed a registration statement to register these shares and we accrued
$350,000 in penalties due Halifax as a result of our failure to register these
shares. We will continue to accrue additional penalties in the amount of
$100,000 per month until the Fiscal 2001 debenture is retired or we file a
registration statement with the SEC and the SEC declares it effective. We expect
to file a registration statement with the SEC to register these shares, as well
as the shares issued in the private placements discussed in the following
paragraph, by June 30, 2002. However, there can be no assurances as to when the
SEC will declare this registration statement effective, or if it will do so at
all.

     On July 3, 2001, we issued 476,191 shares of common stock to ZLP Master
Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology Fund,
LTD. at a purchase price of $1.05 per share. This private placement transaction
was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. Net proceeds after issuance costs of approximately $983,000
were used for general corporate purposes. Because we did not, within 60 days of
July 3, 2001, file a registration statement with the SEC to register the resale
of these shares as

                                        51
<PAGE>

required under the stock purchase agreement, we are required to pay a cash
penalty fee to the purchasers of these shares at a rate equal to 1.5% of the
outstanding amount purchased for each 30-day period that a registration
statement is not filed. As of December 31, 2001 we had not filed a registration
statement to register these shares for resale and $60,000 has been accrued in
connection with this penalty fee. We will continue to accrue additional
penalties in the amount of $15,000 per month until such time as a registration
statement is filed with the SEC. On November 1, 2001 we raised an additional
$752,000, net of issuance costs, through the issuance of 1,334,000 shares of
common stock. These private placement transactions were not registered under the
Securities and Exchange Act of 1934 (the "Act") in reliance upon the exemption
from registration in Section 4(2) of the Act, as transactions not involving any
public offering. Because we have 60 days from the date of issuance, or until
January 1, 2002, to file a registration statement for these shares, we have not
yet accrued any penalties for the November 1, 2001 private placement. However,
we will accrue 1.5% of the gross proceeds, or $12,000 per month, beginning in
January of 2002 for each 30 day period for which we have not filed a
registration statement.

     In September of 2000 we issued 1,187,285 shares of our Series D Preferred
Stock. The Series D Preferred Stock pays a quarterly cash dividend at an annual
rate of 15%, with the initial dividend payable on March 31, 2001. Each share of
Series D Preferred Stock was convertible into one share of the Company's common
stock at the option of the holder, subject to certain rights of the Company. If
these rights are not exercised, the Series D Preferred Stock automatically
converts into common stock on March 1, 2002. The net proceeds of $4,100,000 from
the issuance of Series D Preferred Stock were used for general corporate
purposes.

     We did not pay any of the required cash dividends on the Series D Preferred
Stock due to a deterioration in our financial condition. Dividends in arrears on
the Series D Preferred Stock amounted to $808,631 at December 31, 2001 and
$911,466 at February 28, 2002. On February 28, 2002 we issued a promissory note
to each holder of Series D Preferred Stock for the corresponding amount of
unpaid dividends owed to each holder. The notes pay quarterly interest at 5% per
annum and are due April 1, 2004. On March 1, 2002 all of the 1,187,285 shares of
outstanding Series D Preferred Stock were converted into an equal number of
shares of common stock.

     In November of 2000 through March 2001, we issued 1,714,285 shares of our
Series E Preferred Stock to the Stout Partnership, our largest shareholder.
Several members of our board of directors and a member of our management are
affiliated with Stout Partnership. The Series E Preferred Stock pays a monthly
cash dividend at an annual rate of 10%, with the initial dividend payable on
January 15, 2001. All of the Series E Preferred Stock is held by the Stout
Partnership, our largest shareholder. Several members of our board of directors
and a member of management are affiliated with the Stout Partnership. Each share
of Series E Preferred Stock is convertible into one share of our common stock at
the option of the holder, subject to the rights of the Company. If these rights
are not exercised, the Series E Preferred Stock was to have automatically
converted into common stock on March 1, 2002. The net proceeds of $3,000,000
from the issuance of Series E Preferred Stock were used for general corporate
purposes. There were no dividends in arrears on the Series E Preferred Stock as
of December 31, 2001 or February 28, 2002. On March 4, 2002 our Board of
Directors extended the automatic conversion date of the Series E Preferred Stock
to March 31, 2002.

     On June 30, 2000 we terminated our previously existing line of credit and
entered into a new three-year Senior Credit Facility with three banks. The
Senior Credit Facility provides for a $30,000,000 term loan and a $15,000,000
revolving credit line. During 2000, the Senior Credit Facility allowed us to
select from two interest rate options, one based on a spread over the prime rate
and the other based on a spread over the Eurodollar deposit rate. The spread
above each interest rate option was determined by our ratio of consolidated debt
to EBITDA. Effective with the second amendment to the Senior Credit Facility
dated March 12, 2001 the interest rate on all borrowings under the Senior Credit
Facility was the prime rate plus 350 basis points.

     Proceeds from the Senior Credit Facility were used to pay down
approximately $8.7 million of the Company's existing indebtedness and for
general corporate purposes. At December 31, 2001 we had outstanding borrowings
under the Senior Credit Facility of $37,400,000, plus an additional $2,495,000
of deferred interest, fees and penalties.

                                        52
<PAGE>

     The Senior Credit Facility requires the maintenance of defined levels of
net worth, various financial performance ratios and restrictions on capital
expenditures, dividend payments, acquisitions and additional indebtedness.

     At September 30, 2000 we were not in compliance with certain covenant
requirements of the Senior Credit Facility for which we received waivers and
amendments dated November 13, 2000. In addition to an interest rate increase of
200 basis points and amendment fees of $428,125, the terms of the amendments
required us to raise a minimum of $2 million in equity or equity equivalents
prior to November 30, 2000, an additional $2 million prior to December 26, 2000,
and an additional $500,000 prior to January 31, 2001. The amended terms also put
further limits on our capital expenditures, and gave the senior lenders the
option to permanently reduce their commitment on the revolving credit line when
payments were made on that portion of the Senior Credit Facility by the amount
paid.

     At December 31, 2000, we were not in compliance with certain financial
covenant requirements of our amended Senior Credit Facility, for which we
received a Waiver and Second Amendment dated March 12, 2001. In addition to
amendment fees of $106,250, the terms of the amendment required us to raise an
aggregate of $6,500,000 of equity or equity equivalents prior to February 28,
2002. The Waiver and Second Amendment also put further limits on the Company's
capital expenditures, and contained a provision requiring the Senior Credit
Facility be refinanced or paid in full by April of 2002.

     On July 13, 2001, we entered into a Waiver and Third Amendment to the
Senior Credit Facility ("Waiver and Third Amendment") with our senior lenders,
the primary terms of which were as follows: (i) to extend the required due date
to refinance the Senior Credit Facility until July 1, 2002, (ii) extend terms
relative to the Company's borrowing base as defined in the Amendment and, (iii)
provide for mandatory prepayment when certain outstanding claims of the Company
are collected.

     During 2000, the Company obtained $14,600,000 in new equipment financing
through a Master Credit Facility with GE Capital in order to finance the
expansion of its plastic lumber manufacturing facilities. The Master Credit
Facility is secured by certain equipment and contains a minimum tangible net
worth covenant. At December 31, 2000 we were not in compliance with the minimum
tangible net worth covenant. On March 30, 2001, we entered into amendments on
the Master Credit Facility with GE Capital to waive the tangible net worth
Covenant for the fourth quarter 2000 and amended the covenant for each quarter
of 2001. We were required to accelerate a portion of the principal payments on
the Master Credit Facility and were required to refinance or repay a portion of
the outstanding balance on the Master Credit Facility upon the refinancing or
repayment of the Senior Credit Facility.

     We did not make the payments of $266,667 that were due on December 31, 2001
and December 31, 2000 in connection with an $800,000 note assumed in a 1999
acquisition. On February 4, 2002 we reached an agreement with the holder of the
note, Waste Management Inc., to amend the terms of the note whereby it would be
due in three equal annual installments beginning December 31, 2002. The
agreement also waives the failure to make the aforementioned principal and
interest payments that had been due on December 31, 2001 and 2000.

NEW ACCOUNTING STANDARDS

     In June, 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended, which establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement became
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In accordance with
the transition provisions of SFAS No. 133, we recorded a net-of-tax
cumulative-effect loss of $453,615 in accumulated other comprehensive income to
recognize at fair value two interest-rate swap derivatives that are designated
as a cash-flow hedging instruments. As of September 30, 2001, the net-of-tax
fair value of these derivatives carried as a component of other comprehensive
loss was
                                        53
<PAGE>

$1,123,891. In December of 2001, we received notice from the banks that they
were exercising their rights to terminate the interest rate swap agreements due
to our failure to comply with the terms of the Senior Credit Facility. In
accordance with the termination notice, the banks demanded compensation for
their costs of liquidating their corresponding derivative obligations in the
amount of $1,080,249. We accrued this amount as interest expense in 2001 and
reversed the amounts included within other comprehensive loss in connection with
the fair value of the interest rate swap derivatives. As a result of the
termination of the interest swap agreements in 2001, comprehensive income for
the twelve months ended December 31, 2001 was equal to the net income/loss
amounts presented in our statements of operations.

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

     We were required to adopt the provisions of SFAS No. 141 immediately upon
its issuance and it did not have a material effect on our results of operations
or financial condition. We adopted SFAS No. 142 effective January 1, 2002. SFAS
No. 141 requires that upon adoption of SFAS No. 142 that we evaluate our
existing intangible assets and goodwill that we acquired in prior purchase
business combinations, and make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. Upon adoption of SFAS No. 142, we are required to reassess the useful
lives and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, we are
required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.

     In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 requires us to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. To accomplish this, we
must identify our reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the date of
adoption. We then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds its
fair value, an indication exists that the reporting unit's goodwill may be
impaired and we will be required to perform the second step of the transitional
impairment test. In the second step, we must compare the implied fair value to
all of its assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with SFAS No. 141, to its
carrying amount, both of which would be measured as of the date of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's statement of operations.

     We are currently evaluating the effect that the adoption of SFAS No. 142
may have on our consolidated results of operation and financial position. As of
the date of adoption, we expect to have unamortized goodwill in the amount of
approximately $13,031,000 and an unamortized permit of approximately $8,092,000,
which will be subject to the transition provisions of SFAS No. 141 and 142.
Amortization expense related to goodwill and the permit was approximately
$1,397,000, $1,665,000 and $1,399,000 for the years ended December 31, 2001,
2000 and 1999 respectively.

                                        54
<PAGE>

     Also, in July the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity will capitalize a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier adoption
permitted. We are currently evaluating the effect that the adoption of SFAS No.
143 may have on our consolidated results of operation and financial position.

     On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many
of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the
accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business.
However, it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. The provisions of SFAS No. 144 become
effective for fiscal years beginning after December 15, 2001 and must be adopted
as of the beginning of a fiscal year. Early adoption is encouraged but not
required.

  TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES

     On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to us bearing interest at 10%, with an original maturity date of June 30, 2001.
Several members of our board of directors and a member of our management are
affiliated with the Stout Partnership. The proceeds were used in the purchase of
one of our plastic lumber subsidiaries. The Stout Partnership borrowed the
$5,000,000 from PNC Bank and the individual partners have personally guaranteed
the loan. We paid $529,055 and $321,644 in interest on this loan in 2000 and
1999 respectively.

     On December 1, 2000 the Stout Partnership exchanged the $5,000,000
unsecured loan into a subordinated convertible debenture of an equal dollar
amount which currently matures on July 1, 2002, with interest payable monthly in
arrears at 11.5% per annum. We paid $573,204 of interest on this loan in 2001.
The debenture is convertible into common stock at the lower of $2.00 per share
or the lowest closing price of our common stock during the four trading days
prior to but not including the conversion date. The debenture is convertible at
any time, in whole or part, at the option of the holder. In consideration of the
Stout Partnership exchanging its unsecured loan for a subordinated convertible
debenture and providing funding through Series E Preferred Stock, we granted to
the Stout Partnership 250,000 warrants at the exercise price of $1.50 per share.
In consideration for extending the maturity date of the debenture from December
1, 2001 to July 1, 2002, and because some of our assets were not disposed of as
of June 1, 2001, on June 1, 2001 we granted an additional 250,000 warrants to
purchase our common stock to the Stout Partnership at an exercise price of $1.50
per share. In addition, during 2000 and 2001 Stout Partnership provided us with
additional funding of $3,000,000 through the Series E Preferred stock private
placement. All of the Series E Preferred Stock was to have converted on March 1,
2002. On March 4, 2002 our Board of Directors extended the automatic conversion
date of the Series E Preferred Stock to March 31, 2002.

     On March 1, 2002 all of our outstanding Series D Preferred Stock was
automatically converted into an equal amount of our common stock in accordance
with the Series D Certificate of Designation. The dividends in arrears
pertaining to the Series D Preferred Stock was converted into a note payable to
each holder of the Series D Preferred Stock in pro rata amounts based on the
amount of shares held by each party. In connection with this conversion, A.C.
Schultes, Inc., a corporation controlled by August C. Schultes, III, a director
of the Company, received a note payable in the amount of $110,864. Also in
connection with the conversion, a note

                                        55
<PAGE>

payable in the amount of $32,979 was issued to Consultants and Planners, Inc.
Gary Ziegler, a director of the Company, is affiliated with Consultants and
Planners, Inc.

     In December 2001, Barbella Environmental Technologies, one of our
environmental recycling subsidiaries, ("BET") received notice regarding its
award of a contract with the City of New York to perform environmental services
at the Brooklyn Landfill on Pennsylvania Avenue in the Borough of Brooklyn (the
"Brooklyn Contract"), subject to the satisfaction of certain conditions. These
conditions included the issuance of a performance bond on behalf of BET in the
amount of $57.5 million at the time of the execution of the Brooklyn Contract.
Due to the deterioration in our financial condition during the past year, the
insurance company underwriting the performance bond requested a $4.0 million
letter of credit and personal guarantors with liquid net worth of approximately
$15.0 million in order to issue the performance bond. Neither BET nor us was
able to deliver the required letter of credit or to obtain any third parties
interested in providing collateral and/or guarantees on our behalf without
taking a major portion of the profits from the Brooklyn Contract. During the
course of the negotiations with the prospective purchaser of Clean Earth, the
purchaser indicated that the receipt of the Brooklyn Contract was critical to
the purchaser's decision to proceed with the Clean Earth sale transaction. In
order to permit BET to obtain the Brooklyn Contract and to avoid the termination
of negotiations related to the Clean Earth sale transaction, Mark S. Alsentzer,
the Company's director, Chairman, and Chief Executive Officer, and Mr. Schultes
established a group of personal indemnitors, including family members and
affiliates of the two directors as well as third parties, who were willing to
provide the letter of credit and guarantee for the issuance of the performance
bond in exchange for a fee of $862,500. In the event that we are successful in
completing the proposed transaction to sell Clean Earth, the purchaser will pay
a portion of this fee.

     We have a professional services contract with Rosetto & Associates LLC, a
private law firm, that performs legal work for us as well as for unrelated third
parties. Mr. Rosetto, our Executive Vice President, General Counsel and
Secretary, is the sole principal of Rosetto & Associates. Rosetto & Associates
billed us $523,305, $465,145 and $355,377 for legal services for the years ended
December 31, 2001, 2000 and 1999, respectively, which includes payments to
outside attorneys and consultants for the benefit of the Company. We billed
$160,800, $160,800 and $206,514 to Rosetto & Associates for use of office space,
office equipment and other shared services during the years ended December 31,
2001, 2000 and 1999, respectively. In addition, Rosetto & Associates has paid
out of pocket expenses on behalf of us for outside attorneys' and consulting
fees of approximately $250,000, $200,000 and $130,000 for the years ended
December 31, 2001, 2000 and 1999 respectively. Strategic Alliance Group, LLC,
which provides redevelopment services for landfills and other industrial
properties, may consider engaging the services of the Company in connection with
its operations, including, but not limited to, retaining Clean Earth as a
subcontractor in connection with a landfill contract between Strategic Alliance
Group, LLP and the City of Linden, New Jersey. Some of the Company's officers
and employees, including Mark Alsentzer and Bruce Rosetto, own a minority
interest in Strategic Alliance Group, LLC.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We have identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. The listing is not
intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on our business operations are
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to the Consolidated Financial
Statements in Item 8 on Form 10-K. Note that our preparation of this Form 10-K
requires us to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period. There can be no assurance that actual
results will not differ from those estimates.

                                        56
<PAGE>

  REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

     We recognize a significant portion of the revenue and profit at our
environmental recycling division as work progresses on long-term contracts using
the percentage-of-completion method, which relies on estimates of total expected
contract revenue and costs. Recognized revenues and profit are subject to
revisions as the contract progresses to completion, and a liability is recorded
for estimated losses, if any, on uncompleted contracts. Revenues from our
plastic lumber division are recognized at the date the products are shipped and
risk of ownership transfers to the customer. Title passes to the customer upon
shipment of the goods. We generally do not accept returns or issue credits for
damaged or defective merchandise if not notified by the customer within five
days from the date of delivery. In the event we accept a claim from a customer,
we have sole discretion with regard to replacing the goods, repairing the
product or issuing a credit to the customer. We provide for the estimated cost
of product warranties at the time revenue is recognized and have established an
accrued liability that we believe is sufficient to handle product warranty and
liability issues based upon our historical experience to date. We perform
ongoing credit evaluations of our customers and adjust credit limits based upon
payment history and the customers' current credit worthiness, as determined by
our review of their current credit information. We continuously monitor
collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that have occurred in the past. Our accounts receivable balance as of
December 31, 2001 was approximately $37.3 million, net of allowance for doubtful
accounts of approximately $5.2 million.

  INVENTORY

     We value our inventory at the lower of the actual cost to purchase and/or
manufacture the inventory or the current estimated market value of the
inventory. We write down our finished goods inventory for estimated obsolescence
equal to the difference between the cost of that inventory and either its market
value or its value as a raw material to be reused in our manufacturing process.

  PROPERTY, PLANT AND EQUIPMENT

     We record our property, plant and equipment at cost and depreciate over the
estimated useful life of the asset on a straight-line basis. We periodically
test our property, plant and equipment for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. The conditions that would trigger an impairment assessment of our
property, plant and equipment would include, but not be limited to, a
significant, sustained negative trend in our operating results or cash flows, a
decrease in demand for our products, a change in the competitive environment and
other industry and economic factors. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
net cash flows expected to be generated by the asset. If such assets are deemed
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets
based on the projected net cash flows discounted at a rate commensurate with the
risk of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. We recorded impairment charges
on property, plant and equipment of approximately $8.7 million, $2.3 million and
$1.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.

  ACQUIRED INTANGIBLES

     Acquired intangibles consist of goodwill and permits. We continually
evaluate whether events and changes in circumstances warrant revised estimates
of useful lives or recognition of an impairment loss of unamortized acquired
intangibles. The conditions that would trigger an impairment assessment of
unamortized acquired intangibles include a significant, sustained negative trend
in our operating results or cash flows, a decrease in demand for our products, a
change in the competitive environment and other industry and economic factors.
We assess the recoverability of acquired intangibles by determining whether the
amortization of the balance over their remaining lives can be recovered through
undiscounted future cash flows using a

                                        57
<PAGE>

discount rate commensurate with the risk of the acquired intangibles. For the
year ended December 31, 2001, we recorded a charge of approximately $14.6
million in connection with impairment of acquired intangibles.

  ACCOUNTING FOR INCOME TAXES

     As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $18.8 million as of December 31, 2001, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward and merger
accrual and other accrued expenses, before they expire. The valuation allowance
is based on our estimates of taxable income and the period over which our
deferred tax assets will be recoverable. In the event that actual results differ
from these estimates, or we adjust these estimates in future periods, we may
need to establish an additional valuation allowance which could materially
impact our financial position and results of operations. The net deferred tax
asset as of December 31, 2001 was $0, net of the valuation allowance.

BUSINESS COMBINATIONS

     The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations. See Note 4 to the consolidated financial
statements for summaries of the business combinations completed in 2000 and
1999. Several of the 1999 acquisitions were accounted for as a pooling of
interests. Accordingly, all amounts in the financial statements and related
notes include the accounts of the pooled companies as if the mergers took place
on January 1, 1998. Charges for merger related expenses in connection with these
pooling of interests totaling $1,035,000 in the environmental division and
$810,000 in the plastic lumber division were recorded in 1999.

RESTRUCTURING, AND ASSET IMPAIRMENT CHARGES

  2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

     In September of 2001 we announced the closing of three of our manufacturing
facilities and the leasing of two of our resin processing plants to third
parties in an effort to reduce fixed costs, improve customer service and narrow
management's focus to a smaller number of manufacturing facilities, without
reducing total manufacturing capacity. With the exception of activities
associated with exiting the facilities, the Fontana, California, Denton,
Maryland, and Trenton, Tennessee plants were closed on September 28, 2001 and
the equipment and manufacturing processes at these plants were transferred to
the Chicago, Illinois and Ocala, Florida manufacturing locations. We are
currently attempting to obtain a buyout or sublease of the closed facilities. In
addition, we have discontinued raw material processing at our Auburn,
Massachusetts and Chino, California resin plants have sub-leased these
operations to other raw material processors. We will continue raw material
processing for our own use at the Chicago and Ocala plants. Approximately 140
full time manufacturing and administrative positions were eliminated in
connection with the reduction in facilities. We expect to save approximately $4
million annually, primarily in fixed manufacturing costs as a result of reducing
the number of facilities we operate in. The plan of restructure was adopted by
management and the board of directors and communicated to employees in late
September of 2001. During the fourth quarter of 2001, we

                                        58
<PAGE>

recorded an acquired intangibles impairment charge related to the environmental
division of $13.5 million. The following is a summary of the restructuring and
asset impairment charge recorded in the third and fourth quarter of 2001:

<Table>
<S>                                                            <C>
Write-down for equipment impairment.........................   $ 8,694,000
Write-down for acquired intangibles impairment..............    14,616,000
Lease termination, severance and other exit costs...........     1,656,000
                                                               -----------
          Total restructuring and asset impairment
            charges.........................................   $24,966,000
                                                               ===========
</Table>

     During 2001 we paid approximately $761,000 in employee termination, lease
termination and other exit costs in connection with the restructuring and
approximately $895,000 remains in the accrual as of December 31, 2001, primarily
for lease termination expenses.

  2000 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

     In the fourth quarter of 2000, we committed to a plan of restructure with
respect to some of the smaller plants in our plastic lumber division. In
connection with the plan of restructure, the Reidsville, North Carolina plant
was closed in October of 2000, the Green Bay, Wisconsin and Vernon, California
plants were closed in January 2001 and the Sweetser, Indiana facility was closed
during the third quarter of 2001. As a result, we recorded the following charges
in the fourth quarter of 2000:

<Table>
<S>                                                            <C>
Write-down for equipment impairment.........................   $2,319,000
Lease termination and other exit costs in connection with
  the restructuring.........................................    1,098,000
                                                               ----------
          Total restructuring charges in 2000...............    3,417,000
                                                               ==========
</Table>

     As of December 31, 2000, we had accrued $1,098,000 in connection with lease
termination costs. During 2001 we paid approximately $564,000 in lease
termination payments and charged this amount against the accrual. In addition,
we reversed approximately $154,000 of the accrual for other exit costs related
to the 2000 restructuring due to a change in estimate. As of December 31, 2001,
we had approximately $380,000 remaining in our 2000 restructuring accrual for
lease termination payments. During 2000 and early 2001, we eliminated
approximately 300 employees as part of the 2000 restructuring plan. The
severance component of the restructuring plan was communicated to the employees
in early January 2001. As a result, we recorded a charge of $182,000 in the
first quarter of 2001 in connection with severance. The entire $182,000 cost of
these severance benefits was paid in 2001 and no balance remains in this
accrual.

