<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------

                                   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, 2000

                                       OR

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

                         COMMISSION FILE NUMBER 0-28779
</TABLE>

                           STAR SERVICES GROUP, INC.
             (Exact name of registrant as specified in its charter)

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

<TABLE>
<S>                                <C>                           <C>
             FLORIDA                           4953                  65-0893224
  (State or Other Jurisdiction     (Primary Standard Industrial   (I.R.S. Employer
of Incorporation or Organization)  Classification Code Number)     Identification
                                                                        No.)
</TABLE>

                           STAR SERVICES GROUP, INC.
                           2075 NORTH POWERLINE ROAD
                          POMPANO BEACH, FLORIDA 33069
                                 (954) 974-3800
                         (Address and Telephone Number
        of Principal Executive Offices and Principal Place of Business)

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

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD AND THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] OR NO [ ]

     INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.     [ ]

     THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AT APRIL 13, 2001 WAS APPROXIMATELY $14,370,028. THE AGGREGATE
MARKET VALUE WAS COMPUTED BY USING THE CLOSING PRICE OF THE COMMON STOCK AS OF
THAT DATE.

     THE NUMBER OF SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF THE REGISTRANT
OUTSTANDING AT FEBRUARY 26, 2001 WAS 12,136,745.

                      DOCUMENTS INCORPORATED BY REFERENCE
              (only to the extent set forth in the part indicated)

     Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive proxy statement for Registrant's Annual Meeting of Shareholders to be
held on June 14, 2001, to be filed pursuant of Regulation 14A.
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<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         ----
<S>        <C>                                                           <C>
PART I
Item 1.    Business....................................................    1
Item 2.    Properties..................................................   12
Item 3.    Legal Proceedings...........................................   13
Item 4.    Submission of Matters to a Vote of Security Holders.........   13

PART II
Item 5.    Market for Registrant's Common Equity and Related
           Stockholder Matters.........................................   16
Item 6.    Selected Financial Data.....................................   17
Item 7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations...................................   18
Item 7A    Quantitative and Qualitative Disclosures About Market
           Risk........................................................   23
Item 8.    Financial Statements and Supplementary Data.................   24
Item 9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure....................................   42

PART III
Item 10.   Directors and Executive Officers of the Registrant..........   42
Item 11.   Executive Compensation......................................   42
Item 12.   Security Ownership of Certain Beneficial Owners and
           Management..................................................   42
Item 13.   Certain Relationships and Related Transactions..............   42

PART IV
Item 14.   Financial Statement Schedules, Exhibits, and Reports on Form
           8-K.........................................................   43
</TABLE>

                                        i
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Star Services Group, Inc. is an integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in the greater Miami, Fort Lauderdale and Palm Beach areas of Florida. We intend
to expand our operations into other areas of the eastern United States. We
currently own and/or operate, two lakefill operations, three companies that
collect solid waste, four material recovery facilities ("MRFs") and one
construction and demolition debris transfer station ("C&D Station). As of
December 31, 2000, we were providing service to more than 3,400 commercial and
industrial customers in Florida.

     Star Services intends to become a leading solid waste service company in
Florida and in additional selected markets, particularly along the eastern
seaboard and in the southeastern United States. We have targeted these markets
because we believe that they have strong projected economic or population growth
rates. Additionally, our senior management team has extensive experience in
acquiring, integrating and operating solid waste services businesses in a number
of markets in these areas.

COMPANY HISTORY

     Bailey & Baron was incorporated under the laws of the State of Florida in
April 1989 for the purpose of seeking viable businesses or enterprises with
which to enter into a business combination. Bailey & Baron had no material
operations until June 1999, when Star Services Group, Inc., was merged into
Bailey & Baron and Bailey & Baron changed its name to Star Services Group, Inc.
Bailey & Baron, now renamed Star Services Group, Inc., was the surviving
corporation in the merger. The Board of Directors and management of Star
Services became the Board of Directors and management of the surviving
corporation.

     Star Services was formed in February 1999 as a holding company to
facilitate the consolidation of the operations of six companies which were under
common control, but which had operated independently. These companies specialize
in the collection, recycling and disposal of construction and demolition
materials and also provide other solid waste collection, recycling and waste
industry services. Star Services acquired these predecessor companies in
exchange for 5,000,000 shares of Star Services' common stock.

     These predecessor corporations had revenues for the years ended December
31, 1999 and 1998 of approximately $12.9 million and $3.5 million, respectively.

     The six predecessor companies are:

     - Delta Recycling Corp.

     - Delta Transfer Corp.

     - Eastern Recycling, Inc.

     - Delta Resources Corp.

     - Delrock Management Corp.

     - Delta Waste Corp.

     In April 1999, Star Services formed an additional wholly-owned subsidiary,
Delta Tall Pines Corp., to operate a MRF in Palm Beach County. See "Certain
Transactions." In July 1999, Star Services formed Delta Site Development Corp.
as a wholly-owned subsidiary to acquire the assets of Mario's Equipment Sales,
Inc. and to provide site development services. In October 2000 we formed Delta
Dade Recycling Corp. as a wholly-owned subsidiary to own and operate the assets
acquired from the Peerless Big Apple companies
<PAGE>   4

RECENT DEVELOPMENTS

     During March 2000, Star Services acquired substantially all of the assets
of Allied Rolloff Holdings, Inc., which operates a roll-off container business
in Dade County, Florida. The business was acquired for $960,400, of which
$660,400 was paid in cash and $300,000 was paid by delivery of 59,260 shares of
our common stock.

     In June 1999, Delta Waste entered into an agreement to purchase seven solid
waste collection routes and associated equipment from Waste Management, Inc. for
$5.2 million. In March 2000, our agreement with Waste Management, Inc. was
terminated by mutual consent of the parties.

     Star Services acquired all of the assets and liabilities of Mario's
Equipment Sales, Inc., on October 1, 1999. Mario's is in the business of
construction site development. Star Services believes that this new area of
business will generate additional waste hauling work from developers. The
purchase price was paid by delivery of 100,000 shares of Star Services' common
stock.

     In February 2000, Star Services acquired substantially all of the assets of
Classic Recycling & Construction, Inc., a company engaged in the rolloff
container business. The assets were acquired for $260,000. The purchase price
was paid $100,000 at closing, $80,000 by delivery of our one year promissory
note and $80,000 by delivery of 22,069 shares of Star Services common stock.

     In March 2000, Star Services exercised a purchase option and acquired
approximately 28 acres of real property located in Broward County, Florida,
including the MRF operated on the property. Prior to the acquisition, we had
leased the property from the unrelated third party seller. The $4,000,000
purchase price was paid $500,000 in cash at closing, with the balance paid by
delivery of two promissory notes, one in the amount of $2,500,000 and the other
in the amount of $1,000,000. Both notes bear interest at the rate of 8% per
annum and are payable in monthly installments of $18,344 and $7,338,
respectively, over 30 years.

     In November 2000, Star Services was extended a $4,000,000 credit facility
by Sun Trusts Bank, Inc. The credit facility is comprised of a $2,000,000 line
of credit with a maturity date of April 30, 2002, and a five year term loan in
the amount of $2,000,000. Interest on the outstanding principal balance is
payable at the rate of prime plus 1/2% or 2.75% over the Libor rate of interest,
at the option of Star Services.

     In December 2000, Star Services acquired substantially all of the assets of
Peerless Big Apple, Inc. and certain of its affiliates. With operations in
Miami-Dade County, Florida, the Peerless Big Apple companies collect, haul and
recycle construction and demolition debris, and operate a construction and
demolition debris transfer station. The purchase price of $7,530,850.50 was paid
(a) $630,850.50 by delivery of our four year promissory note, (b) $5,000,000 by
our agreement to issue 1,600,000 shares of our common stock, and (c) by our
assumption of $1,900,000 of liabilities of the Peerless Big Apple companies (the
payment of $1,000,000 of which is secured by our pledge of 500,000 shares of
common stock). The 1,600,000 shares of Star Services' common stock could be
subject to rescission rights by the Peerless Big Apple companies. Rescission of
the purchase would decrease our earnings which could result in a decline of the
market price of our common stock. The purchase occurred while this prospectus
was not current. As a result, the purchase may have violated Section 5 of the
Securities Act and might be required to be integrated into this registration. If
the issuance of the shares in connection with the asset purchase was required to
be registered under the Securities Act, for a period of one year following the
sale the Peerless Big Apple companies would be entitled to rescind the sale as a
result of the inclusion of these shares in the purchase price prior to the
prospectus being current. If rescission were to occur, Star Services might be
required to pay the purchase price for the assets, aggregating approximately
$7,530,000 in cash, or, alternatively, might be required to return the assets to
the former owner. The Peerless Big Apple companies have signed an agreement
waiving any rescission rights in connection with the sale, but its waiver might
not be enforceable. We believe that the likelihood that Peerless will seek to
enforce its possible rescission rights is remote.

     On November 22, 2000, Star Services sold an aggregate of 1,800,000 shares
of common stock to four accredited investors, for a purchase price of
$4,500,000, or $2.50 per share. The purchase price was paid by delivery of the
investors' full recourse installment promissory notes. The shares purchased are
being held in escrow, and will be released, pro-rata, to the extent of
installment payments under the promissory notes. Note payments are scheduled to
commence May 1, 2001.
                                        2
<PAGE>   5

     Star Services Group, Inc.'s executive offices are located at 2075 N.
Powerline Road, Pompano Beach, Florida 33069, telephone no. (954) 974-3800.

OPERATIONS

  General

     The following table reflects the Company's operating revenues for each of 3
years ended 2000, 1999 and 1998 for each of the Company's principal lines of
business.

<TABLE>
<CAPTION>
                                                              2000          1999          1998
                                                           -----------   -----------   ----------
<S>                                                        <C>           <C>           <C>
Waste Services
  Commercial Waste Services..............................  $   951,994   $   297,060   $    6,910
  Industrial Waste Services..............................   11,085,063     6,132,235    1,313,913
  Other Waste Services...................................        4,835        24,008        7,000
                                                           -----------   -----------   ----------
          Total Waste Services...........................   12,041,892     6,453,303    1,327,823
MRFs.....................................................   10,451,697     5,793,445    2,215,028
Management Services......................................    1,537,293        20,258            0
Landfill.................................................            0       647,289            0
                                                           -----------   -----------   ----------
Operating Revenue........................................  $24,030,882   $12,914,295   $3,542,851
                                                           ===========   ===========   ==========
</TABLE>

SERVICES

  Commercial, Industrial and Residential Waste Services

     Star Services currently serves more than 3,400 commercial, industrial and
residential customers.

     We provide commercial and industrial services under service agreements with
terms ranging from one month to five years. We determine fees under these
agreements based upon factors such as collection frequency, level of service,
route density, the type, volume and weight of the waste collected, type of
equipment and containers furnished, the distance to the disposal or processing
facility, the cost of disposal or processing and prices charged by competitors
in our markets for similar service. Collection of larger volumes associated with
commercial and industrial waste streams generally helps improve our operating
efficiencies, and consolidation of these volumes allows us to negotiate more
favorable disposal prices. Our commercial and industrial customers use portable
containers for storage, enabling us to service many customers with fewer
collection vehicles. Commercial and industrial collection vehicles normally
require one operator. We provide containers of between one and fifty cubic yards
to our customers.

     In June 1999, Delta Waste Corp., a subsidiary of Star Services, entered
into an agreement to purchase certain solid waste collection routes and related
equipment from Waste Management, Inc. In March 2000, the agreement was
terminated by mutual consent of the parties.

     We provide or intend to provide residential waste services under contracts
with homeowners' associations, apartment owners or mobile home park operators,
or on a subscription basis with individual households. We base residential
contract fees primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, the cost of disposal or
processing and prices charged by our competitors in that market for similar
services.

  Transfer Station Services and MRFs

     Star Services has an active program to acquire, develop, own and operate
transfer stations in markets sufficiently close to our existing operations to
afford operating efficiencies. Star Services believes it can achieve operating
efficiencies by:

     - owning the landfills to which solid wastes, including C&D debris, are
       delivered;

     - hauling such wastes to Company-owned C&D MRFs;

                                        3
<PAGE>   6

     - separating the materials delivered to the MRFs into usable components;
       and

     - shipping these components to end-users.

Because Star Services is involved in each phase of operations, it believes that
efficiencies in management and infrastructure are achieved.

     We operate one C&D MRFs in Broward County, Florida and one C&D MRF in Palm
Beach County, Florida and two C&D MRFs and one C&D Transfer Station in
Miami-Dade County, Florida. At these facilities we receive, separate and
transfer material received from our own vehicles and other contractors. All
three of these facilities have permits which allow us to separate the material
received and sell any useful products such as wood, paper, metal and plastic. We
believe that the MRFs benefit Star Services by:

     - concentrating the waste stream from a wider area, increasing the volume
       of disposal at landfills that we operate and giving us greater leverage
       in negotiating more favorable disposal rates at other landfills;

     - improving utilization of collection personnel and equipment; and

     - building relationships with municipalities and private operators that
       deliver waste, which can lead to additional growth opportunities.

  Landfills

     Star Services seeks to identify solid waste and C&D landfill acquisition
candidates to achieve vertical integration in markets where the economic and
regulatory environment makes such acquisitions attractive. We believe that in
some markets acquiring landfills provides opportunities to vertically integrate
our collection, transfer and disposal operations while improving operating
margins. We evaluate landfill candidates by determining, among other things, the
amount of waste that could be diverted to the landfill in question, whether
access to the landfill is economically feasible from Star Services' existing
market areas either directly or through transfer stations, the expected life of
the landfill, the potential for expanding the landfill and current disposal
costs compared to the cost of acquiring the landfill. Where the acquisition of a
landfill is not attractive, we pursue disposal contracts with facilities which
are typically municipally controlled.

INDUSTRY OVERVIEW

     The solid waste services industry has undergone significant consolidation
and integration since 1990. We believe that the following factors are primarily
responsible for the consolidation and integration of the waste services
industry:

     - Increased Impact of Regulations.  Stringent industry regulations, such as
       the Subtitle D regulations, have caused operating and capital costs to
       rise and have accelerated consolidation and acquisition activities in the
       solid waste collection and disposal industry. Many smaller industry
       participants have found these costs difficult to bear and have decided to
       either close their operations or sell them to larger operators. In
       addition, Subtitle D requires more stringent engineering of solid waste
       landfills, and mandates liner systems, leachate collection, treatment and
       monitoring systems and gas collection and monitoring systems. These
       ongoing costs are combined with increased financial reserve requirements
       for solid waste landfill operators relating to closure and post-closure
       monitoring. As a result, the number of solid waste landfills is declining
       while the average size is increasing.

