<PAGE>
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.

                                  FORM 10-Q/A

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

         FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                                       OR

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

         FOR THE TRANSITION PERIOD FROM              TO
                                        ____________    ____________

                        COMMISSION FILE NUMBER 000-23855

                            U.S. PLASTIC LUMBER CORP.
                         (Name of issuer in its charter)

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

            NEVADA                                             87-0404343
  (State or other jurisdiction of                           (I.R.S. Employer
   incorporation or organization)                          Identification No.)


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

           2300 W. GLADES ROAD, SUITE 440 W, BOCA RATON, FLORIDA 33431
                                 (561) 394-3511

          (Address and telephone number of principal executive offices
                             and place of business)

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

         The number of shares outstanding of the registrant's common stock as of
September 30, 2001 is 38,232,392 shares.

================================================================================


<PAGE>


                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                                   FORM 10-Q

                                     INDEX

<TABLE>
<CAPTION>
                                                                                     PAGE
<S>                                                                                  <C>
      PART I.  UNAUDITED FINANCIAL INFORMATION
      Item 1.  Financial Statements:
      Condensed Consolidated Balance Sheets as of September 30, 2001
        and December 31, 2000.................................................         2
      Condensed Consolidated Statements of Operations for the
        Three Months Ended September 30, 2001 and 2000........................         3
      Condensed Consolidated Statements of Operations for the Nine
        Months Ended September 30, 2001 and 2000..............................         4
      Condensed Consolidated Statements of Cash Flows for the Nine
        Months Ended September 30, 2001 and 2000..............................         5
      Notes to Condensed Consolidated Financial Statements....................         6
      Item 2.  Management's Discussion and Analysis of Financial
               Condition and Results of Operations............................        17
      PART II.  OTHER INFORMATION
      Item 1.  Legal Proceedings..............................................        23
      Item 2.  Changes in Securities and Use of Proceeds......................        23
      Item 3.  Defaults Upon Senior Securities................................        23
      Item 4.  Submission of Matters to a Vote of Security
        Holders...............................................................        23
      Item 6.  Exhibits and Reports on Form 8-K...............................        23
      SIGNATURES..............................................................        25
</TABLE>



                           FORWARD LOOKING STATEMENTS

    When used in this Form 10-Q, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "projected",
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including but not limited to risks associated with our credit facilities and
liquidity, the ability to obtain adequate financing on commercially acceptable
terms, economic conditions, the affects of rapid growth upon the Company and the
ability of management to effectively respond to such growth, demand for products
and services of the Company, newly developing technologies, the Company's
ability to compete, regulatory matters, protection of the Company's proprietary
technology, the effects of competition from entities with greater financial
resources than that possessed by the Company and shareholder dilution. Such
factors, which are discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the notes to consolidated
financial statements, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
any opinions or statements expressed with undue reliance on any such
forward-looking statements, which speak only as of the date made. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

<PAGE>

                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                  AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
                                  (UNAUDITED)

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
                                         ASSETS
CURRENT ASSETS
  Cash and cash equivalents.................................  $  1,034,529   $  2,211,082
  Accounts receivable, net of allowance for doubtful
    accounts of $1,721,851 and $2,375,479, respectively.....    42,335,223     43,763,378
  Inventories...............................................     7,504,203      9,723,390
  Prepaid expenses and other assets.........................     3,971,946      2,542,126
                                                              ------------   ------------
    Total current assets....................................    54,845,901     58,239,976
Property, plant and equipment (net).........................    89,425,579    100,544,939
Acquired intangibles (net)..................................    34,923,431     37,033,919
Other assets................................................     7,339,781      4,592,125
                                                              ------------   ------------
    Total assets............................................  $186,534,692   $200,410,959
                                                              ============   ============
                          LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable..........................................  $ 31,780,003   $ 27,958,413
  Notes and capital leases payable, current portion.........    52,687,621     11,535,698
  Accrued expenses..........................................     6,335,476      4,390,344
  Convertible subordinated debentures, net of unamortized
    discount................................................     3,360,587             --
  Convertible subordinated debentures -- affiliates, net of
    unamortized discount....................................     4,955,935             --
  Restructuring accrual.....................................     2,091,529      1,149,431
  Other liabilities.........................................     3,003,107      2,240,721
                                                              ------------   ------------
    Total current liabilities...............................   104,214,258     47,274,607
Notes and capital leases payable, net of current portion....     7,009,495     54,613,509
Deferred income taxes and other liabilities.................     1,442,360        571,382
Minority interest...........................................       194,282        196,383
Convertible subordinated debentures, net of unamortized
  discount..................................................     5,329,746      7,255,213
Convertible subordinated debentures -- affiliates, net of
  unamortized discount......................................            --      4,757,657
                                                              ------------   ------------
    Total liabilities.......................................   118,190,141    114,668,751
                                                              ------------   ------------
STOCKHOLDERS' EQUITY
  Convertible preferred stock, par value $.001; authorized
    5,000,000 shares;
    Series "D" 15%, issued and outstanding 1,187,285
      shares................................................         1,187          1,187
    Series "E" 10%, issued and outstanding 1,714,285 and
      1,142,857 shares, respectively........................         1,714          1,143
  Common stock par value $.0001, authorized 100,000,000
    shares; issued and outstanding 38,232,392 and 34,836,594
    shares, respectively....................................         3,823          3,484
  Additional paid-in capital................................   103,393,465     97,195,416
  Accumulated other comprehensive loss......................    (1,123,891)            --
  Accumulated deficit.......................................   (33,931,747)   (11,459,022)
                                                              ------------   ------------
    Total stockholders' equity..............................    68,344,551     85,742,208
                                                              ------------   ------------
    Total liabilities and stockholders' equity..............  $186,534,692   $200,410,959
                                                              ============   ============
</Table>

See accompanying notes to condensed unaudited consolidated financial statements.
                                        2
<PAGE>

                  U. S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (UNAUDITED)

<Table>
<Caption>
                                                                  2001          2000
                                                              ------------   -----------
<S>                                                           <C>            <C>
Sales, net..................................................  $ 46,822,989   $50,087,729
Cost of goods sold..........................................    40,213,193    43,972,460
                                                              ------------   -----------
  Gross profit..............................................     6,609,796     6,115,269
Selling, general and administrative expenses................     7,813,532     7,807,530
Restructuring and asset impairment charge...................    11,465,720            --
                                                              ------------   -----------
  Operating loss............................................   (12,669,456)   (1,692,261)
Interest and other income...................................         7,518        87,409
Interest expense............................................     3,055,826     1,946,562
                                                              ------------   -----------
  Loss before income taxes..................................   (15,717,764)   (3,551,414)
Income tax provision (benefit)..............................       710,244    (1,100,938)
                                                              ------------   -----------
  Net loss..................................................   (16,428,008)   (2,450,476)
Preferred stock dividend earned.............................       233,077       182,560
                                                              ------------   -----------
  Net loss attributable to common stockholders..............  $(16,661,085)  $(2,633,036)
                                                              ============   ===========
Net loss per common share -- Basic:.........................  $      (0.44)  $     (0.08)
Net loss per common share -- Diluted:.......................  $      (0.44)  $     (0.08)
Weighted average common shares outstanding:
  Basic.....................................................    38,210,927    34,786,236
  Diluted...................................................    38,210,927    34,786,236
</Table>

See accompanying notes to condensed unaudited consolidated financial statements.
                                        3
<PAGE>

                  U. S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (UNAUDITED)

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
Sales, net..................................................  $136,209,683   $124,752,166
Cost of goods sold..........................................   118,021,715    103,489,116
                                                              ------------   ------------
  Gross profit..............................................    18,187,968     21,263,050
Selling, general and administrative expenses................    19,588,799     18,839,407
Restructuring and asset impairment charges..................    11,647,727             --
                                                              ------------   ------------
  Operating (loss) income...................................   (13,048,558)     2,423,643
Interest and other income...................................       147,825        209,226
Interest expense............................................     8,428,137      4,484,794
                                                              ------------   ------------
  Loss before income taxes..................................   (21,328,870)    (1,851,925)
Income tax benefit..........................................            --       (467,475)
                                                              ------------   ------------
  Loss before extraordinary item............................   (21,328,870)    (1,384,450)
Extraordinary loss on early extinguishment of debt, net of
  taxes of $599,514.........................................            --        939,675
                                                              ------------   ------------
  Net loss..................................................   (21,328,870)    (2,324,125)
Preferred stock dividend earned.............................     1,143,855        182,560
                                                              ------------   ------------
  Net loss attributable to common stockholders..............  $(22,472,725)  $ (2,506,685)
                                                              ============   ============
Net (loss) income per common share -- Basic:
  Loss before extraordinary item............................  $      (0.62)  $      (0.04)
  Loss on early extinguishment of debt......................            --   $      (0.03)
                                                              ------------   ------------
  Loss per common share.....................................  $      (0.62)  $      (0.07)
                                                              ============   ============
Net loss per common share -- Diluted:
  Loss before extraordinary item............................  $      (0.62)  $      (0.04)
  Loss on early extinguishment of debt......................            --          (0.03)
                                                              ------------   ------------
  Loss income per common share..............................  $      (0.62)  $      (0.07)
                                                              ============   ============
Weighted average common shares outstanding:
  Basic.....................................................    36,189,481     34,107,478
  Diluted...................................................    36,189,481     34,107,478
</Table>