  1999 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

     During the first quarter of 1999, we committed to a plan to restructure and
consolidated our two operating divisions and facilities. As part of this plan,
the plastic lumber division discontinued the labor intensive flow mold process
and converted entirely to the more efficient continuous extrusion method of
manufacturing plastic lumber. As a result, we closed our facility in Mulliken,
Michigan and one of our facilities in Trenton, Tennessee and recorded the
following charges during the first quarter of 1999:

<Table>
<S>                                                            <C>
Write-down of flow mold inventory to its raw material
  Value.....................................................   $2,025,000
Write-down of flow mold equipment to its salvage value......    1,315,000
Severance costs in connection with the restructuring........    1,075,000
Exit costs in connection with the restructuring.............    1,330,000
                                                               ----------
                                                               $5,745,000
                                                               ==========
</Table>

     Of the total charges recorded, $4,365,000 was recorded by the plastic
lumber division and $1,380,000 was recorded by the environmental division, which
includes the closing of the environmental division's Norristown, Pennsylvania
facility. The write-down of flow mold inventory was recorded as a component of
gross profit within the accompanying consolidated statement of operations.
Severance costs relates to the 61 employees

                                        59
<PAGE>

from plants that were planned to be closed during the year. Exit costs consist
primarily of lease termination and idle plant costs during the changeover.

     During 1999, we terminated 53 employees and paid $697,000 in severance
costs. In addition, we charged $973,000 to the exit cost accrual primarily for
lease termination and idle plant costs. As of December 31, 1999, we had
approximately $378,000 remaining in severance reserves and approximately
$357,000 remaining in exit cost reserves, which are primarily for lease
termination costs.

     During 2000, we determined that we had $232,000 of excess accrual from the
restructuring charges recorded during the first quarter of 1999. The residual
excess reserve was reversed in 2000. As of December 31, 2001, no amount remains
in exit cost accruals pertaining to the 1999 restructuring.

     The following table sets forth sales, with percentages of total sales, and
costs of goods sold, selling, general and administrative expenses and operating
income, along with percentages of the applicable segment revenue, for each of
the Company's two business segments. The table also shows operating income for
each segment exclusive of the aforementioned merger, restructuring and asset
impairment charges of $24,994,000, 3,185,000 and $7,590,000 for 2001, 2000 and
1999 respectively.

<Table>
<Caption>
                                                       YEAR ENDED DECEMBER 31,
                                       --------------------------------------------------------
                                         2001       %        2000       %        1999       %
                                       --------   -----    --------   -----    --------   -----
                                                        (DOLLARS IN THOUSANDS)
<S>                                    <C>        <C>      <C>        <C>      <C>        <C>
Sales, net:
  Plastic Lumber.....................  $ 57,830    33.2    $ 73,214    42.1    $ 53,046    38.3
  Environmental Recycling............   116,220    66.8     100,530    57.9      85,499    61.7
     Total revenue...................   174,050   100.0     173,744   100.0     138,545   100.0
Cost of goods sold:
  Plastic Lumber.....................    52,696    91.1      66,489    90.8      36,301    68.4
  Environmental Recycling............    98,650    84.9      82,427    82.0      63,876    74.7
Selling, General and Administrative:
  Plastic Lumber.....................    13,546    23.4      15,087    20.6       9,096    17.1
  Environmental Recycling............    13,211    11.4       9,257     9.2       9,506    11.1
  Corporate..........................     5,563     3.2       3,166     1.8       1,938     1.4
Restructuring and asset impairment
  Plastic Lumber.....................    11,494    19.9       3,185     4.4       4,365     8.2
  Environmental Recycling............    13,500    11.6          --      --       1,380     1.6
Merger expenses
  Plastic Lumber.....................        --      --          --      --         810     1.5
  Environmental Recycling............        --      --          --      --       1,035     1.2
Operating (Loss) income by segment:
  Plastic Lumber.....................   (19,906)  (34.4)    (11,547)  (15.8)      2,474     4.7
  Environmental Recycling............    (9,141)   (7.9)      8,846     8.8       9,702    11.3
  Corporate..........................    (5,563)   (3.2)     (3,166)   (1.8)     (1,938)   (1.4)
                                       --------            --------            --------
     Corporate.......................   (34,610)  (19.9)     (5,867)   (3.4)     10,238     7.4
Operating (Loss) income by segment
  excluding restructuring, asset
  impairment and merger expenses:
  Plastic Lumber.....................    (8,412)  (14.5)     (8,362)  (11.4)      7,649    14.4
  Environmental Recycling............     4,359     3.8       8,846     8.8      12,117    14.2
  Corporate..........................    (5,563)   (3.2)     (3,166)   (1.8)     (1,938)   (1.4)
                                       --------            --------            --------
     Consolidated....................    (9,616)   (5.5)     (2,682)   (1.5)     17,828    12.9
</Table>

                                        60
<PAGE>

RESULTS OF OPERATIONS

  YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

  Consolidated Revenues and Operating (Loss) Income

     Revenues in 2001 were $174,050,000, compared $173,744,000 in 2000, as the
$15,690,000 revenue increase in environmental recycling revenues was almost
entirely offset by a similar revenue decline at the plastic lumber division. The
operating loss in 2001, excluding restructuring and asset impairment charges,
was $9,616,000 compared to in an operating loss of $2,682,000 for 2000. The
increase in operating loss was due primarily to a write down of a receivable
from a large governmental agency of approximately $3.2 million, declining gross
profit margins at both divisions and increased selling, general and
administrative expenses.

     In 1999 and 2000 our environmental recycling division was involved in a
project with the Pennsylvania Department of Environmental Protection ("PaDEP")
in which work was performed beyond the original scope of the project. The
additional work was required in order to meet the objectives of the project,
which were mutually agreed upon by the PaDEP and us, and to avoid further
consequential damages. The reasons for the increased work, and the costs
associated with this work, included a change in federal regulations after the
contract was signed which altered the treatment criteria for certain materials,
an increase in the amount of soil required to be treated of 123% above the
amount indicated necessary by PaDEP, a change in off-site disposal requirements
after the contract was awarded, a change in permitted methods of treating waste
material after the contract was awarded, an increase above what was estimated in
the contract in waste material required to be excavated and unforeseen weather
conditions resulting in significant expenses to treat and dispose of rain water
runoff from adjoining property. When the project was completed, we put in a
claim to PaDEP for approximately $6.7 million as compensation for this
additional work, an amount which was disputed by PaDEP. We retained outside
counsel and two independent consulting firms with experience in these matters to
represent us, and at December 31, 2000 we had a receivable balance of
approximately $4.2 million in connection with this claim. This amount was based
on management's expectation of recovery of the extra costs, as well as the
advice of our outside counsel as to what we were likely to recover upon
completion of the dispute resolution process. On July 19, 2001 PaDEP offered to
pay us approximately $284,000 in full and complete settlement of this claim. We
rejected this offer and demanded a pre-settlement hearing on this matter, which
took place on November 19, 2001. On January 4, 2002 PaDEP rendered a
pre-settlement hearing decision and recommended a payment to us of approximately
$1 million. Because we strongly believe in the merits of our claim and our
ability to support it with the appropriate facts, documentation and expert
opinions, we also rejected this offer and proceeded with the next step in the
dispute resolution process, which is a formal hearing with the Board of Claims
for Pennsylvania. As previously discussed, on December 29, 2001 we entered into
an agreement to sell Clean Earth. Under the terms of the agreement we retained
all of the rights to this claim for payment. While we believe the expertise of
the necessary personnel from Clean Earth will be available to us in any future
litigation with respect to this matter, there can be no assurances we will have
access to this important resource. While we have every intention of pursuing
this claim for the full amount, we established an allowance for this receivable
for the difference in the amount offered us in the January 4, 2002 decision and
the carrying amount, resulting in a $3,180,000 charge to bad debt expense at
December 31, 2001.

  Net Sales By Segment

     Sales of plastic lumber products decreased by 21% in 2001 to $57,830,000
compared to $73,214,000 in 2000. The decrease was primarily due to our
discontinuance of selling resin to third party customers. Excluding resin sales,
sales decreased by $1,796,000, or 3.3% in 2001, as lower sales of slipsheet,
fabricated and structural lumber sales were partially offset by increased sales
for our Carefree 100% plastic decking materials and for cornerboard packaging
products. Plastic lumber revenues were negatively impacted by certain
operational inefficiencies where we were not able to fill some orders for
decking products during the height of the building season, and we have taken
corrective action to address these issues.

     Environmental recycling division revenues increased by 16% in 2001 to
$116,220,000 compared to $100,530,000 in 2000. These increased revenues were
related to an increase in major projects in the dredging

                                        61
<PAGE>

and construction services operations as compared to 2000, as well as a new ash
recycling contract awarded to us in early 2001.

  Gross Profit

     Consolidated gross profit in 2001 decreased by $2,124,000, or 9%, compared
with 2000. The plastic lumber division's gross profit decreased by $1,591,000,
or 24% compared to 2000, mainly due to lower sales. The plastic lumber
division's gross margin as a percentage of sales also declined, from 9.2% in
2000 to 8.9% in 2001. The division's performance was negatively impacted by an
underabsorption of manufacturing overhead resulting from operating as many as
nine different manufacturing and recycling facilities while experiencing sales
declines in several product lines. We concluded from these events that in order
to provide the appropriate level of customer service and achieve the operating
margins that are necessary to compete in the businesses in which we operate, we
needed to restructure our manufacturing "footprint" by reducing the number of
facilities we operate in without reducing our overall manufacturing capacity. We
believe we have accomplished this with the final phase of our restructuring plan
which began in the fourth quarter of 2000 (see -"Restructuring, Equipment and
Inventory Impairment Charges").

     Gross profit at the environmental recycling division decreased by $533,000
in 2001, or 3%, as compared to 2000. The decrease was due to an increase in
lower margin project work, and, to a lesser extent, anticipated losses on a
particular contract which was recorded in the fourth quarter of 2001. As a
percentage of net sales, gross margin for the environmental recycling division
decreased from 18% in 2000 to 15.1% in 2001.

  Selling, General and Administrative Expenses ("SG&A")

     Selling, general and administrative expenses ("SG&A") increased by
$4,810,000 in 2001 to $32,320,000 compared to $27,510,000 in 2000. SG&A expenses
at the environmental recycling division increased by $3,954,000 in 2001,
primarily due to the $3.2 million charge to bad debt expense previously
discussed. The plastic lumber division decreased its SG&A expenses by $1,541,000
as significant reductions in marketing, selling and administrative overhead were
partially offset by an accrual of $1,844,000 in connection with the Southern
Wood litigation award (see "Legal Matters"). Corporate SG&A expenses increased
by $2,397,000, mainly due to expenses related to the common stock purchase
agreement with Fusion Capital ($555,000), increased legal expenses due to
Southern Wood litigation and, to a lesser extent, employee litigation
($495,000), legal and other expenses associated with the proposed sale of Clean
Earth ($312,000), an increase in workers' compensation liabilities ($662,000)
and increased legal, printing and audit fees ($150,000) in connection with our
filing a registration statement and the subsequent review by the SEC. As a
percentage of net sales, SG&A increased to 18.6% in 2001 from 15.8% in 2000.

  Interest Expense

     Interest expense increased by $5,803,000 in 2001 to $12,840,000 as compared
to $7,037,000 in 2000. The change was due primarily to an increase in
amortization of deferred financing costs ($1,606,000), increased amortization of
discounts on convertible subordinated debentures ($588,000), termination of our
interest rate swap derivative agreements ($1,080,000) and penalties associated
with our failure to file a registration statement in connection with the
issuance of a convertible subordinated debenture and a common stock private
placement ($410,000) in 2001. The $4,000,000 convertible subordinated debenture
issued on June 15, 2001 paid interest at 18% through August 15, 2001 and 25%
thereafter. The remainder of the increase was mainly due to amendments in our
Senior Credit Facility in 2001 whereby we were prohibited from borrowing based
on the more favorable LIBOR rates that were available to us in 2000, and which
increased the spread over the prime rate by an additional 150 basis points.

  Income Tax Expense (Benefit)

     We recorded a provision for income taxes in 2001 of $712,000, as compared
to an income tax benefit of $1,188,000 in 2000. During 2001 we determined that
it was more likely than not that we would fail to generate sufficient pre-tax
income to use any net deferred tax assets. As such, we wrote off the net
deferred tax asset of

                                        62
<PAGE>

$672,000 that existed at December 31, 2000 and increased our valuation allowance
so that no net tax benefit was recorded in 2001.

  YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

  Consolidated Revenues and Operating (Loss) Income

     Revenues in 2000 were $173,744,000, an increase of $35,200,000, or 25.4%,
over 1999. Approximately $ 9,439,000 of the increased revenues is attributable
to Plastic Lumber operations acquired in 2000. As a result of deterioration in
gross profit margins at the plastic lumber division and a shift in revenue mix
to lower margin services at the Environmental Division, operating income versus
1999 was reduced by $20,510,000, resulting in an operating loss, excluding
restructuring and asset impairment charges, of $(2,682,000) for 2000.

  Net Sales By Segment

     Sales of plastic lumber products increased by 38% in 2000 to $73,214,000
compared to $53,046,000 in 1999. Approximately $9,439,000 of the increased
revenues is attributable to Plastic Lumber operations acquired in 2000. As a
result of capital expenditures in 2000 to increase capacity, the plastic lumber
division's California, Maryland and Florida manufacturing facilities accounted
for $6,983,000 of the increased internal growth for the plastic lumber division.

     Environmental recycling division revenues increased by 18% in 2000 to
$100,530,000 compared to $85,498,000 in 1999. These increased revenues are
related to several significant projects started in 2000 at the division's
environmental construction operations. Environmental Recycling revenues were
negatively impacted by abnormally wet weather in the northeastern United States
in the first quarter of 2000, which affected all of the soil recycling plants.
In addition, revenues were negatively impacted by the three-month shut down of
the Soil Remediation of Philadelphia (SRP) facility, now known as Clean Earth of
Philadelphia, Inc. ("CEP"), which was retrofitted to process additional waste
streams under its newly expanded permit.

  Gross Profit

     Consolidated gross profit decreased by $13,540,000, or 35%, compared with
1999, excluding inventory impairment charges. The plastic lumber division's
gross profit decreased $10,020,000, or 60% compared to 1999, excluding inventory
impairment charges. Approximately $1 million of this decrease was the result of
returns of SmartDeck product that were accepted from a large customer during the
third quarter of 2000, due primarily to issues with color variation. Gross
profit was also impacted by approximately $1 million of additional expenses
related to the associated handling and regrind costs and the write down of
inventory for the returned product. In late 1999 and 2000, the Company invested
in a major capacity expansion program to accommodate anticipated sales of
SmartDeck for 2000. While SmartDeck sales and production were largely curtailed
in the second half of 2000 due to the aforementioned returns and related quality
issues, the Company continued to incur significant fixed manufacturing overhead
expenses as a result of the capacity expansion, causing further deterioration of
the Company's gross margins throughout the second half of 2000. The returns
accepted from this single large customer were outside the Company's normal
return policy. The Company accepted these returns in order to maintain a
long-term relationship with this customer. Other than occasional returns
customary in the normal course of business, no SmartDeck returns were received
from other customers. Net sales of SmartDeck in 2000 were approximately 8% of
the plastic lumber division's 2000 revenues. Net sales to this single customer
were approximately 7% of the plastic lumber division's 2000 revenues. The
Company has since implemented an extensive engineering and manufacturing program
to ensure that all products entering the distribution system meet rigorous
quality control standards. Gross profit was also negatively impacted by
significantly higher material and direct labor costs. While plans have been put
into place to reduce these costs in the fourth quarter and in 2001, further
increases in the price of oil, which directly impacts our raw material costs,
could adversely affect gross margin. Gross margin as a percent of revenues in
the Plastic Lumber division decreased in 2000, from 31.6% in 1999 to 9.2%,
excluding inventory impairment charges, primarily due to higher material and
labor costs, product returns and associated handling

                                        63
<PAGE>

and regrind costs and the write down of inventory that did not meet the newly
implemented quality control standards.

     Gross profit at the environmental recycling division decreased by
$3,340,000, or 18%, compared to 1999. The decrease was due to a shift in revenue
mix to lower margin replacement revenues for construction services and higher
natural gas prices at two of our five soil recycling plants. Gross margin at the
environmental recycling division decreased to 18.0% in 2000 from 25.3% in 1999.
Reduced soil coming to the Clean Earth New Castle, Clean Rock and CEP
facilities, the shut down of the CEP facility and lower margin replacement
revenues for construction services all contributed to this decline.

  Selling, General and Administrative Expenses ("SG&A")

     Selling, general and administrative expenses ("SG&A") increased by
$6,970,000 in 2000 to $27,510,000 compared to $20,540,000 in 1999. The increase
was primarily due to increases in marketing and promotion and administrative
costs at the plastic lumber division, and increased bad debt expense of
$1,144,000. Approximately $800,000 of the increase in bad debt expense was due
to the bankruptcy filings of three customers and the remainder was due to the
growth in revenues. The three customers that declared bankruptcy in 2000 were
extended credit based on the Company's normal credit review policies. The
Company believed at the time the product was shipped that these customers had
the ability to pay for the products and services received in accordance with the
Company's normal sales terms and conditions. As a percentage of net sales, SG&A
increased to 15.8% in 2000 from 14.8% in 1999. Cost reduction programs
implemented at the plastic lumber division during the third and fourth quarters
of 2000 are expected to reverse this trend in 2001.

  Interest Expense

     Interest expense increased by $1,572,000 in 2000 to $7,037,000 compared to
$5,465,000 in 1999. The increase was primarily due to higher average debt levels
in 2000, offset by lower amortization of financing costs, including discounts on
convertible subordinated debentures compared to 1999. Total amortization of debt
and debenture issuance costs included in interest expense for 2000 was reduced
by 41% to $829,000 as compared to $1,410,000 in 1999.

  Income Tax Expense (Benefit)

     We recorded an income tax benefit of $1,188,000 in 2000, compared to income
tax expense of $1,731,000 in 1999 as we had a pre-tax loss, before extraordinary
item, of $12,635,000 in 2000 compared to pre-tax income of $4,880,000 in 1999.
The tax benefit in 2000 includes the recording of a valuation allowance of
$4,269,000, as we determined that it was more likely than not that we would fail
to generate sufficient pre-tax income in future years to utilize all of our
deferred tax assets.

  Extraordinary Item

     In June of 2000 we entered into a new Senior Credit Facility and terminated
our previously existing line of credit. In connection with this termination, we
incurred an extraordinary loss of $1,028,000, net of taxes, primarily as a
result of prepayment penalties and the write off of deferred loan costs
pertaining to the terminated credit facility.

  Seasonality

     We experience 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 our performance.
Additionally, sales of some plastic lumber products slow significantly in the
winter months.

                                        64
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our major market risk exposure is to changing interest rates. We currently
do not engage in any hedging activities to manage this risk. At December 31,
2001, we had outstanding indebtedness of $71,583,000, of which $55,295,000 was
debt with variable interest rates. A 100 basis point increase in interest rates
would reduce our annual earnings and cash flow by approximately $553,000 based
on our outstanding debt at December 31, 2001. We also have market risk exposure
with respect to petroleum prices. Petroleum prices impact the cost of raw
materials at our plastic lumber division.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following consolidated financial statements are attached hereto and
made a part hereof:

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Certified Public Accountants..........   66
Consolidated Balance Sheets as of December 31, 2001 and
  2000......................................................   67
Consolidated Statements of Operations for the Years Ended
  December 31, 2001, 2000 and 1999..........................   68
Consolidated Statements of Stockholders' Equity for the
  Years Ended December 31, 2001, 2000 and 1999..............   69
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 2001, 2000 and 1999..........................   70
Notes to Consolidated Financial Statements..................   71
</Table>

                                        65
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
U.S. Plastic Lumber Corporation:

     We have audited the accompanying consolidated balance sheets of U.S.
Plastic Lumber Corp. (a Nevada Corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S. Plastic
Lumber Corp. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has an accumulated deficit and a working capital deficit
of approximately $61.0 million and $60.5 million, respectively, and has not made
its scheduled principal and interest payments on its Senior Credit Facility. The
Company's failure to make its principal and interest payments constitute an
event of default that permits the lenders under the Senior Credit Facility to
accelerate their maturity. The Company currently does not have the financial
resources to repay its debt obligations as they become due. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

                                          By:         /s/ KPMG LLP
                                            ------------------------------------
                                                          KPMG LLP

Miami, Florida
March 29, 2002

                                        66
<PAGE>

                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 2001 AND 2000

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
CURRENT ASSETS
  Cash and cash equivalents.................................  $    911,531   $  2,211,082
  Accounts receivable (net).................................    37,316,243     43,763,378
  Inventories...............................................     5,665,948      9,723,390
  Prepaid expenses and other assets.........................     2,351,467      2,542,126
                                                              ------------   ------------
     Total current assets...................................    46,245,189     58,239,976
Property, plant and equipment (net).........................    86,916,060    100,544,939
Assets held for sale........................................     1,070,966             --
Acquired intangibles (net)..................................    21,123,033     37,033,919
Other assets................................................     6,313,907      4,592,125
                                                              ------------   ------------
          Total assets......................................  $161,669,155   $200,410,959
                                                              ============   ============
                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable..........................................  $ 30,657,783   $ 27,958,413
  Notes and capital leases payable, current portion.........    51,778,636     11,535,698
  Accrued expenses..........................................     9,182,350      4,390,344
  Restructuring accrual.....................................     1,274,654      1,149,431
Convertible subordinated debentures, net of unamortized
  discount..................................................     3,579,144             --
Convertible subordinated debentures -- affiliates, net of
  unamortized discount......................................     5,000,000             --
  Other liabilities.........................................     5,297,635      2,240,721
                                                              ------------   ------------
          Total current liabilities.........................   106,770,202     47,274,607
Notes and capital leases payable, net of current portion....     5,641,349     54,613,509
Other liabilities...........................................       324,485        571,382
Minority interest...........................................       165,010        196,383
Convertible subordinated debentures, net of unamortized
  discount..................................................     5,583,579      7,255,213
Convertible subordinated debentures -- affiliates, net of
  unamortized discount......................................            --      4,757,657
                                                              ------------   ------------
          Total liabilities.................................   118,484,625    114,668,751
                                                              ------------   ------------
STOCKHOLDERS' EQUITY
  Convertible preferred stock, par value $.001; authorized
     5,000,000 shares; Series D 15%, issued and outstanding
     1,187,285 in 2001 and 2000.............................         1,187          1,187
  Series E 10%, issued and outstanding 1,714,285 and
     1,142,857 respectively.................................         1,714          1,143
  Common stock par value $.0001, authorized 100,000,000
     shares; issued and outstanding 39,611,392 and
     34,836,594 shares, respectively........................         3,961          3,484
  Additional paid-in capital................................   104,176,557     97,195,416
  Accumulated deficit.......................................   (60,998,889)   (11,459,022)
                                                              ------------   ------------
          Total stockholders' equity........................    43,184,530     85,742,208
                                                              ------------   ------------
          Total liabilities and stockholders' equity........  $161,669,155   $200,410,959
                                                              ============   ============
</Table>

          See accompanying notes to consolidated financial statements.
                                        67
<PAGE>