     - Increased Integration of Collection and Disposal Operations. In certain
       markets, competitive pressures are forcing operators to become more
       efficient by establishing an integrated network of solid waste collection
       operations and transfer stations through which they secure solid waste
       streams for disposal. Operators have adopted a variety of disposal
       strategies, including owning landfills, establishing strategic
       relationships to secure access to landfills and capturing significant
       waste stream volumes to gain leverage in negotiating lower landfill fees
       and securing long-term, most-favored-pricing contracts with high capacity
       landfills.

                                        4
<PAGE>   7

     - Pursuit of Economies of Scale.  Larger operators achieve economies of
       scale by vertically integrating their operations or by spreading their
       facility, asset and management infrastructure over larger volumes. Larger
       solid waste collection and disposal companies have become more
       cost-effective and competitive through control of a larger waste stream
       and by gaining access to significant financial resources to make
       acquisitions.

     Despite the ongoing consolidation, the solid waste services industry
remains primarily regional in nature and highly fragmented. Based on published
industry sources, approximately 27% of the total revenues of the U.S. solid
waste industry is accounted for by more than 5,000 private, predominantly small
collection and disposal businesses, approximately 41% by publicly traded solid
waste companies and approximately 32% by municipal governments that provide
collection and disposal services. We expect the current consolidation trends in
the solid waste industry to continue, because many independent landfill and
collection operators lack the capital resources, management skills and technical
expertise necessary to comply with stringent environmental and other
governmental regulations and to compete with larger, more efficient integrated
operators. In addition, many independent operators may wish to sell their
businesses to achieve liquidity in their personal finances or as part of their
estate planning. We believe that the fragmented nature of the industry offers
significant consolidation and growth opportunities, including Florida and the
Eastern United States, for companies with disciplined acquisition programs,
decentralized operating strategies and access to financial resources.

STRATEGY

     Our objective is to build a leading integrated solid waste services company
in Florida and other areas of the Eastern United States with high population
growth due to rapid residential and commercial development. We plan to
accomplish this using a combination of strategic acquisitions and the opening of
new operating centers in selected markets.

GROWTH STRATEGY

     Our growth strategy is as follows:

     - Initially, we plan to acquire solid waste companies in selected markets;
       we intend to establish a market presence in certain target markets and
       expand our existing markets

     - In target markets where suitable acquisition candidates are not
       available, we plan to start new operating companies; these new companies
       will seek to capitalize on existing relationships with our customers in
       existing markets and a sales force dedicated to building new client
       relationships.

     - Once we are established in a market, we will implement our operating
       strategy, which focuses on generating internal growth through exceptional
       service.

     - We will attempt to obtain contracts and exclusive arrangements with local
       or regional governmental agencies.

     - We plan to be involved in many levels of solid waste disposal in each of
       our markets. For example, we may seek to acquire or operate a transfer
       station, landfill, MRF or lakefill operation in order to become involved
       in many different aspects of the solid waste services industry in those
       markets.

     - Expansion Through Acquisitions.  We intend to expand the scope of our
       operations by acquiring solid waste operations in new markets and in
       existing or adjacent markets that are combined with or "tuck in" to
       existing operations.

        We intend to expand into some new geographic regions by entering these
        markets through acquisitions. We intend to use an initial acquisition in
        a new market as an operating base. Then we intend to seek to strengthen
        the acquired operation's presence in that market by providing additional
        services, adding new customers and making "tuck-in" acquisitions. We
        next intend to seek to broaden our regional presence by adding
        additional operations in markets adjacent to the new location. We are
        currently examining opportunities in central and western Florida.


                                        5
<PAGE>   8

     - New Operating Centers.  In selected markets where we cannot find a
       suitable acquisition candidate, we intend to start a new operating
       company by using relationships developed with customers in our existing
       markets and a sales force focusing on building new client relationships.
       In these markets we will start with roll-off trucks servicing
       construction and demolition sites and will seek to permit transfer
       stations to recycle material received from these sites and ship any
       residue to landfills we intend to acquire in the future.

     - Internal Growth.  To generate continued internal growth, we will focus on
       increasing market penetration in our current and adjacent markets,
       soliciting new commercial, industrial, and residential customers in
       markets where customers may elect whether or not to receive waste
       collection services, marketing upgraded or additional services to
       existing customers and, where appropriate, raising prices. As customers
       are added in existing markets, our revenue per truck increases, which
       generally increases our collection efficiencies and profitability.

OPERATING STRATEGY

     - Decentralized Operations.  We intend to manage our operations on a
       decentralized basis. This places decision-making authority close to the
       customer, enabling us to identify customers' needs quickly and to address
       those needs in a cost-effective manner. We believe that decentralization
       provides a low-overhead, highly efficient operational structure that
       allows us to expand into geographically contiguous markets. We believe
       that this structure will give us a strategic competitive advantage, and
       make us an attractive buyer to many potential acquisition candidates.
       Star Services' management believes that the owners of the types of
       businesses it will seek to acquire often will desire to work for the
       Company after the acquisition. The Company foresees hiring many of these
       local managers. The Company believes that this policy will benefit the
       Company by providing a source of managers knowledgeable in the solid
       waste industry to assist with the integration of the acquired business.
       The Company also believes that granting an immediate equity interest to
       these managers will maximize their efforts on the Company's behalf.

       We currently deliver our services from four operating locations serving
       Dade, Palm Beach, Broward and Brevard Counties, Florida. Each operating
       location has a location manager, with autonomous service and
       decision-making authority for that location and is responsible for
       maintaining service quality, promoting safety in the operations,
       implementing marketing programs, and overseeing day-to-day operations,
       including contract administration. Location managers also help identify
       acquisition candidates and are responsible for integrating them into our
       operations and obtaining the permits and other governmental approvals
       required for us to operate the acquired business.

ACQUISITION PROGRAM

     Star Services currently services the greater Miami, Fort Lauderdale and
Palm Beach markets from its locations in Broward, Miami-Dade and Palm Beach
Counties. We will focus our acquisition program on markets in Florida and the
Eastern parts of the U.S. that generally exhibit the characteristics listed
below:

     - A potential revenue base of at least $15 million, usually in areas with a
       population of 100,000 or more;

     - A fragmented market with additional available acquisition candidates;

     - The opportunity to acquire a significant market share;

     - Strong projected economic or population growth rates;

     - The availability of adequate disposal capacity through acquisition or
       agreements with third parties; and

     - A relatively predictable regulatory environment.

     We believe that our experienced management and decentralized operating
strategy make us an attractive buyer to certain solid waste collection and
disposal acquisition candidates. We have developed a set of

                                        6
<PAGE>   9

financial, geographic and management criteria which we will use to evaluate
specific acquisition candidates. The factors that we will consider in evaluating
an acquisition candidate include:

     - The candidate's historical and projected financial performance;

     - The return on capital invested in a candidate, its margins and capital
       requirements and its impact on our earnings;

     - The experience and reputation of the candidate's management and customer
       service providers, their relationships with local communities and their
       willingness to continue as employees of Star Services;

     - Whether the geographic location of the candidate will enhance or expand
       our market area or ability to attract other acquisition candidates;

     - Whether the acquisition will increase our market share or help protect
       our existing customer base;

     - Any potential synergies that may be gained by combining the candidate
       with our existing operations; and

     - The liabilities of the candidate.

     Before completing an acquisition, we plan to perform extensive
environmental, operational, engineering, legal, human resources and financial
due diligence. Our management evaluates and approves all acquisitions. We will
seek to integrate each acquired business promptly in order to minimize
disruption to the ongoing operations of both Star Services and the acquired
business.

ROYAL OAK RANCH CONSTRUCTION AND DEMOLITION DEBRIS LANDFILL

     Through January 2000, we operated the Royal Oak Ranch Construction and
Demolition Debris Landfill in Brevard County, Florida. The Royal Oak Landfill
consists of 42 total acres of which 36.4 acres were permitted for disposal of
C&D material. Effective January 2000, the landfill operations of Delta Resources
Corp. were suspended following a final court determination that the property
does not have proper zoning (See Item 3 -- Legal Proceedings). We are currently
negotiating a final settlement with the Florida Department of Environmental
Protection with respect to terms of the facility's closure.

LAKEFILL OPERATIONS AND PERMITS

     Two of our current facilities are located next to areas which are subject
fill permits. These permits allow us to fill the area with certain specified
inert materials including concrete and ceramic and clay tiles. Customers are
generally charged a fee for the material they dispose of in these areas. When
the land is completely filled to grade it then can be sold for development. To
date, no such sales have occurred and none are expected to occur in the near
future.

SALES AND MARKETING

     We have eight sales and marketing personnel operating from our offices in
Broward and Miami-Dade Counties, Florida, each of whom solicits customers in our
market areas. We concentrate on providing services to these customers during the
construction phase of their construction projects and then providing solid waste
collection services to them once the project is completed. We also use our sales
force to expand our presence into areas adjacent to our existing market areas.

COMPETITION

     The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes three large national waste companies: Allied Waste Industries, Inc.,
Republic Services, Inc., and Waste Management, Inc. In addition, Star Services
may compete with regional companies. Casella Waste Systems, Inc., Superior
Services, Inc., Waste Connections Inc. and Waste Industries, Inc. are public
regional companies with annual revenues in excess of $100 million. Certain of
the markets in which Star Services competes or intends to compete are served by
one or more large,
                                        7
<PAGE>   10

national solid waste companies, as well as by numerous privately-held regional
and local solid waste companies of varying sizes and resources, some of which
have accumulated substantial goodwill in their markets. We also compete with
operators of alternative disposal facilities, including incinerators, and with
counties, municipalities, and solid waste districts that maintain their own
waste collection and disposal operations. Public sector operations may have
financial advantages over Star Services because of their access to user fees and
similar charges, tax revenues and tax-exempt financing.

     We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause Star Services to reduce the price of our services or, if we elect not
to do so, to lose business. We provide our services under service contracts with
terms ranging from one month to five years with commercial, residential and
industrial customers.

     Intense competition exists not only for collection, transfer and disposal
volume, but also for acquisition candidates. We generally compete for
acquisition candidates with publicly owned regional and large national waste
management companies.

EMPLOYEES

     As of December 31, 2000, we employed approximately 356 full-time employees,
including approximately 30 professionals or managers, approximately 262
employees involved in collection, transfer, disposal and recycling operations,
and approximately 64 sales, clerical, data processing or other administrative
employees.

     We are not aware of any organizational efforts among our employees and
believe that our relations with our employees are good.

REGULATION

  Introduction

     Star Services' operations, including waste transportation, transfer
stations, vehicle maintenance shops and fueling facilities, are all subject to
extensive and evolving federal, state and local environmental laws and
regulations, the enforcement of which has become increasingly stringent in
recent years. The environmental regulations affecting Star Services are
administered by the EPA and other federal, state and local environmental,
zoning, health and safety agencies. Star Services is currently in substantial
compliance with applicable federal, state and local environmental laws, permits,
orders and regulations. We do not currently anticipate any material
environmental costs necessary to bring our operations into compliance (although
there can be no assurance in this regard). We anticipate that regulation,
legislation and regulatory enforcement actions related to the solid waste
services industry will continue to increase. We attempt to anticipate future
regulatory requirements and to plan in advance as necessary to comply with them.

     The principal federal, state and local statutes and regulations that apply
to our operations are described below. All of the federal statutes described
below contain provisions that authorize, under certain circumstances, lawsuits
by private citizens to enforce the provisions of the statutes. In addition to a
penalty award by the United States, some of those statutes authorize an award of
attorneys' fees to parties that successfully bring such an action. Enforcement
actions under these statutes may include both civil and criminal penalties, as
well as injunctive relief in some instances.

  The Resource Conservation and Recovery Act of 1976 ("RCRA")

     RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses

                                        8
<PAGE>   11

that deal with hazardous waste are subject to regulatory obligations in addition
to those imposed on handlers of nonhazardous waste.

     The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C Regulations impose
obligations on generators, transporters and disposers of hazardous wastes and
require permits that are costly to obtain and maintain for sites where such
material is treated, stored or disposed of. Subtitle C requirements include
detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional and more stringent obligations, and may regulate certain
materials as hazardous wastes that are not so regulated under the federal
Subtitle C Regulations. From the date of inception through December 31, 1999,
Star Services did not, to our knowledge, transport hazardous wastes under
circumstances that would subject Star Services to hazardous waste regulations
under RCRA. Some of our ancillary operations (e.g., vehicle maintenance
operations) may generate hazardous wastes. Star Services manages these wastes in
substantial compliance with applicable laws.

     In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Florida and other states in which we may operate in the
future have adopted regulations or programs as stringent as, or more stringent
than, the Subtitle D Regulations.

     RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of Star Services' facilities and operations are subject to these
requirements.

  The Federal Water Pollution Control Act of 1972, as Amended (the "Clean Water
  Act")

     The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from our transfer stations or run-off or
collected leachate from Star Services' owned or operated landfills is discharged
into streams, rivers or other surface waters, the Clean Water Act would require
Star Services to apply for and obtain a discharge permit, conduct sampling and
monitoring and, under certain circumstances, reduce the quantity of pollutants
in such discharge. Also, virtually all landfills are required to comply with the
EPA's storm water regulations issued in November 1990, which are designed to
prevent contaminated landfill storm water runoff from flowing into surface
waters. We believe that our facilities comply in all material respects with the
Clean Water Act requirements. Florida and other states in which we may operate
in the future have been delegated authority to implement the Clean Water Act
permitting requirements, and some of these states have adopted regulations that
are more stringent than the federal requirements. For example, states often
require permits for discharges to ground water as well as surface water.


                                        9
<PAGE>   12

  The Comprehensive Environmental Response, Compensation, and Liability Act of
  1980 ("CERCLA")

     CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If Star Services were found to be a responsible party for a CERCLA cleanup,
the enforcing agency could hold Star Services, or any other generator,
transporter or the owner or operator of the contaminated facility, responsible
for all investigative and remedial costs, even if others were also liable.
CERCLA also authorizes the imposition of a lien in favor of the United States on
all real property subject to, or affected by, a remedial action for all costs
for which a party is liable. CERCLA gives a responsible party the right to bring
a contribution action against other responsible parties for their allocable
shares of investigative and remedial costs. Star Services' ability to obtain
reimbursement from others for their allocable shares of such costs would be
limited by our ability to find other responsible parties and prove the extent of
their responsibility and by the financial resources of such other parties.
Various state laws also impose liability for investigation, cleanup and other
damages associated with hazardous substance releases.