See accompanying notes to condensed unaudited consolidated financial statements.
                                        4
<PAGE>

                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
                                  (UNAUDITED)

<Table>
<Caption>
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $(21,328,871)  $ (2,324,125)
                                                              ------------   ------------
  Adjustments to reconcile net cash provided by (used in)
    operating activities:
    Depreciation............................................     4,955,527      3,459,456
    Amortization............................................     1,517,079      1,424,846
    Loss on early extinguishment of debt....................            --      1,539,189
    Deferred income tax benefit.............................            --     (1,066,990)
    Amortization of deferred financing costs................     1,089,877        157,237
    Reduction of discounts on convertible subordinated
     debentures.............................................       724,736        138,848
    Non cash restructuring charges and asset impairment
     charge.................................................    11,451,727             --
    Beneficial conversion feature of convertible
     subordinated debentures................................       280,000        270,946
    Loss (gain) on sale of property, plant & equipment......        27,328        (19,753)
  Changes in operating assets and liabilities, net of
    acquisitions:
    Accounts receivable.....................................     1,428,155    (16,071,502)
    Inventories.............................................     2,219,187     (3,595,188)
    Prepaid expenses and other current assets...............    (1,320,151)    (3,338,247)
    Other assets............................................    (4,160,026)    (1,258,560)
    Accounts payable........................................     3,821,591      7,017,576
    Other liabilities.......................................      (387,628)     1,190,640
    Accrued expenses........................................     1,548,116      1,190,494
                                                              ------------   ------------
      Net cash provided by (used) in operating activities...     1,866,647    (11,285,133)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures for property and equipment...........    (2,578,177)   (20,749,331)
  Cash paid for acquisitions, net of cash received..........            --        (62,297)
  Divestitures of property, plant and equipment.............       264,564        534,893
                                                              ------------   ------------
      Net cash used in investing activities.................    (2,313,613)   (20,276,735)
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of warrants and options, net of
    costs...................................................         7,980        744,589
  Proceeds from the sale of common stock, net of issuance
    costs...................................................       983,119             --
  Proceeds from the sale of preferred stock, net of issuance
    costs...................................................       999,452      4,119,331
  Proceeds from sale of convertible debentures, net of
    issuance costs..........................................     3,731,956      7,500,000
  Advances from (repayment to) affiliates, net..............            --     (1,000,000)
  Proceeds from notes payable...............................     1,200,000     59,846,620
  Payments of notes payable.................................    (7,652,094)   (40,361,907)
                                                              ------------   ------------
      Net cash (used in) provided by financing activities...      (729,587)    30,848,633
                                                              ------------   ------------
Net change in cash and cash equivalents.....................    (1,176,553)      (713,235)
Cash and cash equivalents, beginning of period..............     2,211,082      1,807,588
                                                              ------------   ------------
Cash and cash equivalents, end of period....................  $  1,034,529   $  1,094,353
                                                              ============   ============
Supplemental disclosure of cash flow information:
  Cash paid during the period for:
  Interest..................................................  $  5,259,263   $  3,865,634
  Income taxes..............................................  $      9,043   $    129,710
Capitalized interest as of September 30:....................  $         --   $  1,379,818
Number of shares issued during the period for non-cash
  transactions:
  Acquisitions and Clean Earth merger.......................         8,075        827,943
  Compensation -- employees and directors...................         4,400         29,284
  Litigation settlements....................................        45,000         11,666
  Conversion of debentures..................................     2,134,742      1,693,085
  Investment banking and commitment fees....................       235,000             --
  Warrants issued in connection with professional services
    provided................................................       181,250             --
</Table>

See accompanying notes to condensed unaudited consolidated financial statements.
                                        5
<PAGE>
                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

         NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION

NATURE OF OPERATIONS

    U.S. Plastic Lumber Corp. and its subsidiaries (collectively the "Company")
are engaged in the manufacturing of recycled plastic lumber and other products
and environmental remediation services, including recycling of soils that have
been exposed to hydrocarbons and the beneficial reuse of dredge materials. The
Company's plastic lumber customers are located throughout the United States,
although some customers are international. The Company's environmental
remediation, dredge and soil recycling customers are located primarily in the
Northeastern United States.

BASIS OF PRESENTATION

    The Company's consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and the regulations of the Securities and Exchange Commission ("SEC")
for quarterly reporting. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K as filed with the SEC for
the year ended December 31, 2000. Management acknowledges its responsibility for
the preparation of the accompanying interim condensed consolidated financial
statements which reflect all adjustments considered necessary, in the opinion of
management, for a fair statement of the results of interim periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results of operations for the entire year. Where appropriate, certain
amounts have been reclassified to conform to the 2001 presentation.


2.  LIQUIDITY AND CAPITAL RESOURCES

    On September 28, 2001, the Company notified all of the banks which
participate in its Senior Credit Facility that due to lower than expected sales
at the plastic lumber division the Company could not make the $2.5 million term
loan payment due September 30, 2001 without jeopardizing its business
operations. In addition, the Company is not in compliance with some of the
covenants under the Senior Credit Facility as of September 30, 2001. The Company
is currently negotiating with the participating banks for a waiver of its
covenant violations and failure to make the scheduled principal payment, as well
as an amendment to the Senior Credit Facility whereby the lenders under the
facility would agree to accept interest only payments from the Company and allow
the Company to defer the September 30, and December 31, 2001 principal payments
until the earlier of February 28, 2002 or the sale of some of the Company's
assets. No assurance can be given as to whether or in what form this waiver will
be obtained.

    On October 4, 2001, the Company requested the participants in its Master
Credit Facility with GE Capital grant a suspension of principal payments on its
Master Credit Facility until the earlier of March 31, 2002 or the sale of some
of the Company's assets. Through November 14, 2001, the Company has continued to
make all scheduled principal payments on its Master Credit Facility. As of
September 30, 2001, the Company was not in compliance with its tangible net
worth covenant under the Master Credit Facility. The Company is currently in
negotiations with GE Capital and the other participants to obtain a deferral of
future principal payments and a waiver of this covenant violation as of
September 30, 2001. No assurance can be given as to whether or in what form this
waiver can be obtained. The Master Credit Facility contains a provision whereby
an event which would accelerate payment terms of the Company's Senior Credit
Facility would also accelerate the payment terms of the Master Credit Facility
to the same due date as the Senior Credit Facility.

    While the covenant violations and the failure to make a principal payment
constitute events of default under the respective loan agreements, as of
November 14, 2001 neither lending group has taken any action against the
Company. The lending groups have been negotiating forbearance agreements with
the Company, and the Company believes it will be successful in obtaining the
necessary waivers and forbearances from its lenders. However, in the event that
waivers and a deferral of principal are not obtained, the lenders can demand
immediate repayment of the outstanding balances of $38,800,000 and $11,899,000
of the Senior Credit Facility and Master Credit Facility, respectively. The
Company currently does not have the financial resources to repay these debt
obligations in the event that they become immediately


                                       6

<PAGE>


due without obtaining new debt and/or equity capital and/or selling some of the
Company's assets. Pursuant to the terms of the Senior Credit Facility, upon the
occurrence of an event of default, the administrative agent for the lending
banks, upon the request of the lending banks, can declare all commitments
terminated, and/or declare all Company loans and other obligations due and
payable.

The Company's liquidity and ability to meet its financial obligations will be
dependent on among other things, the Company's ability to obtain waivers for its
debt covenant and payment violations as of September 30, 2001 and through the
date of this filing, maintain compliance with future debt covenants and raise
new capital through the issuance of additional equity, new debt financing and/or
sell some of the Company's assets.

    The Company is highly leveraged and during 2000 and the nine months ended
September 30, 2001, the Company suffered significant losses from operations,
primarily resulting from the expenses incurred in its plastic lumber division
related to the expansion and start up of certain manufacturing facilities, the
inefficiencies in the production of certain products, increases in raw material
costs and interest expense. During the third quarter of 2001 the Company closed
three of its plastic lumber manufacturing facilities and agreed to sub-lease two
of its resin processing plants to third party raw material processors. In
connection with the exiting of these facilities, the Company eliminated
approximately 140 full time manufacturing positions, recorded asset impairment
charges of $9,810,000 and recorded a restructuring charge of $1,656,000 (see
Note 6). The Company's accumulated deficit and working capital deficit totaled
approximately $33,932,000 and $49,368,000, respectively, as of September 30,
2001.

    Since its inception, the Company has financed its operations through a
number of stock and debt issuances. During 2000 and the first nine months of
2001, the Company's primary sources of working capital have been the net
proceeds from sales of the Company's convertible preferred and common stock,
proceeds from its Senior Credit Facility, the issuance of convertible
subordinated debentures and direct sales of the Company's products and services
to its customers. As of December 31, 2000, the Company was not in compliance
with certain covenant requirements of its Senior Credit Facility and its Master
Credit Facility. The Company received waivers for these covenant violations as
of December 31, 2000 and entered into amendments to the Senior Credit Facility
and Master Credit Facility (see Note 4).