                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                         2001           2000           1999
                                                     ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>
Sales, net.........................................  $174,050,099   $173,744,343   $138,544,512
Cost of goods sold.................................   151,345,476    148,916,681    100,176,431
Inventory impairment...............................            --             --      2,025,000
                                                     ------------   ------------   ------------
  Gross profit.....................................    22,704,623     24,827,662     36,343,081
Selling, general and administrative expenses.......    32,320,985     27,509,565     20,539,660
Merger costs.......................................            --             --      1,845,000
Restructuring and asset impairment charges.........    24,993,522      3,184,926      3,720,000
                                                     ------------   ------------   ------------
  Operating (loss) income..........................   (34,609,884)    (5,866,829)    10,238,421
Interest and other (expense) income................       (31,717)       215,083        106,275
Interest expense...................................    12,840,349      7,037,457      5,464,880
Minority interest..................................        31,373         53,782             --
                                                     ------------   ------------   ------------
  (Loss) earnings before extraordinary item and
     income taxes..................................   (47,450,577)   (12,635,421)     4,879,816
Provision for (benefit from) income taxes..........       712,358     (1,188,075)     1,731,000
                                                     ------------   ------------   ------------
  (Loss) earnings before extraordinary item........   (48,162,935)   (11,447,346)     3,148,816
  Extraordinary loss on extinguishment of debt, net
     of taxes of $655,729..........................            --     (1,027,785)            --
                                                     ------------   ------------   ------------
  Net (loss) earnings..............................   (48,162,935)   (12,475,131)     3,148,816
Preferred stock dividend earned....................    (1,376,932)      (819,759)      (316,782)
                                                     ------------   ------------   ------------
  Net (loss) earnings attributable to common
     stockholders..................................  $(49,539,867)  $(13,294,890)  $  2,832,034
                                                     ============   ============   ============
Net (loss) earnings per common share -- Basic:
  (Loss) earnings before extraordinary item........  $      (1.34)  $      (0.36)  $       0.10
  Loss on extinguishment of debt...................  $         --   $      (0.03)  $         --
                                                     ------------   ------------   ------------
  Net (loss) earnings per common share.............  $      (1.34)  $      (0.39)  $       0.10
                                                     ============   ============   ============
Net (loss) earnings per common share -- Diluted:
  (Loss) earnings before extraordinary item........  $      (1.34)  $      (0.36)  $       0.09
  Loss on extinguishment of debt...................  $         --   $      (0.03)  $         --
                                                     ------------   ------------   ------------
  Net (loss) earnings per common share.............  $      (1.34)  $      (0.39)  $       0.09
                                                     ============   ============   ============
Weighted average common shares outstanding:
  Basic............................................    36,973,930     34,297,292     28,171,655
                                                     ============   ============   ============
  Diluted..........................................    36,973,930     34,297,292     30,199,499
                                                     ============   ============   ============
</Table>

          See accompanying notes to consolidated financial statements.
                                        68
<PAGE>

                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                            CONVERTIBLE
                                          PREFERRED STOCK        COMMON STOCK                           RETAINED
                                         ------------------   -------------------     ADDITIONAL       (DEFICIT)
                                          SHARES     AMOUNT     SHARES     AMOUNT   PAID-IN-CAPITAL     EARNINGS        TOTAL
                                         ---------   ------   ----------   ------   ---------------   ------------   ------------
<S>                                      <C>         <C>      <C>          <C>      <C>               <C>            <C>
Balance at December 31, 1998...........    382,709   $ 383    20,091,292   $2,009    $ 25,126,549     $   (540,769)  $ 24,588,172
Business acquisitions and earnout
  agreements...........................         --      --     4,074,711     407       19,380,593               --     19,381,000
Settlement of Historical Shareholders'
  earnout agreement....................         --      --            --      --        5,166,005               --      5,166,005
Value of warrants issued on
  acquisitions.........................         --      --            --      --        1,219,892               --      1,219,892
Exercise of options and warrants.......         --      --       761,226      76        3,009,100               --      3,009,176
Costs of issuing common and preferred
  shares...............................         --      --            --      --       (1,978,509)              --     (1,978,509)
Private placement of common shares.....         --      --     4,090,171     409       26,573,681               --     26,574,090
Stock issued in conjunction with
  private placements...................         --      --        35,000       4          288,747               --        288,751
Stock & options issued in conjunction
  with debt agreement and subordinated
  debentures...........................         --      --        10,000       1          516,733               --        516,734
Debenture proceeds allocated to 10%
  conversion discount..................         --      --            --      --          277,777               --        277,777
Other issuances........................         --      --       161,040      16        1,078,605               --      1,078,621
Distributions to sub S shareholders
  prior to pooling.....................         --      --            --      --               --         (260,127)      (260,127)
Conversion of Preferred to Common......   (407,742)   (408)    2,854,192     286              122               --             --
Preferred stock dividends..............     25,033      25            --      --          512,027         (512,052)            --
Net earnings...........................         --      --            --      --               --        3,148,816      3,148,816
                                         ---------   ------   ----------   ------    ------------     ------------   ------------
Balance at December 31, 1999...........         --      --    32,077,632   3,208       81,171,322        1,835,868     83,010,398
Business acquisitions and earnout
  Agreements...........................         --      --       835,209      84        1,755,332               --      1,755,416
Other issuances........................         --      --        50,334       5          194,709               --        194,714
Exercise of options and warrants.......         --      --       180,334      18          785,057               --        785,075
Costs of issuing common shares.........         --      --            --      --          (40,485)              --        (40,485)
Value of warrants issued with
  Subordinated debentures..............         --      --            --      --          840,077               --        840,077
Private placement of preferred
  shares...............................  2,330,142   2,330            --      --        6,153,171               --      6,155,501
Costs associated with issuance of
  preferred shares.....................         --      --            --      --         (107,282)              --       (107,282)
Amortization of beneficial conversion
  feature -- Series D preferred........         --      --            --      --          617,465         (617,465)            --
Preferred dividends....................         --      --            --      --               --         (202,294)      (202,294)
Beneficial conversion
  features -- subordinated
  debentures...........................         --      --            --      --          270,946               --        270,946
Conversion of debentures and accrued
  Interest.............................         --      --     1,693,085     169        6,544,942               --      6,545,111
Costs associated with debentures
  Converted............................         --      --            --      --         (989,838)              --       (989,838)
Net loss...............................         --      --            --      --               --      (12,475,131)   (12,475,131)
                                         ---------   ------   ----------   ------    ------------     ------------   ------------
Balance at December 31, 2000...........  2,330,142   2,330    34,836,594   3,484       97,195,416      (11,459,022)    85,742,208
Settlement of Historical Shareholders'
  earnout agreement....................         --      --         8,075       1            8,835               --          8,836
Exercise of options....................         --      --        21,200       2            7,978               --          7,980
Stock issued in conjunction with Stock
  purchase agreement...................         --      --       200,000      20          286,740               --        286,760
Private placement of preferred
  shares...............................    571,428     571            --      --          998,881               --        999,452
Private placement of common shares.....         --      --     2,286,381     229        1,751,771               --      1,752,000
Beneficial conversion
  features -- subordinated
  debentures...........................         --      --            --      --        1,277,439               --      1,277,439
Value of warrants issued with
  subordinated debentures..............         --      --            --      --          365,506               --        365,506
Conversion of debentures and accrued
  Interest, net of costs...............         --      --     2,134,742     213        2,082,049               --      2,082,262
Other issuances of common stock........         --      --       124,400      12           61,895               --         61,907
Value of other options and warrants
  issued...............................         --      --            --      --          140,047               --        140,047
Preferred dividends....................         --      --            --      --               --       (1,376,932)    (1,376,932)
Net loss...............................         --      --            --      --               --      (48,162,935)   (48,162,935)
                                         ---------   ------   ----------   ------    ------------     ------------   ------------
Balance at December 31, 2001...........  2,901,570   $2,901   39,611,392   $3,961    $104,176,557     $(60,998,889)  $ 43,184,530
                                         =========   ======   ==========   ======    ============     ============   ============
</Table>

          See accompanying notes to consolidated financial statements.
                                        69
<PAGE>

                  U. S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

<Table>
<Caption>
                                                                  2001           2000           1999
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) earnings.......................................  $(48,162,935)  $(12,475,131)  $  3,148,816
                                                              ------------   ------------   ------------
  Adjustments to reconcile net (loss) earnings to net cash
    provided by (used in) operating activities:
    Depreciation............................................     6,610,154      4,955,080      3,880,752
    Amortization............................................     2,016,055      1,908,719      2,491,769
    Deferred income tax provision (benefit).................       672,285     (2,062,184)     1,148,159
    Amortization of deferred financing costs................     1,947,660        342,743      1,442,646
    Loss (gain) on sale of property, plant & equipment......       309,177        (17,430)            --
    Loss on early extinguishment of debt....................            --      1,683,514             --
    Non cash restructuring charges and asset impairment
      charge................................................    23,310,629      3,184,926      3,972,142
    Beneficial conversion feature of convertible
      subordinated debentures...............................       280,000        270,946             --
    Amortization of discounts on convertible subordinated
      debentures............................................       918,869        330,916             --
    Provision for bad debt expense..........................     4,240,155      1,766,109        621,755
    Interest paid in kind...................................       201,764             --             --
    Non cash merger costs...................................            --             --      1,461,766
  Changes in operating assets and liabilities, net of
    Acquisitions:
    Accounts receivable.....................................     2,206,980    (11,438,866)   (13,649,845)
    Inventories.............................................     4,057,442     (1,991,917)    (3,276,013)
    Prepaid expenses and other current assets...............       601,087        144,707       (769,129)
    Other assets............................................    (4,794,080)    (1,999,388)        60,432
    Accounts payable........................................     2,699,370      7,548,605      6,966,968
    Accrued expenses........................................     3,965,913       (165,194)    (1,449,962)
    Other liabilities.......................................     2,903,867        329,338        (89,645)
                                                              ------------   ------------   ------------
      Net cash provided by (used in) operating activities...     3,984,392     (7,684,507)     5,960,611
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures for property and equipment...........    (3,388,361)   (24,808,163)   (31,909,978)
  Cash paid for acquisitions, net of cash received..........            --        (62,297)   (15,098,104)
  Proceeds from the sale of property, plant and equipment...       359,136        534,893             --
  Payments on non-compete agreements........................            --             --       (841,591)
                                                              ------------   ------------   ------------
      Net cash used in investing activities.................    (3,029,225)   (24,335,567)   (47,849,673)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of warrants and options, net of
    issuance costs..........................................         7,980        744,590      1,924,381
  Proceeds from the sale of common stock, net of issuance
    costs...................................................     1,735,119             --     25,206,612
  Sale of preferred stock, net of issuance costs............       999,452      6,045,889             --
  Proceeds from sale of convertible debentures, net of
    issuance costs..........................................     4,000,000      7,500,000      2,500,000
  Advances from (repayment to) affiliates, net..............            --     (1,000,000)     6,000,000
  Proceeds from notes payable...............................            --     61,610,619     23,128,118
  Payment of deferred financing costs.......................      (268,044)            --       (632,373)
  Distributions to shareholders of pooled companies.........            --             --       (260,128)
  Payments of notes payable and capital leases..............    (8,729,225)   (42,477,530)   (17,222,478)
                                                              ------------   ------------   ------------
      Net cash (used in) provided by financing activities...    (2,254,718)    32,423,568     40,644,132
                                                              ------------   ------------   ------------
Net change in cash and cash equivalents.....................    (1,299,551)       403,494     (1,244,930)
Cash and cash equivalents, beginning of period..............     2,211,082      1,807,588      3,052,518
                                                              ------------   ------------   ------------
Cash and cash equivalents, end of period....................  $    911,531   $  2,211,082   $  1,807,588
                                                              ============   ============   ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
  Interest..................................................  $  6,700,951   $  5,994,687   $  3,772,631
  Income taxes..............................................  $     40,073   $    (98,202)  $    704,453
Capitalized interest........................................            --   $  1,379,818   $    236,115
Capitalized leases..........................................            --      1,832,657         77,801
Number of shares issued during the period for non-cash
  transactions:
  Acquisitions and Clean Earth merger.......................         8,075        835,209      4,074,711
  Compensation -- employees and directors...................         4,400         45,934        117,408
  Litigation settlements....................................            --         11,666         30,000
  Conversion of debentures..................................     2,134,742      1,693,085             --
  Financing fees and other..................................       320,000             --        107,082
  Conversion of preferred stock.............................            --             --      2,854,192
</Table>

          See accompanying notes to consolidated financial statements
                                        70
<PAGE>

                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND 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, Eaglebrook Group, Inc., and Clean Earth, Inc. ("CEI"), as well as CEI's
wholly-owned subsidiaries: Clean Earth of Carteret, Inc. ("CEC"), Clean Earth of
New Castle, Inc. ("CENC"), Clean Earth of Philadelphia, Inc. ("CEP"),
Consolidated Technologies, Inc. ("CTI"), Integrated Technical Services, Inc.
("ITS"), Clean Earth of North Jersey, Inc. ("CENJ"), Barbella Environmental
Technologies, Inc., ("BET"), Advanced Remediation and Disposal Technologies
Delaware ("ARDT"), Allied Waste Services, Inc., Clean Earth of Maryland, Inc.
and Clean Rock Properties, LTD. The accompanying consolidated financial
statements also include the accounts of the joint venture between the Company
and Interstate Industrial Corp., for which the Company held a 51.1% interest at
December 31, 2001, 2000 and 1999. All significant intercompany balances and
transactions have been eliminated in consolidation.

USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.

RECLASSIFICATIONS

     Where appropriate, certain amounts in 2000 and 1999 have been reclassified
to conform to the 2001 presentation.

CASH AND CASH EQUIVALENTS

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

INVENTORIES

     Inventories are valued at the lower of cost or market, cost being
determined by the first-in, first-out method.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method over the estimated useful lives of the
assets. Useful lives for certain machinery and equipment at CTI are based on the
number of units of material to be processed, and depreciation for this equipment
is

                                        71
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

computed based on the number of units processed during the period. Expenditures
for maintenance and repairs are charged to operations as incurred. Significant
renewals, improvements and betterments are capitalized. Leasehold improvements
are amortized over the shorter of the underlying lease term or the asset's
useful life. Applicable interest charges incurred during the construction of new
facilities are capitalized and amortized over the asset's estimated useful
lives.

     Property, plant and equipment held for sale amounting to $1,070,966 at
December 31, 2001 is stated at net realizable value and is not being
depreciated.

IMPAIRMENT OF LONG LIVED ASSETS

     It is the Company's policy to review the carrying value of acquired
intangibles and property, plant and equipment based on an evaluation of such
factors as the occurrence of a significant adverse event or changes in the
environment in which the business operates. The Company accounts for long-lived
assets in accordance with the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 121, "Accounting for the Impairment of Long Lived Assets
and for Long Lived Assets to be Disposed of." This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. See note 11 for asset impairment
charges for 2001, 2000 and 1999.

ACQUIRED INTANGIBLES, NET

     Acquired intangibles were amortized on a straight-line basis as follows at
December 31, 2001 and 2000:

<Table>
<Caption>
                                                 USEFUL LIVES      2001          2000
                                                 ------------   -----------   -----------
<S>                                              <C>            <C>           <C>
Goodwill -- acquisitions.......................    20 years     $ 3,723,087   $13,872,583
Goodwill -- acquisitions.......................    25 years              --     5,457,264
Goodwill -- acquisitions.......................    40 years      10,831,355    10,831,355
Permits -- acquired............................    25 years       9,453,813    10,575,891
                                                                -----------   -----------
                                                                 24,008,255    40,737,093
Less accumulated amortization..................                  (2,885,222)   (3,703,174)
                                                                -----------   -----------
Acquired intangibles (net).....................                 $21,123,033   $37,033,919
                                                                ===========   ===========
</Table>

     The Company assesses the recoverability of acquired intangibles by
determining whether the amortization of the balance over their remaining lives
can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of acquired intangibles impairment, if any, would
be measured based on the projected discounted future operating cash flows using
a discount rate commensurate with the risk of the acquired intangibles. During
2001, the Company recorded approximately $14.6 million for acquired intangibles
impairment (see note 11).

                                        72
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

OTHER ASSETS

     Other assets are summarized as follows at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Disposal permits and deferred site development costs, net...  $2,222,924   $  946,247
Deferred financing costs, net...............................   1,531,173      864,721
Deferred convertible debenture issuance costs, net..........     228,415       47,434
Non compete agreements, net.................................     441,507      608,654
Restricted cash.............................................     827,500      250,000
Deferred tax asset..........................................          --      672,285
Patents, net................................................     624,256      644,482
Other.......................................................     438,132      558,302
                                                              ----------   ----------
          Total other assets................................  $6,313,907   $4,592,125
                                                              ==========   ==========
</Table>

     In February of 2001 the Company entered into a five-year contract to
recycle ash generated from a municipal incinerator. The Company incurred
approximately $1.5 million in site development costs at its facilities to
accommodate the work to be performed under this contract, and the costs are
being amortized over the life of the contract.

     Prior to 1999, the Company incurred $2,165,397 of costs to permit and
develop dredge material disposal sites in strip mines in Pennsylvania. Through
1999, these costs were being amortized over the estimated number of cubic yards
of dredge material to be disposed of, which was 550,000 cubic yards. This
resulted in amortization expense of $1,003,519 in 1999. Based on the success of
the dredge disposal project through 1999, in 2000 the Company increased the
estimated number of cubic yards over which the permit is being amortized to
approximately 2,000,000 cubic yards, including ash material, to better reflect
the expected work to be done under the permit. As a result, amortization in 2001
and 2000 was $205,056 and $68,588 respectively. Had the Company not changed the
estimated units available for disposal in 2000, amortization expense related to
this permit would have been $393,762 and $456,776 in 2001 and 2000,
respectively.

     Non-compete agreements are being amortized over periods ranging from two to
six years, resulting in amortization expense of $171,000 in 2001, $137,500 in
2000 and $39,600 in 1999. The $626,099 value assigned to the Trimax patents
acquired in 1998 is being amortized over 12 years resulting in $52,873, $52,164,
$50,269 of amortization expense in 2001, 2000 and 1999 respectively. The
unamortized balance of the Trimax patents at December 31, 2001 was $445,793.
During 2001 the Company incurred approximately $41,000 of expenses which were
assigned to the value of various other patents held by the Company. The
restricted cash of $827,500 pertains to certificates of deposit held as
collateral for letters of credit and certain funds which are being held in
escrow.

REVENUE RECOGNITION

     Revenues from the Company's plastic lumber division are recognized at the
date the products are shipped and risk of ownership transfers to the buyer.
Title passes to the customer upon shipment of goods. The Company generally does
not accept returns or issue credits for damaged or defective goods if not
notified by the customer within five days from the date of delivery. In the
event that the Company accepts a claim from a customer, the Company has sole
discretion with regard to replacing the goods, repairing the product or issuing
a credit to the customer. The Company has a warranty policy for its plastic
lumber products which includes a warranty period ranging from seven to fifty
years, depending on the type of product, for structural damage. The Company's
liability for warranty claims is limited to the replacement of substitute
product.

                                        73
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Revenues from the environmental construction services companies are
recognized on the percentage of completion method or as units are processed.
Revenues from the environmental recycling facilities are recognized when
material is treated. Under the percentage of completion method, contract revenue
is recognized in the ratio of contract costs incurred to date to the estimated
total costs to complete the project. Contract costs include all direct and
indirect labor, material and equipment depreciation required to complete the
contract. A liability is recorded for estimated losses, if any, on uncompleted
contracts. Billings in excess of costs incurred and estimated profit recognized
are included in other liabilities. Costs incurred and profits recognized in
excess of billings on applicable contracts are included in accounts receivable.

     The following is a summary of the costs and estimated earnings on
uncompleted contracts at December 31:

<Table>
<Caption>
                                                 2001           2000           1999
                                             ------------   ------------   ------------
<S>                                          <C>            <C>            <C>
Costs incurred on uncompleted contracts....  $ 30,383,561   $ 33,951,824   $ 18,697,161
Estimated profit...........................     3,178,884      4,402,705      4,520,207
                                             ------------   ------------   ------------
Total included in sales....................    33,562,445     38,354,529     23,217,368
Less billings to date......................   (30,353,580)   (34,101,682)   (21,387,899)
                                             ------------   ------------   ------------
Costs and estimated profits in excess of
  billings.................................  $  3,208,865   $  4,252,847   $  1,829,469
                                             ============   ============   ============
</Table>

     In accordance with industry practice, the Company classifies as current all
assets and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year. Also included within accounts receivable are
unbilled revenues which represent revenue earned for work completed in
accordance with contract provisions.

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 the fair value
of these instruments as compensation expense when these types of instruments 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 provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities.

ADVERTISING COSTS

     Advertising production costs are expensed the first time the advertisement
is run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising costs charged to operations were $1,817,001,
$3,550,671 and $391,581 in 2001, 2000 and 1999, 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

                                        74
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

cash equivalents with various financial institutions which are primarily located
in the Eastern United States. At December 31, 2001, the Company had bank
balances of approximately $215,285 in excess of amounts insured by federal
deposit insurance. Trade receivables are concentrated primarily in the
Northeastern United States. The Company does not normally require collateral
from its customers. The Company is not dependent upon a single customer or a few
customers for either segment of its business. No single customer accounts for
sales equal to or greater than 10% of the Company's consolidated revenues for
the years ended December 31, 2001, 2000 and 1999.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     Financial instruments include cash and cash equivalents, receivables,
accounts payable, accrued expenses, notes payable and convertible subordinated
debentures. The carrying amounts reported in the consolidated balance sheet for
these financial instruments approximate their fair value. For certain
instruments, including cash and cash equivalents, trade accounts receivable,
accounts payable and accrued expenses, the carrying amount approximates fair
value due to their short maturity.

EARNINGS (LOSS) PER SHARE

     Basic earnings or loss per share is computed by dividing net earnings or
loss attributable to common stockholders by the weighted average number of
shares outstanding during the year. Diluted earnings or loss per share
attributable to common stockholders further considers the impact of dilutive
common stock equivalents. Diluted loss per share is equal to basic loss per
share for 2001 and 2000 because the effect of the additional shares which would
be issued assuming conversion of the convertible debentures, convertible
preferred stock and the outstanding common stock options and warrants are
anti-dilutive for the aforementioned years. Common shares which would be issued
assuming conversion of the convertible debentures, convertible preferred stock
and common stock options and warrants total 16,009,575 and 13,284,796 for 2001
and 2000 respectively.

     The following is a reconciliation of the numerator (net earnings) and the
denominator (common shares outstanding) of the basic and diluted per share
computations for 1999):

<Table>
<Caption>
                                                         NET
                                                       EARNINGS      SHARES     AMOUNT
                                                      ----------   ----------   ------
<S>                                                   <C>          <C>          <C>
BASIC EPS
Net earnings available to common shareholders.......  $2,832,034   28,171,655   $ .10
EFFECT OF DILUTIVE SECURITIES
Stock options.......................................          --    2,027,844    (.01)
                                                      ----------   ----------   -----
DILUTED EPS.........................................  $2,832,034   30,199,499   $ .09
                                                      ==========   ==========   =====
</Table>

     Common shares assumable in connection with convertible debentures and
convertible preferred stock total 6,832,329 for 1999. These shares were not
included in the computation of diluted EPS in 1999 because their effect is
anti-dilutive.

COMPREHENSIVE INCOME

     During the years ended December 31, 2001, 2000 and 1999 the Company did not
have any changes in its stockholders equity resulting from non-owner sources.
Accordingly, comprehensive income was equal to the net income/loss amounts
presented in the statements of operations. See note 17 for further information.