  The Clean Air Act

     The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the potential air emissions. State air regulatory programs may
implement the federal requirements but may impose additional restrictions. For
example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.

  The Occupational Safety and Health Act of 1970 (the "OSH Act")

     The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to Star Services'
operations, including standards concerning notices of hazards, safety in
excavation and demolition work, the handling of asbestos and asbestos-containing
materials, and worker training and emergency response programs.

  Flow Control/Interstate Waste Restrictions

     Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts


                                        10
<PAGE>   13

have held that some flow control schemes violate constitutional limits on state
or local regulation of interstate commerce. From time to time, federal
legislation is proposed that would allow some local flow control restrictions.
Although no such federal legislation has been enacted to date, if such federal
legislation should be enacted in the future, Florida and other states in which
Star Services may operate landfills in the future could limit or prohibit the
importation of out-of-state waste or direct that wastes be handled at specified
facilities. Such state actions could adversely affect Star Services' landfills.
These restrictions could also result in higher disposal costs for our collection
operations. If we were unable to pass such higher costs through to our
customers, our business, financial condition and operating results could be
adversely affected.

     Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, we
may elect not to challenge such restrictions. These restrictions could reduce
the volume of waste going to landfills in certain areas, which may adversely
affect our ability to operate our landfills at their full capacity and/or reduce
the prices that we can charge for landfill disposal services. These restrictions
may also result in higher disposal costs for our collection operations. If we
were unable to pass such higher costs through to our customers, Star Services'
business, financial condition and operating results could be adversely affected.

  State and Local Regulation

     Florida and states in which Star Services may operate in the future have
laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. In addition, many states have adopted statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting Star
Services' operations. These include zoning and health measures that limit solid
waste management activities to specified sites or activities, flow control
provisions that direct or restrict the delivery of solid wastes to specific
facilities, laws that grant the right to establish franchises for collection
services and then put such franchises out for bid, and bans or other
restrictions on the movement of solid wastes into a municipality.

     Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.

     There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source, waste recycling, and to prohibit or
restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
prevent Star Services from operating our current and future facilities at their
full capacity.

     Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are
enforced by local or state authorities instead of by the EPA, and in some states
those laws are enforced jointly by state or local and federal authorities.

  Public Utility Regulation

     In many states, public authorities regulate the rates that landfill
operators may charge. The adoption of rate regulation or the reduction of
current rates in states in which Star Services may own or operate landfills
could adversely affect our business, financial condition and operating results.

                                        11
<PAGE>   14

RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS

     Star Services maintains environmental and other risk management programs
appropriate for our business. Our environmental risk management program includes
evaluating existing facilities and potential acquisitions for environmental law
compliance. We do not presently expect environmental compliance costs to
increase above current levels, but we cannot predict whether future acquisitions
will cause such costs to increase. Operating practices at all Star Services'
operations emphasize minimizing the possibility of environmental contamination
and litigation. We believe that our facilities comply in all material respects
with applicable federal and state regulations.

     We carry a broad range of insurance, which our management considers
adequate to protect our assets and operations. The coverage includes general
liability, comprehensive property damage, workers' compensation and other
coverage customary in the industry. These policies exclude coverage for damages
associated with environmental conditions except for certain specified types of
environmental damage, such as that caused by release of hazardous materials
resulting from explosions. Because of the limited availability and high cost of
environmental impairment liability insurance, and in light of our limited
landfill operations, we have not obtained such coverage. If Star Services were
to incur liability for environmental cleanups, corrective action or damage, our
financial condition could be materially and adversely affected. We will continue
to investigate the possibility of obtaining environmental impairment liability
insurance, particularly if we acquire or operate landfills other than the Royal
Oak landfill. We believe that most other landfill operators do not carry such
insurance.

     Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have not experienced
difficulty in obtaining performance bonds or letters of credit for our current
operations. At December 31, 1999, we had provided customers and various
regulatory authorities with surety bonds and letters of credit in the aggregate
amount of approximately $0.7 million to secure our obligations. If we were
unable to obtain surety bonds or letters of credit in sufficient amounts or at
acceptable rates, we could be precluded from entering into additional municipal
solid waste collection contracts or obtaining additional landfill operating
permits.

     This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") concerning the Company's
operations, economic performance and financial conditions, including, in
particular, the likelihood of the Company's success in developing and bringing
to market the products which it currently has under development. These
statements are based upon a number of assumptions and estimates which are
inherently subject to significant uncertainties, and contingencies, many of
which are beyond the control of the Company and reflect future business
decisions which are subject to change. Some of these assumptions inevitably will
not materialize, and unanticipated events will occur which will affect the
Company's results. Consequently, actual results will vary from the statements
contained herein and such variance may be material. Prospective investors should
not place undue reliance on this information.

ITEM 2.  PROPERTIES

     As of December 31, 2000,

     - We owned and operated two collection operations, one of which is located
       in Broward County, and the other in Miami-Dade County;

     - We owned and/or operated four MRFs, one of which is located in Broward
       County, and two of which are located in Miami-Dade County, and one in
       Palm Beach County;

     - We operated one C&D transfer station in Miami-Dade County; and

     - We operated two C&D MRFs in Palm Beach County, one in Broward County, one
       in Miami-Dade County and one in Collier County.

                                        12
<PAGE>   15

     We lease various offices and facilities, including our corporate offices in
Pompano Beach, Florida. We also own approximately 35 acres of property at our
facility in Broward County, Florida, subject to encumbrances more fully
described in the financial statements included elsewhere in this prospectus. We
own various equipment, including waste collection and transportation vehicles,
related support vehicles, containers, and heavy equipment used in our
operations. We believe that our existing facilities and equipment are generally
adequate for our current operations. However, we expect to make additional
investments in property and equipment for expansion and replacement of assets
and in connection with future acquisitions.

ITEM 3.  LEGAL PROCEEDINGS

     Star Services is a party to various legal proceedings in the ordinary
course of business and as a result of the extensive governmental regulation of
the solid waste industry. Management does not believe that these proceedings,
either individually or in the aggregate, are likely to have a material adverse
effect on our business, financial condition, operating results or cash flows.

     On October 31, 2000, our appeal of a January 13, 2000 lower court
injunction was denied, as a result of which a permanent injunction was issued
preventing Star Services from operating the Royal Oak Construction and
Demolition Debris Landfill in Brevard County. The injunction was based on
violations of local zoning laws. Additionally, two employees of Star Services'
subsidiary Delta Resources, Charles Green and Susan Johnson, were arrested and
charged with illegal dumping. Mr. Green is a former Secretary of the Company.
Star Services is currently negotiating with the Florida Department of
Environmental Protection the terms under which the facility will be closed. In
connection therewith, Charles Greene pleaded nolo contendre, was adjudged guilty
of one misdemeanor count of violating of Florida's litter law and one
misdemeanor count of the unlawful discharge of oil, was sentenced to two years'
of self probation and was prohibited from operating a landfill in Brevard
County, Florida. Susan Johnson was sentenced to six months self probation
following a withheld adjudication on one misdemeanor count of violating
Florida's litter law.

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

     No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of 1999.

EXECUTIVE OFFICERS AND DIRECTORS

     The following table sets forth certain information concerning Star
Services' executive officers and directors as of December 31, 2000:

<TABLE>
<CAPTION>
        NAME           AGE                             TITLE
        ----           ---                             -----
<S>                    <C>   <C>
Jack R. Casagrande...  55    Chairman of the Board, Chief Executive Officer and
                             Director
Patrick F. Marzano...  53    President, Chief Financial Officer and Director
Phillip Foreman......  39    Chief Operating Officer and Director
Thomas R. Roberts....  51    Vice President, Environmental Compliance and Director
Michael C. Marzano...  26    Treasurer
Angelo Marzano.......  25    Secretary
Frank P. Marzano.....  28    Director
Rick Casagrande......  50    Director
Samuel G. Weiss......  51    Director
</TABLE>

     Jack R. Casagrande has been the Chairman, Chief Executive Officer and a
director of Star Services since inception. In 1971, Mr. Casagrande founded
Industrial Waste Services, Inc. ("IWS") in Miami-Dade County, Florida and, by
1984, the company had grown to be the largest waste hauling operation in the
county and the second largest in the State of Florida. In 1984, IWS was
purchased by Attwoods, plc and Mr. Casagrande became head of U.S. operations.
During his tenure its revenues grew from $24,000,000 in

                                        13
<PAGE>   16

1984 to over $300,000,000 by the end of 1993. Attwoods had become the fourth
largest waste services company in the United States prior to its acquisition by
Browning-Ferris Industries ("BFI") in December 1994. Since that time, Mr.
Casagrande has served as a business consultant to, and a director of, several
private companies. Jack R. Casagrande is the brother of Rick Casagrande.

     Patrick F. Marzano is the founder, President and a director of Star
Services. Mr. Marzano graduated from St. John's University in Queens, New York
in 1969 with a Bachelors of Science degree in Accounting. From 1969 to 1971, Mr.
Marzano worked as a staff accountant at Price Waterhouse in New York City. In
1971, Mr. Marzano left Price Waterhouse and started his own accounting firm. Mr.
Marzano has been a certified public accountant and a partner in Geller, Marzano
& Company CPA's PC for the last twenty seven (27) years. He also has been
involved as a CEO and partner/shareholder for over twenty (20) years in several
waste companies in New York and Florida. Patrick F. Marzano is the uncle of
Angelo Marzano and the father of Frank P. Marzano and Michael C. Marzano.

     Phillip Foreman has been the Chief Operating Officer and a Director of Star
Services since July 1999. From 1988 until 1993 Mr. Foreman served as the
Regional Manager for Attwoods Florida operations and then became the CEO for
Attwoods U.S. solid waste operations. As a result of the acquisition by BFI, Mr.
Foreman became the Divisional Vice President for BFI's Florida Gulf Atlantic
Division, where he oversaw operations generating $230,000,000 in annual
revenues. In 1996 Mr. Foreman left BFI and has since acted as a private
consultant to a number of entities in the waste industry including a
consolidation group in New Jersey. From October 1998 until July 1999, he served
as the Director of Operations for Atlas Environmental, Inc.

     Thomas R. Roberts has been Vice President, Acquisitions, Compliance and
Governmental Affairs and a director of Star Services since 1998. From 1995 to
1998, Mr. Roberts served as Vice President of Atlas Environmental, Inc.,
including the company's 11 solely owned facilities. Mr. Roberts is the President
of the Florida Recyclers Coalition, Inc. and serves as an instructor for the
University of Florida Center for Training, Research and Education for
Environmental Occupations (TREEO Center), co-sponsored by State of Florida
Department of Environmental Protection and the Florida Sunshine Chapter of the
Solid Waste Association of North America (SWANA). Mr. Roberts received the
"Distinguished Service Award 1998" from SWANA for his coordination of Florida's
C&D Operators Training Course. Mr. Roberts has served and serves on several
Florida Department of Environmental Protection and local counties' C&D-related
Task Forces and Technical Advisory Councils. Mr. Roberts has appeared as speaker
on C&D topics at the International WasteExpo, Florida Environmental Expo,
Recycle Florida Today, FDEP's Future of Recycling Advisory Group, Florida's
Organic Recyclers Association, and FDEP's C&D Landfill Task Force.

     Michael C. Marzano, has served as Treasurer of Star Services since December
2000, and from June 1999 until December 2000, he served as its controller. Mr.
Marzano graduated from the Pennsylvania State University in June 1996. From
October 1996 until December 1997, Mr. Marzano served in the audit department of
Grant Thornton, CPAs. From December 1997 until June 1999, he was employed by
Geller, Marzano and Company CPAs in Port Washington, New York. Mr. Marzano is
the son of Patrick F. Marzano and the brother of Frank P. Marzano and the cousin
of Angelo Marzano.

     Angelo Marzano, Treasurer and Assistant Secretary of the Company since
inception, graduated from Pennsylvania State University in 1997, with a Bachelor
of Science Degree in Business Logistics. Throughout his college education, he
maintained a position in several waste companies. Upon graduation, Mr. Marzano
began working at Delta Recycling Corp. Mr. Marzano is responsible for developing
the internal controls and procedures for Delta Recycling Corp. Mr. Marzano is
certified as a construction and demolition landfill and materials recovery
facility operator. Angelo Marzano is the nephew of Patrick Marzano and the
cousin of Frank P. Marzano and Michael C. Marzano.

     Frank P. Marzano, a director of the Company since inception, graduated from
Pennsylvania State University in 1994 with a Bachelor of Science degree in
Accounting. Mr. Marzano is a Certified Public Accountant and worked at KPMG Peat
Marwick in New York City until 1996. In 1996, Mr. Marzano joined Geller, Marzano
& Company CPAs PC in Port Washington, New York. While working at Geller Marzano,
Mr. Marzano received his Masters in Taxation from Long Island University in
January 1998. Mr. Marzano is
                                        14
<PAGE>   17

managing partner of Geller Marzano. Frank P. Marzano is the son of Patrick
Marzano, the brother of Michael C. Marzano and the cousin of Angelo Marzano.

     Rick Casagrande, a director of the Company since inception, graduated from
Christ The King High School in Middle Village, New York in 1967. In 1971 he was
one of the co-founders of Industrial Waste Services in Miami-Dade County,
Florida. He has also held various executive positions in several solid waste
management companies. From 1994 until September 1997, he served as a Vice
President of American Transfer, Inc., a refuse recycling company that was sold
to Allied Waste in September 1997. Follwing that sale, Mr. Casagrande sought new
employment and in January 1998, he became president. He has held various
executive positions in several solid waste management companies including
American Transfer Services, Inc. He is currently President of Total Care of Long
Island, a cleaning and janitorial services company. He continues to serve as
president of that Company. Rick Casagrande is the brother of Jack R. Casagrande.