    The Company's material financial commitments relate principally to its
working capital requirements and obligations to make term loan payments on its
Senior Credit Facility. As of September 30, 2001, the outstanding balance on the
Senior Credit Facility is $38,800,000. Under the terms of the proposed amended
Senior Credit Facility, the $2.5 million principal payments due September 30,
and December 31, 2001 would be deferred until February 28, 2002 or the sale of
some of the Company's assets. Additional principal payments in the amount of
$2.5 million each are due on March 31, and June 30, 2002. The remaining
outstanding balance would have to be refinanced or repaid on or before July 2,
2002. On or before July 1, 2002, the Company is also required to retire its
$4,000,000 convertible debenture issued to the Halifax Fund, L.P. ("Halifax"),
as well as the $5,000,000 convertible debenture payable to the Stout
Partnership, the Company's largest shareholder. Several members of the Company's
Board of Directors and a member of management are affiliated with the Stout
Partnership. The Company currently does not have the financial resources to
retire these debt obligations in 2002 and the Company will need to obtain new
debt and/or equity capital and/or sell certain assets to meet these
requirements.

    Additional financial obligations of the Company include interest payments on
the Senior Credit Facility of approximately $275,000 per month, lease payments
pursuant to certain real property and equipment leases of approximately $203,000
per month, installment payments for manufacturing equipment of approximately
$240,000 per month, interest payments on the Company's Convertible Subordinated
Debentures of approximately $460,000 quarterly, and dividends on the Company's
Series D and Series E Convertible Preferred Stock of approximately $231,000
quarterly. As of September 30, 2001 the Company has not made any dividend
payments on its Series D Convertible Preferred Stock. Dividends in arrears
pertaining to the Series D Convertible Preferred Stock amount to $652,000 at
September 30, 2001. There are no dividends in arrears with respect to the Series
E Convertible Preferred Stock.

    The terms of the Senior Credit Facility also required the Company to raise
$6,500,000 of equity or equity equivalents by February 28, 2002. During February
and March 2001, the Company raised $1 million through the issuance of its Series
"E" Convertible Preferred Stock (see Note 3). In June 2001, the Company raised
$4 million through the issuance of a subordinated convertible debenture, (see
Note 5) due July 1, 2002. Additionally, on July 3, 2001, the Company raised $1
million through the issuance of 952,381 shares of common stock (see Note 3). On
November 1, 2001 the Company raised an additional $800,000 through the issuance
of 1,334,000 shares of common stock. These private placement transactions were
not registered under the Securities and Exchange Act of 1934 (the "Act") in
reliance upon the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. With the


                                       7

<PAGE>


completion of the November 1, 2001 private placement transaction, the Company
has now met the financial covenant contained in the Senior Credit Facility
pertaining to the securing of equity or equity equivalents. However, the Company
will also need to raise additional capital by selling certain assets or
obtaining additional sources of debt or equity in order to meet its financial
obligations.

    Some of the Company's debt instruments contain covenants establishing
performance measurement through various financial ratios and operating
restrictions. The Company's failure to comply with any covenant or material
obligation contained in these debt agreements or any of the Company's other debt
agreements, absent a waiver from the lenders, would result in an event of
default which could accelerate debt repayment terms under the debt agreements.
Due to various cross-default provisions contained within some of the Company's
credit agreements, an event of default under the senior debt agreements could
accelerate debt repayment terms under some of the other credit agreements, all
of which would have a material adverse affect on the Company's liquidity and
capital resources.

    Capital requirements relating to the implementation of the Company's
business plan have been and will continue to be significant. The Company
believes that its ability to generate cash from operations is dependent upon,
among other things, increased demand for its products and services and the
successful development of direct marketing, improved manufacturing efficiencies
and product distribution capabilities. There can be no assurance that the
Company will have sufficient capital resources to permit the Company to continue
implementation of its business plan.

    In November of 2000, the Company retained Bank of America Securities to
explore and evaluate strategic alternatives for the Company, which could include
the possible sale of the Company's environmental recycling division, Clean Earth
Inc. ("CEI"). No agreement has been reached with any prospective buyers and
there can be no assurances that an agreement will be reached. Proceeds from the
sale of CEI, if it occurs, would be used to first pay down the Company's Senior
Credit Facility. Any excess proceeds would be applied to some of the Company's
other debt obligations and provide working capital.

    While there can be no assurances, the Company believes its cash flows from
operations, the sale of certain assets, and/or the raising of additional capital
will satisfy its liquidity requirements through September 30, 2002. The Company
is seeking additional sources of financing to supplement its cash flow
requirements, however, there can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all. If the Company
does not obtain the necessary waivers and amendments from the lending groups for
covenant violations and failure to make scheduled principal payment as of
September 30, 2001, comply in the future with the covenants contained within its
debt agreements, and if adequate cash flow from operations, funds from the
capital markets or proceeds from the sale of assets are not available to finance
the Company's operations and retire its debt obligations as they become due, the
Company will be required to significantly curtail its operations and the
Company's ability to continue as a going concern would be impaired. The
accompanying consolidated financial statements do not include any adjustment
that might result from the outcome of these uncertainties.

    In early September of 2001, the Company was advised by the Staff of Nasdaq
National Market that the Company's stock failed to maintain a minimum bid price
of $1.00 over the previous 30 consecutive trading days, and that in accordance
with the Nasdaq Market Place Rules, the Company had 90 calendar days, or until
December 5, 2001, to regain compliance. On September 28, 2001 the Company
received notification from Nasdaq that the listing qualification notice
previously received had been suspended until January 2, 2002. If the bid price
for the Company's common stock is not above $1.00 per share for at least 10
consecutive trading days prior to April 2, 2002, or if the Company fails to
comply with any other requirement for continued listing, the Company's common
stock will be delisted from trading on the Nasdaq National Market, subject to
the Company's right to appeal. If the Company's stock were to be delisted, it
may adversely impact the Company's ability to secure additional equity
financing.

3.  CAPITAL STOCK

SERIES E CONVERTIBLE PREFERRED STOCK

    During February 2001 and March 2001, the Company issued a total 571,429
shares of its Series "E" Preferred Stock to the Stout Partnership in exchange
for a payment to the Company of $500,000 on each of the aforesaid dates. The
stock pays a monthly cash dividend at an annual rate of 10%. Each share of
Series E Preferred Stock is convertible into one share of the Company's common
stock at the option of the holder at any time after December 31, 2001, subject
to certain rights of the Company. The Company at its sole option can redeem the
Preferred Stock at 110% of the initial purchase price in cash prior to December
31, 2001. In addition, if the common stock of the Company is trading at an
average


                                       8

<PAGE>


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

FUSION CAPITAL FUND II

    On December 7, 2000, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion Capital
agreed to purchase up to $6.0 million of the Company's common stock subject to
increase, at the Company's discretion, by an additional $6.0 million, subject to
certain conditions. The $6.0 million of common stock purchasable under the first
tranche of the common stock purchase agreement is to be purchased over a
twelve-month period, subject to a 6-month extension or earlier termination at
the Company's discretion. The selling price of the shares will be equal to the
lesser of (1) $15.00 or (2) a price based upon the future market price of the
common stock without any fixed discount to the market price. Pursuant to the
terms of the agreement with Fusion Capital, the Company may not sell shares to
Fusion Capital until such time as the Securities and Exchange Commission
declares a registration statement effective which registers for resale the
shares Fusion Capital has agreed to purchase. As of September 30, 2001, the
Company had not filed a registration statement with the Securities and Exchange
Commission.

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

COMMON STOCK PRIVATE PLACEMENT

    On July 3, 2001, the Company issued 476,191 shares of common stock to ZLP
Master Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology
Fund, LTD. at a purchase price of $1.05 per share. This private placement
transaction was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. Net proceeds after issuance costs of approximately $983,000
were used for general corporate purposes. Because the Company did not, within 60
days of July 3, 2001, file a registration statement with the SEC to register the
resale of these shares as required under the stock purchase agreement, the
Company is required to pay a cash penalty fee to the purchasers of these shares
at a rate equal to 1.5% of the outstanding amount purchased for each 30-day
period that a registration statement is not filed. As of September 30, 2001 the
Company had not filed a registration statement to register these shares for
resale and $15,000 has been accrued in connection with this penalty fee.

WARRANTS

    During the third quarter of 2001, the Company issued 81,250 warrants to
entities providing investment banking and other professional services to the
Company. These warrants were valued at approximately $48,000, which is being
amortized over the related period of service.