                                        75
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS

     In June, 1998 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, which establishes accounting and reporting standards for derivative
instruments, including some derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement became effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company adopted SFAS No. 133 and SFAS
No. 138 on January 1, 2001. In accordance with the transition provisions of SFAS
No. 133, the Company recorded a net-of-tax cumulative-effect loss of $453,615 in
accumulated other comprehensive income to recognize at fair value two
interest-rate swap derivatives that are designated as a cash-flow hedging
instruments. As of September 30, 2001, the net-of-tax fair value of these
derivatives carried as a component of other comprehensive loss was $1,123,891.
In December of 2001, the Company received notice from the banks that they were
exercising their rights to terminate the interest rate swap agreements due to
the Company's failure to comply with the terms of the Senior Credit Facility. In
accordance with the termination notice, the banks demanded compensation for
their costs of liquidating their corresponding derivative obligations in the
amount of $1,080,249. The Company accrued this amount as interest expense in
2001 and reversed the amounts included within other comprehensive loss in
connection with the fair value of the interest rate swap derivatives. As a
result of the termination of the interest swap agreements in 2001, comprehensive
income for the twelve months ended December 31, 2001 was equal to the net
income/loss amounts presented in the accompanying consolidated statements of
operations.

     In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121.

     The Company adopted the provisions of SFAS No. 141 during 2001 and adopted
the provisions SFAS No. 142 on January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued to be
amortized prior to the adoption of SFAS No. 142.

     SFAS No. 141 requires upon adoption of SFAS No. 142 that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS No. 141 for recognition apart
from goodwill. SFAS No. 142 requires the Company to reassess the useful lives
and residual values of all intangible assets acquired in purchase business
combinations, and make any necessary amortization period adjustments by the end
of the first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
is required to test the intangible asset for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period. Any impairment loss
will be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.

     In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 requires the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to
                                        76
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

those reporting units as of the date of adoption. The Company has up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second step, the
Company must compare the implied fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS No. 141, to its carrying amount, both of which would be
measured as of the date of adoption. Any transitional impairment loss will be
recognized as the cumulative effect of a change in accounting principle in the
Company's statement of operations.

     At December 31, 2001, the Company has approximately $13.0 million of
unamortized goodwill and an unamortized permit in the amount of approximately
$8.1 million, which was acquired in a purchase business combination by our
environmental recycling division in 1999, which will be subject to the
transition provisions of SFAS No. 141 and 142. The Company recorded amortization
expense of $1,397,000, $1,665,000 and $1,399,000 pertaining to this goodwill and
permit in 2001, 2000 and 1999 respectively. The Company is currently evaluating
the effect that the adoption of SFAS No. 142 may have on its consolidated
results of operation and financial position. Although the Company's analysis is
not yet complete, management believes that it has identified all of the existing
intangibles other than goodwill that have been acquired in prior purchase
business combinations in order to make the necessary reclassifications required
by the new standard. The Company is currently evaluating the effect that the
adoption of SFAS No. 142 may have upon the Company's results of operations and
financial condition.

     Also, in July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". That standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002, with earlier
adoption permitted. The Company is currently evaluating the effect that the
adoption of SFAS No. 143 may have on its consolidated results of operation and
financial position.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. The Company adopted the provisions of
SFAS No. 144 on January 1, 2002.

2.  LIQUIDITY AND CAPITAL RESOURCES

     The Company's liquidity and ability to meet its financial obligations and
maintain its current operations in 2002 and beyond will be dependent on, among
other things, its ability to refinance its Senior Credit Facility, its ability
to meet its payment obligations under, achieve and maintain compliance with the
financial covenants in all of its debt agreements and to provide financing for
working capital.

                                        77
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company is highly leveraged, and during 2000 and 2001 incurred
substantial losses from operations, primarily resulting from the significant
expenses incurred in its plastic lumber division. The Company's accumulated
deficit and working capital deficit totaled approximately $61.0 million and
$60.5 million respectively as of December 31, 2001. The Company's obligations to
make payments under, achieve and maintain compliance with the covenants in its
Senior Credit Facility and Master Credit Facility are material financial
commitments.

     On September 28, 2001, the Company notified all of the banks which
participate in its Senior Credit Facility that due to lower than expected sales
at the Company's plastic lumber division the Company would not make the $2.5
million term loan payment due September 30, 2001. In addition, the Company was
not in compliance with some of the covenants under its Senior Credit Facility as
of September 30, 2001. Substantially all of the assets of the Company have been
pledged as collateral with respect to the Senior Credit Facility. Effective
November 14, 2001, the Company entered into a forbearance agreement with the
participating banks whereby the lenders under the Senior Credit Facility agreed
to accept interest only payments from the Company and allowed it to defer the
September 30, and December 31, 2001 principal payments until the earlier of
February 28, 2002 or the sale of some of its assets. Pursuant to the terms of
the forbearance agreement, the lenders also agreed not to take any action
against the Company with respect to covenant violations as of September 30 and
December 31, 2001. The forbearance period terminated on February 28, 2002. As of
February 28, 2002 the Company did not make the required principal payments under
the forbearance agreement that were originally due September 30, and December
31, 2001 in the amount of $2.5 million each. The Company also did not make the
required interest payments of approximately $215,000 and $197,000 due January
31, and February 28, 2002 respectively. In addition, on March 11, 2002 the
Company informed the lenders under the Senior Credit Facility that it could not
make the $2.5 million principal payment due March 31, 2002. The Company also has
an additional $2.5 million principal payment due June 30, 2002 and the
outstanding balance of the Senior Credit Facility is due in its entirety on July
1, 2002. At December 31, 2001, amounts outstanding under the Senior Credit
Facility totaled approximately $39.9 million, including accrued interest, fees
and penalties.

     The Company is negotiating with the senior lenders under the Senior Credit
Facility for an extension of the forbearance period in connection with its
failure to make its September 30, and December 31, 2001 principal payments on
February 28, 2002, its interest payments due January 31, and February 28, 2002
and the $2.5 million principal payment due March 31, 2002. Although the failure
to make these principal and interest payments constitute events of default under
the Senior Credit Facility and the forbearance agreement, the lenders that are
party to the Senior Credit Facility have yet to take any action against the
Company, including declaration of default. The Company believes that if it could
obtain an extension of the forbearance period, it may provide the Company with
sufficient time to sell certain assets or find an alternative means to refinance
the Senior Credit Facility. In the event that the necessary waiver and
forbearance are not obtained or future principal and interest payments cannot be
made, the lenders under the Senior Credit Facility can demand immediate
repayment from the Company of the outstanding balance on the Senior Credit
Facility.

     On January 3, 2002, the Company notified all of the participants in its
Master Credit Facility with GE Capital Corporation that it would not be making
any further principal payments until at least April of 2002. In addition, the
Company did not make the term payment of $1.7 million due January 2, 2002 and,
as of September 30, and December 31, 2001, was not in compliance with the
tangible net worth covenant under the Master Credit Facility. On February 28,
2002 the Company, GE Capital Corp. and the other participants in the Master
Credit Facility agreed to and signed a Forbearance and Modification Agreement
which restructures the Master Credit Facility by allowing the Company to defer
principal payments until April 1, 2002 while continuing to make interest
payments and providing a waiver of the September 30, and December 31, covenant
violations. In accordance with the agreement, the Company will be required to
make a $500,000 principal payment upon the proposed sale of Clean Earth, Inc.,
if it takes place. In addition, the Company will be required to make a $2
million prepayment on the Master Credit Facility upon the earlier of
                                        78
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(i) the Company's obtaining a new revolving credit facility with availability of
at least $10 million to replace its existing revolving credit facility; (ii) the
Company's exercising the purchase option on, and subsequently obtaining a
mortgage against, its Chicago property; or (iii) September 30, 2002. The
Forbearance and Modification Agreement also re-sets the minimum tangible net
worth covenant for March 31, 2002 and adds new covenants for minimum levels of
earnings before interest, taxes, depreciation and amortization ("EBITDA")
commencing March 31, 2002 if the proposed sale of Clean Earth (see note 3) does
not take place, or June 30, 2002 if the proposed sale does take place. It also
requires the Company, under certain circumstances, to grant additional security
interest to GE Capital Corp. and to the other participants in the Master Credit
Facility for some of the Company's property, plant and equipment that these
lenders currently have no security interest in.

     Pursuant to this agreement, commencing on September 1, 2002, the Master
Credit Facility will be restructured to a 48-month term. The Company will be
required to pay a forbearance fee in connection with the Forbearance and
Modification Agreement in an amount equal to 1% of our obligations under the
Master Credit Facility outstanding as of the date of the proposed sale of Clean
Earth. This forbearance fee will be immediately due and payable if the closing
of the proposed sale of Clean Earth does not occur by June 1, 2002.

     The Master Credit Facility also contains a provision whereby an event which
would accelerate payment terms of the Company's Senior Credit Facility would
also accelerate the payment terms of the Master Credit Facility to the same due
date as the Senior Credit Facility. The Senior Credit Facility has a similar
provision with respect to the Master Credit Facility. At December 31, 2001,
amounts outstanding under the Master Credit Facility totaled approximately $11.4
million. In addition, defaults under these lending agreements cause defaults,
pursuant to cross default provisions, of the Company's other agreements,
including, but not limited to, other lending agreements, debenture agreements,
lease agreements and others.

     The Company is also required to retire its $4.0 million convertible
debenture issued to Halifax Fund, L.P., as well as the $5.0 million convertible
debenture payable to Stout Partnership, the Company's largest stockholder, on or
before July 1, 2002. Several members of the Company's board of directors and a
member of its management are affiliated with Stout Partnership. In addition, the
$4.0 million convertible debenture contains a provision which provides that the
sale or transfer by the Company of substantially all of its assets gives the
holder an option to consider the debenture immediately due and payable and
require the Company to redeem this debenture at a redemption price equal to 100%
of the outstanding principal amount of the debenture or at a premium. The holder
of a significant portion of the Company's convertible debentures has a second
lien on substantially all of the assets of the Company. The Forbearance and
Modification Agreement to the Master Credit Facility prohibits the Company from
making any payments of principal, interest or any other amounts due and owing to
Halifax Fund, L.P., other than the payment of Halifax' $4.0 million debenture,
Stout Partnership or any future subordinated lender for one year from the date
of the closing of the proposed sale of Clean Earth, if consummated, unless an
equal payment, in addition to all currently scheduled principal and interest
payments, is paid to the participants in the Master Credit Facility.

     The Company currently does not have the financial resources to repay its
debt obligations under the Senior Credit Facility, Master Credit Facility, $4
million convertible debenture and the $5 million convertible debenture as they
become due or in the event that current or future events of default are not
waived in writing and such debt is immediately due without obtaining new debt
and/or equity capital, negotiating different payment terms and/or selling some
of its assets. The Company's current and past failures to comply with the terms
of its Senior Credit Facility and Master Credit Facility, as well as the related
forbearance agreement and other debt obligations, and the material financial
obligations currently contained in its Senior Credit Facility and Master Credit
Facility have a material adverse effect upon the Company's liquidity and capital
resources and raise substantial doubt about the Company's ability to continue as
a going concern. The

                                        79
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

     On December 29, 2001 the Company entered into an agreement to sell 100% of
the capital stock of Clean Earth, Inc. to a newly created corporation owned by
Founders Equity, Inc. See note 3 for further information on the proposed sale of
Clean Earth, Inc. No assurances can be given that the Company will be able to
close this transaction or that the Company will be successful in selling Clean
Earth, Inc. at all in the event this transaction is not consummated. If the
Company is successful in completing the sale transaction as described in note 3,
it will pay down its entire Senior Credit Facility, as well as the $4.0 million
convertible debenture that requires redemption upon the sale of substantially
all of the Company's assets. The Company believes that it will have the
available cash necessary to retire this debenture in its entirety if this
transaction take place. While there can be no assurances, the Company believes
that this sale transaction, if consummated, would be a critical catalyst in
allowing the Company to reorganize its capital structure and cure its liquidity
crisis.

     If the Company is not successful in completing the sale transaction
described in note 3, it will be required to seek other alternatives for
refinancing its capital structure which could include raising additional equity,
selling some of its assets or restructuring the Senior Credit Facility. There
can be no assurances that this course of action will be successful. The
Company's failure to refinance its capital structure would require the Company
to significantly curtail its operations. In this event, the Company may be
forced to seek protection under the Bankruptcy Code or it may be forced into a
bankruptcy proceeding by these lenders.

3.  PURCHASE AGREEMENT TO SELL CLEAN EARTH, INC.

     On December 29, 2001 the Company entered into a purchase agreement,
subsequently amended on February 12, 2002, and again on March 5, 2002, to sell
100% of the capital stock of Clean Earth, Inc. ("CEI") to New CEI Inc., a newly
created Delaware corporation owned by affiliates of Founders Equity, Inc., an
investment group headquartered in New York, New York ("Founders"), subject to
approval of the Company's shareholders. No assurances can be given that the
Company will be able to close this transaction or that the Company will be
successful in selling CEI at all in the event the sale to New CEI, Inc. is not
consummated.

     Under the terms of the purchase agreement, the purchase price will consist
of:

     - $45.0 million, of which $44.0 million will be payable at the closing and
       $1.0 million will be held in escrow pending the outcome of several
       purchase price adjustments pursuant to the terms of the Purchase
       Agreement; and

     - 45,000 shares of the Junior Preferred Stock of New CEI, Inc. The Junior
       Preferred Stock is redeemable upon the earlier of (i) the tenth
       anniversary of the issuance of the Junior Preferred Stock, (ii) a change
       of control event, or (iii) a registered offering of New CEI's securities
       that results in gross proceeds of at least $25.0 million. The Junior
       Preferred Stock will be subordinate to the senior debt of New CEI and the
       other outstanding preferred stock of New CEI.

     Additional adjustments to the purchase price will be made if the $1.0
million escrow is not sufficient to cover the adjustments related to debt and
other obligations outstanding and non-cash working capital. The adjustments, if
any, for a shortfall of escrow in excess of $1.0 million related to debt and
other obligations outstanding and non-cash working capital will result in a
reduction in the Junior Preferred Stock the Company will receive from New CEI by
0.02% for each $1,000 of the shortfall.

     In addition, there may be additional adjustments to the cash portion of the
purchase price based upon a final audited balance sheet to be delivered after
the closing if the amount of outstanding debt and other obligations and non-cash
working capital set forth on the final audited balance sheet differ from the
amounts

                                        80
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of such items set forth on the unaudited balance sheet on the closing date. The
$1.0 million escrow will be distributed among the parties accordingly. If on the
closing date, there are any obligations of CEI or any subsidiary of CEI that an
obligee would have the right to accelerate the date of payment of such
obligation of CEI or its subsidiary (a "Clean Earth Defaulted Obligation"), the
cash portion of the purchase price will be reduced by the amount of the
accelerated portion of the Clean Earth Defaulted Obligation less the amount by
which such acceleration has resulted in the reduction of the cash portion of the
purchase price pursuant to the foregoing adjustments pertaining to working
capital and retention of debt.

     If New CEI has received the mezzanine financing of at least $8.0 million
but less than $10.0 million by or at the closing, the cash portion of the
purchase price will be reduced by the amount by which the amount of the
mezzanine financing is less than $10.0 million, but such reduction will not,
unless we, in our sole discretion, agree otherwise, cause the closing date cash
payment to be less than $43.5 million.

     In addition, the receivables pursuant to (i) the Company's ownership
interest in the joint venture between Interstate Industrial Corp. and the
Company (ii) the Quakertown Foundry Site Agreement between Integrated Technical
Services, a subsidiary of CEI, and the Pennsylvania Department of Environmental
Protection were not included as part of the purchase agreement. The net book
value of these receivables were approximately $1,640,000 as of December of 2001.

     The sale of CEI was approved by the Company's board of directors on
December 31, 2001. On March 19, 2002, a special meeting of the Company's
stockholders was held whereby the stockholders approved the purchase agreement.
The shareholder approval obtained on March 19, 2002 was only applicable to the
specific purchase agreement with Founders and did not authorize the Company's
management or board of directors to pursue alternative plans for the sale or
disposal of CEI.

     The terms of the purchase agreement, as amended, provide for significant
preconditions to the purchaser's obligation to close the transaction. These
preconditions include, but are not limited to, requirements that the purchaser
obtain $32.0 million of senior debt and $10.0 million of mezzanine financing
prior to closing the transaction. The Company cannot predict the date as to when
all of these preconditions will be met or whether they will be met at all. On
March 5, 2002 the agreement, which had been terminated by a letter from Founders
dated March 4, 2002, was reinstated and amended to allow Founders additional
time to meet all of the preconditions to closing the transaction, and to extend
the date for which either party to the transaction could terminate the agreement
from March 31, 2002 to April 21, 2002.

     Because the purchaser has not met all of these preconditions, and since the
shareholder approval was only applicable to the specific purchase agreement, the
Company did not account for CEI as a discontinued operation in the accompanying
consolidated financial statements. The Company is currently working with the
purchaser to close this transaction prior to April 21, 2002.

4. ACQUISITIONS

1999 ACQUISITIONS

  PURCHASE TRANSACTIONS

     On March 23, 1999, the Company acquired all of the stock of Brass
Investment Co. ("Brass") and its wholly owned subsidiaries Soil Remediation of
Philadelphia ("SRP") and Allied Waste, Inc. ("AWI"). SRP operates a soil
remediation facility in Philadelphia, PA. AWI provides environmental services.
The Company entered into a Management Contract taking over all responsibility
for day to day management and financial control of SRP and AWI as of January 7,
1999 and entitling the Company to all net profits or losses after January 4,
1999.

     On January 28, 1999, the Company acquired 100% of the stock of Eaglebrook
Plastics, Inc. and Eaglebrook Products, Inc. (collectively "Eaglebrook"), a
plastic recycling and plastic lumber manufacturing
                                        81
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

company located in Chicago, IL. The Company is leasing the 300,000 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 Company intends to
purchase the Chicago facility and has recorded the appraised value of the land
and building in property and equipment and the applicable lease payments and the
option price in notes and capital leases payable.

     On April 1, 1999, the Company signed a Management Contract with Brigadoon
Industries, Inc., ("Brigadoon") taking over all responsibility for day-to-day
management and financial control as of that date and entitling the Company to
all net profits or losses after April 1, 1999. Brigadoon manufactures corner
boards from recycled plastic for use by the packaging industry. The Company
acquired 100% of the stock of Brigadoon on June 30, 1999. The Company also
purchased a 140,000 sq. ft. facility situated on approximately 39 acres in
Ocala, Florida. The Ocala plant will house expanded operations of Brigadoon plus
a large number of new extruders to manufacture other products for the plastic
lumber division.

     The $41,965,833 total purchase price for all of the 1999 acquisitions
consisted of 4,244,525 shares of the Company's common stock valued at an
aggregate of $19,343,714, cash payments of $14,800,000 and issuance of debt
totaling $5,763,494, costs totaling $838,733 and $1,219,892 assigned to warrants
granted to a former owner. Several of the acquisitions included non compete
agreements, stock options and earnout provisions based on achieving specified
profitability levels for key employees and former owners. The earnout provisions
were payable entirely in the form of the Company's common stock. No shares were
issued under the earnout provisions in 2000. At December 31, 2000 all of the
Company's obligations related to the earnout provisions have been satisfied and
there are no outstanding liabilities related to the earnout agreements. A
summary of the allocation of the $41,965,833 aggregate purchase price of the
1999 acquisitions to the net assets acquired follows:

<Table>
<S>                                                            <C>
Working capital (deficit)...................................   $(9,296,459)
Long-term assets............................................    29,517,927
Deferred tax liabilities....................................    (2,655,384)
Acquired intangibles........................................    24,399,749
                                                               -----------
Aggregate purchase price....................................   $41,965,833
                                                               ===========
</Table>

     All of the aforementioned acquisitions in 1999 have been accounted for as
purchases. Accordingly, the results of operations of the purchased companies are
included in the consolidated financial statements for periods subsequent to the
date of acquisition or the date management obtained day-to-day management and
financial control. The excess of the aggregate purchase price over the estimated
fair value of the net assets acquired in all of the acquisitions has been
recorded as acquired intangibles. The acquired intangibles are being amortized
on a straight-line basis over periods of twenty to forty years.

     The unaudited pro forma combined results of operations of the Company and
all of its subsidiaries for the year ended December 31, 1999, after giving
effect to certain pro forma adjustments as if the acquisitions had taken place
on January 1, 1998, are as follows:

<Table>
<Caption>
                                                                  1999
                                                              ------------
<S>                                                           <C>
Net sales...................................................  $141,401,003
                                                              ============
Net income (loss)...........................................  $  3,117,343
                                                              ============
Net income (loss) attributable to common stockholders.......  $  2,800,561
                                                              ============
Net income (loss) per share -- diluted......................  $       0.09
                                                              ============
Weighted average shares used in computation.................    30,467,766
                                                              ============
</Table>

                                        82
<PAGE>
                   U.S. PLASTIC LUMBER CORP. 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, 1998 or of future results of operations
of the consolidated entities.

  POOLING TRANSACTIONS

     On June 25, 1999, the Company acquired 100% of the stock of Barbella
Environmental Technology, Inc. ("Barbella"), an environmental remediation and
construction service company located in Somerville, New Jersey, for 810,000
shares of the Company's common stock. The Company incurred merger costs totaling
$595,000 in the Barbella transaction which were charged to expenses in the
second quarter of 1999. On September 28, 1999, the Company acquired 100% of the
stock of Eureka Plastics of California, Inc. ("Eureka"), and Ecosource
Corporation ("Ecosource"), for 236,600 and 392,000 shares respectively of the
Company's common stock, in unrelated transactions. Both of these companies
recycle and process plastics in Southern California. The Company incurred $
810,000 of costs related to these mergers that were written off in the third
quarter of 1999. On December 14, 1999, the Company acquired 100% of the stock of
Clean Rock Industries, Inc. and Clean Rock Properties, Ltd. (collectively "Clean
Rock"), for 422,164 shares of the Company's common stock. Clean Rock Industries,
Inc. is a soil recycling facility located in Hagerstown, Maryland. Clean Rock
Properties, Ltd. is a holding company that owns the real estate upon which this
business operates. The Company incurred $440,000 of costs related to the Clean
Rock merger which were charged to expense in the fourth quarter of 1999.

     The Company has accounted for each of the Barbella, Eureka, Ecosource and
Clean Rock transactions as a pooling of interests. Accordingly, the accompanying
financial statements include the applicable amounts for the pooled companies as
if the acquisitions had taken place on January 1, 1998. Following is a summary
of the amounts included in the accompanying statements of operations for the
year ended December 31, 1999 for all of the pooled companies:

<Table>
<Caption>
                                                                 1999
                                                              -----------
<S>                                                           <C>
Net sales...................................................  $34,480,025
Net income..................................................    1,747,110
Net income per share........................................  $       .06
</Table>

     The statement of stockholders' equity was also restated to include $850,523
of retained earnings and $457,302 of additional paid in capital for all of the
pooled companies as of January 1, 1998. The Company had no inter-company
transactions with the pooled entities prior to their acquisition.

2000 ACQUISITIONS

     On February 10, 2000, the Company acquired certain assets and certain
liabilities of Baron Enterprises, Inc. ("Baron"), a manufacturer of plastic slip
and tier sheets used in handling freight. Baron operates facilities in Denver,
CO and Reidsville, NC. Both plants manufacture tier and slip sheets that are
similar to products manufactured in the Company's Chicago facility. The
acquisition was accounted for as a purchase. Accordingly the $1,635,147 excess
of the purchase price over the value of the net tangible assets acquired is
included in acquired intangibles as of December 31, 2000.