     Samuel G. Weiss, a director of the Company since its inception, is an
attorney admitted to practice in the State of New York since 1974. He is
currently a member of the firm of Weiss & Federici, LLP., which has an office
located at 30 Main Street, Port Washington, New York 11050. Prior to becoming a
member of Weiss & Federici, LLP in 1999, Mr. Weiss was a private practitioner in
Port Washington, New York, since 1988. Mr. Weiss received his BA Degree from New
York University in 1971. Mr. Weiss received his Juris Doctor from New York
University in 1974 and his LLM in taxation from New York University in 1977. Mr.
Weiss is General Counsel and a Director of Strategic Capital Resources, Inc
since November 27, 1999.

BOARD AND COMMITTEE ACTIVITY; STRUCTURE AND COMPENSATION

     During fiscal year 2000, the Board of Directors had four meetings. The
directors attended all of the meetings of the Board of Directors.

     Star Services' operations are managed under the supervision of the Board of
Directors, which has the ultimate responsibility for the establishment and
implementation of our general operating philosophy, objectives, goals and
policies.

     The Board of Directors has established three standing committees: the
Executive Committee, the Compensation Committee and the Audit Committee. The
Executive Committee is charged with making major management decisions and
recommending policy directions to the Board of Directors as a whole. The
Executive Committee is currently composed of Jack Casagrande, Phillip Foreman
and Patrick F. Marzano. The Compensation Committee is charged with recommending
to the Board the compensation for our executives and administering the stock
option and benefit plans. The Compensation Committee is currently composed of
Patrick F. Marzano, Jack Casagrande, Rick Casagrande and Samuel Weiss. The Audit
Committee is charged with recommending to the Board the appointment of
independent auditors, as well as discussing and reviewing, with the independent
auditors, the scope of the annual audit and results thereof. The Audit Committee
is currently composed of Patrick F. Marzano, Rick Casagrande and Samuel Weiss.
We are in the process of reconstituting the Audit Committee in order to meet
American Stock Exchange requirements for independent audit committee members.

COMPENSATION OF DIRECTORS

     Directors who are officers or employees do not currently receive any
compensation for attending meetings of the Board of Directors. Each independent
director receives a fee of $1,500 for attending each board meeting and each
committee meeting (unless held on the same day of the full Board meeting), in
addition to reimbursement of reasonable expenses.

                                        15
<PAGE>   18

                                    PART II

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

     Star Services' Common Stock began trading on the Nasdaq OTC bulletin board
under the symbol "SSVC" effective July 7, 1999. Prior to that date, Bailey &
Baron's Common Stock traded on the Nasdaq OTC bulletin board under the symbol
"BYAB". As Bailey & Baron had no operations, assets or liabilities prior to its
merger with Star Services, information regarding trading information prior to
July 7, 1999 is not presented. The following table presents quarterly
information on the price range of the Company's Common Stock. This information
indicates the high and low bid quotations reported by the Nasdaq OTC bulletin
board.

<TABLE>
<CAPTION>
                                                              HIGH BID   LOW BID
1999                                                           PRICE      PRICE
----                                                          --------   -------
<S>                                                           <C>        <C>
Third Quarter (July 7, 1999 through September 30, 1999).....   $10.00     $3.25
Fourth Quarter (October 1, 1999 through December 31,
  1999).....................................................   $ 8.25     $5.00
</TABLE>

<TABLE>
<CAPTION>
                                                              HIGH BID   LOW BID
2000                                                           PRICE      PRICE
----                                                          --------   -------
<S>                                                           <C>        <C>
First Quarter (January 1, 2000 through March 31, 2000)......   $6.50      $5.00
Second Quarter (April 1, 2000 through June 30, 2000)........   $5.00      $3.75
Third Quarter (July 1, 2000 through September 30, 2000).....   $4.25      $3.50
Fourth Quarter (October 1, 2000 through December 31,
  2000).....................................................   $4.12      $2.12
</TABLE>

     On April 13, 2001, the last sale price reported on the Nasdaq over the
counter bulletin board for the Common Stock was $1.95.

     As of the date of this filing there are 12,136,745 issued and outstanding
shares of our common stock.

     The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price of less than $5.00 per share, subject to certain exceptions. Depending on
market fluctuations, our common stock could be considered to be a "penny stock".
A penny stock is subject to rules that impose additional sales practice
requirements on broker/dealers who sell these securities to persons other than
established customers and accredited investors. For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of these securities. In addition he must receive the purchaser's
written consent to the transaction prior to the purchase. He must also provide
certain written disclosures to the purchaser. Consequently, the "penny stock"
rules may restrict the ability of broker/dealers to sell our securities, and may
negatively affect the ability of holders of shares of our common stock to resell
them.

                                        16
<PAGE>   19

ITEM 6.  SELECTED FINANCIAL DATA

     The following tables present selected historical, supplemental and pro
forma consolidated statements of operations and balance sheet data of Star
Services and the companies it acquired for the periods indicated. Before being
acquired by Star Services, these companies operated as separate businesses.

     The following selected financial data as of and for the years ended
December 31, 1998, 1999 and 2000 are derived from the Company's audited
financial statements. The financial data below should be read in conjunction
with the Company's financial statements and related notes contained elsewhere in
this report and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                              -----------------------------------
                                                                 2000         1999        1998
                                                              ----------   ----------   ---------
<S>                                                           <C>          <C>          <C>
Statement of Operations Data:
Revenues....................................................  24,030,882   12,914,295   3,542,851
                                                              ----------   ----------   ---------
Expenses:
  Direct costs..............................................  17,096,395   10,128,535   2,449,085
  Selling and administrative................................   4,710,868    2,390,203     935,723
  Stock-based compensation..................................     322,572      295,693           0
  Depreciation and amortization.............................   1,232,502      471,085     177,362
Costs related to closure of facilities......................     653,540            0           0
                                                              ----------   ----------   ---------
                                                              24,015,877   13,285,516   3,562,170
                                                              ----------   ----------   ---------
Income (loss) from operations...............................      15,005     (371,221)    (19,319)
Interest income.............................................      24,205       73,294           0
Interest expense............................................    (734,279)    (259,219)    (70,423)
Gain on sale of assets......................................      19,217            0           0
                                                              ----------   ----------   ---------
Income (loss) before income taxes...........................    (675,852)    (557,146)    (89,742)
Income tax benefit..........................................     236,548      195,001           0
                                                              ----------   ----------   ---------
Net income (loss)...........................................    (439,304)    (362,145)    (89,742)
                                                              ==========   ==========   =========
Earnings (loss) per share...................................       (0.05)       (0.05)      (0.02)
                                                              ==========   ==========   =========
Weighted average shares outstanding.........................   8,386,409    7,012,500   5,000,000
                                                              ==========   ==========   =========
</TABLE>

UNAUDITED PRO FORMA INCOME TAX, NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE
                                  INFORMATION

<TABLE>
<S>                                                         <C>         <C>            <C>
Historical income (loss) before income taxes..............   (675,852)      (557,146)    (89,742)
Pro forma income tax (expense) benefit....................    236,548        195,001      27,000
                                                            ---------   ------------   ---------
Pro forma net income (loss)...............................   (439,304)      (362,145)    (62,742)
                                                            =========   ============   =========
Proforma earnings (loss) per share........................      (0.05)         (0.05)      (0.01)
                                                            =========   ============   =========
Historical weighted average shares outstanding............  8,386,409      7,012,500   5,000,000
                                                            =========   ============   =========
</TABLE>

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                              -----------------------------------
                                                                 2000         1999        1998
                                                              ----------   ----------   ---------
<S>                                                           <C>          <C>          <C>
Balance Sheet Data:
  Cash......................................................     189,199    1,476,406      49,149
  Current assets............................................   4,080,813    3,812,799     751,525
  Current liabilities.......................................   6,407,461    2,997,125   1,224,615
  Working capital (deficit).................................  (2,326,648)     815,674    (473,090)
          Total assets......................................  28,396,796   10,949,544   2,979,664
  Long-term debt, net of current portion....................  10,166,368    3,094,221   1,316,899
  Shareholders' equity......................................  10,122,967    4,858,198     438,150
</TABLE>

                                        17
<PAGE>   20

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

OVERVIEW

     Star Services is a regional, integrated solid waste services company that
presently provides solid waste collection, transfer, disposal and recycling
services in south and central Florida.

     The Company's primary objective is to become one of the leading companies
in the environmental service industry in the eastern United States. The Company
intends to implement an aggressive program of internal growth and acquisitions
aimed at expanding the Company's existing market share and acquiring a number of
additional, established operating entities.

     Star Services intends to grow through both acquisitions and internal
growth. We expect a substantial part of our future growth to come from acquiring
additional solid waste collection, transfer and disposal businesses. Additional
acquisitions could continue to affect period-to-period comparisons of our
operating results. We also expect to invest in collection vehicles and
equipment, maintenance of existing equipment, and management information
systems, which should supply the infrastructure to support our growth. We expect
to fund future acquisitions through cash from operations, borrowings, the
issuance of debt or equity and/or seller financing. We do not presently have any
credit facility for acquisitions or any commitment for one.

     The Company operates in several areas of the environmental services
industry: collection, recycling and disposal of construction and demolition
debris, land clearing, yard waste debris, and source separated recyclable
materials. Star Services' operations are carried out by Delta Recycling Corp.,
which was incorporated in Florida on August 26, 1997, Delrock Management Corp.,
which was incorporated in Florida on May 29, 1998, Delta Transfer Corp., which
was incorporated in Florida on August 26, 1998, Eastern Recycling, Inc., which
was incorporated in Florida on June 11, 1997, Delta Resources, which was
incorporated in Florida on January 29, 1999, Delta Waste Corp., which was
incorporated in Florida in January 1999, Delta Site Development which was
incorporated August 2, 1999, and Delta Dade Recycling Corp., which was
incorporated October 20, 2000.

     Star Services operates MRFs which are licensed and regulated by the State
of Florida Department of Environmental Protection and various county agencies.
As MRFs, these facilities accept assorted loads of debris consisting of
construction and demolition debris, land clearing, yard waste and source
separated materials primarily from customers in the construction and demolition
industry. The incoming loads are processed using an semi-automated sorting
system to separate recyclables from the waste stream. Additional loads are also
supplied directly by the Company through its hauling operations. The reclaimed
recyclables are shipped to end user markets for re-use. Star Services owns real
estate used in conjunction with certain of its operations and also maintains a
dredge and fill permit and operates a C&D debris landfill in Titusville,
Florida. Each of the above-described operations is performed by one or more of
Star Services' subsidiaries.

     C&D debris enters the Company's facilities from its own roll-off collection
operation (consisting of over 1,800 containers in Palm Beach, Miami-Dade and
Broward Counties) and from other waste haulers. After the material is inspected
at the entrance inspection station and gate house, as required by regulations of
the Florida Department of Environmental Protection ("FDEP") and operational
safety plans, the material is unloaded on the tipping floor. The material is
then sorted to remove appropriately designated recycling materials, which are
then placed in containers for storage or shipment to markets. The remaining
material is then processed or disposed of in landfills or other facilities.

     Land clearing, yard waste and wood are processed in tub grinders or impact
grinders to produce wood chips or mulch which is marketed as boiler fuel or
cover material. Large concrete, rocks and other inert material are sent to
designated tipping areas for future processing and/or disposed of in our
adjoining permitted lakefill operations. The remaining material, consisting of
dirt, fines, paper, plastics, metals, glass, drywall, broken concrete blocks,
bricks, lumber, wood and the like, is stockpiled for removal or processed
through additional screening and picking. The system first screens out fines
which are stockpiled for landfill cover material, with the remaining material
manually sorted to segregate recyclable material such as wood, plastic, glass,
ferrous and non- ferrous metals, corrugated cardboard, paper, roofing and
aggregate. The MRFs currently recycle approximately 70% to 90% of all waste that
they receive.

                                        18
<PAGE>   21

     Effective October 1, 1999, the Delta Site Development Corp. acquired the
business, and substantially all of the assets and liabilities, of Mario's
Equipment Rental, Inc. ("Mario's"). As a result, the Company commenced
operations of providing site development services, such as site clearing and
grading.

RESULTS OF OPERATIONS

     The following table presents, for the periods indicated, the various
consolidated line items as a percentage of gross revenues:

<TABLE>
<CAPTION>
                                                            2000      1999      1998
                                                           ------    ------    ------
<S>                                                        <C>       <C>       <C>
Revenues Services........................................   84.15%    97.59%   100.00%
  Related party services.................................    9.45%     2.25%     0.00%
  Related party management fees..........................    6.40%     0.16%     0.00%
                                                           ------    ------    ------
                                                           100.00%   100.00%   100.00%
Expenses:
     Direct costs........................................   59.24%    70.41%    69.13%
     Related Party.......................................   11.89%     8.02%     0.00%
     Selling and administrative..........................   19.60%    18.51%    26.41%
     Stock-based compensation............................    1.34%     2.29%     0.00%
     Depreciation and amortization.......................    5.13%     3.64%     5.01%
     Costs related to closure of facilities..............    2.73%     0.00%     0.00%
                                                           ------    ------    ------
                                                            99.93%   102.87%   100.55%
Income (loss) from operations............................    0.07%    (2.87)%   (0.55)%
Interest income..........................................    0.10%     0.57%     0.00%
Interest expense.........................................   (3.06)%   (2.01)%   (1.98)%
Gain on sale of assets...................................    0.08%     0.00%     0.00%
                                                           ------    ------    ------
                                                            (2.88)%   (1.44)%   (1.98)%
Loss before income taxes.................................   (2.81)%   (4.31)%   (2.53)%
                                                           ------    ------    ------
Income taxes benefit.....................................    0.98%     1.51%     0.00%
                                                           ------    ------    ------
Net loss.................................................   (1.83)%   (2.80)%   (2.53)%
                                                           ======    ======    ======
Waste Services
  Commercial Waste Services..............................    3.96%     2.30%     0.19%
  Industrial Waste Services..............................   46.14%    47.48%    37.09%
  Other Waste Services...................................    0.00%     0.19%     0.20%
                                                           ------    ------    ------
          Total Waste Services...........................   50.10%    49.97%    37.48%
MRFs.....................................................   43.50%    44.86%    62.52%
Management Services......................................    6.40%     0.16%     0.00%
Landfill.................................................    0.00%     5.01%     0.00%
                                                           ------    ------    ------
Operating Revenue........................................  100.00%   100.00%   100.00%
                                                           ======    ======    ======
</TABLE>

COMPARISON OF 2000 OPERATIONS TO 1999 OPERATIONS

  Revenues

     Total revenues increased to $24,030,882 in 2000 from $12,914,295 in 1999.
The increase of $11,116,587 was primarily attributable to increased volumes in
industrial waste services and MRF's. The industrial waste services revenues
increased due to the expansion of our hauling operations in Broward, Palm Beach
and the acquisition of 2 Hauling operations in Dade County. The MRF's revenues
increased due to the start up of Delta Tall Pines in June of 1999 and for the 12
months generated from Delta Transfer Corp. as opposed to 3 months in 1999. In
addition the MRF revenue increased due to the acquisition of the Peerless group
in 2000, which has 3 MRF's in Dade County. The industrial waste services revenue
increased to $11,085,063 in 2000
                                        19
<PAGE>   22

from $6,132,235 in 1999. The MRF's revenue increased to $10,451,697 in 2000 from
$5,793,445 in 1999. Approximately $4,804,244 of the total $4,952,828 increase
increase in industrial waste services revenues was related to increase in
volumes and $148,584 was related to an increase in prices. The MRF's revenue
increase of $4,658,252 was related to increased volumes.