4.  NOTES AND CAPITAL LEASES PAYABLE

    On March 15, 2001, the Company entered into a Waiver and Second Amendment to
the Senior Credit Facility ("Waiver and Second Amendment") with its senior
lenders, Bank of America, LaSalle National Bank and Union Planters Bank, in
which they agreed to waive past defaults on its senior credit facility and the
Waiver and First Amendment. The Waiver and Second Amendment required that the
Company maintain its financial condition and operating profit within certain
defined parameters including ratios involving earnings before interest, taxes,
depreciation and amortization and interest expense. In addition, the Waiver and
Second Amendment contains a provision which requires the Senior Credit Facility
be refinanced or paid in full by April 2002.

    On March 30, 2001, the Company entered into an Amendment of the Master
Credit Facility with GE Capital to waive the tangible net worth covenant for the
4th Quarter 2000 and amended the covenant for each quarter in 2001.
Additionally, the Company agreed to accelerate a portion of its principal
payments. At June 30, 2001, the Company was in compliance with the tangible net
worth covenant.


                                       9

<PAGE>


    On July 13, 2001, the Company entered into a Waiver and Third Amendment to
the Senior Credit Facility ("Waiver and Third Amendment") with its senior
lenders, the primary terms of which were as follows: (i) to extend the required
due date to refinance the Senior Credit Facility until July 1, 2002, (ii) extend
terms relative to the Company's borrowing base as defined in the Amendment and,
(iii) provide for mandatory prepayment when certain outstanding claims of the
Company are collected. The Company was in compliance with the covenants of the
Senior Credit Facility at June 30, 2001.

    On September 28, 2001, the Company notified all of the banks which
participate in its Senior Credit Facility that due to lower than expected sales
at the plastic lumber division the Company could not make the $2.5 million term
loan payment due September 30, 2001 without jeopardizing its business
operations. In addition, the Company is not in compliance with some of the
covenants under the Senior Credit Facility as of September 30, 2001. The Company
is currently negotiating with the participating banks for a waiver of its
covenant violations and failure to make the scheduled principal payment, as well
as an amendment to the Senior Credit Facility whereby the lenders under the
facility would agree to accept interest only payments from the Company and allow
the Company to defer the September 30, and December 31, 2001 principal payments
until the earlier of February 28, 2002 or the sale of some of the Company's
assets. No assurance can be given as to whether or in what form this waiver will
be obtained.

    On October 4, 2001, the Company requested the participants in its Master
Credit Facility with GE Capital grant a suspension of principal payments on its
Master Credit Facility until the earlier of March 31, 2002 or the sale of some
of the Company's assets. Through November 14, 2001, the Company has continued to
make all scheduled principal payments on its Master Credit Facility. As of
September 30, 2001, the Company was not in compliance with its tangible net
worth covenant under the Master Credit Facility. The Company is currently in
negotiations with GE Capital and the other participants to obtain a deferral of
future principal payments and a waiver of this covenant violation as of
September 30, 2001. No assurance can be given as to whether or in what form this
waiver can be obtained. The Master Credit Facility contains a provision whereby
an event which would accelerate payment terms of the Company's Senior Credit
Facility would also accelerate the payment terms of the Master Credit Facility
to the same due date as the Senior Credit Facility.

    While the covenant violations and the failure to make a principal payment
constitute events of default under the respective loan agreements, as of
November 14, 2001 neither lending group has taken any action against the
Company. The lending groups have been negotiating forbearance agreements with
the Company, and the Company believes it will be successful in obtaining the
necessary waivers and forbearances from its lenders. However, in the event that
waivers and a deferral of principal are not obtained, the lenders can demand
immediate repayment of the outstanding balances of $38,800,000 and $11,899,000
of the Senior Credit Facility and Master Credit Facility, respectively. All
indebtedness outstanding at September 30, 2001 under these credit facilities are
reflected as current liabilities as of September 30, 2001 in the accompanying
condensed consolidated balance sheets. The Company currently does not have the
financial resources to repay these debt obligations in the event that they
become immediately due without obtaining new debt and/or equity capital and/or
selling some of the Company's assets. Pursuant to the terms of the Senior Credit
Facility, upon the occurrence of an event of default, the administrative agent
for the lending banks, upon the request of the lending banks, can declare all
commitments terminated, and/or declare all Company loans and other obligations
due and payable.


Notes payable and capital leases consist of the following:

<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30, 2001    DECEMBER 31, 2000
                                                                                            ------------------    ------------------
<S>                                                                                         <C>                   <C>
 Term loan under the Senior Credit Facility                                                 $       25,000,000    $       27,500,000
 Revolving credit line under the Senior Credit Facility                                             13,800,000            14,900,000
 Equipment term loans under the Master Credit Facility                                              11,899,425            13,514,733
 Mortgage notes and capital leases payable collateralized by
 Certain  facilities  and  equipment  owned by the Company and its
 subsidiaries                                                                                        4,995,949             6,148,809
 Other notes payable                                                                                 4,001,742             4,085,665
                                                                                            ------------------    ------------------
 Total notes payable and capital leases                                                             59,697,116            66,149,207
         Less current portion:                                                                      52,687,621            11,535,698
                                                                                            ------------------    ------------------
                                                                                                     7,009,495    $       54,613,509
                                                                                            ==================    ==================
</TABLE>

5.  CONVERTIBLE SUBORDINATED DEBENTURES

    On February 20, 2001, the Company received a Put Notice from Halifax
relative to the 5% Convertible Subordinated Debenture issued on February 5, 2000
in the amount of $7,500,000 due February 5, 2005 (the "Fiscal 2000 Debenture").
Pursuant to the Put Notice, the Company had the option to either (a) repurchase
the outstanding principal amount plus all


                                       10

<PAGE>


accrued, unpaid interest for a cash price equal to 110% thereof, or (b) have the
Minimum Floating Conversion Price permanently re-set to zero. Prior to the Put
Notice, the Minimum Floating Conversion Price was $8.25 per share; however,
since the stock price of the Company's common stock had traded for less than
$8.25 per share for ten consecutive trading days ending February 16, 2001,
Halifax Fund L.P. had this right of re-set or buy-out. The Company did not elect
option (a), therefore the Minimum Floating Conversion Price has permanently
re-set to zero. The effect of re-setting the Minimum Floating Conversion Price
to zero is that upon conversion of the Fiscal 2000 Debenture into common stock
the price at which the common stock of the Company will be issued to Halifax
shall be equal to the lowest trading price of the common stock on the principal
trading market for such common stock (which is currently the NASDAQ National
Market) during the four (4) trading days prior to but not including the holder's
conversion date. The right of the debenture holder to convert the debenture to
common stock is limited in that the holder may not convert the debenture if upon
such conversion the holder will become a beneficial owner of more than 9.9% of
the total issued and outstanding shares of the Company's common stock. If the
holder elects to convert and the entire debenture cannot be converted due to
this limitation, the Company must settle in cash that portion of the debenture
which cannot be converted to stock when the debenture matures in February of
2005, at 110% of the sum of the outstanding balance of the debenture that is in
excess of the limitation and accrued but unpaid interest and default payments.

    In May 2001, $191,000 of the previously issued convertible subordinated
debentures and $1,000 of unpaid interest were converted into 189,800 shares of
common stock at an average conversion price of $1.02 per share. On June 22, 2001
an additional $2,000,000 of the previously issued convertible subordinated
debentures and $23,000 of unpaid interest were converted into 1,944,942 shares
of common stock at a conversion price of $1.04 per share. Unamortized debenture
issuance costs and debt discounts of $12,475 and $120,558 respectively were
charged to additional paid-in-capital. As a result of the above conversions, the
Company recorded an additional beneficial conversion feature benefit granted to
the holder of approximately $280,000, which was charged to interest expense
during the quarter ended June 30, 2001. As of September 30, 2001, $5,329,746,
net of discounts, is outstanding on the Fiscal 2000 convertible subordinated
debentures.

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

    The Company has the option at any time and, upon five business day's notice,
to repurchase all or any part of the Fiscal 2001 Debenture. At August 15, 2001,
the Company did not repurchase the Fiscal 2001 Debenture, nor did it consummate
a sale/leaseback of some of its assets under the terms described in the Fiscal
2001 Debenture Purchase Agreement As a result, Halifax may convert the principal
amount plus accrued interest and any default payments on the Fiscal 2001
Debenture into shares of the Company's common stock. The conversion price of the
common stock under the Fiscal 2001 Debenture is a price per share equal to the
average of the lowest trading prices of the common stock on the principal
trading market for the common stock during any three trading days during the
twenty-two trading days immediately prior to the conversion date. Because the
Fiscal 2001 Debenture was not repurchased by August 15, 2001 and the
sale/leaseback was not completed, in accordance with the terms of the Fiscal
2001 Debenture Purchase Agreement (do we mean to say Fiscal 2001 Debenture) the
Company: (i) issued to Halifax for no consideration another Warrant to purchase
250,000 shares of its common stock at a purchase price per share equal to 120%
of the closing market price of such stock on August 15, 2001, which was $0.90
per share and, (ii) increased the coupon rate from 18% to 25%. On August 15,
2001, the Company recognized a beneficial conversion feature in the amount of
$534,000 which was recorded as a discount to the debenture. The $170,000 value
assigned to the warrants issued on August 15, 2001 was recorded as an additional
discount to the face value of the debenture. These discounts are being accreted
as interest expense through June 30, 2002. As of September 30, 2001 the
outstanding balance on the Fiscal 2001 convertible debenture is $3,360,587, net
of discounts.