     The $2,105,000 purchase price of the Baron acquisition consisted of 202,376
shares of the Company's common stock valued at an aggregate of $1,800,000 and
acquisition related costs of $305,000.

                                        83
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the allocation of the purchase price of the Baron acquisition
to the net assets acquired follows:

<Table>
<S>                                                            <C>
Working capital.............................................   $ 1,540,072
Long-term assets............................................     3,096,778
Long-term debt..............................................    (4,166,997)
Acquired intangibles........................................     1,635,147
                                                               -----------
Aggregate purchase price....................................   $ 2,105,000
                                                               ===========
</Table>

     The unaudited pro forma combined results of operations of the Company and
all of its subsidiaries for the years ended December 31, 2000 and 1999 after
giving effect to certain pro forma adjustments as if the Baron acquisition had
taken place on January 1, 1999, are as follows:

<Table>
<Caption>
                                                               2000           1999
                                                           ------------   ------------
<S>                                                        <C>            <C>
Net sales................................................  $175,226,924   $153,913,003
Net (loss) income........................................  $(12,653,499)  $  1,973,498
Net (loss) income attributable to common stockholders....  $(13,473,255)  $  1,656,716
Net (loss) income per share -- diluted...................  $       (.39)  $        .05
Weighted average shares used in computation..............    34,319,470     30,670,142
</Table>

     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, 1999 or of future results of operations
of the consolidated entities.

5. ACCOUNTS RECEIVABLE, NET

     Accounts receivable consist of the following at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                2001          2000
                                                             -----------   -----------
<S>                                                          <C>           <C>
Trade receivables..........................................  $26,814,035   $29,679,374
Unbilled receivables related to long-term contracts........    8,471,782     8,749,307
Costs and estimated profits in excess of billings..........    3,208,865     4,252,847
Retainage..................................................    3,992,284     3,457,329
Allowance for doubtful accounts............................   (5,170,723)   (2,375,479)
                                                             -----------   -----------
Accounts receivable (net)..................................  $37,316,243   $43,763,378
                                                             ===========   ===========
</Table>

     In 1999 and 2000 the Company's environmental recycling division was
involved in a project with the Pennsylvania Department of Environmental
Protection ("PaDEP") in which work was performed beyond the original scope of
the project. The additional work was required in order to meet the objectives of
the project, which were mutually agreed upon by the PaDEP and the Company, and
to avoid further consequential damages. When the project was completed, the
Company put in a claim to PaDEP for approximately $6.7 million as compensation
for this additional work, an amount which was disputed by PaDEP. The Company
retained outside counsel and two independent consulting firms with experience in
these matters to represent it, and at December 31, 2000 had a receivable balance
of approximately $4.2 million in connection with this claim, of which
approximately $3.8 million was included in unbilled receivables related to long
term contracts, and approximately $400,000 was included in trade receivables.
This amount was based on management's expectation of recovery of the extra
costs, as well as the advice of outside counsel as to what the

                                        84
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company was likely to recover upon completion of the dispute resolution process.
On July 19, 2001 PaDEP offered to pay the Company approximately $284,000 in full
and complete settlement of this claim. The Company rejected this offer and
demanded a pre-settlement hearing on this matter, which took place on November
19, 2001. On January 4, 2002 PaDEP rendered a pre-settlement hearing decision
and recommended a payment to the Company of approximately $1 million. Because
the Company strongly believes in the merits of its claim and its ability to
support it with the appropriate facts, documentation and expert opinions, the
Company also rejected this offer and proceeded with the next step in the dispute
resolution process, which is a formal hearing with the Board of Claims for
Pennsylvania. As discussed in note 3, on December 29, 2001 the Company entered
into an agreement to sell Clean Earth, Inc. Under the terms of the proposed
agreement the Company retained all of the rights to this claim for payment.
While the Company believes the expertise of the necessary personnel from Clean
Earth will be available to the Company in any future litigation with respect to
this matter, there can be no assurances the Company will have access to this
important resource. While the Company has every intention of pursuing this claim
for the full amount, the Company decided to establish an allowance for this
receivable for the difference between the amount offered in the January 4, 2002
decision and the carrying amount, resulting in a $3,180,000 charge to bad debt
expense at December 31, 2001.

     With the exception of payments due under long-term contracts, as discussed
in the Revenue Recognition section of Note 1, the Company believes that all
receivables included in the table above are collectible within one year.

6.  INVENTORIES

     Inventories consist of the following at December 31, 2001 and 2000:

<Table>
<Caption>
                                                                 2001         2000
                                                              ----------   ----------
<S>                                                           <C>          <C>
Raw materials...............................................  $1,458,328   $5,626,356
Finished goods..............................................   4,207,620    4,097,034
                                                              ----------   ----------
Inventories.................................................  $5,665,948   $9,723,390
                                                              ==========   ==========
</Table>

7.  PROPERTY, PLANT AND EQUIPMENT, NET

     Property, plant and equipment consist of the following at December 31, 2001
and 2000:

<Table>
<Caption>
                                             USEFUL LIVES        2001           2000
                                            --------------   ------------   ------------
<S>                                         <C>              <C>            <C>
Land......................................                   $  6,257,500   $  6,257,500
Buildings.................................  30 to 40 years     24,875,101     21,460,673
Machinery & equipment in use..............  5 to 20 years      67,944,205     69,427,149
Leasehold improvements....................  Life of lease       4,062,217      5,486,112
Furniture and office equipment............   5 to 7 years       2,289,843      2,364,176
Construction in progress..................                      4,066,672     11,841,860
                                                             ------------   ------------
                                                              109,495,538    116,837,470
Less accumulated depreciation.............                    (22,579,478)   (16,292,531)
                                                             ------------   ------------
Property, plant and equipment (net).......                   $ 86,916,060   $100,544,939
                                                             ============   ============
</Table>

                                        85
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8.  NOTES AND CAPITAL LEASES PAYABLE

     Notes payable and capital leases consist of the following at December 31,
2001 and 2000:

<Table>
<Caption>
                                                               2001           2000
                                                           ------------   ------------
<S>                                                        <C>            <C>
Revolving credit line under the Senior Credit Facility
  with interest payments monthly at prime plus 3.5%
  collateralized by accounts receivable, inventory and
  equipment of certain subsidiaries of the company.......    12,400,000     14,900,000
Term loan under the Senior Credit Facility with quarterly
  installments of $1,250,000 through June 30, 2001,
  quarterly installments of $2,500,000 through March 31,
  2002, and the remainder due July 2, 2002, with monthly
  interest payments at prime plus 3.5% collateralized by
  substantially all the assets of certain subsidiaries of
  the company............................................    25,000,000     27,500,000
Equipment term loans under the Master Credit Facility due
  in monthly installments of approximately $250,000
  through June 2006 bearing interest at LIBOR plus
  3.5%...................................................    11,356,490     13,514,733
Low 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 CENJ facility...................................     1,325,399      1,426,229
Real estate loan payable in monthly installments of
  approximately $14,720 through June 1, 2009 bearing
  interest at .50% over prime, collateralized by the CEP
  facility...............................................     1,000,817      1,093,559
Notes payable to government agency, payable in monthly
  installments totaling $9,505 through July 1, 2003,
  including interest at 5% to 5.5%.......................       172,671        285,665
Capital lease payable on real estate in monthly
  installments of $41,566 through January 31, 2009
  bearing interest of 10% collateralized by Chicago
  facility...............................................     3,000,000      3,000,000
Note payable assumed in acquisition of Brass payable in
  annual installments of $267,000 through December 31,
  2004 plus interest accrued at 5% (interest imputed at
  8.5%)..................................................       800,000        800,000
Other notes and capital leases payable in monthly
  installments of approximately $150,000, maturing
  through January 1, 2006, with interest ranging from
  5.9% to 11.75%, collateralized by various equipment of
  subsidiaries of the Company............................     2,364,608      3,629,021
                                                           ------------   ------------
          Total notes payable and capital leases.........    57,419,985     66,149,207
Less current portion.....................................   (51,778,636)   (11,535,698)
                                                           ------------   ------------
Long-term portion........................................  $  5,641,349   $ 54,613,509
                                                           ============   ============
</Table>

     On June 30, 2000 the Company terminated its previously existing line of
credit and entered into a new three-year Senior Credit Facility with three
banks. The Senior Credit Facility provides for a $30,000,000 term loan and a
$15,000,000 revolving credit line. During 2000, the Senior Credit Facility
allowed the Company to select from two interest rate options, one based on a
spread over the prime rate and the other based on a spread over the Eurodollar
deposit rate. The spread above each interest rate option was determined by the
Company's ratio of consolidated debt to EBITDA. Effective with the second
amendment to the Senior Credit Facility dated March 12, 2001 the interest rate
on all borrowings under the Senior Credit Facility was the prime rate plus 350
basis points. The revolving credit line has an unused commitment fee of 50 basis
points. The weighted

                                        86
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

average interest rate on the Senior Credit Facility was approximately 9.1% and
11.2% during 2001 and 2000 respectively.

     In terminating the previously existing line of credit, the Company incurred
an extraordinary loss in the second quarter of 2000 for prepayment penalties and
the write off of deferred loan costs amounting to $1,027,785, net of taxes. At
December 31, 2001 the Company had outstanding borrowings under the Senior Credit
Facility of $37,400,000, plus an additional $2,495,000 of deferred interest,
fees and penalties.

     The Senior Credit Facility requires the maintenance of defined levels of
net worth, various financial performance ratios and restrictions on capital
expenditures, dividend payments, acquisitions and additional indebtedness.

     At September 30, 2000 the Company was not in compliance with certain
covenant requirements of the Senior Credit Facility for which the Company
received waivers and amendments dated November 13, 2000. In addition to an
interest rate increase of 200 basis points and amendment fees of $428,125, the
terms of the amendments required the Company to raise a minimum of $2 million in
equity prior to November 30, 2000, an additional $2 million prior to December
26, 2000, and an additional $500,000 prior to January 31, 2001. The amended
terms also put further limits on the Company's capital expenditures, and gave
the senior lenders the option to permanently reduce their commitment on the
revolving credit line when payments were made on that portion of the Senior
Credit Facility by the amount paid.

     At December 31, 2000, the Company was not in compliance with certain
financial covenant requirements of its amended Senior Credit Facility, for which
the Company received a Waiver and Second Amendment dated March 12, 2001. In
addition to amendment fees of $106,250, the terms of the amendment required the
Company to raise an aggregate of $6,500,000 of equity or equity equivalents
prior to February 28, 2002. The Waiver and Second Amendment also put further
limits on the Company's capital expenditures, and contained a provision
requiring the Senior Credit Facility be refinanced or paid in full by April of
2002.

     On July 13, 2001, the Company entered into a Waiver and Third Amendment to
the Senior Credit Facility ("Waiver and Third Amendment") with its senior
lenders, the primary terms of which were as follows: (i) to extend the required
due date to refinance the Senior Credit Facility until July 1, 2002, (ii) extend
terms relative to the Company's borrowing base as defined in the Amendment and,
(iii) provide for mandatory prepayment when certain outstanding claims of the
Company are collected.

     On September 28, 2001, the Company notified all of the banks which
participate in its Senior Credit Facility that the Company would not make the
$2.5 million term loan payment due September 30, 2001 without jeopardizing its
business operations. In addition, the Company was not in compliance with some of
the covenants under its Senior Credit Facility as of September 30, 2001.
Substantially all of the assets of the Company have been pledged as collateral
with respect to the Senior Credit Facility. Effective November 14, 2001, the
Company entered into a forbearance agreement with the participating banks
whereby the lenders under the Senior Credit Facility agreed to accept interest
only payments from the Company and allowed it to defer the September 30, and
December 31, 2001 principal payments until the earlier of February 28, 2002 or
the sale of some of its assets. Pursuant to the terms of the forbearance
agreement, the lenders also agreed not to take any action against the Company
with respect to covenant violations as of September 30 and December 31, 2001.
The forbearance agreement provided for a forbearance fee of $100,000 payable by
the Company at the termination of the forbearance period. The forbearance period
terminated on February 28, 2002. As of February 28, 2002 the Company did not
make the required principal payments under the forbearance agreement that were
originally due September 30, and December 31, 2001 in the amount of $2.5 million
each. The Company also did not make the required interest payments due January
31, and February 28, 2002. In addition, on March 11, 2002 the Company informed
the lenders under the Senior Credit Facility that it would not make the $2.5
million principal payment due March 31, 2002. The Company also

                                        87
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

has an additional $2.5 million principal payment due June 30, 2002 and the
outstanding balance of the Senior Credit Facility is due in its entirety on July
1, 2002.

     The Company is negotiating with the senior lenders under the Senior Credit
Facility for an extension of the forbearance period in connection with its
failure to make its September 30 and December 31, 2001 principal payments on
February 28, 2002 and its interest payments due January 31, 2002 and February
28, 2002. Although the failure to make these principal and interest payments
constitute events of default under the Senior Credit Facility and the
forbearance agreement, none of the lenders that are party to the Senior Credit
Facility have taken action against the Company. The Company believes that an
extension of the forbearance period may provide it with sufficient time to close
the Clean Earth sale transaction or find an alternative means to refinance the
Senior Credit Facility. In the event that the necessary waiver and forbearance
are not obtained or future principal and interest payments cannot be made, the
lenders under the Senior Credit Facility can demand immediate repayment from the
Company of the outstanding balance on the Senior Credit Facility.

     During 2000, the Company obtained $14,600,000 in new equipment financing
through a Master Credit Facility with GE Capital in order to finance the
expansion of its plastic lumber manufacturing facilities. The Master Credit
Facility is secured by certain equipment and contains a minimum tangible net
worth covenant. At December 31, 2000 the Company was not in compliance with the
minimum tangible net worth covenant. On March 30, 2001, the Company entered into
amendments on the Master Credit Facility with GE Capital to waive the tangible
net worth covenant for the fourth quarter 2000 and amended the covenant for each
quarter of 2001. The Company was required to accelerate a portion of the
principal payments on the Master Credit Facility and was required to refinance
or repay a portion of the outstanding balance on the Master Credit Facility upon
the refinancing or repayment of the Senior Credit Facility.

     On January 3, 2002, the Company notified all of the participants in its
Master Credit Facility with GE Capital Corporation that it would not be making
any further principal payments until at least April of 2002. In addition, the
Company did not make the term payment of $1.7 million due January 2, 2002 and,
as of September 30, and December 31, 2001, was not in compliance with the
tangible net worth covenant under the Master Credit Facility. On February 28,
2002 the Company, GE Capital Corp. and the other participants in the Master
Credit Facility agreed to and signed a Forbearance and Modification Agreement
which restructures the Master Credit Facility by allowing the Company to defer
principal payments until April 1, 2002 while continuing to make interest
payments and providing a waiver of the September 30, and December 31, covenant
violations. In accordance with this agreement, the Company will be required to
make a $500,000 principal payment upon the proposed sale of Clean Earth, Inc.,
if it takes place. In addition, the Company will be required to make a $2
million prepayment on the Master Credit Facility upon the earlier of (i) an
increase in availability on a new revolving credit facility to at least $10
million; (ii) the Company's exercising the purchase option on, and subsequently
obtaining a mortgage against, its Chicago property; or (iii) September 30, 2002.
The Forbearance and Modification Agreement also re-sets the minimum tangible net
worth covenant for March 31, 2002 and adds new covenants for minimum levels of
EBITDA commencing March 31, 2002 if the proposed sale of Clean Earth does not
take place, or on June 30, 2002 if the proposed sale does take place. It also
requires the Company, under certain circumstances, to grant additional security
interest to GE Capital Corp. and to the other participants in the Master Credit
Facility for some of the Company's property, plant and equipment that these
lenders currently have no security interest in.

     Pursuant to this agreement, commencing on September 1, 2002, the Master
Credit Facility will be restructured to a 48-month term. The Company will be
required to pay a forbearance fee in connection with the Forbearance and
Modification Agreement in an amount equal to 1% of our obligations under the
Master Credit Facility outstanding as of the date of the proposed sale of Clean
Earth. This forbearance fee will be immediately due and payable if the closing
of the proposed sale of Clean Earth does not occur by June 1, 2002.

                                        88
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Master Credit Facility also contains a provision whereby an event which
would accelerate payment terms of the Company's Senior Credit Facility would
also accelerate the payment terms of the Master Credit Facility to the same due
date as the Senior Credit Facility. The Senior Credit Facility has a similar
provision with respect to the Master Credit Facility. In addition, defaults
under these lending agreements cause defaults, pursuant to cross default
provisions, of the Company's other agreements, including, but not limited to,
other lending agreements, debenture agreements, lease agreements and others.

     At December 31, 2000, the Company had interest rate swap agreements
outstanding with a notional amount of $20,000,000 under which the Company paid a
fiscal rate of interest and received a floating rate of interest over the term
of the interest rate swap agreement without the exchange of the underlying
notional amounts. The interest rate swap agreements converted a portion of the
Senior Credit Facility from a floating rate to a fixed rate obligation. The fair
value of the interest rate swap agreements outstanding at December 31, 2000 was
$453,615. On January 1, 2001, in accordance with the transition provisions of
SFAS No. 133, the Company recorded a net-of-tax cumulative-effect loss of
$453,615 in accumulated other comprehensive income to recognize at fair value
the interest-rate swap derivatives that are designated as a cash-flow hedging
instruments. See note 17 for further discussion of these cash-flow hedging
instruments.

     The Company did not make the payments of $266,667 that were due on December
31, 2001 and December 31, 2000 in connection with the $800,000 note assumed in
the Brass acquisition. On February 4, 2002 the Company reached an agreement with
the holder of the note, Waste Management Inc., to amend the terms of the note
whereby it would be due in three equal annual installments beginning December
31, 2002. The agreement also waives the failure to make the aforementioned
principal and interest payments that had been due on December 31, 2001 and 2000.

     Notes payable and capital leases mature as follows:

<Table>
<Caption>
YEAR ENDING                                                     AMOUNTS
-----------                                                     -------
<S>                                                           <C>
2002........................................................  $51,778,636
2003........................................................      503,888
2004........................................................    1,202,132
2005........................................................      153,655
2006........................................................      165,000
2007 and later..............................................    3,616,674
                                                              -----------
                                                              $57,419,985
                                                              ===========
</Table>

9. CONVERTIBLE SUBORDINATED DEBENTURES

     On February 2, 2000 the Company issued a 5% $7,500,000 convertible
subordinated debenture (the "Fiscal 2000 Debenture"), which is convertible into
shares of the Company's common stock. The original conversion price of the
Fiscal 2000 Debenture was the lower of $9.65 or the lowest trading price of the
Company's common stock during the four trading days prior to the conversion
date, but not less than $8.25 (the "minimum floating conversion price"). The
convertible debenture includes a provision that, in the event that the market
price of the common stock of the Company is less than $8.25 for ten consecutive
trading days after the first anniversary of the issuance of the debenture, the
holder of the debenture may give notice to the Company which would require the
Company to, at the Company's option, (a) repurchase the debenture for a cash
price equal to 110% of the outstanding principal amount of the debenture plus
accrued interest, or (b) reset the minimum floating conversion price to zero
(which changes the conversion price to the market price upon conversion, not to
exceed $9.6525). The right of the debenture holder to convert the debenture to
common stock is limited in that the holder may not convert the debenture if upon
such conversion the holder will become a beneficial owner of more than 9.9% of
the total issued and outstanding shares of the Company's

                                        89
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

common stock. If the holder elects to convert and the entire debenture cannot be
converted due to this limitation, the Company must settle in cash that portion
of the debenture which cannot be converted to stock when the debenture matures
in February of 2005, at 110% of the sum of the outstanding balance of the
debenture that is in excess of the limitation and accrued but unpaid interest
and default payments.

     In conjunction with the issuance of the debentures, the Company issued
200,000 warrants to purchase Common stock at $10.09 per share. The Company
expensed a beneficial conversion feature of $270,946 in the first quarter of
2000. The $575,703 value assigned to the warrants and the $750,000 discount
attributed to the 10% contingent premium discussed in option (a) in the above
paragraph are reflected as discounts from the face value of the Fiscal 2000
Debenture and are being accreted into interest expense over the term of the
debenture.

     On February 20, 2001 the holder of the Fiscal 2000 Debenture exercised its
option to have the Company repurchase the debenture for cash at 110% of the
outstanding principal balance plus accrued interest or reset the minimum
floating conversion price to zero. The Company elected not to repurchase the
debenture and the minimum floating conversion price was effectively reset to
zero. During 2001 the holder of the Fiscal 2000 Debenture converted $2,191,494
of the debenture and $23,801 of unpaid interest into 2,134,742 shares of common
stock at prices ranging from $1.00 to $1.05 per share. Unamortized debenture
issuance costs and debt discounts of $12,475 and $120,558 respectively were
charged to additional paid-in capital. As a result of these conversions, the
Company recorded an additional beneficial conversion feature benefit granted to
the holder of approximately $280,000, which was charged to interest expense
during 2001. Also during 2001, the balance of the Fiscal 2000 Debenture
increased by $201,764 resulting from interest that was paid in kind. As of
December 31, 2001 the outstanding balance on the Fiscal 2000 Debenture was
$5,583,579, net of unamortized discounts.

     During the first quarter of 2002 the holder of the Fiscal 2000 Debenture
converted an additional $697,000 of principal and $5,105 of unpaid interest into
1,903,031 shares of common stock. The Company will record an additional
beneficial conversion feature benefit in connection with these conversions in
the first quarter of 2002 of approximately $323,000.

     On June 15, 2001, the Company issued a convertible subordinated debenture
due May 31, 2002 in the principal amount of $4.0 million (the "Fiscal 2001
Debenture") and a warrant to purchase 250,000 shares of its common stock, at an
initial purchase price of $2.00 per share, (the "Warrant") to Halifax Fund, LP
("Halifax"). Halifax paid the Company $4.0 million for these securities. The
$195,120 value assigned to these warrants was recorded as a discount to the face
value of the debenture, and is being accreted as interest expense through June
30, 2002. The principal amount of the Fiscal 2001 Debenture bears interest at a
rate of 18% per year through August 14, 2001. On August 9, 2001, the Company and
Halifax amended the Fiscal 2001 Debenture agreement to change the due date from
May 31, 2002 to July 1, 2002.

     The Company has the option at any time and, upon five business day's
notice, to repurchase all or any part of the Fiscal 2001 Debenture. At August
15, 2001, the Company did not repurchase the Fiscal 2001 Debenture, nor did it
consummate a sale/leaseback of some of its assets under the terms described in
the Fiscal 2001 Debenture Purchase Agreement. As a result, Halifax may convert
the principal amount plus accrued interest and any default payments on the
Fiscal 2001 Debenture into shares of the Company's common stock. The conversion
price of the common stock under the Fiscal 2001 Debenture is a price per share
equal to the average of the lowest trading prices of the common stock on the
principal trading market for the common stock during any three trading days
during the twenty-two trading days immediately prior to the conversion date.
Because the Fiscal 2001 Debenture was not repurchased by August 15, 2001 and the
sale/leaseback was not completed, in accordance with the terms of the Fiscal
2001 Debenture the Company: (i) issued to Halifax for no consideration another
Warrant to purchase 250,000 shares of its common stock at a purchase price per
share equal to 120% of the closing market price of such stock on August 15,
2001, which was $0.90 per share and, (ii) increased the interest rate from 18%
to 25%. On August 15, 2001, the Company
                                        90
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recognized a beneficial conversion feature in the amount of $534,000 which was
recorded as a discount to the debenture. The $170,000 value assigned to the
warrants issued on August 15, 2001 was recorded as an additional discount to the
face value of the debenture. These discounts are being accreted as interest
expense through June 30, 2002. As of December 31, 2001 the outstanding balance
on the Fiscal 2001 convertible debenture is $3,579,144, net of unamortized
discounts.