  Direct Costs

     Total direct costs increased to $17,096,395 in 2000 from $10,128,535 in
1999. The increase of $6,967,860 was due to the increased volume and disposal
costs of industrial waste services and MRF's and principally due to the
inclusion, in 2000 of direct costs from businesses acquired in 1999. Direct
costs as a percentage of revenues decreased to 71.14% in 2000 from 78.43% in
1999. The percentage decrease is attributable to acquisitions that were
completed in 2000 that were integrated into our existing operations. The
industrial waste services direct costs increased to $8,432,041 from $4,679,890
in 1999. The MRF's direct cost increased to $7,675,282 from $4,873,810 in 1999.

  Selling and Administrative

     Selling and administrative expenses increased to $4,710,868 in 2000 from
$2,390,203 in 1999. The increase of $2,320,665 was due to the increase in
administrative overhead required to manage the Company's growth. The largest
increases came in the areas of administrative salaries, professional fees,
occupancy costs and travel. As a percentage of revenues, selling and
administrative expenses for 2000 increased to 19.60% from 18.51% in 1999.

  Stock-Based Compensation

     During February 1999, the Company issued 759,000 options to employees of
the Company. The options vest over a four-year period. Stock-based compensation
represents the portion of the total compensation expense to be recognized over
the vesting period, which is attributable to the 12-month period ended December
31, 2000 and 11 months in 1999.

  Depreciation and Amortization

     Depreciation and amortization expense increased to $1,232,502 in 2000 from
$471,085 in 1999. The increase was the result of the purchase of over
$11,000,000 of property and equipment and amortization of costs in excess of net
assets acquired in business combinations.

  Interest Income and Expense

     Interest income decreased to $24,205 in 2000 from $73,294 in 1999. Interest
expense increased to $734,279 in 2000 from $259,219 in 1999. The increased
interest expense of $475,060 was a result of higher debt levels resulting from
the purchase of additional property and equipment. Interest income was earned on
excess cash balances available as a result of proceeds from the Company's
private placement.

COMPARISON OF 1999 OPERATIONS TO 1998 OPERATIONS

  Revenues

     Total revenues increased to $12,914,295 in 1999 from $3,542,851 in 1998.
The increase of $9,371,444 was primarily attributable to increased volumes in
industrial waste services and MRFs. The industrial waste services revenues
increased due to the expansion of our rolloff operations into Naples and
Titusville and the increased revenues generated from our rolloff operation in
Pompano. The MRFs revenues increased due to the start up of Delta Tall Pines in
June and for the 12 months of revenues generated from Delta Transfer Corp. as
opposed to 3 months in 1998.

                                        20
<PAGE>   23

  Direct Costs

     Total direct costs increased to $10,128,535 in 1999 from $2,449,085 in
1998. The increase of $7,679.450 was principally due to increased volume, the
costs of operations of newly formed Delta Transfer Corp., increased disposal
costs and the cost of operations of the hauling operations of Delta Recycling
Corp. Direct costs as a percentage of revenues increased to 78.43% in 1999 from
69.13% in 1998. The percentage increase was primarily due to costs associated
with building and maintaining the Company's infrastructure, including equipment
leasing, maintenance and depreciation cost, as well as fixed rental costs for
operating facilities which have capacities well beyond volumes presently
utilized.

  Selling and Administrative

     Selling and administrative expenses increased to $2,390,203 in 1999 from
935,723 in 1998. The increase of $1,454,480 was due to the increase in
administrative overhead required to manage the Company's growth. The largest
increases came in the areas of administrative salaries, professional fees,
occupancy costs and travel. As a percentage of revenues, selling and
administrative expenses decreased to 18.51% in 1999 as compared to 26.41% in
1998.

  Stock-Based Compensation

     During February 1999, the Company issued 759,000 options to employees of
the Company. The options vest over a four-year period. Stock-based compensation
represents the portion of the total compensation expense to be recognized over
the vesting period, which is attributable to the 12 month period ended December
31, 1999. There was no stock-based compensation prior to 1999.

  Depreciation and Amortization

     Depreciation and amortization expense increased to $471,085 in 1999 from
$177,362 in 1998. The increase was the result of the purchase of over $4,000,000
of property and equipment during 1999 and amortization of costs in excess of net
assets acquired in business combinations.

  Interest Income and Expense

     Interest expense increased to $259,219 in 1999 from $70,423 in 1998. The
increased interest expense of $188,796 was a result of higher debt levels
resulting from the purchase of additional property and equipment. Interest
income was earned in 1999 on excess cash balances available as a result of
proceeds from the Company's private placement.

CONTRACTS

     Our revenues consist mainly of fees we charge customers for construction
and demolition debris transfer, disposal and recycling services. A large part of
our collection revenue comes from providing service to industrial, residential
and commercial customers. These services are provided under contracts that
generally last from one month to five years. The contracts provide a relatively
stable source of revenue for Star Services.

     We typically determine the prices for our solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services.

EXPENSES

     Direct costs include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, workers' compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and permits, engineering and
legal services.

                                        21
<PAGE>   24

     Selling, general and administrative ("SG&A") expense includes management,
clerical and administrative compensation and overhead costs associated with our
marketing and sales force, professional services and community relations
expenses.

     Depreciation and amortization expense includes depreciation of fixed assets
over their estimated useful life using the straight line method and amortization
of goodwill and other intangible assets using the straight line method.

     Star Services intends to capitalize some expenditures related to pending
acquisitions or development projects, such as legal and engineering expenses. We
intend to expense indirect acquisition costs, such as executive and corporate
overhead, public relations and other corporate services. We charge against net
income any unamortized capitalized expenditures and advances (net of any portion
that we believe we may recover, through sale or otherwise) that relate to any
operation that is permanently shut down and any pending acquisition or landfill
development project that is not completed. We routinely evaluate all capitalized
costs, and expense those related to projects that we believe are not likely to
succeed.

     We will have material financial obligations relating to closure costs of
any disposal facilities we may own or operate in the future. In such case, Star
Services will accrue for those obligations, based on engineering estimates of
consumption of permitted landfill airspace over the useful life of any such
landfill.

LIQUIDITY AND CAPITAL RESOURCES

     The Company operates in an industry that requires a high level of capital
investment. The Company's capital requirements primarily stem from its working
capital needs for its ongoing operations, capital expenditures for new trucks
and equipment and business acquisitions. The Company's strategy is to meet these
capital needs first from internally generated funds and secondly from various
financing sources available to the Company, including the incurrence of debt,
and the issuance of its common stock. Currently the Company has no credit
facilities in place and plans on securing additional capital in the near future.

     As of December 31, 1999, the Company had a working capital surplus of
$815,674 (a ratio of current assets to current liabilities of 1.28:1) and a cash
balance of $1,476,406 which compares to a working capital deficit of $473,090 (a
current ratio of 0.62:1) and a cash balance of $49,149 as of December 31, 1998.
The working capital at December 31, 1999, was impacted by an increase in
deferred income taxes of $195,001 as compared to the prior year balance and the
private placement of $4,000,000.

     For the year ended December 31, 1999, net cash provided by operating
activities was $190,228 as compared to cash used in operating activities of
$225,163 in 1998. Net cash provided by financing activities was $1,616,148 in
1999 as compared to $728,861 in 1998. In 1999, cash generated from operating and
financing activities was primarily used to acquire businesses and equipment.

     For the year ended December 31, 1999 there were no cash dividends paid.

     The Company expects to generate sufficient cash flow from its operations in
2001 to cover its anticipated working capital needs and moderate capital
expenditures and acquisitions. If the Company's cash flow from operations during
2001 is less than currently expected or if the Company decides to make
substantial acquisitions, or if the Company's capital requirements increase,
either due to strategic decisions or otherwise, the Company may elect to incur
future indebtedness or issue equity securities to cover any additional capital
needs. However, there can be no assurance that the Company will be successful in
obtaining additional capital on acceptable terms through such debt incurrances
or issuances of additional equity securities.

INFLATION

     Inflation has not significantly affected our operations. Consistent with
industry practice, many of our contracts allow us to pass through certain costs
to our customers, including increases in landfill tipping fees and, in some
cases, fuel costs. Therefore, we believe that we should be able to increase
prices to offset many cost increases that result from inflation. However,
competitive pressures may require us to absorb at least part of these cost
increases, particularly during periods of high inflation.

                                        22
<PAGE>   25

SEASONALITY

     Seasonality has not had a material effect on our operations and is not
expected to have a material effect in the future.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company is exposed to market risks, primarily related to changes in
U.S. interest rates and, to a lesser extent, recyclable prices. The Company does
not engage in financial transactions for trading and speculative purposes.

     Commodity Risk On Resale of Recyclables.  We provide recycling services.
The sale prices of and demand for recyclable waste products, particularly
wastepaper, are frequently volatile and may affect our operating results.

                                        23
<PAGE>   26

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                           STAR SERVICES GROUP, INC.
                                AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................   25
Consolidated balance sheets as of December 31, 2000 and
  1999......................................................   26
Consolidated statements of operations for the years ended
  December 31, 2000, 1999 and 1998..........................   27
Consolidated statements of shareholders' equity for the
  years ended December 31, 2000, 1999 and 1998..............   28
Consolidated statements of cash flows for the years ended
  December 31, 2000, 1999 and 1998..........................   29
Notes to consolidated financial statements..................   30
</TABLE>

                                        24
<PAGE>   27

                          INDEPENDENT AUDITORS' REPORT

The Shareholders
Star Services Group, Inc. and subsidiaries
Pompano Beach, Florida

     We have audited the accompanying consolidated balance sheets of Star
Services Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 2000, 1999 and 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Star Services
Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their consolidated operations and cash flows for the years ended December 31,
2000, 1999 and 1998, in conformity with generally accepted accounting principles

                                                        HORTON & COMPANY, L.L.C.

Wayne, New Jersey
February 28, 2001

                                        25
<PAGE>   28

                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                 2000           1999
                                                              -----------    -----------
<S>                                                           <C>            <C>
                                         ASSETS
Current assets:
  Cash and equivalents......................................  $   189,199    $ 1,476,406
  Accounts receivable, net of allowances of $318,264 in 2000
     and $119,322 in 1999...................................    3,156,357      1,940,083
  Prepaid expenses..........................................      591,407        163,149
  Deferred income taxes.....................................      143,850        195,001
                                                              -----------    -----------
          Total current assets..............................    4,080,813      3,774,639
                                                              -----------    -----------
Property and equipment, at cost:
  Machinery and equipment...................................   11,935,658      6,164,321
  Structures and improvements...............................    6,092,460        887,364
  Office furniture and equipment............................      176,581         84,320
                                                              -----------    -----------
                                                               18,204,699      7,136,005
  Less accumulated depreciation.............................    1,745,747        647,427
                                                              -----------    -----------
          Net property and equipment........................   16,458,952      6,488,578
                                                              -----------    -----------
Other assets:
  Cost in excess of net assets acquired.....................    3,671,096        534,864
  Deferred charges..........................................    4,185,935        113,303
                                                              -----------    -----------
                                                                7,857,031        648,167
                                                              -----------    -----------
          Total assets......................................  $28,396,796    $10,911,384
                                                              ===========    ===========

                          LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt.........................  $ 2,990,372    $ 1,174,060
  Accounts payable..........................................    1,280,968      1,222,168
  Accrued expenses..........................................    1,994,147        562,737
  Deferred revenues.........................................      141,974             --
                                                              -----------    -----------
          Total current liabilities.........................    6,407,461      2,958,965
                                                              -----------    -----------
Long-term debt, net of current portion......................   10,166,368      3,094,221
Loans from related parties..................................    1,700,000             --
                                                              -----------    -----------
                                                               11,866,368      3,094,221
                                                              -----------    -----------
Shareholders' equity:
  Common stock, $.01 par value, 30,000,000 shares
     authorized, 11,590,495 shares issued and outstanding in
     2000 8,100,000 shares issued and outstanding in 1999...      115,905         81,000
  Additional paid-in capital................................   15,368,561      5,199,393
  Subscriptions receivable..................................   (4,500,000)            --
  Accumulated deficit.......................................     (861,499)      (422,195)
                                                              -----------    -----------
          Total shareholders' equity........................   10,122,967      4,858,198
                                                              -----------    -----------
          Total liabilities and shareholders' equity........  $28,396,796    $10,911,384
                                                              ===========    ===========
</TABLE>

                 See notes to consolidated financial statements

                                        26
<PAGE>   29

                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                           --------------------------------------
                                                              2000          1999          1998
                                                           -----------   -----------   ----------
<S>                                                        <C>           <C>           <C>
Revenues:
  Services...............................................  $20,223,763   $12,603,612   $3,542,851
  Related party services.................................    2,269,826       290,425           --
  Related party management fees..........................    1,537,293        20,258           --
                                                           -----------   -----------   ----------
                                                            24,030,882    12,914,295    3,542,851
                                                           -----------   -----------   ----------
Expenses:
  Direct costs...........................................   14,238,908     9,092,987    2,449,085
  Related party..........................................    2,857,487     1,035,548           --
  Selling and administrative.............................    4,710,868     2,390,203      935,723
  Stock-based compensation...............................      322,572       295,693           --
  Depreciation and amortization..........................    1,232,502       471,085      177,362
  Costs related to closure of facilities.................      653,540            --           --
                                                           -----------   -----------   ----------
                                                            24,015,877    13,285,516    3,562,170
                                                           -----------   -----------   ----------
Income (loss) from operations............................       15,005      (371,221)     (19,319)
                                                           -----------   -----------   ----------
Other income (expense):
  Interest income........................................       24,205        73,294           --
  Interest expense.......................................     (734,279)     (259,219)     (70,423)
  Gain on sale of assets.................................       19,217            --           --
                                                           -----------   -----------   ----------
                                                              (690,857)     (185,925)     (70,423)
                                                           -----------   -----------   ----------
Loss before income taxes.................................     (675,852)     (557,146)     (89,742)
Income tax benefit.......................................      236,548       195,001           --
                                                           -----------   -----------   ----------
Net loss.................................................  $  (439,304)  $  (362,145)  $  (89,742)
                                                           ===========   ===========   ==========
Loss per share...........................................  $     (0.05)  $     (0.05)  $    (0.02)
                                                           ===========   ===========   ==========
Weighted average shares outstanding......................    8,386,409     7,012,500    5,000,000
                                                           ===========   ===========   ==========
</TABLE>