    As part of the financing, the Company also granted a subordinate lien on all
its assets to Halifax through a Security Agreement. The lien not only secures
the Company's obligations under the Fiscal 2001 Debenture, but it also secures
the Company's obligations under the Fiscal 2000 Debenture due February 5, 2005
and the $1.0 million stated value of the Company's Series D Convertible
Preferred Stock previously sold to Halifax. In addition, the Fiscal 2001
Debenture Purchase Agreement with Halifax required that the shares and
associated warrants underlying the Fiscal 2001 Debenture be registered within 90
days of the June 15, 2001 closing date of the agreement. The Fiscal 2001
Debenture Purchase Agreement provides that the Company pay in cash a default
payment of 2.5% of the sum of the outstanding principal


                                       11

<PAGE>


amount of the Fiscal 2001 Debenture plus the accrued interest for each thirty
day period that the shares are not registered. As of September 30, 2001 the
Company had not filed a registration statement to register these shares and the
Company has accrued $50,000 in penalties due Halifax as a result of the
Company's failure to register these shares.

6.  RESTRUCTURING CHARGES

    In September of 2001 the Company announced the closing of three of its
manufacturing facilities and the leasing of two of its resin processing plants
to third parties in an effort to reduce fixed costs, improve customer service
and narrow management's focus to a smaller number of manufacturing facilities,
without reducing total manufacturing capacity. The Fontana, California, Denton,
Maryland, and Trenton, Tennessee plants were closed on September 28, 2001 and
the equipment and manufacturing processes at these plants will be transferred to
the Chicago, Illinois and Ocala, Florida manufacturing locations. The Company is
currently attempting to obtain a buyout or sublease of the closed facilities. In
addition, the Company has discontinued raw material processing at its Auburn,
Massachusetts and Chino, California resin plants and has agreed to lease these
operations to other raw material processors. The Company will continue raw
material processing for its own use at the Chicago and Ocala plants.
Approximately 140 full time manufacturing and administrative positions were
eliminated in connection with the reduction in facilities. The plan of
restructure was adopted by management and the board of directors and
communicated to employees in late September of 2001. As a result of this
restructuring, the Company recorded the following charges:

<TABLE>
<S>                                                          <C>
Write-down for equipment impairment                          $  8,694,000
Write-down for goodwill impairment                              1,116,000
Lease termination, severance and other exit costs               1,656,000
                                                             ------------
     Total restructuring and asset impairment charges        $ 11,466,000
                                                             ============
</TABLE>

During the third quarter, the Company paid approximately $196,000 in employee
termination and other expenses in connection with the restructuring and
approximately $1,460,000 remains in the accrual as of September 30, 2001,
primarily for lease termination expenses.

    In the fourth quarter of 2000, the Company committed to a plan to
restructure and to consolidate some of its smaller plants within the plastic
lumber division. Specifically, the Company closed its Reidsville, North Carolina
facility in the fourth quarter of 2000, its Green Bay, Wisconsin and Vernon,
California facilities in January 2001 and its Sweetser, Indiana facility early
in the third quarter of 2001. As a result, the Company recorded a charge of
$3,417,000 in the fourth quarter of 2000 for equipment impairment and lease
termination costs in connection with the restructuring. As of December 31, 2000,
the Company had accrued $1,098,000 in connection with the lease termination
costs and anticipates making lease termination payments throughout 2001 as it
completes its restructuring plan. During the nine months ended September 30,
2001, the Company paid approximately $457,000 in lease termination payments and
charged this amount against the accrual. As of September 30, 2001, the Company
has approximately $631,000 remaining in its restructuring accrual for lease
termination payments.

    During 2000 and early 2001, the Company eliminated approximately 300
employees as part of this restructuring plan. The severance component of the
restructuring plan was communicated to the employees in early January 2001. As a
result, the Company recorded a charge of approximately $182,000 during the three
months ended March 31, 2001 in connection with severance. During the nine months
ended September 30, 2001 the entire $182,000 was paid and no balance remains in
this accrual.

7.  LEGAL PROCEEDINGS

    In April 2001, the Company was served with an arbitration demand from
Southern Wood Services seeking an award of $3,328,000 due to the failure to
abide by the terms of a contract relative to the purchase of wood flour. On
September 12, 2001, the Company received a copy of an arbitration award in favor
of Southern Wood Services in the amount of $1,759,822, inclusive of arbitration
costs and expenses.

    The Company filed a motion to vacate the award based on the principle that
the award does not reflect any evidence presented at the hearing nor is the
award based on current case law on damages in similar cases in the United
States.


                                       12

<PAGE>



The Company anticipates that it will be several months before a trial court will
hear the company's motion. Due to the fact that this is not a judgement, the
Company is not required to post a bond.

    The Company intends to vigorously contest this case and will appeal any
adverse ruling as it believes the law on damage awards in similar contracts in
the United States is clear and that arbitrators must base their decision on
existing legal authority. The Company cannot at this time predict the outcome of
the appeal or the amount of any liability, if any that would result in a
judgment by the courts.

8.  DERIVATIVES

    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of SFAS 133". SFAS No.
133 and SFAS No. 138 standardize the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standards, entities are required to carry all derivative instruments on the
balance sheet at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change, together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings), and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness, as well as the ineffective portion
of the gain or loss are reported in earnings immediately. If the derivative
instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.

    As part of its overall interest rate risk management activities, the Company
utilizes interest rate related derivatives to manage its exposure to various
types of interest rate risks. The Company does not speculate using derivative
instruments.

    The Company's risk management policies emphasize the management of interest
rate risk within acceptable guidelines. The Company's objective in maintaining
these policies is to limit volatility arising from changes in interest rates.
Risks to be managed are primarily cash flow risks. Utilization of derivative
financial instruments provides a valuable tool to assist in the management of
these risks.

    The Company is exposed to interest rate cash flow risk due to loans under
its Senior Credit Facility whose interest payments are based on floating rate
indices. The Company continually monitors changes in these exposures and their
impact on its risk management activities. The Company has entered into interest
rate swap agreements under which the Company pays a fixed rate of interest and
receives a floating rate of interest over the term of the interest rate swap
agreement without the exchange of the underlying notional amounts. These
agreements allow the Company to offset the variability of floating rate loan
interest with the variable interest payments due on the interest rate swaps. The
Company assesses the effectiveness of these hedges by comparing the timing,
frequency, and magnitude of changes in its interest rate to that of the interest
rate referenced in the swap agreements, and no portion of the hedging
instruments' gain or loss is excluded from the assessment of hedge
effectiveness.

    Under SFAS No. 133 and SFAS No. 138, changes in the fair value of interest
rate swaps designated as hedges of the variability of cash flows associated with
floating rate debt are reported in other comprehensive income. These amounts are
subsequently reclassified into interest income as a yield adjustment of the
hedged loans.

    The Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a net-of-tax cumulative-effect loss of $453,615 in accumulated other
comprehensive income to recognize at fair value two interest-rate swap
derivatives that are designated as a cash-flow hedging instruments. As of
September 30, 2001, the net-of-tax fair value of these derivatives carried as a
component of other comprehensive loss was $1,123,891.

    During the nine months ended September 30, 2001, no gain or loss was
recognized as a result of any ineffectiveness of the cash flow hedging
instruments. In addition, the cash flow hedge was assumed to be 100% effective
over the next


                                       13

<PAGE>


twelve months, thus the Company does not anticipate reclassifying into earnings
any gains or losses currently within Accumulated Other Comprehensive Income.

    During the nine months ended September 30, 2001, no gains or losses were
recognized into earnings as a result of the discontinuance of the cash flow
hedge. However, the interest rate swap agreements expire in March of 2003, and
the Senior Credit Facility is required to be refinanced or repaid in July of
2002. At that time, the cash flow hedge will be discontinued. The Company cannot
determine at this time the amount of gains or losses that will be recognized
into earnings as a result of the discontinuance of the hedge.

9.  COMPREHENSIVE INCOME

    Accumulated other comprehensive loss consists of changes in the fair value
of the Company's interest rate swap derivatives (see Note 7).

<TABLE>
<S>                                          <C>
Balance at December 31, 2000                           --
Transition adjustment for interest
rate swap derivative designated as
a cash flow hedge                            $   (453,615)
Change in fair value of
interest rate swap derivative                    (670,276)
                                             ------------
Balance at September 30, 2001                $ (1,123,891)
                                             ============
</TABLE>

10. RECENT ACCOUNTING PRONOUNCEMENTS

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

    The Company is required to adopt the provisions of SFAS No. 141 immediately
and SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of SFAS No. 142.

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

    In connection with the transitional goodwill impairment evaluation, SFAS No.
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount


                                       14

<PAGE>


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

    As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of approximately $25,283,000 and an unamortized permit of
approximately $9,344,000, which will be subject to the transition provisions of
SFAS No. 141 and 142. Amortization expense related to goodwill and the permit
was approximately $1,665,000 and $1,090,000 for the year ended December 31, 2000
and nine months ended September 30, 2001, respectively.