     As part of the financing, the Company also granted a subordinate lien on
all its assets to Halifax through a Security Agreement. The lien not only
secures the Company's obligations under the Fiscal 2001 Debenture, but it also
secures the Company's obligations under the Fiscal 2000 Debenture due February
5, 2005 and the $1.0 million stated value of the Company's Series D Convertible
Preferred Stock previously sold to Halifax. In addition, the Fiscal 2001
Debenture Purchase Agreement with Halifax required that the shares and
associated warrants underlying the Fiscal 2001 Debenture be registered within 90
days of the June 15, 2001 closing date of the agreement. The Fiscal 2001
Debenture Purchase Agreement provides that the Company pay in cash a default
payment of 2.5% of the sum of the outstanding principal amount of the Fiscal
2001 Debenture plus the accrued interest for each thirty day period that the
shares are not registered. As of December 31, 2001 the Company had not filed a
registration statement to register these shares and the Company has accrued
$350,000 in penalties due Halifax as a result of the Company's failure to
register these shares.

10. CAPITAL STOCK

SERIES D CONVERTIBLE PREFERRED STOCK

     In September of 2000 the Company issued 1,187,285 shares of its Series D
Preferred Stock and received net proceeds of $4.1 million. The Series D
Preferred Stock pays a quarterly cash dividend at an annual rate of 15%, with
the initial dividend payable on March 31, 2001. Each share of Series D Preferred
Stock is convertible into one share of the Company's common stock at the option
of the holder any time after March 31, 2001, subject to certain rights of the
Company. The Company at its sole option can redeem the Series D Preferred Stock
at 115% of the initial purchase price in cash prior to March 31, 2001. In
addition, if the common stock of the Company is trading at an average closing
price of $3.50 per share or higher for 20 consecutive trading days at any time
prior to March 1, 2002 the Company has the right to require conversion of the
Series D Preferred Stock into common stock. Otherwise, the Series D Preferred
Stock automatically converts into common stock on March 1, 2002. The beneficial
conversion feature in the amount of $1,080,563 was accreted and recorded as
preferred stock dividend from the date the Series D Preferred Stock was issued
until the earliest possible conversion date.

     The Company did not pay any of the required cash dividends on the Series D
Preferred Stock due to a deterioration in the Company's financial condition.
Dividends in arrears on the Series D Preferred Stock amounted to $808,631 at
December 31, 2001 and $911,466 at February 28, 2002. On February 28, 2002 the
Company issued a promissory note to each holder of Series D Preferred Stock for
the corresponding amount of unpaid dividends owed to each holder. The notes pay
quarterly interest at 5% per annum and are due April 1, 2004. On March 1, 2002
all 1,187,285 shares of outstanding Series D Preferred Stock was converted into
an equal number of shares of common stock.

SERIES E CONVERTIBLE PREFERRED STOCK

     In November of 2000, the Company issued 1,142,857 shares of its Series E
Preferred Stock to the Stout Partnership, the Company's largest shareholder, and
received net proceeds of $2 million. The Series E Preferred Stock pays a monthly
cash dividend at an annual rate of 10%, with the initial dividend payable on
January 15, 2001. Each share of Series E Preferred Stock is convertible into one
share of the Company's common stock at the option of the holder any time after
December 31, 2001, subject to certain rights of the Company. The Company can at
its sole option redeem the Series E Preferred Stock at 110% of the initial
purchase price in cash prior to December 31, 2001. In addition, if the common
stock of the Company is
                                        91
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

trading at an average closing price of $1.75 per share or higher for 20
consecutive trading days at any time prior to March 1, 2002 the Company has the
right to require conversion of the Series E Preferred Stock into common stock.
Otherwise, the Series E Preferred Stock automatically converts into common stock
on March 1, 2002.

     During February and March 2001, the Company issued an additional 571,428 of
Series E Preferred stock to the Stout Partnership and received net proceeds of
approximately $1 million. On March 4, 2002 the Company's Board of Directors
extended the automatic conversion date of the Series E Preferred Stock to March
31, 2002.

FUSION CAPITAL FUND II

     On December 7, 2000, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion Capital
agreed to purchase up to $6.0 million of the Company's common stock subject to
increase, at the Company's discretion, by an additional $6.0 million of common
stock. The $6.0 million of common stock purchasable under the first tranche of
the common stock purchase agreement is to be purchased over a twelve-month
period, subject to a 6-month extension or earlier termination at our discretion.
The selling price of the shares will be equal to the lesser of (1) $15.00 or (2)
a price based upon the future market price of the common stock without any fixed
discount to the market price. Pursuant to the terms of the Agreement with
Fusion, the Company may not sell shares to Fusion until such time as the
Securities and Exchange Commission declares a registration statement effective
which registers for resale the shares Fusion Capital has agreed to purchase.
Because the Company did not file a registration statement with the Securities
and Exchange Commission prior to October 31, 2001, Fusion Capital has the right
to terminate this agreement. The Company currently has no intention of utilizing
this agreement.

     On March 2, 2001 under the terms of the common stock purchase agreement,
Fusion Capital Fund II, LLC was issued 200,000 shares of the Company's common
stock as a commitment fee. The market value of these shares was approximately
$287,000 at the time of issuance. Unless an event of default occurs, these
shares must be held by Fusion Capital until the common stock purchase agreement
has been terminated. On August 31, 2001 the common stock purchase agreement was
amended whereby the Company granted Fusion Capital warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $1.00 per share in
exchange for Fusion Capital's agreement to revise the terms under which Fusion
Capital could terminate the agreement. These warrants were valued at
approximately $65,000. During 2001 the Company recorded expenses of
approximately $555,000 in connection with the Fusion Capital Agreement,
including the value of these shares and warrants issued during 2001.

COMMON STOCK PRIVATE PLACEMENTS

     On July 3, 2001, the Company issued 476,191 shares of common stock to ZLP
Master Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology
Fund, LTD. at a purchase price of $1.05 per share. This private placement
transaction was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. Net proceeds after issuance costs of approximately $983,000
were used for general corporate purposes. Because the Company did not, within 60
days of July 3, 2001, file a registration statement with the SEC to register the
resale of these shares as required under the stock purchase agreement, the
Company is required to pay a cash penalty fee to the purchasers of these shares
at a rate equal to 1.5% of the outstanding amount purchased for each 30-day
period that a registration statement is not filed. As of December 31, 2001 the
Company had not filed a registration statement to register these shares for
resale and $60,000 has been accrued in connection with this penalty fee. On
November 1, 2001 the Company raised an additional $752,000, net of issuance
costs, through the issuance of 1,334,000 shares of common stock. These private
placement transactions were not

                                        92
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

registered under the Securities and Exchange Act of 1934 (the "Act") in reliance
upon the exemption from registration in Section 4(2) of the Act, as transactions
not involving any public offering.

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 Company generally vest ratably over a period of three years.
Employee stock option activity in 2001, 2000 and 1999 is as follows:

<Table>
<Caption>
                                                              WEIGHTED
                                                              AVERAGE     NUMBER OF
                                                              EXERCISE     OPTIONS
                                                               PRICE     OUTSTANDING
                                                              --------   -----------
<S>                                                           <C>        <C>
Outstanding at December 31, 1998............................   $3.46      1,671,000
  Granted...................................................    6.93      3,040,250
  Exercised.................................................    2.94       (343,332)
  Canceled..................................................    5.04       (465,500)
                                                               -----      ---------
Outstanding at December 31, 1999............................   $6.01      3,902,418
  Granted...................................................    4.41        572,667
  Exercised.................................................    3.75        (85,335)
  Canceled..................................................    7.98       (803,000)
                                                               -----      ---------
Outstanding at December 31, 2000............................   $5.37      3,586,750
  Granted...................................................    2.16        482,250
  Exercised.................................................      --             --
  Canceled..................................................    5.33       (310,000)
                                                               -----      ---------
Outstanding at December 31, 2001............................   $4.96      3,759,000
                                                               =====      =========
</Table>

                                        93
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The weighted average remaining contractual life of all outstanding employee
stock options is 7.0 years at December 31, 2001. Additional information
regarding options outstanding at December 31, 2001, 2000 and 1999 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>         <C>
1999:
                       $2.25    $ 6.00    2,406,918       $4.45        1,182,875       $3.71
                        7.22     12.50    1,495,500        8.53          284,166        8.27
                       -----    ------    ---------       -----        ---------       -----
                       $2.25    $12.50    3,902,418       $6.01        1,467,041       $4.59
                       =====    ======    =========       =====        =========       =====
2000:
                       $1.25    $ 6.25    2,634,250       $4.34        1,706,128       $4.23
                        6.25     12.50      952,500        8.22          396,673        8.02
                       -----    ------    ---------       -----        ---------       -----
                       $1.25    $12.50    3,586,750       $5.37        2,102,801       $4.95
                       =====    ======    =========       =====        =========       =====
2001:
                       $0.50    $ 6.25    2,899,000       $4.03        2,096,383       $4.27
                        6.25     12.50      860,000        8.11          615,003        8.01
                       -----    ------    ---------       -----        ---------       -----
                       $0.50    $12.50    3,759,000       $4.96        2,711,386       $5.12
                       =====    ======    =========       =====        =========       =====
</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, 2001, 2000 and 1999.

<Table>
<Caption>
                                                           2001           2000          1999
                                                       ------------   ------------   ----------
<S>                                                    <C>            <C>            <C>
As reported results of operations:
  Net (loss) earnings................................  $(48,162,935)  $(12,475,131)  $3,148,816
                                                       ============   ============   ==========
  Net (loss) earnings attributable to common
     stockholders....................................  $(49,539,867)  $(13,294,890)  $2,832,034
                                                       ============   ============   ==========
  Basic (loss) earnings per share....................  $      (1.34)  $       (.39)  $      .10
                                                       ============   ============   ==========
  Diluted (loss) earnings per share..................  $      (1.34)  $       (.39)  $      .09
                                                       ============   ============   ==========
Pro forma results of operations:
  Net (loss) earnings................................  $(49,433,991)  $(14,199,284)  $1,086,001
                                                       ============   ============   ==========
Net (loss) earnings attributable to common
  stockholders.......................................  $(50,810,923)  $(15,019,040)  $  769,219
                                                       ============   ============   ==========
  Basic (loss) earnings per share....................  $      (1.37)  $       (.44)  $      .03
                                                       ============   ============   ==========
  Diluted (loss) earnings per share..................  $      (1.37)  $       (.44)  $      .03
                                                       ============   ============   ==========
</Table>

     For purposes of the above disclosure, the determination of the fair value
of stock options granted in 2001, 2000 and 1999 was based on the following: (i)
a risk free interest rate of 5%, 7% and 7% respectively; (ii) expected option
lives of four years, four years and four years respectively; (iii) expected
volatility in the

                                        94
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

market price of the Company's common stock of 100%, 100% and 75% respectively;
and (iv) expected dividends on the underlying common stock of 0%, 2.5% and 2.5%
respectively.

     The weighted average fair value of options granted to employees were $0.93,
$2.96 and $4.60 per share for the years ended December 31, 2001, 2000 and 1999
respectively.

NON-EMPLOYEE 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 were
exercised on June 30, 1999.

     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 note 14). Stout Partnership exercised 250,000 shares
in September 1999. The remaining 70,000 options expired during 2001.

     Nonemployee stock option activity in 2001, 2000 and 1999 is summarized as
follows:

<Table>
<Caption>
                                                                                NUMBER OF
                                                            WEIGHTED AVERAGE     OPTIONS
                                                             EXERCISE PRICE    OUTSTANDING
                                                            ----------------   -----------
<S>                                                         <C>                <C>
Outstanding at December 31, 1998..........................       $2.37           520,395
  Granted.................................................        7.38            25,000
  Exercised...............................................        2.32          (427,895)
  Canceled................................................          --                --
                                                                 -----          --------
Outstanding at December 31, 1999..........................       $3.38           117,500
  Granted.................................................        3.79           102,500
  Exercised...............................................        5.00           (10,000)
  Canceled................................................          --                --
                                                                 -----          --------
Outstanding at December 31, 2000..........................       $3.50           210,000
  Granted.................................................        0.53            41,200
  Exercised...............................................        0.38           (21,200)
  Canceled................................................        2.25           (70,000)
                                                                 -----          --------
Outstanding at December 31, 2001..........................       $3.70           160,000
                                                                 =====          ========
Stock options exercisable at December 31, 2001............       $3.70           160,000
                                                                 =====          ========
</Table>

STOCK WARRANTS

     Warrants to purchase 62,500 common shares at $7.22 per share were issued to
the purchasers of $2,500,000 of convertible subordinated debentures in January
1999. Another 85,000 and 42,500 warrants to purchase common stock at $5.00 and
$7.50, respectively, were also issued in conjunction with the sale of the
$2,500,000 convertible subordinated debentures in 1999. The Company issued
500,000 warrants to purchase the Company's common stock at $6.00 per share to
the shareholders of Brass Investment Company as part of the acquisition
consideration. The company issued warrants to purchase 200,000 common shares at
$10.09 in conjunction with the issuance of $7,500,000 of convertible
subordinated debentures in February 2000 (see note 9). In December 2000, the
company granted 250,000 warrants to the Stout Partnership at an exercise price
of $1.50 per share. The warrants were granted in consideration of the Stout
Partnership for exchanging the unsecured loan to a convertible subordinated
debenture and providing the additional funding of Series E

                                        95
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Preferred Stock (see note 14). August C. Schultes, III and Gary J. Ziegler are
individual partners in Stout Partnership and also serve as directors to the
Company. Mark S. Alsentzer is Chairman and CEO of the Company as well as an
individual partner in Stout Partnership. At December 31, 2000 a total of
1,260,000 warrants were outstanding.

     On June 1, 2001, the Company granted 250,000 warrants to purchase the
Company's common stock to the Stout Partnership at an exercise price of $1.50
per share. The warrants were granted in consideration of the Stout Partnership
extending the maturity date of its $5,000,000 convertible debenture to July 1,
2002 and because some of the assets of the Company were not disposed of as of
June 1, 2001 (see note 14).

     On June 15, 2001 the Company granted 250,000 warrants to Halifax Fund L.P.
at an exercise price of $2.00 per share in connection with their purchase of a
$4,000,000 convertible debenture purchased from the Company on that date (see
note 9). In addition, because the Company failed to retire the debenture prior
to August 15, 2001, and a sale/leaseback of some of the Company's assets was not
consummated in accordance with the terms of the debenture, the Company issued to
Halifax an additional 250,000 warrants at an exercise price of $0.90 per share
on August 15, 2001.

     On July 3, 2001 the Company granted Zimmer Lucas Partners LLC 238,095
warrants in connection with their purchase of 952,381 shares of the Company's
common stock in a private placement transaction.

     In August of 2001 the Company granted a total of 175,000 warrants in
exchange for investment banking and financial consulting services to be incurred
over a prospective one-year period. The exercise price of the warrants range
from $1.07 to $1.40. These warrants were valued at approximately $75,000, and
are being amortized over the related period of services.

     On August 31, 2001 the Company amended the Common Stock Purchase Agreement
entered into with Fusion Capital Fund II, LLC on December 7, 2000 and granted
Fusion 100,000 warrants at an exercise price of $1.00 per share in connection
with the amendment.

     On October 23, 2001 the Company issued 375,200 warrants, at an exercise
price of $0.60 per share, to the participants in the November 1, 2001 common
stock private placement.

     As of December 31, 2001 warrants to purchase 2,828,295 shares of common
stock were outstanding.

EARNOUT AGREEMENT WITH "HISTORICAL SHAREHOLDERS"

     The Company had previously reserved 4,609,386 shares for issuance pursuant
to earnout provisions in the Agreement and Plan of Reorganization entered into
by the Company on December 15, 1995 and subsequently in an Earn Out Rights
Agreement dated October, 1997. The parties to the agreement specified that the
shares would be paid to certain shareholders (Historical Shareholders), who held
the common stock as of the date of the Agreement and Plan of Reorganization,
when net sales or production of Earth Care Global Holdings, on a consolidated
basis, meet or exceed 2.0 million pounds of plastic lumber per month for three
consecutive months, subject to certain limitations contained in the Agreement.

     In 1999 the Company determined that it was unlikely to meet the performance
goals set out in the Earnout Rights Agreement and approached all of the
Historical Shareholders and requested that they sign a Settlement Agreement.
Under the terms of the Settlement Agreement, the historical shareholders
individually waived any future rights to Earnout Shares in exchange for a
reduced payment in the form of Company shares upon signing the agreement.
Approximately 99% of the Historical Shareholders (representing 4,553,606 shares
of the total 4,609,386 earn out shares) agreed to accept 15% of the original
earnout shares. The remaining 1% of the Historical Shareholders could not be
located by the Company, and there are no pending proceedings with these
remaining shareholders.

                                        96
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On January 17, 2000, the Company issued 632,833 shares to the Historical
Shareholders who accepted the Settlement Agreement. The Company has included the
$5,166,005 value of the shares issued in acquired intangibles and additional
paid in capital on the balance sheet as of December 31, 1999.

     During 2001 the Company issued an additional 8,075 shares to a Historical
Shareholder who had previously not received shares under the terms of the
Settlement Agreement.

STOCK RESERVED

     At December 31, 2001, common stock was reserved for the following:

<Table>
<S>                                                            <C>
Shares contingently issuable to USPL and CEI shareholders...       55,845
Non employee stock options..................................      160,000
Employee stock options......................................    3,759,000
Warrants....................................................    2,828,295
Convertible debentures......................................   46,807,323
Preferred Stock.............................................    2,901,570
                                                               ----------
                                                               56,512,033
                                                               ==========
</Table>

11. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

     In September of 2001 the Company announced the closing of three of its
manufacturing facilities and the leasing of two of its resin processing plants
to third parties in an effort to reduce fixed costs, improve customer service
and narrow management's focus to a smaller number of manufacturing facilities,
without reducing total manufacturing capacity. With the exception of activities
associated with exiting the facilities, the Fontana, California, Denton,
Maryland, and Trenton, Tennessee plants were closed on September 28, 2001 and
the equipment and manufacturing processes at these plants were transferred to
the Chicago, Illinois and Ocala, Florida manufacturing locations. The Company is
currently attempting to obtain a buyout or sublease of the closed facilities. In
addition, the Company has discontinued raw material processing at its Auburn,
Massachusetts and Chino, California resin plants and has agreed to lease these
operations to other raw material processors. The Company will continue raw
material processing for its own use at the Chicago and Ocala plants.
Approximately 140 full time manufacturing and administrative positions were
eliminated in connection with the reduction in facilities. The plan of
restructure was adopted by management and the board of directors and
communicated to employees in late September of 2001. During the fourth quarter
of 2001, the Company recorded an acquired intangibles impairment charge related
to the environmental division of $13.5 million as a result of the proposed sale
of CEI (see note 3) and the requirement to reduce to fair value the carrying
value of CEI's long-lived assets. The following is a summary of the
restructuring and asset impairment charges recorded during the third and fourth
quarter of 2001. As a result of this restructuring, the Company recorded the
following charges:

<Table>
<S>                                                            <C>
Write-down for equipment impairment.........................   $ 8,694,000
Write-down for acquired intangibles impairment..............    14,616,000
Lease termination, severance and other exit costs...........     1,656,000
                                                               -----------
  Total restructuring and asset impairment charges..........   $24,966,000
                                                               ===========
</Table>

     During 2001 the Company paid approximately $761,000 in employee
termination, lease termination and other exit costs in connection with the
restructuring and approximately $895,000 remains in the accrual as of December
31, 2001, primarily for lease termination expenses.

                                        97
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2000 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

     In the fourth quarter of 2000, the Company committed to a plan of
restructure with respect to some of the smaller plants in its plastic lumber
division. In connection with the plan of restructure, the Reidsville, North
Carolina plant was closed in October of 2000, the Green Bay, Wisconsin and
Vernon, California plants were closed in January 2001 and the Sweetser, Indiana
facility was closed during the third quarter of 2001. As a result, the Company
recorded the following charges in the fourth quarter of 2000:

<Table>
<S>                                                            <C>
Write-down for equipment impairment.........................   $2,319,000
Lease termination and other exit costs in connection with
  the restructuring.........................................    1,098,000
                                                               ----------
  Total restructuring and asset impairment charges in
     2000...................................................   $3,417,000
                                                               ==========
</Table>

     The Company anticipates lease termination costs will be paid throughout
2001 and 2002, as the Company completes its restructuring plan. As of December
31, 2000, the Company had accrued $1,098,000 in connection with lease
termination costs. During 2001 the Company paid approximately $564,000 in lease
termination payments and charged this amount against the accrual. Also during
2000, the Company reversed $154,000 of the accrual for other exit costs due to a
change in estimate. As of December 31, 2001, the Company has approximately
$380,000 remaining in its 2000 restructuring accrual for lease termination
payments. During 2000 and early 2001, the Company eliminated approximately 300
employees as part of the 2000 restructuring plan. The severance component of the
restructuring plan was communicated to the employees in early January 2001. As a
result, the Company recorded a charge of $182,000 in the first quarter of 2001
in connection with severance. The entire $182,000 cost of these severance
benefits was paid in 2001 and no balance remains in this accrual.

1999 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

     During the first quarter of 1999, the Company committed to a plan to
restructure and consolidated its two operating divisions and facilities. As part
of this plan, the plastic lumber division discontinued the labor intensive flow
mold process and converted entirely to the more efficient continuous extrusion
method of manufacturing plastic lumber. As a result, the Company closed its
facility in Mulliken, Michigan and one of its facilities in Trenton, Tennessee
and recorded the following charges during the first quarter of 1999:

<Table>
<S>                                                            <C>
Write-down of flow mold inventory to its raw material
  Value.....................................................   $2,025,000
Write-down of flow mold equipment to its salvage value......    1,315,000
Severance costs in connection with the restructuring........    1,075,000
Exit costs in connection with the restructuring.............    1,330,000
                                                               ----------
                                                               $5,745,000
                                                               ==========
</Table>

     Of the total charges recorded, $4,365,000 was recorded by the plastic
lumber division and $1,380,000 was recorded by the environmental division, which
includes the closing of the environmental division's Norristown, Pennsylvania
facility. The write-down of flow mold inventory was recorded as a component of
gross profit within the accompanying consolidated statement of operations.
Severance costs relates to the 61 employees from plants that were planned to be
closed during the year. Exit costs consist primarily of lease termination and
idle plant costs during the changeover.

     During 1999, the Company terminated 53 employees and paid $697,000 in
severance costs. In addition, the company charged $973,000 to the exit cost
accrual primarily for lease termination and idle plant costs. As of December 31,
1999, the Company has approximately $378,000 remaining in severance reserves and
approximately $ 357,000 remaining in exit cost reserves, which are primarily for
lease termination costs.

                                        98
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 2000, the Company determined it had approximately $232,000 of excess
accrual from the restructuring charges recorded during the first quarter of
1999. The residual excess reserve was reversed in 2000. As of December 31, 2001,
no amount remains in exit cost accruals pertaining to the 1999 restructuring.

12. 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 $182,547, $127,374 and $132,493 in 2001, 2000 and 1999,
respectively.