                 See notes to consolidated financial statements

                                        27
<PAGE>   30

                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

<TABLE>
<CAPTION>
                                           COMMON STOCK                                        RETAINED
                                      ----------------------   ADDITIONAL                      EARNINGS
                                        ISSUED                   PAID-IN     SUBSCRIPTIONS   (ACCUMULATED
                                        SHARES     PAR VALUE     CAPITAL      RECEIVABLE       DEFICIT)
                                      ----------   ---------   -----------   -------------   ------------
<S>                                   <C>          <C>         <C>           <C>             <C>
Balance at January 1, 1998..........   5,000,000   $ 50,000    $   241,000    $        --     $  29,692
Net capital contributed.............          --         --        207,200             --            --
Net loss............................          --         --             --             --       (89,742)
                                      ----------   --------    -----------    -----------     ---------
Balance at December 31, 1998........   5,000,000     50,000        448,200             --       (60,050)
Issuance of common stock and capital
  contributions.....................   2,000,000     20,000      3,969,000             --            --
Shares issued in reverse acquisition
  business combination..............   1,000,000     10,000             --             --            --
Shares issued in purchase business
  combination.......................     100,000      1,000        486,500             --            --
Stock-based compensation............          --         --        295,693             --            --
Net loss............................          --         --             --             --      (362,145)
                                      ----------   --------    -----------    -----------     ---------
Balance at December 31, 1999........   8,100,000     81,000      5,199,393             --      (422,195)
Shares issued in purchase business
  combinations......................   1,685,495     16,855      5,363,146             --            --
Stock options exercised.............       5,000         50          1,450             --            --
Stock-based compensation............          --         --        322,572                           --
Shares issued in private
  placement.........................   1,800,000     18,000      4,482,000     (4,500,000)           --
Net loss............................          --         --             --             --      (439,304)
                                      ----------   --------    -----------    -----------     ---------
Balance at December 31, 2000........  11,590,495   $115,905    $15,368,561    $(4,500,000)    $(861,499)
                                      ==========   ========    ===========    ===========     =========
</TABLE>

                 See notes to consolidated financial statements

                                        28
<PAGE>   31

                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                            ------------------------------------
                                                               2000          1999         1998
                                                            -----------   -----------   --------
<S>                                                         <C>           <C>           <C>
Cash flows from operating activities:
  Net income (loss).......................................  $  (439,304)  $  (362,145)  $(89,742)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
       Depreciation and amortization......................    1,232,502       471,085    177,362
       Stock-based compensation...........................      322,572       295,693         --
       Gain on sale of equipment..........................      (19,217)
       Changes in operating assets and liabilities, net of
          effects from business combination:
          Increase in accounts receivable.................   (1,178,114)   (1,137,183)  (503,218)
          Increase in prepaid expenses....................     (428,258)      (39,815)  (116,058)
          Increase in deferred income tax asset...........     (236,548)     (195,001)        --
          Increase in deposits and other assets...........           --       (55,070)        --
          Increase in accounts payable....................       71,123       680,850    280,524
          Increase in accrued expenses....................    1,431,411       531,814     25,969
          Increase in deferred revenue....................      141,974            --         --
                                                            -----------   -----------   --------
          Net cash provided by (used in) operating
            activities....................................      898,141       190,228   (225,163)
                                                            -----------   -----------   --------
Cash flows from investing activities:
  Capital expenditures....................................   (2,363,946)     (302,586)  (569,582)
  Proceeds from sale of assets............................       53,194            --         --
  Deferred charges........................................           --       (76,533)        --
                                                            -----------   -----------   --------
          Net cash used in investing activities...........   (2,310,752)     (379,119)  (569,582)
                                                            -----------   -----------   --------
Cash flows from financing activities:
  Proceeds from long-term debt............................       30,000            --         --
  Proceeds from (repayment of) shareholder loans..........    1,700,000      (537,125)   527,125
  Principal payments under loan agreements................   (1,606,097)   (1,845,727)  (142,424)
  Net proceeds from issuance of common stock and capital
     contributions........................................        1,501     3,999,000    344,160
                                                            -----------   -----------   --------
          Net cash provided by financing activities.......      125,404     1,616,148    728,861
                                                            -----------   -----------   --------
Net increase (decrease) in cash and equivalents...........   (1,287,207)    1,427,257    (65,884)
Cash and equivalents, beginning of period.................    1,476,406        49,149    115,033
                                                            -----------   -----------   --------
Cash and equivalents, end of period.......................  $   189,199   $ 1,476,406   $ 49,149
                                                            ===========   ===========   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest expense paid.....................................  $   695,790   $   259,219   $ 70,423
                                                            ===========   ===========   ========
</TABLE>

                 See notes to consolidated financial statements

                                        29
<PAGE>   32

                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2000, 1999 AND 1998

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     This summary of significant accounting policies of Star Services Group,
Inc. and subsidiaries (hereinafter "Star" or the "Company") is presented to
assist in understanding the consolidated financial statements. The financial
statements and notes are representations of the management of Star Services
Group, Inc. and subsidiaries which is responsible for their integrity and
objectivity. These accounting policies conform to generally accepted accounting
principles and have been consistently applied in the preparation of the
financial statements.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Star Services
Group, Inc. ("Star") and of its wholly-owned subsidiaries, Delta Recycling Corp.
("Recycling"), Delta Transfer Corp. ("Transfer"), Delrock Management Corp.
("Delrock"), Eastern Recycling, Inc. ("Eastern"), Delta Resources Corp.
("Resources"), Delta Tall Pines Corp. ("Tall Pines"), Delta Site Development
Corp. ("Site"), Delta Waste Corp. ("Waste"), and Delta Dade Recycling Corp.
("Dade"). Recycling, Transfer, Delrock, Eastern and Resources are collectively
referred to as the "Predecessors". Significant intercompany accounts and
transactions have been eliminated. On February 4, 1999, Star acquired 100% of
the issued and outstanding capital stock of Recycling, Transfer, Delrock,
Eastern and Resources, thereby making them wholly-owned subsidiaries of Star.
Prior to that date, and throughout the years ended December 31, 1998 and 1997,
the ownership and voting percentage of each of the Predecessors were identical.
The ownership and voting percentage of Star Services subsequent to the
acquisitions of the Predecessors is also identical to that of the Predecessors
prior to the acquisitions. Because of the identical ownership of Star Services
and the Predecessors, the acquisitions have been accounted for as a
recapitalization, similar to a pooling of interests, because the transaction was
not substantive. The capital structure for all periods has been retroactively
restated to give effect to the business combination and the capital structure of
Star Services.

     Effective June 22, 1999, Star Services effected a business combination with
Bailey & Baron, Inc., a publicly-held shell corporation. Under the terms of the
agreement, the shell corporation, which had 1,000,000 common shares outstanding,
issued 7,000,000 unregistered shares of its common stock in exchange for all of
the outstanding common stock of Star Services. As a result of the transaction,
the shareholders of Star Services received stock representing approximately 88%
of the public shell corporation, thereby effecting a change in control of the
public entity.

     Such business combination has been accounted for as a reverse acquisition.
Under the accounting rules for a reverse acquisition, Star Services is
considered the acquiring entity. As a result, historical financial information
for periods prior to the date of the transaction is that of Star Services.
However, the capital structure for all periods presented has been restated to
reflect the capital structure of Bailey & Baron, Inc. as the legal acquirer.
Goodwill was not recorded in the merger since the transaction was equivalent to
the issuance of stock by Star Services for the net monetary assets of the public
shell corporation.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.

                                        30
<PAGE>   33
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

HISTORY AND BUSINESS ACTIVITY

     Star Services Group, Inc. was incorporated in the State of Florida on
February 3, 1999. Its corporate offices and operations are located in Pompano
Beach, Florida. The Company services commercial customers throughout
Southeastern Florida. The Company operates in several areas of the environmental
services industry: collection, recycling and disposal of construction and
demolition debris, land clearing, yard waste debris, and source separated
recyclable materials. The Company's operations are carried out by Delta
Recycling Corp. which was incorporated in the State of Florida on August 26,
1997, Delrock Management Corp. which was incorporated in the State of Florida on
May 29, 1998, Delta Transfer Corp. which was incorporated in the State of
Florida on August 26, 1998, Eastern Recycling, Inc. which was incorporated in
the State of Florida on June 11, 1997, Delta Resources Corp. which was
incorporated in the State of Florida on January 29, 1999, Delta Tall Pines
Corp., which was incorporated April 23, 1999, Delta Waste Corp., which was
incorporated January 28, 1999 and Delta Site Development Corp., which was
incorporated August 2, 1999 and Delta Dade Recycling Corp., which was
incorporated October 20, 2000. Operations commenced with the incorporation of
Delta Recycling Corp. on August 26, 1997.

     Delta Recycling Corp., Delta Transfer Corp. and Delta Tall Pines Corp.
operate material resource recovery facilities ("MRF"), which are environmentally
licensed and regulated by the State of Florida Department of Environmental
Protection and various local regulatory authorities. As a MRF, these facilities
accept assorted loads of debris consisting of construction and demolition
debris, land clearing, and yard waste and source separated materials primarily
from customers in the construction and demolition debris industry. The incoming
loads are processed using a semi-automated sorting system to separate
recyclables from the waste stream. Additional loads are also supplied by Delta
Recycling Corp. through its hauling operations. The reclaimed recyclables are
shipped to end user markets for re-use. Delta Recycling Corp. also operates a
solid waste disposal service to collect and transport materials for the industry
segment. Delrock Management Corp. owns real estate used in conjunction with the
Company's operations. Eastern Recycling, Inc. has been inactive throughout 1997
and 1998. Delta Resources Corp. commenced operations in February 1999 as the
operator of a construction and demolition debris landfill in Titusville,
Florida. The operations of Delta Resources Corp. ended in January 2000 (Note 6).
Delta Site Development Corp. commenced operations during 1999 and provides site
development services, such as site clearing and grading, for major residential
home builders. Delta Waste Corp. commenced operations during 1999 as a lessor of
portable toilets under short-term operating leases. Delta Dade Recycling Corp.
commenced operations in October 2000, first as the operator, then as the owner
of a MRF, two transfer stations and a waste collection business.

CONCENTRATION OF CREDIT RISK

     Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and equivalents and of
accounts receivable. The Company's policies do not require collateral to support
accounts receivable. However, because of the diversity and credit worthiness of
individual accounts which comprise the total balance, management does not
believe that the Company is subject to any significant credit risk.

     The Company routinely maintains cash balances with one bank under limits
insured by the Federal Deposit Insurance Corporation ("FDIC"). At December 31,
2000, the Company's cash balance with this bank was $419,433 in excess of the
FDIC insured limit.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company's receivables and payables are current and on normal terms and,
accordingly, are believed by management to approximate fair value. Management
also believes that notes payable, long-term debt and capital lease obligations
approximate fair value when current interest rates for similar debt securities
are applied.
                                        31
<PAGE>   34
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost. Depreciation is provided on the
straight-line method over the following estimated useful lives:

<TABLE>
<CAPTION>
                                                              YEARS
                                                              -----
<S>                                                           <C>
Machinery and equipment.....................................  5-10
Office furniture and equipment..............................     5
Structures and improvements.................................  5-39
</TABLE>

     Maintenance, repairs and renewals which neither materially add to the value
of the equipment nor appreciably prolong its life are charged to expense as
incurred. Gains or losses on dispositions of equipment are included in income.

COST IN EXCESS OF NET ASSETS ACQUIRED

     Cost in excess of net assets acquired is net of accumulated amortization of
$99,502 and $13,000 at December 31, 2000 and 1999, respectively. Such costs are
being amortized on the straight-line method over a ten-year period. For the
years ended December 31, 2000, 1999 and 1998, amortization expense was $86,502,
$13,000 and $0, respectively.

RECLASSIFICATIONS

     Certain reclassifications have been made to the 1999 financial statements
in order to confirm to the 2000 presentation.

DEFERRED CHARGES

     Deferred charges are recorded at cost and consist of the following:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2000        1999
                                                              ----------   --------
<S>                                                           <C>          <C>
Restrictive covenants, net..................................  $  948,223   $     --
Development agreement.......................................   1,800,000         --
Operation agreement.........................................     775,625         --
Permits.....................................................     300,000         --
Deferred acquisition costs..................................      37,269     58,233
Deposits and other..........................................      37,118     55,070
Deferred income taxes, net of current portion...............     287,700         --
                                                              ----------   --------
                                                              $4,185,935   $113,303
                                                              ==========   ========
</TABLE>

     Restrictive covenants, permits and the operation agreement are amortized on
the straight-line method over their estimated useful lives as follows:

<TABLE>
<S>                                                    <C>
5 years..............................................  Restrictive covenants
20 years.............................................    Operation agreement
5 years..............................................                Permits
</TABLE>

     Restrictive covenants are net of accumulated amortization of $9,777 at
December 31, 2000. Amortization of the development agreement will begin upon
commencement of providing services to a real estate development project.

                                        32
<PAGE>   35
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred acquisition costs are capitalized as a component of total
acquisition costs upon successful consummation of a planned acquisition. Such
costs are expensed if it is determined that a proposed acquisition is unlikely
to occur.

REVENUE RECOGNITION

     The Company recognizes revenue upon receipt and acceptance of waste
materials at its material recovery facilities and landfills, upon collection of
waste materials for its waste disposal operations, and when services are
provided for its site development and portable toilet leasing operations.