    Because of the extensive effort needed to comply with adopting Statements
141 and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principle.

    Also, in July the FASB issued Statement No. 143 ("SFAS No. 143"), Accounting
for Asset Retirement Obligations ("SFAS No. 143"). That standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity will capitalize a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years beginning after June
15, 2002, with earlier adoption permitted. Due to the extensive effort needed to
comply with adopting SFAS No. 143, it is not practicable to reasonably estimate
the impact of adopting this statement as of the date of this report.

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

11.  SEGMENT REPORTING

    The Company has two reportable operating segments. The Plastic lumber
division manufactures structural and non-structural plastic lumber and a variety
of accessory products such as park and site amenities. The Environmental
recycling division provides environmental recycling services including
environmental construction services, upland disposal of dredge materials,
beneficial re-use of industrial wastes and on-site recycling services. In the
third quarter of 2001, the Plastic lumber division recorded restructuring and
asset impairment charges of $11,466,000. In the first quarter of 2001 the
Plastic lumber division recorded a $182,000 restructuring charge related to
severance. The operating results of the two segments excluding the
aforementioned restructuring charge are as follows (in thousands):


                                       15

<PAGE>


<TABLE>
<CAPTION>
                                              FOR THE THREE MONTHS       FOR THE NINE MONTHS
                                               ENDED SEPTEMBER 30,        ENDED SEPTEMBER 30,
                                            ------------------------    ------------------------
                                               2001          2000          2001         2000
                                            ----------    ----------    ----------    ----------
<S>                                         <C>           <C>           <C>           <C>
Sales:
  Environmental recycling ...............   $   31,500    $   30,562    $   88,677    $   65,455
  Plastic lumber ........................       15,323        19,526        47,533        59,297
                                            ----------    ----------    ----------    ----------
          Total .........................   $   46,823    $   50,088    $  136,210    $  124,752
                                            ==========    ==========    ==========    ==========
Operating Income (Loss):
  Environmental recycling ...............   $    2,784    $    3,301    $    6,371    $    5,913
  Plastic lumber ........................       (2,574)       (4,096)       (4,593)       (1,199)
  Corporate .............................       (1,414)         (897)       (3,179)       (2,290)
                                            ----------    ----------    ----------    ----------
          Total .........................   $   (1,204)   $   (1,692)   $   (1,401)   $    2,424
                                            ==========    ==========    ==========    ==========
Depreciation and Amortization:
  Environmental recycling ...............   $      933    $      827    $    2,767    $    2,290
  Plastic lumber ........................        1,196           797         3,387         2,263
  Corporate .............................          104           108           319           332
                                            ----------    ----------    ----------    ----------
          Total .........................   $    2,233    $    1,732    $    6,473    $    4,885
                                            ==========    ==========    ==========    ==========
Expenditures for Long-Lived Assets:
  Environmental recycling ...............   $      316    $    1,419    $    1,363    $    3,885
  Plastic lumber ........................          614         1,958         1,212        16,858
  Corporate .............................            2             3             3             6
                                            ----------    ----------    ----------    ----------
          Total .........................   $      932    $    3,380    $    2,578    $   20,749
                                            ==========    ==========    ==========    ==========
</TABLE>

    The identifiable assets of the respective segments is set forth below (in
thousands):

<TABLE>
<CAPTION>
                                           SEPTEMBER 30,     DECEMBER 31,
                                              2001               2000
                                           ------------      -----------
<S>                                        <C>               <C>
Identifiable assets:
  Environmental recycling...............   $    90,694       $    92,784
  Plastic lumber........................        88,939           103,222
  Corporate.............................         6,902             4,405
                                           -----------       -----------
          Total.........................   $   186,535       $   200,411
                                           ===========       ===========
</TABLE>


                                       16


<PAGE>



                   U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

    Cash and cash equivalents totaled $1,035,000 at September 30, 2001, a
decrease of $1,176,000 from the $2,211,000 at December 31, 2000. Cash provided
by operating activities amounted to $1,867,000 for the first nine months of 2001
while cash used in operating activities for the comparable period in 2000
amounted to $11,285,000. The change is primarily due to decreases in receivable
and inventory balances of $1,428,000 and $2,219,000 respectively in 2001,
compared to increases in receivables and inventories of $16,072,000 and
$3,595,000 respectively in 2000, partially offset by a smaller increase in
payables and lower earnings in the 2001 period as compared to 2000.

    Cash used in investing activities was $2,314,000 in the first nine months of
2001, a decrease of $17,963,000 from the prior year. The decrease is primarily
due to a significant reduction in capital expenditures at the Plastic lumber
division, whose major capital expansion was completed during 2000.

    Cash used in financing activities totaled $730,000 for the nine months
ending September 30, 2001. During this period, $3,732,000 in net proceeds from
the sale of an 18% convertible debenture, $999,000 in net proceeds from the
issuance of convertible preferred stock, $983,000 in net proceeds from the sale
of common stock, and $1,200,000 in additional borrowings under existing credit
agreements were offset by $7,652,000 of principal payments on existing notes and
capital leases payable, including net repayments of $3,600,000 on the Senior
Credit Facility.

    At September 30, 2001, the Company's current liabilities exceeded current
assets by $49,368,000, compared to net working capital of $10,965,000 at
December 31, 2000. The change is due primarily to the entire Senior Credit
facility of $38,800,000 maturing in less than one year as of September 30, 2001,
as compared to $7,500,000 as of December 31, 2000, and to convertible
subordinated debentures, net of discounts, of $3,361,000 and $4,956,000 due to
Halifax and the Stout Partnership respectively maturing on July 1, 2002. The
Stout Partnership is the Company's largest shareholder. Several members of the
Company's Board of Directors and a member of management are affiliated with the
Stout Partnership. In addition, certain cross-default provisions contained in
the Master Credit Facility with GE Capital require the classification of the
entire Master Credit Facility of $11,899,000 as current portion of long term
debt. In addition, the Company is currently not in compliance with the tangible
net worth covenant of the Master Credit Facility as of September 30, 2001. The
remainder of the difference is due to increases in accounts payable and accrued
expenses and decreases in inventory and accounts receivable.

    Capital expenditures in the first nine months of 2001 amounted to
$2,578,000, a decrease of $18,171,000 over the same period in 2000. The decrease
is primarily due to the completion of the Plastic lumber division's major
capital expansion during 2000. Capital expenditures in 2001 consisted primarily
of $1,363,000 to expand capacity at the Environmental recycling division and
$1,212,000 for purchases of manufacturing equipment for the Plastic lumber
division. Capital expenditures for the remainder of 2001 are expected to be
approximately $1,250,000.

    On September 28, 2001, the Company notified all of the banks which
participate in its Senior Credit Facility that due to lower than expected sales
at the plastic lumber division the Company could not make the $2.5 million term
loan payment due September 30, 2001 without jeopardizing its business
operations. In addition, the Company was not in compliance with some of its
covenants under the Senior Credit Facility as of September 30, 2001. The Company
is currently negotiating with the participating banks for a waiver of its
covenant violations and failure to make the scheduled principal payment, as well
as an amendment to the Senior Credit Facility whereby the lenders under the
facility would agree to accept interest only payments from the Company and allow
the Company to defer the September 30, and December 31, 2001 principal payments
until the earlier of February 28, 2002 or the sale of some of the Company's
assets. No assurance can be given as to whether or in what form this waiver will
be obtained.

    On October 4, 2001, the Company requested that the participants in its
Master Credit Facility with GE Capital grant a suspension of principal payments
on its Master Credit Facility until the earlier of March 31, 2002 or the sale of
some of the Company's assets. Through November 14, 2001, the Company continued
to make all scheduled principal payments on its Master Credit Facility. In
addition, as of September 30, 2001, the Company was not in compliance with its
tangible net worth covenant under the Master Credit Facility due to the
restructuring and other non-recurring charges. The Company


                                       17

<PAGE>


is currently in negotiations with GE Capital Corp. and the other participants to
obtain a deferral of future principal payments and a waiver for this covenant
violation. No assurance can be given as to whether or in what form this waiver
will be obtained. The Master Credit Facility contains a provision whereby an
event which would accelerate payment terms of the Company's Senior Credit
Facility would also accelerate the payment terms of the Master Credit Facility
to the same due date as the Senior Credit Facility.

    While the covenant violations and the failure to make a principal payment
constitute events of default under the respective loan agreements, as of
November 14, 2001 neither lending group has taken any action against the
Company. The lending groups have been negotiating forbearance agreements with
the Company, and the Company believes it will be successful in obtaining the
necessary waivers and forbearances from its lenders. However, in the event that
waivers and a deferral of principal are not obtained, the lenders can demand
immediate repayment of the outstanding balances of $38,800,000 and $11,899,000
of the Senior Credit Facility and Master Credit Facility, respectively. The
Company currently does not have the financial resources to repay these debt
obligations in the event that they become immediately due without obtaining new
debt and/or equity capital and/or selling some of the Company's assets. Pursuant
to the terms of the Senior Credit Facility, upon the occurrence of an event of
default, the administrative agent for the lending banks, upon the request of the
lending banks, can declare all commitments terminated, and/or declare all
Company loans and other obligations due and payable.