13. INCOME TAXES

     The provision (benefit) for income taxes includes federal and state taxes
currently payable and those deferred because of temporary differences between
the 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>
                                                    2001          2000          1999
                                                 -----------   -----------   ----------
<S>                                              <C>           <C>           <C>
Current:
  Federal......................................  $        --   $   509,108   $  178,647
  State........................................       40,073      (290,728)     404,204
                                                 -----------   -----------   ----------
                                                      40,073       218,380      582,851
                                                 -----------   -----------   ----------
Deferred:
  Federal......................................    2,837,276      (778,147)   1,225,417
  State........................................   (2,164,991)     (628,308)     (77,268)
                                                 -----------   -----------   ----------
                                                     672,285    (1,406,455)   1,148,149
                                                 -----------   -----------   ----------
          Total continuing operations..........      712,358    (1,188,075)   1,731,000
Extraordinary item.............................           --      (655,729)          --
                                                 -----------   -----------   ----------
Total provision (benefit) for income taxes.....  $   712,358   $(1,843,804)  $1,731,000
                                                 ===========   ===========   ==========
</Table>

     The total provision for income taxes (benefit) differed from the amount
obtained by applying the federal statutory income tax rate to pre-tax accounting
earnings (loss), before extraordinary item, as follows:

<Table>
<Caption>
                                                    2001          2000          1999
                                                ------------   -----------   ----------
<S>                                             <C>            <C>           <C>
Tax at statutory rate of 34%..................  $(16,133,196)  $(4,296,043)  $1,659,136
State taxes, net of Federal benefit...........    (2,164,991)     (803,245)     198,518
Nondeductible goodwill amortization...........     4,751,761       207,597      656,910
Increases (decreases) in valuation reserves...    14,484,527     4,268,771     (435,500)
Earnings of Pooled Sub S corporations.........            --            --     (223,412)
Other.........................................      (225,743)     (565,155)    (124,652)
                                                ------------   -----------   ----------
  Income tax provision (benefit)..............  $    712,358   $(1,188,075)  $1,731,000
                                                ============   ===========   ==========
</Table>

                                        99
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Temporary differences between financial statement carrying amounts and tax
basis of assets and liabilities that give rise to significant deferred tax
assets and liabilities as of December 31, 2001, 2000 and 1999 are as follows:

<Table>
<Caption>
                                                    2001          2000          1999
                                                ------------   -----------   ----------
<S>                                             <C>            <C>           <C>
Deferred tax assets:
  Goodwill....................................  $  2,691,766   $ 2,703,389   $2,994,000
  Merger reserves and accrued expenses........     3,068,051     2,542,012    1,176,000
  Allowance for doubtful accounts.............     2,223,416       998,192      383,000
  Original issue discount on debentures.......       288,800       288,800      289,000
  Net operating loss..........................    15,477,519     5,606,598    1,134,000
  Inventory overhead..........................       327,586       324,699      252,000
  Other.......................................       225,964       218,277       74,000
                                                ------------   -----------   ----------
     Total deferred tax assets................    24,303,102    12,681,967    6,302,000
Less valuation allowance......................   (18,753,298)   (4,268,771)          --
                                                ------------   -----------   ----------
Net deferred tax asset........................     5,549,804     8,413,196    6,302,000
Deferred tax liabilities:
  Property and equipment basis difference.....     4,900,515     7,473,353    6,585,000
  Goodwill on asset purchases.................       571,757       241,099      250,000
  Long term contracts.........................            --            --      226,000
  Other.......................................        77,532        26,459      178,000
                                                ------------   -----------   ----------
     Total deferred tax liabilities...........     5,549,804     7,740,911    7,239,000
                                                ------------   -----------   ----------
  Deferred tax asset (liabilities), net.......  $          0   $   672,285   $ (937,000)
                                                ============   ===========   ==========
</Table>

     A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
determines a valuation allowance based on its analysis of amounts available in
the statutory carryback period, consideration of future deductible amounts, and
assessment of future profitability. As a result of the substantial operating
losses incurred during 2000 and 2001, the Company established valuation
allowances for the entire net deferred tax asset as of December 31, 2001. The
net change in the valuation allowance was an increase of $14,484,527 and
$4,268,771 for the years ended December 31, 2001 and 2000 respectively. In 1999
the Company used approximately $8,200,000 of Federal net operating loss
carryforwards to reduce taxes that would otherwise be payable. For financial
reporting purposes a valuation allowance of $2,824,000 had been established to
offset the net deferred tax assets related to these carryforwards at December
31, 1998. With the realization of the tax benefit of these loss carryforwards in
1999, the valuation allowance was no longer needed and $2,388,500 of the
reduction in the valuation allowance was recorded as a reduction of acquired
intangible assets in 1999. The remaining $435,500 decrease in the valuation
allowance was recorded as a reduction of income tax expense in 1999.

     The Company also realized $1,084,796 of tax benefits related to the
exercise of non-qualified stock options in 1999. There was no exercise of
non-qualified stock options in 2001 and 2000. The $1,084,796 of tax benefits and
$1,439,966 net proceeds on the exercise of stock options was recorded as
additional paid in capital in 1999.

     The Company had net operating loss carryforwards of approximately
$38,700,000 as of December 31, 2001 which begin to expire in 2010. A portion of
these losses is subject to limitations regarding the offset of the Company's
future taxable income. The Company does not expect any recent changes in the tax
code to have a material effect upon the Company's statement of operations or
financial condition.

                                       100
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. RELATED PARTY TRANSACTIONS

     In 1999 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, 2001. At December 31, 1999 $1,500,000 was outstanding under
the line. No balance was outstanding at December 31, 1998. The Company paid
$109,933 and $171,849 in interest on this line in 1999 and 1998, respectively.
During 2000 the line of credit was paid-off and terminated in conjunction with
the entering into the Senior Credit Facility on June 30, 2000 (see note 8).

     On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company bearing interest at 10%, with an original maturity date of June
30, 2001. The proceeds were used in the purchase of Eaglebrook (see note 4). The
Stout Partnership borrowed the $5,000,000 from PNC Bank and the individual
partners have personally guaranteed the loan. The Company paid $529,055 and
$321,644 in interest on this loan in 2000 and 1999 respectively.

     On December 1, 2000 the Stout Partnership exchanged the $5,000,000
unsecured loan into a subordinated convertible debenture of an equal dollar
amount which currently matures on July 1, 2002, with interest payable monthly in
arrears at 11.5% per annum. The Company paid $573,204 of interest on this loan
in 2001. The debenture is convertible into common stock at the lower of $2.00
per share or the lowest closing price of the Company's common stock during the
four trading days prior to but not including the conversion date. The debenture
is convertible at any time, in whole or part, at the option of the holder. In
consideration of the Stout Partnership exchanging its unsecured loan for a
subordinated convertible debenture and providing funding through Series E
Preferred Stock, the Company granted 250,000 warrants at the exercise price of
$1.50 per share. The $264,374 value assigned to the warrants was reflected as a
discount from the face value of the debentures and was accreted over the
original term of the debenture. In consideration for extending the maturity date
of the debenture from December 1, 2001 to July 1, 2002, and because some of the
assets of the Company were not disposed of as of June 1, 2001, on June 1, 2001
the Company granted an additional 250,000 warrants to purchase the Company's
common stock to the Stout Partnership at an exercise price of $1.50 per share.
In addition, during 2000 and 2001 Stout Partnership provided the Company with
additional funding of $3,000,000 through the Series E Preferred stock private
placement (see note 10).

     On March 1, 2002 all of the Company's outstanding Series D Preferred Stock
was automatically converted into an equal amount of the Company's common stock
in accordance with the Series D Certificate of Designation. The dividends in
arrears pertaining to the Series D Preferred Stock was converted into a note
payable to each holder of the Series D Preferred Stock in pro rata amounts based
on the amount of shares held by each party (see note 10). In connection with
this conversion, A.C. Schultes, Inc., a corporation controlled by August C.
Schultes, III, a director of the Company, received a note payable in the amount
of $110,864. Also in connection with the conversion, a note payable in the
amount of $32,979 was issued to Consultants and Planners, Inc. Gary Ziegler, a
director of the Company, is affiliated with Consultants and Planners, Inc.

     On March 4, 2002 the Company's Board of Directors extended the automatic
conversion date of the Series E Preferred Stock to March 31, 2002. All of the
Series E Preferred Stock is held by the Stout Partnership.

     In December 2001, BET received notice regarding its award of a contract
with the City of New York to perform environmental services at the Brooklyn
Landfill on Pennsylvania Avenue in the Borough of Brooklyn (the "Brooklyn
Contract"), subject to the satisfaction of certain conditions. These conditions
included the issuance of a performance bond on behalf of BET in the amount of
$57.5 million at the time of the execution of the Brooklyn Contract. Due to the
deterioration in the Company's financial condition during the past year, the
insurance company underwriting the performance bond requested a $4.0 million
letter of credit and personal guarantors with liquid net worth of approximately
$15.0 million in order to issue the performance bond. Neither BET nor the
Company was able to deliver the required letter of credit or to obtain any third

                                       101
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

parties interested in providing collateral and/or guarantees on the Company's
behalf. In order to permit BET to obtain the Brooklyn Contract and to avoid the
termination of negotiations related to the Clean Earth, Inc. sale transaction
(see note 3), Mark S. Alsentzer, the Company's director, Chairman, and Chief
Executive Officer, and Mr. Schultes established a group of personal indemnitors,
including family members and affiliates of the two directors as well as third
parties, who were willing to provide the letter of credit and guarantee for the
issuance of the performance bond in exchange for a fee of $862,500. In the event
that the Company is successful in completing the proposed transaction to sell
Clean Earth, Inc. the purchaser will pay a portion of this fee.

     The Company has a professional services contract with Rosetto & Associates
LLC, a private law firm, that performs legal work for the company as well as
unrelated third parties. Mr. Rosetto, Executive Vice President, General Counsel
and Secretary for the Company, is the sole principal of Rosetto & Associates.
Rosetto & Associates billed the Company $523,305, $465,145 and $355,377 for
legal services for the years ended December 31, 2001, 2000 and 1999
respectively, which includes payments to outside attorneys and consultants for
the benefit of the Company. The Company billed $160,800, $160,800 and $206,514
to Rosetto & Associates for use of office space, office equipment and other
shared services during the years ended December 31, 2001, 2000 and 1999
respectively.

     Strategic Alliance Group, LLC, which provides redevelopment services for
landfills and other industrial properties, may consider engaging the services of
the Company in connection with its operations, including, but not limited to,
retaining Clean Earth as a subcontractor in connection with a landfill contract
between Strategic Alliance Group, LLP and the City of Linden, New Jersey. Some
of the Company's officers and employees, including Mark Alsentzer and Bruce
Rosetto, own a minority interest in Strategic Alliance Group, LLC.

     In June 1999 the Company entered into an agreement to charter air services
from a company owned by a former director. During 2000 and 2001, the Company did
not utilize any services under this agreement and the charter service was
discontinued. The Company leases approximately 3,240 square feet of office space
for $62,000 per year from that same former director. The lease expires in
October 2004.

15.  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
year 2028. Rent expense for all operating leases for the years ended December
31, 2001, 2000 and 1999 was approximately $5,077,000, $2,514,000 and $2,186,000
respectively.

     Future minimum payments are as follows for the year ending December 31:

<Table>
<S>                                                           <C>
2002........................................................  $ 5,006,000
2003........................................................    3,962,000
2004........................................................    2,413,000
2005........................................................    1,038,000
2006........................................................    1,114,000
Thereafter..................................................    5,580,000
                                                              -----------
          Total.............................................  $19,113,000
                                                              ===========
</Table>

     The Company leases approximately 7.5 acres of land at its Delaware 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

                                       102
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$245,000, $213,000 and $190,000 in 2001, 2000 and 1999, respectively. The lease
was renewed for five years in 1998 and contains two 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
New Jersey soil recycling facility. The lease term is 30 years with two renewal
options.

     The Company leases premises in Jersey City, New Jersey as an off-loading,
processing and transfer facility for dredged materials. The lease expires in
2009, and terms of the lease include a component for minimum basic rent, and a
component to compensate the lessor for its costs incurred in improving the
property in 1999 and 2000. Such improvements included rail sidings, grading,
paving and reconstruction of the pier and bulkhead on which a portion of the
leased premises is located. The minimum rental payments include $305,000 per
year through 2008 in connection with these property improvements.

EMPLOYMENT AGREEMENTS

     At December 31, 2001, the Company had employment agreements with certain
officers and key employees. Salaries and benefits expense recorded under these
agreements totaled approximately $4,028,000, $3,234,000 and $2,544,000 during
the years ended December 31, 2001, 2000 and 1999, respectively. Future minimum
payments under these employment agreements are as follows:

<Table>
<Caption>
YEAR ENDING DECEMBER 31,                                        AMOUNT
------------------------                                        ------
<S>                                                           <C>
2002........................................................  $2,538,000
2003........................................................     259,000
2004 and thereafter.........................................          --
                                                              ----------
                                                              $2,797,000
                                                              ==========
</Table>

LEGAL PROCEEDINGS

     In April 2001, the Company was served with an arbitration demand from
Southern Wood Services seeking an award of $3,328,000 due to the Company's
failure to abide by the terms of a contract relative to the purchase of wood
flour. On September 7, 2001, the arbitrators issued an award for damages in
favor of Southern Wood Services in the amount of $1,759,822, inclusive of
arbitration costs and expenses.

     The Company promptly appealed the award, however on February 28, 2002 the
results of a hearing in the Superior Court of DeKalb County, Georgia, in a civil
action, affirmed the arbitration ruling in favor of Southern Wood Services. The
court upheld the $1,759,822 award for damages, and also ordered the Company to
pay administrative fees, arbitrators' compensation and interest on the aggregate
at 12% retroactive to September 7, 2001. As a result, the Company accrued
$1,844,299 at December 31, 2001 in connection with this ruling. While the
Company will continue to appeal this decision, the Company cannot avoid the
judgement without posting a financial security bond. The Company is unable to
post a financial security bond at this time, and has commenced negotiations to
reach a settlement and payment plan with Southern Wood Services. No assurances
can be given that the Company will be able to amicably resolve or reach a
settlement and payment plan with Southern Wood Services.

     In December 1998, we purchased CENJ (then known as S&W Waste, Inc.) in a
stock purchase transaction. Pursuant to such purchase, we could be responsible
for liabilities resulting from matters wherein CENJ has been named as a
potentially responsible party ("PRP") in matters involving the possible disposal
of hazardous waste at specific disposal sites. CENJ is currently named as a PRP
in the following matters: Bayonne Barrel & Drum Site, Spectron, Inc. and Four
County Landfill-Operable Unit #2. At December 31, 2001 the Company currently has
accrued approximately $324,000 for estimated liabilities related to these

                                       103
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

matters. The Company believes the accrual is sufficient to cover the aggregate
liability that may be incurred in these matters; however, there can be no
assurances that the accrual will be sufficient.

     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 AGREEMENTS

     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. The license agreement was
subsequently modified in September of 2001. It requires the Company to pay an
annual maintenance fee of $10,000 and a 2.5% royalty fee. The company had no
sales of these products in 1999 and 2000 and had minimal sales in 2001.

     CEC 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 $85,000, $73,288 and $77,790 in 2001, 2000 and 1999,
respectively.

     The Company also has a license agreement with Paul T. Adam for the
manufacture and commercial sale of contaminated or impacted dredge material from
a wide variety of industrial waste streams that the Company uses in its
environmental division. The license requires that the Company pay a royalty fee
equal to 10% of net sales or 25% of net income, but in no event less than $0.20
per ton. No royalty fee was paid in 2001. Minimum annual royalties of $25,000
have been paid through 2003, and the license does not expire until December 5,
2011. During 2001 no dredge material was processed using the technology
specified in this license agreement, thus no additional royalty expense was
incurred.

     The Company also has a non-exclusive license with the Strandex Corporation
to manufacture a composite railing product and deck plank, although the Company
no longer uses the Strandex technology to manufacture composite planks. The
license expires on April 22, 2011. The license requires a royalty fee equal to
$.032 per pound of product manufactured. The Company did not manufacture any of
this product in 2001.

LOSS CONTINGENCIES

     Loss contingencies are recorded and recognized by accruing a charge to
income if it is probable that a liability has been incurred and the amount of
the loss can be reasonably estimated.

16.  SEGMENT REPORTING

     The Company's sales generating operations are conducted through its plastic
lumber and environmental recycling divisions. Separate 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

                                       104
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

segments. Information on the operating results of each segment for each of the
years ended December 31, 2001, 2000 and 1999 follows (in thousands):

<Table>
<Caption>
                                                         2001       2000       1999
                                                       --------   --------   --------
<S>                                                    <C>        <C>        <C>
Revenues:
  Environmental recycling............................  $116,220   $100,530   $ 85,499
  Plastic lumber.....................................    57,830     73,214     53,046
                                                       --------   --------   --------
                                                       $174,050   $173,744   $138,545
                                                       ========   ========   ========
Operating (loss) income:
  Environmental recycling............................  $ (9,141)  $  8,846   $  9,702
  Plastic lumber.....................................   (19,906)   (11,547)     2,474
  Corporate..........................................    (5,563)    (3,166)    (1,938)
                                                       --------   --------   --------
                                                       $(34,610)  $ (5,867)  $ 10,238
                                                       ========   ========   ========
Depreciation and amortization:
  Environmental recycling............................  $  4,080   $  3,586   $  3,765
  Plastic lumber.....................................     4,450      3,171      2,551
  Corporate..........................................        96        107         57
                                                       --------   --------   --------
                                                       $  8,626   $  6,864   $  6,373
                                                       ========   ========   ========
</Table>

     Information with respect to assets of the segments and reconciliation to
the financial statements is set forth below (in thousands):

<Table>
<Caption>
                                                                2001       2000
                                                              --------   --------
<S>                                                           <C>        <C>
Segment assets at December 31:
Environmental recycling.....................................  $ 71,945   $ 93,215
Plastic lumber..............................................    84,858    103,222
Corporate...................................................     4,866      3,974
                                                              --------   --------
                                                              $161,669   $200,411
                                                              ========   ========
</Table>

     Expenditures for long-lived assets for the segments is set forth below (in
thousands):

<Table>
<Caption>
                                                            2001     2000      1999
                                                           ------   -------   -------
<S>                                                        <C>      <C>       <C>
Segment assets at December 31:
Environmental recycling..................................  $1,786   $ 8,278   $26,494
Plastic lumber...........................................   1,599    19,354    33,344
Corporate................................................       3       186       381
                                                           ------   -------   -------
                                                           $3,388   $27,818   $60,219
                                                           ======   =======   =======
</Table>

17.  DERIVATIVES

     As part of its overall interest rate risk management activities, the
Company utilized interest rate related derivatives during 2001 to manage its
exposure to various types of interest rate risks. The Company does not speculate
using derivative instruments. The Company's risk management policies emphasize
the management of interest rate risk within acceptable guidelines. The Company's
objective in maintaining these policies is to limit volatility arising from
changes in interest rates. Risks to be managed are primarily cash flow risks.

                                       105
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Utilization of derivative financial instruments provides a valuable tool to
assist in the management of these risks.

     The Company is exposed to interest rate cash flow risk due to loans under
its Senior Credit Facility whose interest payments are based on floating rate
indices. The Company continually monitors changes in these exposures and their
impact on its risk management activities. The Company had entered into interest
rate swap agreements under which the Company paid a fixed rate of interest and
received a floating rate of interest over the term of the interest rate swap
agreement without the exchange of the underlying notional amounts. The financial
institutions that were party to these interest rate swap agreements were two of
the banks which provide loans under the Company's Senior Credit Facility. These
agreements allowed the Company to offset the variability of floating rate loan
interest with the variable interest payments due on the interest rate swaps. The
Company assessed the effectiveness of these hedges by comparing the timing,
frequency, and magnitude of changes in its interest rate to that of the interest
rate referenced in the swap agreements, and no portion of the hedging
instruments' gain or loss was excluded from the assessment of hedge
effectiveness. During 2001 no gain or loss was recognized as a result of any
ineffectiveness of the cash flow hedging instruments.

     The Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a net-of-tax cumulative-effect loss of $453,615 in accumulated other
comprehensive income to recognize at fair value two interest-rate swap
derivatives that are designated as a cash-flow hedging instruments. As of
September 30, 2001, the net-of-tax fair value of these derivatives carried as a
component of other comprehensive loss was $1,123,891. In December of 2001 the
Company received notice from the banks that they were exercising their rights to
terminate the interest rate swap agreements due to the Company's failure to
comply with the terms of the Senior Credit Facility (see note 8). In accordance
with the termination notice, the banks demanded compensation for their costs of
liquidating their corresponding derivative obligations in the amount of
$1,080,249. The Company accrued this amount as interest expense in 2001 and
reversed the amounts included in other comprehensive loss in connection with the
fair value of the interest rate swap derivatives. As a result of the termination
of the interest swap agreements in 2001, comprehensive income for the twelve
months ended December 31, 2001 was equal to the net income/loss amounts
presented in the Company's statements of operations.

18.  CHANGES IN VALUATION ACCOUNTS

<Table>
<Caption>
                                 BALANCE AT    CHARGES TO
                                BEGINNING OF   COSTS AND      CHARGED TO                   BALANCE AT
DESCRIPTION                        PERIOD       EXPENSES    OTHER ACCOUNTS   DEDUCTIONS   END OF PERIOD
-----------                     ------------   ----------   --------------   ----------   -------------
<S>                             <C>            <C>          <C>              <C>          <C>
AT DECEMBER 31, 2001:
Allowance for Doubtful
  Accounts Receivable.........   $2,375,479    $4,240,155             --     $1,444,911    $ 5,170,723
Deferred Tax Asset Valuation
  Allowance...................    4,268,771    14,484,527             --             --     18,753,298
AT DECEMBER 31, 2000:
Allowance for Doubtful
  Accounts Receivable.........   $1,139,870    $1,766,109             --     $  530,500    $ 2,375,479
Deferred Tax Asset Valuation
  Allowance...................           --     4,268,771             --             --      4,268,771
AT DECEMBER 31, 1999:
Allowance for Doubtful
  Accounts Receivable.........   $  460,907    $  621,755         57,208             --    $ 1,139,870
Deferred Tax Asset Valuation
  Allowance...................    2,824,000      (435,500)    (2,388,500)            --             --
</Table>

                                       106
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. QUARTERLY FINANCIAL DATA (UNAUDITED)

     Following is a summary of the quarterly results of operations for the years
ended December 31, 2001 and 2000:

<Table>
<Caption>
                                                              FISCAL QUARTER
                                            --------------------------------------------------
                                             FIRST    SECOND     THIRD      FOURTH     TOTAL
                                            -------   -------   --------   --------   --------
                                                 $ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S>                                         <C>       <C>       <C>        <C>        <C>
2001
Sales, net................................  $38,636   $50,750   $ 46,823   $ 37,841   $174,050
Gross profit..............................    2,782     8,796      6,610      4,517     22,705
(Loss) earnings before extraordinary
  item....................................   (4,972)       71    (16,428)   (26,834)   (48,163)
Net (loss) earnings.......................   (4,972)       71    (16,428)   (26,834)   (48,163)
Net (loss) earnings attributable to Common
  shareholders............................   (5,652)     (160)   (16,661)   (27,067)   (49,540)
Net (loss) earnings per common
  share -- Basic:
  (Loss) earnings before extraordinary
     item.................................     (.16)     (.00)      (.44)      (.69)     (1.34)
Net (loss) earnings per common share......     (.16)     (.00)      (.44)      (.69)     (1.34)
                                            -------   -------   --------   --------   --------
Net (loss) earnings per common share --
  Diluted:
  (Loss) earnings before extraordinary
     item.................................     (.16)     (.00)      (.44)      (.69)     (1.34)
Net (loss) earnings per common share......     (.16)     (.00)      (.44)      (.69)     (1.34)
                                            -------   -------   --------   --------   --------
2000
Sales, net................................  $30,404   $44,260   $ 50,088   $ 48,992   $173,744
Gross profit..............................    5,517     9,630      6,115      3,566     24,828
(Loss) earnings before extraordinary
  item....................................     (670)    1,735     (2,450)   (10,062)   (11,447)
Net (loss) earnings.......................     (670)      796     (2,450)   (10,151)   (12,475)
Net (loss) earnings attributable to Common
  shareholders............................     (670)      796     (2,633)   (10,788)   (13,295)
Net (loss) earnings per common
  share -- Basic:
  (Loss) earnings before extraordinary
     item.................................     (.02)      .05       (.08)      (.31)      (.36)
Net (loss) earnings per common share......     (.02)      .02       (.08)      (.31)      (.39)
                                            -------   -------   --------   --------   --------
Net (loss) earnings per common share --
  Diluted:
  (Loss) earnings before extraordinary
     item.................................     (.02)      .05       (.08)      (.31)      (.36)
Net (loss) earnings per common share......     (.02)      .02       (.08)      (.31)      (.39)
                                            -------   -------   --------   --------   --------
</Table>

                                       107
<PAGE>

ITEM 9.  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 2002 Annual Meeting is incorporated herein by reference.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding the directors of the Company is incorporated by
reference from the Proxy Statement for the 2002 Annual Meeting which will be
filed with the SEC within 120 days of the Company's fiscal year end.