ENVIRONMENTAL COSTS

     It is our policy and a requirement of the Florida Administrative Code for
all environmental solid waste permits to establish and maintain financial
assurance for closure and post closure. This financial assurance must be
approved by the Florida Department of Environmental Protection. The financial
assurance mechanism must include funds for removing all stockpiles and provide
for site closure. Because the Company does not presently own any landfill sites,
there have been no accruals required for closure or post-closure costs.

CASH AND EQUIVALENTS

     For purposes of the consolidated statements of cash flows, the Company
considers all highly-liquid debt instruments purchased with an original maturity
date of three months or less to be cash equivalents.

SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING ACTIVITIES

     The Company financed equipment purchases as follows:

<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                     ------------------------------------
                                                        2000         1999         1998
                                                     ----------   ----------   ----------
<S>                                                  <C>          <C>          <C>
Property and equipment purchased...................  $9,984,652   $4,234,744   $2,014,879
Long-term debt financing...........................  (7,620,706)  (3,932,259)  (1,445,297)
                                                     ----------   ----------   ----------
Capital expenditures...............................  $2,363,946   $  302,586   $  569,582
                                                     ==========   ==========   ==========
</TABLE>

     During 1998, the Company received capital contributions and its
subsidiaries purchased treasury stock as follows:

<TABLE>
<S>                                                           <C>
Capital contributions.......................................  $411,000
Expenditures for treasury stock of subsidiaries.............   (66,840)
                                                              --------
Net proceeds from capital contributions.....................   344,160
Debt issued to purchase treasury stock of subsidiaries......  (136,960)
                                                              --------
Net capital contributed.....................................  $207,200
                                                              ========
</TABLE>

     During 2000 and 1999, the Company issued common stock and notes to effect
business combinations, as follows:

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                              ------------------------
                                                                 2000          1999
                                                              -----------    ---------
<S>                                                           <C>            <C>
Value of business combinations..............................  $8,223,850     $597,500
Value of common stock issued................................  (5,380,000)    (497,500)
Notes issued or assumed.....................................  (2,843,850)    (100,000)
                                                              ----------     --------
Cash expenditures for business combinations.................  $       --     $     --
                                                              ==========     ========
</TABLE>

                                        33
<PAGE>   36
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 2000, the Company issued 1,800,000 shares of common stock in
exchange for notes totaling $4,500,000.

2.  BUSINESS COMBINATIONS

MARIO'S EQUIPMENT RENTAL

     Effective October 1, 1999, the Delta Site Development Corp. acquired the
business, and substantially all of the assets and liabilities, of Mario's
Equipment Rental, Inc. ("Mario's") in exchange for 100,000 shares of Star's
common stock valued at $487,500 and a $100,000 note. As a result, the Company
commenced operations of providing site development services, such as site
clearing and grading. The share issuance has been recorded at the bid price of
the Company's common stock for two days before and after September 21, 1999, the
date the agreement was entered into. The value of the consideration given in
excess of the fair value of the net equity of Mario's has been recorded as
goodwill which is being amortized over a 10-year period.

     The following unaudited information has been prepared on a pro forma basis
as if the business of Mario's had been acquired as of the beginning of the year
ended December 31, 1999:

<TABLE>
<S>                                                           <C>
Revenues....................................................  $13,816,711
                                                              ===========
Net loss....................................................  $  (360,440)
                                                              ===========
Loss per share..............................................  $     (0.05)
                                                              ===========
Weighted average common shares..............................  $ 7,087,500
                                                              ===========
</TABLE>

     The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the Mario's acquisition been consummated as of the beginning of the
period presented, nor are they necessarily indicative of future operating
results.

CLASSIC RECYCLING & CONSTRUCTION, INC.

     In February 2000, Star Services acquired substantially all of the assets of
Classic Recycling & Construction, Inc., a company engaged in the roll-off
container business. The assets were acquired for $260,000. The purchase price
was paid $100,000 at closing, $80,000 by delivery of a one year promissory note
and $80,000 by delivery of 26,235 shares of Star Services common stock.

ALLIED ROLL-OFF HOLDINGS, INC.

     During March 2000, Star Services acquired substantially all of the assets
of Allied Roll-off Holdings, Inc., which operated a roll-off container business
in Dade County, Florida. The business was acquired for $960,400, of which
$660,400 was paid in cash and $300,000 was paid by delivery of 59,260 shares of
the Company's common stock.

PEERLESS BIG APPLE, INC.

     In December 2000, Star acquired substantially all of the assets of Peerless
Big Apple, Inc. and certain of its affiliates. With operations in Miami-Dade
County, Florida, the Peerless companies collect, haul and recycle construction
and demolition debris, and operate a construction and demolition debris transfer
station. The purchase price of $7,530,850 was paid (a) $630,850 by delivery of a
four year promissory note, (b) $5,000,000 by the Company's agreement to issue
1,600,000 shares of common stock, and (c) by assumption of $1,900,000 of
liabilities of the Peerless companies (the payment of $1,000,000 of which is
secured by the pledge of 500,000 shares of common stock). However, the 1,600,000
shares of Star's common stock could be subject to rescission rights by the
Peerless Big Apple companies. The purchase occurred while Star's registration
statement was not current. As a result, the purchase may have violated Section 5
of the Securities

                                        34
<PAGE>   37
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Act. If the issuance of the shares in connection with the transaction was
required to be registered under the Securities Act the Peerless Big Apple
companies would be entitled to rescind the transaction for a period of one year
as a result of the inclusion of these shares in the purchase price prior to the
registration statement being current. If rescission were to occur, Star might be
required to pay the purchase price for the assets, aggregating approximately
$7,530,000, in cash or other consideration, or, alternatively, might be required
to return the assets to the former owner. The Peerless Big Apple companies have
signed an agreement waiving any rescission rights in connection with the sale,
but its waiver might not be enforceable. The Company believes that the
likelihood that the Peerless Big Apple companies will seek to enforce its
possible rescission rights is remote.

OPERATING AND MANAGEMENT AGREEMENT

     In connection with the Peerless acquisition agreements, the Company entered
into an Operating and Management Agreement on October 24, 2000, whereby Star
agreed to operate the facilities and businesses of Peerless until the
acquisition was consummated. Under the terms of the agreement, Star received all
revenues and paid all expenses from the operation of the facilities and business
from the date of the agreement (October 24, 2000) until the date the acquisition
was consummated (December 26, 2000). The acquisition of the Peerless companies
was recorded concurrent with the commencement of the operating and management
agreement because effective control of the Peerless companies was transferred to
Star.

     For all of the above acquisitions, the share issuances were recorded based
on the bid price of the Company's common stock at the time the agreements were
entered into. The value of the consideration given in excess of the fair value
of the net assets acquired is being amortized over a 10-year period.

     The following unaudited information has been prepared on a pro forma basis
as if the businesses of Classic, Allied and Peerless had been acquired as of the
beginning of the year ended December 31, 2000:

<TABLE>
<S>                                                           <C>
Revenues....................................................  $31,683,400
                                                              ===========
Net loss....................................................  $  (932,475)
                                                              ===========
Loss per share..............................................  $     (0.09)
                                                              ===========
Weighted average common shares..............................  $10,001,766
                                                              ===========
</TABLE>

     The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the Classic, Allied and Peerless acquisitions been consummated as
of the beginning of the period presented, nor are they necessarily indicative of
future operating results.

                                        35
<PAGE>   38
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3.  LONG-TERM DEBT

     Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                              --------------------------
                                                                  2000           1999
                                                              ------------    ----------
<S>                                                           <C>             <C>
Notes payable to various financial institutions in monthly
  installments totalling $275,720 in 2000 and $109,408 in
  1999, including interest ranging from 5.9% to 12.9%. The
  notes mature in January 2001 through January 2008. The
  notes are secured by machinery and equipment..............  $ 7,102,698     $3,949,543
Mortgages payable to individuals in monthly installments of
  $30,296 in 2000 and $4,614 in 1999, including interest at
  8%. These mortgages mature in May 2003 through March
  2030......................................................    3,693,355        251,629
Notes payable to individuals in monthly installments
  totalling $36,408 in 2000 and $3,639 in 1999, including
  interest ranging from 7% to 9%. The notes mature in
  September 2001 through September 2005 and are personally
  guaranteed by the Company's majority shareholders.........    2,330,687         67,109
Note payable to a bank under a $2 million line of credit
  (Note 6) with a maturity date of April 30, 2002. Interest
  is payable monthly at the rate of prime plus  1/2% or
  2.75% over the Libor rate, at the Company's option........       30,000             --
                                                              -----------     ----------
                                                               13,156,740      4,268,281
Less current portion........................................    2,990,372      1,174,060
                                                              -----------     ----------
                                                              $10,166,368     $3,094,221
                                                              ===========     ==========
</TABLE>

     As of December 31, 2000, maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S>                                                           <C>
2001........................................................  $ 2,990,372
2002........................................................    2,533,337
2003........................................................    3,061,343
2004........................................................    1,582,501
2005........................................................      653,166
Thereafter..................................................    2,336,021
                                                              -----------
                                                              $13,156,740
                                                              ===========
</TABLE>

4.  RELATED PARTY TRANSACTIONS

MANAGEMENT AGREEMENT

     Effective November 1999, Star entered into an agreement to provide
operational and administrative management services to J.R. Capital Corp., ("J.R.
Capital") a related party corporation. J.R. Capital, which is owned by the
chairman of Star, owns and operates several material recovery facilities in
Florida. The agreement is for a five-year period ending October 2004. Under the
terms of the agreement, Star is to provide administrative and managerial
functions, maintain books and records, and provide other services to J.R.
Capital. In addition, Star has agreed to permit J.R. Capital to dispose of waste
at a rate equal to the lesser of the fair market value, or the same rate which
Star charges on an internal basis. In return, Star receives an annual management
fee of $1,537,293, receivable in monthly installments of $128,108. The full
provisions of the agreement were deferred by the parties until January 1, 2000.
As a result, for the years ended

                                        36
<PAGE>   39
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2000 and 1999, related party management fee income totalled
$1,537,293 and $20,258, respectively.

     In addition, Star and J.R. Capital allow each other to utilize any of each
other's facilities for a price equal to 90% of the fair market value for such
services charged to non-affiliate third parties. The agreement may be terminated
by J.R. Capital upon 30 days written notice and by Star upon 90 days written
notice.

RELATED PARTY ACCOUNTS

     Star derived $2,269,826 and $290,425 of revenue for disposal fees and
trucking services provided to J.R. Capital in 2000 and 1999, respectively. Star
incurred $2,857,487 and $1,035,548 of costs for disposal fees at J.R. Capital's
material recovery facilities in 2000 and 1999, respectively.

     Accounts payable includes net payables to J.R. Capital of $10,452 and
$499,854 for the years ended December 31, 2000 and 1999, respectively. Such
payables are satisfied in the ordinary course of business.

     During 2000, 1999 and 1998, Star paid accounting fees to a firm, which is
owned, in part, by one of Star's significant shareholders. Such fees totalled
$59,865, $13,400 and $12,000 for the years ended December 31, 2000, 1999 and
1998, respectively.

     The Company also leases one of its facilities from a related party. See
Note 6.

LOANS FROM RELATED PARTIESS

     Loans from related parties represent uncollateralized advances made to the
Company by shareholders and officers. Interest only is payable in monthly
installments at rates ranging from 2% above the prime rate to 12%. The notes
mature in October 2003 through February 2004.

5.  SHAREHOLDERS' EQUITY

COMMON STOCK

     As described in Note 1, on February 4, 1999, Star Services Group, Inc.
issued 5,000,000 shares of common stock to acquire all of the issued and
outstanding shares of the Subsidiaries. Prior to that date, and throughout 1998
and 1997, the ownership and voting percentage of the Subsidiaries was identical.
The ownership and voting percentage of Star Services subsequent to the
acquisitions was also identical to that of the Subsidiaries prior to the
acquisitions. As a result, the business combination has been accounted for as a
recapitalization, similar to a pooling of interests. The capital structure for
all periods has been retroactively restated to give effect to the business
combination and the capital structure of Star Services.

PREFERRED STOCK

     The Company's articles of incorporation provide that the Company may
authorize the issuance of up to 5,000,000 shares of preferred stock. The
preferred stock may be issued in series from time to time with such
designations, rights, preferences and limitations as the Company's Board of
Directors may determine by resolution.

PRIVATE PLACEMENTS

     During 1999, Star completed a private placement under which it sold
2,000,000 shares of its $.01 par value common stock at a purchase price of $2
per share. The Company received net proceeds of $3,950,000.

     During November 2000, the Company entered into agreements with four
companies to issue a total of 1,800,000 shares of the Company's common stock for
$2.50 per share. The consideration paid was in the form

                                        37
<PAGE>   40
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of notes totaling $4,500,000. The notes are payable in principal installments,
plus accrued interest at 8%, as follows:

<TABLE>
<CAPTION>
                                                              PRINCIPAL
                                                              ----------
<S>                                                           <C>
May 1, 2001.................................................  $  400,000
August 1, 2001..............................................     600,000
November 1, 2001............................................     800,000
February 1, 2002............................................     900,000
May 1, 2002.................................................   1,000,000
August 1, 2002..............................................     800,000
                                                              ----------
                                                              $4,500,000
                                                              ==========
</TABLE>

     The unpaid balance of the notes represents a subscription receivable, which
is presented as a reduction of shareholders' equity.

STOCK OPTION PLAN

     The 1999 Stock Option Plan was adopted by the Board of Directors effective
as of February 3, 1999. The plan is intended to provide employees, consultants
and directors with additional incentives by increasing their proprietary
interests in the Company. Under the plan, Star may grant options with respect to
2,000,000 shares of the Company's common stock. Concurrent with the effective
date of the plan, the Company's board granted options to purchase 759,000 shares
of common stock at an exercise price of $0.30 per share. All such options vest
over a four-year schedule and are exercisable no later than 10 years after the
grant date.

     The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25, the
Company is recording stock-based compensation based on the difference between
the $2.00 per share estimated fair market value of the Company's stock on the
date of the grant and the $0.30 per share exercise price. Such compensation is
being recorded over the four-year vesting period of the options. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement 123).