    The Company's liquidity and ability to meet its financial obligations will
be dependent on among other things, the Company's ability to obtain waivers for
its debt covenant and payment violations as of September 30, 2001 and through
the date of this filing, maintain compliance with future debt covenants and
raise new capital through the issuance of additional equity, new debt financing
and/or sell some of the Company's assets.

    The Company is highly leveraged and during 2000 and the nine months ended
September 30, 2001, the Company suffered significant losses from operations,
primarily resulting from the expenses incurred in its plastic lumber division
related to the expansion and start up of certain manufacturing facilities, the
inefficiencies in the production of certain products, increases in raw material
costs and interest expense. During the third quarter of 2001 the Company closed
three of its plastic lumber manufacturing facilities and agreed to sub-lease two
of its resin processing plants to third party raw material processors. In
connection with the exiting of these facilities, the Company eliminated
approximately 140 full time manufacturing positions, recorded asset impairment
charges of $9,810,000 and recorded a restructuring charge of $1,656,000 (see
Note 6). The Company's accumulated deficit and working capital deficit totaled
approximately $33,932,000 and $49,368,000, respectively, as of September 30,
2001.

    Since its inception, the Company has financed its operations through a
number of stock and debt issuances. During 2000 and the first nine months of
2001, the Company's primary sources of working capital have been the net
proceeds from sales of the Company's convertible preferred and common stock,
proceeds from its Senior Credit Facility, the issuance of convertible
subordinated debentures and direct sales of the Company's products and services
to its customers. As of December 31, 2000, the Company was not in compliance
with certain covenant requirements of its Senior Credit Facility and its Master
Credit Facility. The Company received waivers for these covenant violations as
of December 31, 2000 and entered into amendments to the Senior Credit Facility
and Master Credit Facility (see Note 4).

    The Company's material financial commitments relate principally to its
working capital requirements and obligations to make term loan payments on its
Senior Credit Facility of $2.5 million per month and monthly interest payments
of approximately $297,000. As of September 30, 2001, the outstanding balance on
the Senior Credit Facility was $38,800,000.

    Under the terms of the proposed amendment to the Senior Credit Facility,
which we are currently negotiating with the participating lenders, the $2.5
million principal payments due September 30, and December 31, 2001 would be
deferred until February 28, 2002 or the sale of some of the Company's assets.
Additional principal payments in the amount of $2.5 million each are due on
March 31, and June 30, 2002. The remaining outstanding balance would have to be
refinanced or repaid on or before July 2, 2002. No assurance can be given as to
whether or in what form this amendment will be obtained.

    On or before July 1, 2002, the Company is also required to retire its
$4,000,000 convertible debenture issued to the Halifax Fund, L.P. ("Halifax"),
as well as its $5,000,000 convertible debenture payable to the Stout
Partnership. Several members of the Company's Board of Directors and a member of
management are affiliated with the Stout Partnership. The Company currently does
not have the financial resources to retire these debt obligations in 2002 and
the Company will need to obtain new debt and/or equity capital and/or sell
certain assets to meet these requirements.


                                       18

<PAGE>


    Additional financial obligations of the Company include interest payments on
the Senior Credit Facility of approximately $275,000 per month, lease payments
pursuant to certain real property and equipment leases of approximately $203,000
per month, installment payments for manufacturing equipment of approximately
$240,000 per month commencing March 31, 2002, interest payments on the Company's
Convertible Subordinated Debentures of approximately $460,000 quarterly, and
dividends on the Company's Series D and Series E Convertible Preferred Stock of
approximately $231,000 quarterly. As of September 30, 2001 the Company has not
made any dividend payments on its Series D Convertible Preferred Stock.
Dividends in arrears pertaining to the Series D Convertible Preferred Stock
amount to $652,000 at September 30, 2001. There are no dividends in arrears
with respect to the Series E Convertible Preferred Stock.

    The terms of the Senior Credit Facility also required the Company to raise
$6,500,000 of equity or equity equivalents by February 28, 2002. During February
and March 2001, the Company raised $1 million through the issuance of its Series
"E" Convertible Preferred Stock. In June 2001, the Company raised $4 million
through the issuance of a subordinated convertible debenture, due July 1, 2002.
Additionally, on July 3, 2001, the Company raised $1 million through the
issuance of 952,381 shares of common stock. This private placement transaction
was not registered under the Securities and Exchange Act of 1934 (the "Act") in
reliance upon the exemption from registration in Section 4(2) of the Act, as a
transaction not involving any public offering. The offering was completed
without any general or public solicitation to a very limited number of entities
with strong knowledge and experience in business and financial matters. Their
knowledge and experience enabled them to evaluate the risks and merits of the
investment. On November 1, 2001 the Company raised an additional $800,000
through the issuance of 1,334,000 shares of common stock in a private placement
with reliance upon the exemption from registration similar to that of the July
3rd private placement. With the completion of this transaction, the Company has
now met the financial covenant contained in the Senior Credit Facility
pertaining to the securing of equity or equity equivalents. However, the Company
will also need to raise additional capital by selling certain assets and/or
obtaining additional sources of debt and/or equity in order to meet its
financial obligations.

    Some of the Company's debt instruments contain covenants establishing
performance measurement through various financial ratios and operating
restrictions. The Company's failure to comply with any covenant or material
obligation contained in these debt agreements or any of the Company's other debt
agreements, absent a waiver from the lenders, would result in an event of
default which could accelerate debt repayment terms under the debt agreements.
Due to various cross-default provisions contained within some of the Company's
credit agreements, an event of default under the senior debt agreements could
accelerate debt repayment terms under some of the other credit agreements, all
of which would have a material adverse affect on the Company's liquidity and
capital resources.

    Capital requirements relating to the implementation of the Company's
business plan have been and will continue to be significant. The Company
believes that its ability to generate cash from operations is dependent upon,
among other things, increased demand for its products and services and the
successful development of direct marketing, improved manufacturing efficiencies
and product distribution capabilities. There can be no assurance that the
Company will have sufficient capital resources to permit the Company to continue
implementation of its business plan.

    In November of 2000, the Company retained Bank of America Securities to
explore and evaluate strategic alternatives for the Company, which could include
the possible sale of the Company's environmental recycling division, Clean Earth
Inc. ("CEI"). No agreement has been reached with any prospective buyers and
there can be no assurances that an agreement will be reached Proceeds from the
sale of CEI, if it occurs, would be used to first pay down the Company's Senior
Credit Facility. Any excess proceeds would be applied to some the Company's
other debt obligations and provide working capital.

    While there can be no assurances, the Company believes its cash flows from
operations, the sale of certain assets, and/or the raising of additional capital
will satisfy its liquidity requirements through September 30, 2002. The Company
is seeking additional sources of financing to supplement its cash flow
requirements, however, there can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all. If the Company
does not obtain the necessary waivers and amendments from the lending groups for
covenant violations and failure to make the scheduled principal payment as of
September 30, 2001, comply in the future with the covenants contained within its
debt agreements, and if adequate cash flow from operations, funds from the
capital markets or proceeds from the sale of assets are not available to finance
the Company's operations and retire its debt obligations as they become due, the
Company will be required to significantly curtail its operations and the
Company's ability to continue as a going concern would be impaired.


                                       19

<PAGE>


On September of 2001, the Company was advised by the Staff of Nasdaq National
Market that the Company's stock failed to maintain a minimum bid price of $1.00
over the previous 30 consecutive trading days, and that in accordance with the
Nasdaq Market Place Rules, the Company had 90 calendar days, or until December
5, 2001, to regain compliance. On September 28, 2001 the Company received
notification from Nasdaq that the listing qualification notice previously
received had been suspended until January 2, 2002. If the bid price for the
Company's common stock is not above $1.00 per share for at least 10 consecutive
trading days prior to April 2, 2002, or if the Company fails to comply with any
other requirement for continued listing, the Company's common stock will be
delisted from trading on the Nasdaq National Market, subject to the Company's
right to appeal. If the Company's stock were to be delisted, it may adversely
impact the Company's ability to secure additional equity financing.

INTERIM RESULTS OF OPERATIONS

Comparison of the three months ended September 30, 2001 and 2000

    Net sales in the third quarter of 2001 were $46,823,000, a decrease of
$3,265,000, or 6.5%, as compared to the third quarter of 2000. Plastic lumber
division revenues decreased by 21.5% in the quarter to $15,323,000, as a result
of the Company's decision to exit the lower margin resin business. Environmental
recycling division revenues increased by 3% to $31,500,000 in the second quarter
of 2001.