     The information contained in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" relating to the 2002 Annual
Meeting is incorporated herein by reference.

     Information regarding the officers of the Company who are not also
directors can be found in ITEM 1, DIRECTORS AND OFFICERS OF THE REGISTRANT.

ITEM 11.  EXECUTIVE COMPENSATION

     The information contained in the Proxy Statement under the caption
"Executive Compensation" relating to the 2002 Annual Meeting is incorporated
herein by reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated by reference from the Proxy Statement
for the 2002 Annual Meeting which will be filed with the SEC within 120 days
after the Company's fiscal year-end.

ITEM 13.  CERTAIN TRANSACTIONS

     The information contained in the Proxy Statement under the caption "Certain
Transactions" relating to the 2002 Annual Meeting is incorporated herein by
reference.

                                    PART IV

ITEM 14.  EXHIBITS AND REPORTS

EXHIBITS

<Table>
<Caption>
EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
<C>      <S>
  2.1    Agreement and Plan of Reorganization between Educational
         Storybooks International, Inc. and Earth Care Global
         Holdings, Inc. (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    Restated Articles of Incorporation of U.S. Plastic Lumber
         Corp.
  3.2    Amended and Restated Bylaws (Incorporated by reference from
         Exhibit 3.7 to the Company's Form 10-K for the year ended
         December 31, 2000 filed with the SEC on April 3, 2001)
  3.3    Articles of Incorporation of Educational Resources, Inc.,
         the predecessor of the Company (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)
  3.4    Plan and Articles of Merger of Educational Resources, Inc.
         into Earth Care Global Holdings, Inc. (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)
</Table>

                                       108
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
<C>      <S>
  3.5    Certificate of Amendment to the Certificate of Designation
         of Preferences, Rights and Limitations of Series D Preferred
         Stock. (Incorporated by reference from Exhibit 4.1 to the
         Company's Current Report on Form 8-K filed with the SEC on
         June 22, 2001)
  3.6    Certificate of Amendment to the Certificate of Designation
         of Preferences, Rights and Limitations of Series E Preferred
         Stock
  4.1    5% Convertible Debenture issued to Halifax Fund, L.P.
         (Incorporated by reference from Exhibit 4.1 to the Company's
         Registration Statement on Form S-3 filed with the SEC on
         March 10, 2000 (File No. 333-32148))
  4.2    Common Stock Purchase Warrant issued to Halifax Fund, L.P.
         dated February 2, 2000 (Incorporated by reference from
         Exhibit 4.2 to the Company's Registration Statement on Form
         S-3 filed with the SEC on March 10, 2000 (File No.
         333-32148))
  4.3    Form of the 11.5% Convertible Debenture issued to Stout
         Partnership (Incorporated by reference as exhibit 4.3 on the
         Company's Form 10-K/A for the year ended December 31, 2000
         filed with the SEC on January 18, 2002)
 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)
 10.6    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)
 10.7    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)
 10.8    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)
 10.9    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)
 10.10   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)
 10.11   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)
 10.12   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)
</Table>

                                       109
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
<C>      <S>
 10.13   Lease Agreement (Dalphon Sr./Clean Earth) (Incorporated by
         reference from Exhibit 10.19 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   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)
 10.15   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)
 10.16   Lease Agreement (Earth Care Products of Tennessee)
         (Incorporated by reference from Exhibit 10.23 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)
 10.17   WCI Acquisition Agreement (Incorporated by reference from
         Exhibit 10.24 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)
 10.18   CTI Securities Purchase Agreement (Incorporated by reference
         from Exhibit 10.25 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)
 10.19   Employment Agreement -- Steven Sands (Incorporated by
         reference from Exhibit 10.26 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)
 10.20   ICC/USPL Joint Venture Agreement II (Incorporated by
         reference from Exhibit 10.28 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)
 10.21   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)
 10.22   Eaglebrook Plastics, Inc. Stock Purchase Agreement
         (Incorporated by reference from Exhibit 10.1 to the
         Company's Form 8-K filed with the SEC on February 10, 1999)
 10.23   Eaglebrook Plastics, Inc. Stock Purchase Agreement
         (Incorporated by reference from Exhibit 10.2 to the
         Company's Form 8-K filed with the SEC on February 10, 1999)
 10.24   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 (Incorporated by reference from Exhibit 10.33 to
         the Company's Form 10KSB filed with the SEC on March 30,
         1999)
 10.25   Convertible Debenture Purchase Agreement dated December 22,
         1998 (Incorporated by reference from Exhibit 10.34 to the
         Company's Form 10KSB filed with the SEC on March 30, 1999)
 10.26   Convertible Debenture Purchase Agreement dated January 26,
         1999 (Incorporated by reference from Exhibit 10.35 to the
         Company's Form 10KSB filed with the SEC on March 30, 1999)
 10.27   1999 Non-Employee Director Stock Option Plan (Incorporated
         by reference from Exhibit 10.37 to the Company's Form 10KSB
         filed with the SEC on March 30, 1999)
 10.28   Amended and Restated 1999 Employee Stock Option Plan
         (Incorporated by reference from Exhibit 10.38 to the
         Company's Form 10KSB filed with the SEC on March 30, 2000)
 10.29   Employment Agreement of Bruce C. Rosetto (Incorporated by
         reference from Exhibit 10.39 to the Company's Form 10KSB
         filed with the SEC on March 30, 2000)
 10.30   Employment Agreement of Michael D. Schmidt (Incorporated by
         reference from Exhibit 10.40 to the Company's Form 10KSB
         filed with the SEC on March 30, 2000)
 10.31   Employment Agreement of John W. Poling (Incorporated by
         reference from Exhibit 10.41 to the Company's Form 10KSB
         filed with the SEC on March 30, 2000)
</Table>

                                       110
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
<C>      <S>
 10.32   Employment Agreement of Mark S. Alsentzer (Incorporated by
         reference from Exhibit 10.42 to the Company's Form 10KSB
         filed with the SEC on March 30, 2000)
 10.33   Private Placement Stock Purchase Agreement dated August 20,
         1999 (Incorporated by reference from Exhibit 10.43 to the
         Company's Form 10KSB filed with the SEC on March 30, 2000)
 10.34   Asset Purchase Agreement -- Baron Enterprises, Inc.
         (Incorporated by reference from Exhibit 10.44 to the
         Company's Form 10-Q filed with the SEC on May 16, 2000)
 10.35   Master Security Agreement with GE Capital Corporation
         (Incorporated by reference from Exhibit 10.45 to the
         Company's Form 10-Q filed with the SEC on May 16, 2000)
 10.36   Credit Agreement with Bank of America dated as of June 30,
         2000 (Incorporated by reference from Exhibit 10.46 to the
         Company's Form 10-Q filed with the SEC on August 14, 2000)
 10.37   Waiver and First Amendment to the Credit Agreement with Bank
         of America (Incorporated by reference from Exhibit 10.47 to
         the Company's Form 10-Q filed with the SEC on November 14,
         2000)
 10.38   Convertible Debenture Purchase Agreement by and between the
         Company and Halifax Fund, L.P. dated February 2, 2000
         (Incorporated by reference from Exhibit 99.1 to the
         Company's Registration Statement on Form S-3 filed with the
         SEC on March 10, 2000 (File No. 333-32148))
 10.39   Registration Rights Agreement by and between the Company and
         Halifax Fund, L.P. dated February 2, 2000 (Incorporated by
         reference from Exhibit 99.2 to the Company's Registration
         Statement on Form S-3 filed with the SEC on March 10, 2000
         (File No. 333-32148))
 10.40   Common Stock Purchase Agreement with Fusion Capital Fund II,
         LLC (Incorporated by reference from Exhibit 10.50 to the
         Company's Form 10-K for the year ended December 31, 2000
         filed with the SEC on April 3, 2001)
 10.41   Waiver and Second Amendment to the Credit Agreement with
         Bank of America (Incorporated by reference from Exhibit
         10.51 to the Company's Form 10-K for the year ended December
         31, 2000 filed with the SEC on April 3, 2001)
 10.42   Amendments to the Master Security Agreement with GE Capital
         Corporation (Incorporated by reference from Exhibit 10.52 to
         the Company's Form 10-K for the year ended December 31, 2000
         filed with the SEC on April 3, 2001)
 10.43   Form of the Letter Agreement by and between the Company and
         Stout Partnership, dated November 13, 2000 (Incorporated by
         reference as exhibit 4.3 on the Company's Form 10-K/A for
         the year ended December 31, 2000 filed with the SEC on
         January 18, 2002)
 10.44   Form of the Convertible Debenture Purchase Agreement by and
         between the Company and Stout Partnership, dated December 1,
         2000 (Incorporated by reference as exhibit 4.3 on the
         Company's Form 10-K/A for the year ended December 31, 2000
         filed with the SEC on January 18, 2002)
 10.45   Form of the Amendment to the Convertible Debenture Purchase
         Agreement by and between the Company and Stout Partnership,
         dated March 15, 2001 (Incorporated by reference as exhibit
         4.3 on the Company's Form 10-K/A for the year ended December
         31, 2000 filed with the SEC on January 18, 2002)
 10.46   Form of the Amendment to the Convertible Debenture Purchase
         Agreement by and between the Company and Stout Partnership,
         dated November, 2001 (Incorporated by reference as exhibit
         4.3 on the Company's Form 10-K/A for the year ended December
         31, 2000 filed with the SEC on January 18, 2002)
 10.47   Purchase Agreement entered into as of December 29, 2001
         among New CEI Inc., a Delaware corporation and Clean Earth,
         Inc., a Delaware corporation and U.S. Plastic Lumber Corp.,
         (Incorporated by reference as exhibit 10.2 on the Company's
         Form 8-K filed with the SEC on January 25, 2002)
 10.48   Amendment to Purchase Agreement dated as of February 12,
         2002 among New CEI Inc., a Delaware corporation and Clean
         Earth, Inc., a Delaware corporation and U.S. Plastic Lumber
         Corp., (Incorporated by reference as exhibit to the
         Company's Definitive proxy statement filed with the SEC on
         February 15, 2002)
</Table>

                                       111
<PAGE>

<Table>
<Caption>
EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
<C>      <S>
 10.49   Forbearance and modification agreement entered into as of
         the 28th day of February, 2002 by and among General Electric
         Capital Corporation, ("GE CAPITAL"), the other LENDERS, U.S.
         Plastic Lumber Ltd., Eaglebrook, Inc. and U.S. Plastic
         Lumber, Corp. (Incorporated by reference as exhibit 10.2 on
         the Company's Form 8-K filed with the SEC on March 19, 2002)
 10.50   Forbearance Agreement to Credit Agreement effective as of
         November 14, 2002 between the BANKS and U.S. Plastic Lumber,
         Corp. (Incorporated by reference as exhibit 10.1 on the
         Company's Form 8-K filed with the SEC on January 25, 2002)
 11.1    Statement or Computation of Per Share Earnings (Included in
         Note 1 of the Notes to Consolidated Financial Statements)
 21.1    List of Subsidiaries of the Company
 23.1    Consent of KPMG LLP
</Table>

                                       112
<PAGE>

                                   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: April 1, 2002

     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                                                           April 1, 2002
-----------------------------------------------------
Mark S. Alsentzer, Chairman of the Board Chief
Executive Officer and President

/s/ JOHN W. POLING                                                              April 1, 2002
-----------------------------------------------------
John W. Poling, Chief Financial Officer and Chief
Accounting Officer

/s/ AUGUST C. SCHULTES III                                                      April 1, 2002
-----------------------------------------------------
August C. Schultes III, Director

/s/ GARY J. ZIEGLER                                                             April 1, 2002
-----------------------------------------------------
Gary J. Ziegler, Director

/s/ ROGER N. ZITRIN                                                             April 1, 2002
-----------------------------------------------------
Roger N. Zitrin, Director

/s/ KENNETH LEUNG                                                               April 1, 2002
-----------------------------------------------------
Kenneth Leung, Director
</Table>

                                       113
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
    2.1       Agreement and Plan of Reorganization between Educational
              Storybooks International, Inc. and Earth Care Global
              Holdings, Inc. (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       Restated Articles of Incorporation of U.S. Plastic Lumber
              Corp. (Incorporated by reference from Exhibit 3.1 to the
              Company's Form 10-K for the year ended December 31, 2000
              filed with the SEC on April 3, 2001)
    3.2       Amended and Restated Bylaws (Incorporated by reference from
              Exhibit 3.7 to the Company's Form 10-K for the year ended
              December 31, 2000 filed with the SEC on April 3, 2001)
    3.3       Articles of Incorporation of Educational Resources, Inc.,
              the predecessor of the Company (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)
    3.4       Plan and Articles of Merger of Educational Resources, Inc.
              into Earth Care Global Holdings, Inc. (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)
    3.5       Certificate of Amendment to the Certificate of Designation
              of Preferences, Rights and Limitations of Series D Preferred
              Stock. (Incorporated by reference from Exhibit 4.1 to the
              Company's Current Report on Form 8-K filed with the SEC on
              June 22, 2001)
    3.6       Certificate of Amendment to the Certificate of Designation
              of Preferences, Rights and Limitations of Series E Preferred
              Stock
    4.1       5% Convertible Debenture issued to Halifax Fund, L.P.
              (Incorporated by reference from Exhibit 4.1 to the Company's
              Registration Statement on Form S-3 filed with the SEC on
              March 10, 2000 (File No. 333-32148))
    4.2       Common Stock Purchase Warrant issued to Halifax Fund, L.P.
              dated February 2, 2000 (Incorporated by reference from
              Exhibit 4.2 to the Company's Registration Statement on Form
              S-3 filed with the SEC on March 10, 2000 (File No.
              333-32148))
    4.3       Form of the 11.5% Convertible Debenture issued to Stout
              Partnership (Incorporated by reference as exhibit 4.3 on the
              Company's Form 10-K/A for the year ended December 31, 2000
              filed with the SEC on January 18, 2002)
   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)
   10.6       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)
</Table>

                                       114
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
   10.7       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)
   10.8       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)
   10.9       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)
   10.10      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)
   10.11      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)
   10.12      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)
   10.13      Lease Agreement (Dalphon Sr./Clean Earth) (Incorporated by
              reference from Exhibit 10.19 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      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)
   10.15      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)
   10.16      Lease Agreement (Earth Care Products of Tennessee)
              (Incorporated by reference from Exhibit 10.23 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)
   10.17      WCI Acquisition Agreement (Incorporated by reference from
              Exhibit 10.24 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)
   10.18      CTI Securities Purchase Agreement (Incorporated by reference
              from Exhibit 10.25 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)
   10.19      Employment Agreement -- Steven Sands (Incorporated by
              reference from Exhibit 10.26 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)
   10.20      ICC/USPL Joint Venture Agreement II (Incorporated by
              reference from Exhibit 10.28 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)
   10.21      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)
   10.22      Eaglebrook Plastics, Inc. Stock Purchase Agreement
              (Incorporated by reference from Exhibit 10.1 to the
              Company's Form 8-K filed with the SEC on February 10, 1999)
   10.23      Eaglebrook Plastics, Inc. Stock Purchase Agreement
              (Incorporated by reference from Exhibit 10.2 to the
              Company's Form 8-K filed with the SEC on February 10, 1999)
</Table>

                                       115
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
   10.24      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 (Incorporated by reference from Exhibit 10.33 to
              the Company's Form 10KSB filed with the SEC on March 30,
              1999)
   10.25      Convertible Debenture Purchase Agreement dated December 22,
              1998 (Incorporated by reference from Exhibit 10.34 to the
              Company's Form 10KSB filed with the SEC on March 30, 1999)
   10.26      Convertible Debenture Purchase Agreement dated January 26,
              1999 (Incorporated by reference from Exhibit 10.35 to the
              Company's Form 10KSB filed with the SEC on March 30, 1999)
   10.27      1999 Non-Employee Director Stock Option Plan (Incorporated
              by reference from Exhibit 10.37 to the Company's Form 10KSB
              filed with the SEC on March 30, 1999)
   10.28      Amended and Restated 1999 Employee Stock Option Plan
              (Incorporated by reference from Exhibit 10.38 to the
              Company's Form 10KSB filed with the SEC on March 30, 2000)
   10.29      Employment Agreement of Bruce C. Rosetto (Incorporated by
              reference from Exhibit 10.39 to the Company's Form 10KSB
              filed with the SEC on March 30, 2000)
   10.30      Employment Agreement of Michael D. Schmidt (Incorporated by
              reference from Exhibit 10.40 to the Company's Form 10KSB
              filed with the SEC on March 30, 2000)
   10.31      Employment Agreement of John W. Poling (Incorporated by
              reference from Exhibit 10.41 to the Company's Form 10KSB
              filed with the SEC on March 30, 2000)
   10.32      Employment Agreement of Mark S. Alsentzer (Incorporated by
              reference from Exhibit 10.42 to the Company's Form 10KSB
              filed with the SEC on March 30, 2000)
   10.33      Private Placement Stock Purchase Agreement dated August 20,
              1999 (Incorporated by reference from Exhibit 10.43 to the
              Company's Form 10KSB filed with the SEC on March 30, 2000)
   10.34      Asset Purchase Agreement -- Baron Enterprises, Inc.
              (Incorporated by reference from Exhibit 10.44 to the
              Company's Form 10-Q filed with the SEC on May 16, 2000)
   10.35      Master Security Agreement with GE Capital Corporation
              (Incorporated by reference from Exhibit 10.45 to the
              Company's Form 10-Q filed with the SEC on May 16, 2000)
   10.36      Credit Agreement with Bank of America dated as of June 30,
              2000 (Incorporated by reference from Exhibit 10.46 to the
              Company's Form 10-Q filed with the SEC on August 14, 2000)
   10.37      Waiver and First Amendment to the Credit Agreement with Bank
              of America (Incorporated by reference from Exhibit 10.47 to
              the Company's Form 10-Q filed with the SEC on November 14,
              2000)
   10.38      Convertible Debenture Purchase Agreement by and between the
              Company and Halifax Fund, L.P. dated February 2, 2000
              (Incorporated by reference from Exhibit 99.1 to the
              Company's Registration Statement on Form S-3 filed with the
              SEC on March 10, 2000 (File No. 333-32148))
   10.39      Registration Rights Agreement by and between the Company and
              Halifax Fund, L.P. dated February 2, 2000 (Incorporated by
              reference from Exhibit 99.2 to the Company's Registration
              Statement on Form S-3 filed with the SEC on March 10, 2000
              (File No. 333-32148))
   10.40      Common Stock Purchase Agreement with Fusion Capital Fund II,
              LLC (Incorporated by reference from Exhibit 10.50 to the
              Company's Form 10-K for the year ended December 31, 2000
              filed with the SEC on April 3, 2001)
   10.41      Waiver and Second Amendment to the Credit Agreement with
              Bank of America (Incorporated by reference from Exhibit
              10.51 to the Company's Form 10-K for the year ended December
              31, 2000 filed with the SEC on April 3, 2001)
</Table>

                                       116
<PAGE>

<Table>
<Caption>
EXHIBIT NO.                           DESCRIPTION
-----------                           -----------
<C>           <S>
   10.42      Amendments to the Master Security Agreement with GE Capital
              Corporation (Incorporated by reference from Exhibit 10.52 to
              the Company's Form 10-K for the year ended December 31, 2000
              filed with the SEC on April 3, 2001)
   10.43      Form of the Letter Agreement by and between the Company and
              Stout Partnership, dated November 13, 2000 (Incorporated by
              reference as exhibit 4.3 on the Company's Form 10-K/A for
              the year ended December 31, 2000 filed with the SEC on
              January 18, 2002)
   10.44      Form of the Convertible Debenture Purchase Agreement by and
              between the Company and Stout Partnership, dated December 1,
              2000 (Incorporated by reference as exhibit 4.3 on the
              Company's Form 10-K/A for the year ended December 31, 2000
              filed with the SEC on January 18, 2002)
   10.45      Form of the Amendment to the Convertible Debenture Purchase
              Agreement by and between the Company and Stout Partnership,
              dated March 15, 2001 (Incorporated by reference as exhibit
              4.3 on the Company's Form 10-K/A for the year ended December
              31, 2000 filed with the SEC on January 18, 2002)
   10.46      Form of the Amendment to the Convertible Debenture Purchase
              Agreement by and between the Company and Stout Partnership,
              dated November, 2001 (Incorporated by reference as exhibit
              4.3 on the Company's Form 10-K/A for the year ended December
              31, 2000 filed with the SEC on January 18, 2002)
   10.47      Purchase Agreement entered into as of December 29, 2001
              among New CEI Inc., a Delaware corporation and Clean Earth,
              Inc., a Delaware corporation and U.S. Plastic Lumber Corp.,
              (Incorporated by reference as exhibit 10.2 on the Company's
              Form 8-K filed with the SEC on January 25, 2002)
   10.48      Amendment to Purchase Agreement dated as of February 12,
              2002 among New CEI Inc., a Delaware corporation and Clean
              Earth, Inc., a Delaware corporation and U.S. Plastic Lumber
              Corp., (Incorporated by reference as exhibit to the
              Company's Definitive proxy statement filed with the SEC on
              February 15, 2002)
   10.49      Forbearance and modification agreement entered into as of
              the 28th day of February, 2002 by and among General Electric
              Capital Corporation, ("GE CAPITAL"), the other LENDERS, U.S.
              Plastic Lumber Ltd., Eaglebrook, Inc. and U.S. Plastic
              Lumber, Corp. (Incorporated by reference as exhibit 10.2 on
              the Company's Form 8-K filed with the SEC on March 19, 2002)
   10.50      Forbearance Agreement to Credit Agreement effective as of
              November 14, 2002 between the BANKS and U.S. Plastic Lumber,
              Corp. (Incorporated by reference as exhibit 10.1 on the
              Company's Form 8-K filed with the SEC on January 25, 2002)
   11.1       Statement or Computation of Per Share Earnings (Included in
              Note 1 of the Notes to Consolidated Financial Statements)
   21.1       List of Subsidiaries of the Company
   23.1       Consent of KPMG LLP
</Table>

                                       117