     A summary of stock-based compensation is as follows:

<TABLE>
<S>                                                           <C>
Total compensation to be recognized.........................  $1,290,300
</TABLE>

     Compensation recognized during the year ended:

<TABLE>
<S>                                                           <C>
December 31, 1999...........................................    (295,693)
December 31, 2000...........................................    (322,572)
                                                              ----------
Deferred compensation at December 31, 2000..................  $  672,035
                                                              ==========
</TABLE>

     During 2000, the Company's Board of Directors granted options to purchase
217,400 shares of common stock at an exercise price of $3.75 per share. All such
options vest over a four-year schedule and are exercisable no later than 10
years after the grant date. Because the exercise price was greater than the
market value of the Company's stock on the date of the grant, there was no
compensation cost associated with the grant.

                                        38
<PAGE>   41
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The following is a summary of stock option transactions during the years
ended December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                                             WEIGHTED
                                                              NUMBER OF      AVERAGE
                                                               SHARES     EXERCISE PRICE
                                                              ---------   --------------
<S>                                                           <C>         <C>
Outstanding at January 1, 1999..............................        --        $  --
  Granted -- February 1999..................................   759,000         0.30
                                                               -------        -----
  Outstanding at December 31, 1999..........................   759,000         0.30
  Granted -- September 2000.................................   217,400         3.75
  Cancelled.................................................    (5,000)        0.30
  Exercised.................................................    (5,000)        0.30
                                                               -------        -----
  Outstanding at December 31, 2000..........................   966,400        $1.08
                                                               =======        =====
</TABLE>

6.  COMMITMENTS AND CONTINGENCIES

CREDIT FACILITY

     In November 2000, Star was extended a $4,000,000 credit facility by a bank.
The credit facility is comprised of a $2,000,000 line of credit with a maturity
date of April 30, 2002, and a five-year term loan in the amount of $2,000,000.
Interest on the outstanding principal balance is payable at the rate of prime
plus  1/2% or 2.75% over the Libor rate of interest, at the option of the
Company. At December 31, 2000, the Company had $30,000 outstanding on the line
of credit (Note 3).

LEASE AGREEMENTS

     From inception through October 1998, the Company maintained its offices on
the site of the 50-acre material recovery facility described in the following
paragraph. During November 1998 through January 1999, the Company leased its
offices on a month-to-month basis. Effective February 1, 1999, the Company
entered into an operating lease for its office facilities. Such lease was
revised effective October 1999. The lease is for a three-year period ending
September 2002 at an annual rental of $39,448, with an option to extend the
lease for an additional three years.

     Through March 2000, the Company leased approximately 50 acres of land under
an operating lease on which it operates one of its material recovery facilities
at a monthly rental of $8,333. Effective March 2000, the Company entered into an
agreement to terminate this lease, with the goal of reducing costs by
consolidating its operations at another of its facilities located nearby. The
Company made a one-time payment of approximately $40,000 in connection with the
termination of this lease.

     The Company also leases approximately 30 acres on which it operates a
material recovery facility at a monthly rental of $20,000 under an operating
lease which expires August 2000. The lease also provides for the option to
purchase the facility for $4,000,000. During March 2000, the Company exercised
its purchase option and closed on the acquisition of the material recovery
facility, which it had previously leased. The purchase price for the property
was $4,000,000 which was paid as follows: $500,000 at closing and the remainder
in two purchase promissory notes: one at $2,500,000 and the second at $1,000,000
each with interest at the rate of 8%. The promissory notes are for a term of 30
years and call for payments of $18,344 and $7,338 per month, respectively.

     Effective June 1999, Delta Tall Pines Corp. entered into an operating lease
agreement with a related party for a material recovery facility in Palm Beach
County, Florida. The lessor is a corporation which is owned by two of Star's
principal shareholders and officers. The lease is for a 74-month term ending
July 2005, at a monthly rental of $21,200. In addition, the Company is
responsible for all real estate taxes and operating

                                        39
<PAGE>   42
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

costs. Rent paid to the related party totalled $254,400 and $148,400 for the
years ended December 31, 2000 and 1999, respectively.

     In connection with the acquisition of the Peerless companies described in
Note 2, the Company assumed two operating leases for transfer station
facilities. One lease is for a four-year period ending December 2004, at a
monthly rental of $9,000. The second lease is for a five-year period ending
February 2005, at a monthly rental of $3,000.

     Rent expense under the above office and facilities leases totalled
$413,182, $614,698 and $154,610 for the years ended December 31, 2000, 1999 and
1998, respectively.

     During 1998, the Company commenced leasing four of its trucks from a
financing corporation under operating leases, which expire in various months of
2003. The Company has the option to purchase the trucks and trailers for the
fair market value at the expiration of the lease term. The Company also leases a
variety of office equipment under operating leases which expire through 2004.
Lease expense under these operating leases for the years ended December 31,
2000, 1999 and 1998 was approximately $107,000, $107,000 and $47,000,
respectively.

MINERAL EXTRACTION AGREEMENT

     Eastern Recycling, Inc. entered into a mineral extraction agreement, dated
October 10, 1997, and amended May 26, 1998, whereby Eastern Recycling, Inc. has
the exclusive right to excavate, dredge, mine and remove all sand products in
and from an 18.2 acre lake area located in Pompano Beach, Florida.

     The parties in the contract, through Eastern Recycling, Inc., will conduct
the mining production and sale of screened mason sand, its by-products, lawn
sand, stabilizer and fill for sale to third parties.

     The agreement includes the lease of approximately 6.5 acres of land
adjoining the lake area. Under the terms of the agreement, the Company is
obligated to pay a royalty of 15% of gross sales price for all minerals and
materials extracted, or $.50 per ton, whichever is greater. Such royalty
payments shall not be less than $2,500 per month. Such payments commenced in
July 1998.

     Royalty and rent payments under the mineral extraction agreement totaled
$30,000, $30,000 and $15,000 for the years ended December 31, 2000, 1999 and
1998, respectively.

FUTURE MINIMUM PAYMENTS

     The minimum future payments under the above lease and mineral extraction
agreements are as follows:

<TABLE>
<CAPTION>
YEAR ENDING                                             OPERATING                 MINERAL
DECEMBER 31,                                            FACILITIES   EQUIPMENT   EXTRACTION
------------                                            ----------   ---------   ----------
<S>                                                     <C>          <C>         <C>
2001..................................................  $  437,966   $105,162     $ 30,000
2002..................................................     429,182    101,880       30,000
2003..................................................     398,400     41,802       30,000
2004..................................................     398,400      2,259       30,000
2005..................................................     154,400         --       30,000
Thereafter............................................          --         --       60,000
                                                        ----------   --------     --------
                                                        $1,818,348   $251,103     $210,000
                                                        ==========   ========     ========
</TABLE>

OPERATION AND DEVELOPMENT AGREEMENTS

     In connection with the Peerless transaction described in Note 2, the
Company acquired an operation agreement and a development agreement. The
operation agreement provides for Star to operate a material recovery facility.
Under the terms of the agreement, Star records the revenue and incurs the
expenses of operating the facility. Star is obligated to pay the owner 10% of
the revenue generated from up to 450 cubic

                                        40
<PAGE>   43
                   STAR SERVICES GROUP, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

yards of waste received at the facility per day and 6% of the revenue generated
from receipt of in excess of 450 cubic yards of waste per day.

     The development agreement provides Star with the exclusive right to provide
pre- and post-development waste services for a specified real estate development
project planned by the former owners of the Peerless companies. The agreement is
in effect unless terminated by Peerless upon 30 days written notice for any
material breath of the agreement or for failure to perform the services.

GOVERNMENT REGULATION

     Substantially all of the Company's operations are subject to federal, state
and local regulations relating to the disposition of environmentally-sensitive
waste. Compliance with these provisions has not had, nor does the Company expect
such compliance to have, any material effect upon the capital expenditures, net
income, financial condition or competitive position of the Company. Management
believes that its current practices and procedures for the control and
disposition of such wastes comply with applicable federal, state and local
requirements.

7.  INCOME TAXES

     During 1998, the Subsidiaries elected to be treated as S Corporations under
the provisions of the Internal Revenue Code and similar provisions of state tax
laws. As S Corporations, the net income or loss of the Subsidiaries was
reportable by the shareholders who were responsible for any income taxes
thereon. Therefore, no provision for taxes on income has been included in the
1998 financial statements. Star's acquisition of the Predecessors in 1999
automatically terminated their S Corporation elections. Therefore, a provision
for income tax benefit has been recognized for the years ended December 31, 2000
and 1999, at the statutory U.S. income tax rate of 35%. There are no material
differences in the basis of assets and liabilities for income tax and financial
reporting purposes.

     The following schedule presents pro forma information (unaudited) of income
tax expense which would have been recorded had Star's Predecessors been taxable
corporations based on the tax laws in effect during the year ended December 31,
1998 and the resultant pro forma effect on net loss and loss per share.

<TABLE>
<S>                                                           <C>
Historical income (loss) before income taxes................  $  (89,742)
Pro forma income tax benefit................................      27,000
                                                              ----------
Pro forma net loss..........................................  $  (62,742)
                                                              ==========
Pro forma loss per share....................................  $    (0.01)
                                                              ==========
Historical weighted average shares outstanding..............   5,000,000
                                                              ==========
</TABLE>

     Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities for which
income tax effects will be realized in future years. Valuation allowances, if
any, are provided when the expected realization of deferred tax assets does not
meet a "more likely than not" criterion.

     Deferred tax benefits of $236,548 and $195,001 were recognized for the
years ended December 31, 2000 and 1999, respectively, as a result of the
Company's net operating losses of approximately $675,000 in 2000 and $557,000 in
1999. Such losses are available to be carried forward through the years 2020 and
2019, respectively, to offset future years' taxable income. Although realization
is not assured, management believes that it is more likely than not that all of
the deferred tax asset will be realized. As of December 31, 2000 and 1999,
$143,850 and $195,001 of the deferred tax assets have been classified as current
based on the expected reversal date of the temporary difference. The non-current
portion of the deferred tax asset is included in deferred charges.

                                        41
<PAGE>   44

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

     None.

                                    PART III

     Certain information required by Part III is omitted from this Report in
that the registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

     The information concerning the Company's executive officers required by
this Item is incorporated by reference herein to the section in Part I, Item 4,
entitled "Executive Officers and Directors."

     The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item 11 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 12 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 13 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.

                                        42
<PAGE>   45

                                    PART IV

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

a. 1. FINANCIAL STATEMENTS:

     Reference is made to the index set forth in "ITEM 8, FINANCIAL STATEMENTS
and SUPPLEMENTARY DATA" of this Annual Report on Form 10-K.

   2. FINANCIAL STATEMENT SCHEDULES:

     The following financial statement schedules of Star Services Group, Inc.
for the calendar years ended December 31, 2000, 1999, and 1998 are filed as part
of this Report and should be read in conjunction with the Consolidated Financial
Statements of Star Services Group, Inc.

<TABLE>
<CAPTION>
SCHEDULE                                                               PAGE
--------                                                               ----
<C>       <S>                                                          <C>
   II     Valuation and Qualifying Accounts..........................  S-1
</TABLE>

     Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or Notes thereto.

   3. EXHIBITS

     None

b. REPORTS ON FORM 8-K

     No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

                                        43
<PAGE>   46

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                           STAR SERVICES GROUP, INC.

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                     DATE
                      ---------                                     -----                     ----
<S>                                                    <C>                               <C>

/s/ JACK R. CASAGRANDE                                 Chairman of the Board and Chief
-----------------------------------------------------  Executive Officer (Principal
Jack R. Casagrande                                     Executive Officer)                April 16, 2001

/s/ PATRICK F. MARZANO                                 President, Chief Financial
-----------------------------------------------------  Officer and Director
Patrick F. Marzano                                                                       April 16, 2001

/s/ PHILLIP FOREMAN                                    Chief Operating Officer and
-----------------------------------------------------  Director
Phillip Foreman                                                                          April 16, 2001

/s/ THOMAS R. ROBERTS                                  Vice President, Environmental
-----------------------------------------------------  Compliance and Director
Thomas R. Roberts                                                                        April 16, 2001

/s/ MICHAEL C. MARZANO                                 Treasurer
-----------------------------------------------------
Michael C. Marzano                                                                       April 16, 2001

/s/ ANGELO MARZANO                                     Secretary
-----------------------------------------------------
Angelo Marzano                                                                           April 16, 2001

/s/ FRANK P. MARZANO                                   Director
-----------------------------------------------------
Frank P. Marzano                                                                         April 16, 2001

/s/ RICK CASAGRANDE                                    Director
-----------------------------------------------------
Rick Casagrande                                                                          April 16, 2001

/s/ SAMUEL G. WEISS                                    Director
-----------------------------------------------------
Samuel G. Weiss                                                                          April 16, 2001
</TABLE>

                                        44
<PAGE>   47

                          INDEPENDENT AUDITORS' REPORT
                         ON OTHER FINANCIAL INFORMATION

The Shareholders
Star Services Group, Inc.

     The audited consolidated financial statements of the Company and our report
thereon are presented in the preceding section of this report. The financial
information in Schedule II - Valuation and Qualifying Accounts on Page S-1 is
presented for purposes of additional analysis and is not a required part of the
financial statement of the Company. Such information has been subjected to the
auditing procedures applied in our audit of the financial statements and, in our
opnion, is fairly stated in all material aspects in relation to the financial
statements taken as a whole.

                                                        HORTON & COMPANY, L.L.C.

Wayne, New Jersey
February 28, 2001

                                        45
<PAGE>   48

                           STAR SERVICES GROUP, INC.

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                 BALANCE AT   CHARGED TO   CHARGED                 BALANCE
                                                 BEGINNING     COST AND    TO OTHER               AT END OF
                                                 OF PERIOD     EXPENSES    ACCOUNTS   DEDUCTION    PERIOD
                                                 ----------   ----------   --------   ---------   ---------
<S>                                              <C>          <C>          <C>        <C>         <C>
Year ended December 31, 1998
Allowance for doubtful accounts (deducted from
  accounts receivable).........................   $      0     $  2,000       $0       $     0    $  2,000
                                                  --------     --------       --       -------    --------
Year ended December 31, 1999
Allowance for doubtful accounts (deducted from
  accounts receivable).........................   $  2,000     $119,322       $0       $ 2,000    $119,322
                                                  --------     --------       --       -------    --------
Year ended December 31, 2000
Allowance for doubtful accounts (deducted from
  accounts receivable).........................   $119,322     $255,793       $0       $56,851    $318,264
                                                  ========     ========       ==       =======    ========
</TABLE>

                                       S-1