    Gross profit in the third quarter 2001 increased by $495,000, or 8%, as
compared to the third quarter of 2000. The increase was primarily due to product
returns and associated inventory write-downs in the Plastic lumber division
during the third quarter of 2000. Gross profit margin as a percent of revenues
in the Plastic lumber division increased in the third quarter of 2001 to 9.7%,
as compared to 2.1% in the third quarter of 2000. Gross profit at the
Environmental recycling division decreased by $586,000, or 10.3%, to $5,122,000
versus the same quarter in 2000. The Environmental recycling division's gross
profit as a percent of revenue decreased to 16.3% in 2001 from 18.7% in 2000,
due primarily to a shift in revenue mix to the dredging and construction
services group, whose revenues traditionally have lower margins.

    Selling, general and administrative expenses ("SG&A"), excluding
restructuring and asset impairment charges of $11,466,000, remained flat in the
third quarter of 2001, as increases in legal and insurance expenses were largely
offset by cost reduction efforts at both the Plastic lumber and Environmental
recycling divisions. As a percentage of net sales, SG&A increased to 16.7% in
the three months ended September 30, 2001 as compared to 15.6% in the three
months ended September 30, 2000, mainly due to lower sales.

    The third quarter of 2001 produced an operating loss of $12,669,000 as
compared to $1,692,000 for the same quarter in 2000. Excluding the restructuring
and asset impairment charges in 2001, operating loss was $1,204,000. Operating
income decreased by $517,000 at the Environmental recycling division due to
lower gross margins. Operating loss at the Plastic lumber division, excluding
restructuring and asset impairment charges, improved by $1,522,000 as compared
with the same quarter in 2000 due to higher gross margins and reduced SG&A
expenses.

    Interest expense increased by $1,109,000 for the third quarter of 2001,
mainly due to higher interest rates incurred by the Company in 2001 and
increased amortization of debt discounts and deferred financing costs as
compared to 2000, partially offset by lower debt levels.

    Income tax expense in the third quarter of 2001 was $710,000 as compared to
income tax benefit of $1,101,000 in the third quarter of 2000, as the Company
concluded in the current quarter that it was more likely than not that the
Company would fail to generate sufficient future taxable income to utilize all
of its deferred tax assets.

Comparison of the nine months ended September 30, 2001 and 2000

    Net sales for the first nine months of 2001 were $136,210,000, an increase
of $11,458,000, or 9.2%, over the same period of 2000. Plastic lumber division
revenues decreased by 17% in the period to $47,533,000, as a result of the
Company's decision to exit the lower margin resin business. Environmental
recycling division revenues increased by 35.4% to $88,677,000 due to an increase
in major projects in the dredging and construction services group, as compared
to the same period in 2000.

    Gross profit in the first nine months of 2001 decreased by $3,075,000, or
14.4%, compared with the first nine months of 2000. The decrease was primarily
due to lower revenue and underabsorption of manufacturing overhead costs at the
Plastic lumber division. Gross profit margin as a percent of revenues in the
Plastic lumber division decreased from 15.1%


                                       20

<PAGE>


in the first nine months of 2000 to 10.1% in the first nine months of 2001.
Gross profit margin at the Environmental recycling division decreased to 15.1%
in 2001 from 18.8% in 2000 primarily due to the increase in the lower margin
project work. Gross profit at the Environmental recycling division increased by
$1,078,000, or 8.9%, due to the overall increased revenue volume in the first
nine months of 2001.

    SG&A expenses, excluding restructuring and asset impairment charges,
increased by $749,000 in the first nine months of 2001, primarily due to
increases in marketing expenses in the Plastic lumber division and support for
the higher revenue experienced at the Environmental recycling division. As a
percentage of net sales, SG&A, excluding restructuring and asset impairment
charges, decreased to 14.4% in 2001 from 17.0% in 2000, primarily due to
increased sales volume at the Environmental recycling division.

    The first nine months of 2001 produced an operating loss of $13,049,000, as
compared to operating income of $2,424,000 for the same period in 2000.
Excluding the asset impairment and restructuring charges, operating loss in 2001
would have been $1,401,000, primarily due to the decline in revenue and gross
margins in the Plastic lumber division. Operating income increased by $458,000
at the Environmental recycling division, while operating loss at the Plastic
lumber division increased by $3,394,000 to $4,593,000, excluding the
restructuring and asset impairment charges of $11,648,000.

    Interest expense increased by $3,943,000 for the first nine months of 2001,
mainly due to higher interest rates incurred by the Company in 2001 and
increased amortization of debt discounts and deferred financing costs as
compared to 2000, partially offset by lower debt levels.

SEASONALITY

    The Company experiences a seasonal slow down during the winter months
because its environmental operations are located in the Northeast United States
where adverse weather and normal ground freezing can impact the Company's
performance. Additionally, sales of certain plastic lumber products slow
significantly in the winter months.

RECENTLY ISSUED ACCOUNTING STANDARDS

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

    The Company is required to adopt the provisions of SFAS No. 141 immediately
and SFAS No. 142 effective January 1, 2002. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of SFAS No. 142.

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

    In connection with the transitional goodwill impairment evaluation, SFAS No.
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this,


                                       21

<PAGE>


the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS No. 141, to its carrying amount, both of which would be measured as of
the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Company's statement of operations.

    As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of approximately $25,283,000 and an unamortized permit of
approximately $9,344,000, which will be subject to the transition provisions of
SFAS No. 141 and 142. Amortization expense related to goodwill and the permit
was approximately $1,655,000 and $1,090,000 for the year ended December 31, 2000
and nine months ended September 30, 2001, respectively.

    Because of the extensive effort needed to comply with adopting Statements
141 and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized as the cumulative effect of a change in accounting principle.

    Also, in July the FASB issued Statement No. 143 ("SFAS No. 143"), Accounting
for Asset Retirement Obligations ("SFAS No. 143"). That standard requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity will capitalize a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years beginning after June
15, 2002, with earlier adoption permitted. Due to the extensive effort needed to
comply with adopting SFAS No. 143, it is not practicable to reasonably estimate
the impact of adopting this statement as of the date of this report.

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


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                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

    In April 2001, the Company was served with an arbitration demand from
Southern Wood Services seeking an award of $3,328,000 due to the failure to
abide by the terms of a contract relative to the purchase of wood flour. The
Company utilizes wood flour for the production of its SmartDeck composite
product. The arbitration hearing took place in the first week of August 2001 in
Atlanta, Georgia in accordance with the rules and procedures of the American
Arbitration Association. On September 12, 2001 the Company received a copy of an
arbitration award in favor of Southern Wood Services in the amount of
$1,759,822, inclusive of arbitration costs and expenses.

    The Company filed a motion to vacate the award based on the principle that
the award does not reflect any evidence presented at the hearing nor is the
award based on current case law on damages in similar cases in the United
States. The Company anticipates that it will be several months before a trial
court will hear the company's motion. Due to the fact that this is not a
judgement, the Company is not required to post a bond.

    The Company intends to vigorously contest this case and will appeal any
adverse ruling as it believes the law on damage awards in similar contracts in
the United States is clear and that arbitrators must base their decision on
existing legal authority. The Company cannot at this time predict the outcome of
the appeal or the amount of any liability, if any that would result in a
judgment by the courts.

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

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

    Issuances of Common Stock in private offerings during the three months ended
September 30, 2001 are listed in the following paragraphs:

    On July 3, 2001, the Company issued 476,191 shares of common stock to ZLP
Master Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology
Fund, LTD. at a purchase price of $1.05 per share. This private placement
transaction was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as transaction not involving any public
offering. The offering was completed without any general or public solicitation
to a very limited number of entities who have strong knowledge and experience in
business and financial matters. Their knowledge and experience enabled them to
evaluate the risks and merits of the investment. The Company also issued 35,000
shares as compensation for professional services in connection with this
transaction.

    During the third quarter of 2001, the Company issued 100,000 warrants to
purchase shares of the Company's common stock to Fusion Capital in exchange for
Fusion Capital's agreement to amend the common stock purchase agreement between
Fusion Capital and the Company. Also during the third quarter of 2001, the
Company issued 81,250 warrants to entities providing investment banking and
other professional services to the Company.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

    Events of default are discussed in Notes 2 and 3 to the Condensed Unaudited
Consolidated Financial Statements.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS-- NONE.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

    (a)  Exhibits
         None


                                       23

<PAGE>


(b)      Reports on Form 8-K

           On September 17, 2001 the Company filed a Report on Form 8-K to
        report that the Company was advised by the Staff of Nasdaq National
        Market that its stock failed to maintain a minimum bid price of $1.00
        over the last 30 consecutive trading days, and that in accordance with
        the Nasdaq Market Place Rules, the Company had 90 calendar days, or
        until December 5, 2001, to regain compliance. On September 28, 2001 the
        Company received notification from Nasdaq that the listing qualification
        notice previously received had been suspended until January 2, 2002.

           On September 18, 2001 the Company filed an amendment on Current
        Report on Form 8-K/A to report amendments to its Debenture Purchase
        Agreement with Halifax Fund L.P. and its Common Stock Purchase Agreement
        with Fusion Capital.


                                       24


<PAGE>


                                   SIGNATURES

    In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


January 17, 2002                             /s/ John W. Poling
----------------                             ----------------------------------
  Date                                       John W. Poling,
                                             Chief Financial Officer