U S PLASTIC LUMBER CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

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

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U.S. PLASTIC LUMBER CORP.
(Exact Name of Registrant as specified 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
(Address of Principal Executive Offices) (Zip Code)

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(561) 394-3511

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

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

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

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

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

Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2. Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of June 30, 2002 based on the closing
market price on such date, of $0.31 per share, was $11,206,621.

The aggregate market value of the voting common equity held by
non-affiliates of the registrant on February 28, 2003 based on the closing
market price on such date, of $0.21 per share, was $7,536,416.

The number of shares outstanding of the registrant's common stock as of
February 28, 2003 is 64,429,216.

DOCUMENTS INCORPORATED BY REFERENCE: PART III -- Portions of the
Registrant's definitive Proxy Statement relating to its 2003 Annual Meeting of
Stockholders which will be filed with the Commission within 120 days after the
end of the registrant's fiscal year.

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PART I

ITEM 1. BUSINESS

GENERAL

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

We manufacture structural and non-structural plastic lumber for a wide
variety of industries, including but not limited to the building, packaging,
transportation, steel, spa and window and door industries. We also fabricate a
variety of accessory products, such as park and site amenities made from 100%
recycled high-density polyethylene, a form of plastic. We also manufacture a
composite decking product made from plastic and wood fiber in addition to the
above products.

We operate a total of three manufacturing, processing, recycling and
fabrication facilities throughout the United States. The primary product
produced in two of these plants is plastic lumber profiles made from recycled
plastic waste. Recycled plastic lumber is manufactured in a variety of colors,
profiles, and shapes including standard lumber dimensions and many custom
engineered profiles and shapes. Plastic lumber's principal intended use is as an
environmentally friendly and non-toxic alternative to pressure treated lumber
and rain forest hardwoods, which is suitable for and provides superior
performance in most outdoor applications.

Our plastic lumber operation manufactures plastic profiles from recycled
waste plastic, and plastic composite lumber with additives including wood and
fiberglass, to produce a high quality, long lasting alternative to pressure
treated lumber. Plastic lumber provides superior performance in outdoor uses and
is suitable for most nonstructural and structural applications. We have a
license to use a patented technology and also own two patents to manufacture
structural plastic lumber. By producing a high quality recycled plastic lumber
product, we believe that we conserve natural resources through reducing the need
for lumber products made from wood. At the same time we reduce the amount of
plastic waste going into landfills while providing a longer lasting, useful
product. Our plastic lumber products are intended as an excellent replacement
for pressure treated lumber, which often times is treated with toxic chemicals
such as chromated copper arsenate ("CCA") to retard decay and insect
infestation. The Environmental Protection Agency has recently indicated its
intention to phase out CCA on December 31, 2003 due to its carcinogenic
properties. Plastic lumber is not subject to decay or insect infestation and
thus will outlast wood, especially in applications exposed to moisture. Recycled
plastic lumber is environmentally friendly because it eliminates potential
pollution from these toxic chemicals leaching into the environment.

FORWARD LOOKING STATEMENTS

When used in this Annual Report, the words or phrases "will likely result",
"are expected to", "will continue", "is anticipated", "estimate", "projected",
"intends to" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to numerous risks and uncertainties,
including but not limited to risks associated with our history of operating
losses, liquidity, the ability to obtain adequate financing on commercially
acceptable terms, economic conditions, the affects of rapid growth upon the
Company and the ability of management to effectively respond to such growth,
demand for products and services of the Company, newly developing technologies,
regulatory matters, protection of the Company's proprietary technology, the
effects of competition from entities with greater financial resources than that
possessed by the Company and shareholder dilution.

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Such factors, which are discussed in "Risk Factors," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to the consolidated financial statements, could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or statements
expressed with undue reliance on any such forward-looking statements, which
speak only as of the date made. See "RISK FACTORS", "BUSINESS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

RECENT EVENTS

SALE OF CLEAN EARTH, INC.

On June 14, 2002, we entered into an Amended and Restated Purchase
Agreement ("Purchase Agreement") to sell all of the issued and outstanding
capital stock of Clean Earth, Inc., our wholly-owned subsidiary which together
with its subsidiaries comprised our environmental recycling division ("Clean
Earth"), to CEI Holding Corporation ("Purchaser"), a corporation recently formed
by Eos Partners, L.P. and BancAmerica Capital Investors, two private equity
investment groups that collectively manage over $2.5 billion of capital, and CEI
Acquisition Corp. ("Purchaser Sub") (the "Clean Earth Sale Transaction"). The
closing of the Clean Earth Sale Transaction (the "Closing") took place on
September 9, 2002.

The purchase price that we received in the Clean Earth Sale Transaction
consisted of approximately $45.2 million in cash paid at the Closing, net of
purchase price adjustments, of which $1.0 million was placed in escrow, and a
5.0% subordinated promissory note issued by Purchaser in the original principal
amount of $3.5 million maturing on September 9, 2012, subject to certain
adjustments and rights of set-off. We used the net cash proceeds from the sale
of Clean Earth, which were approximately $41.5 million after the $1.0 million
escrow withholding and transaction expenses, to retire the entire principal
balance of the Senior Credit Facility dated June 30, 2000 (the "Original Senior
Credit Facility") in the amount of $37,900,000 and to pay down certain other
indebtedness. The purchase price remains subject to various adjustments set
forth in the Purchase Agreement based upon a final audited closing date balance
sheet that was delivered after the Closing if the adjusted long-term debt and
adjusted working capital set forth on the final audited closing date balance
sheet differ from the amounts of such items set forth on the estimated closing
date balance sheet, upon which adjustments to the cash portion of the purchase
price at the Closing were based.

A dispute has arisen between the parties regarding the final audited
closing date balance sheet as the Purchaser and Clean Earth have sought a
purchase price adjustment in the amount of approximately $4,000,000 to the
purchase price due to various closing adjustments. We filed litigation against
the Purchaser and Clean Earth on January 2, 2003, in a case entitled U.S.
Plastic Lumber Corp. v. CEI Holding Corporation and Clean Earth, Inc., in the
United States District Court for the District of Delaware, Civil Action No. 03-
0001, alleging that the audit process had been subverted through fraud as it
related to certain adjustments claimed by the Purchaser and Clean Earth.

The Purchase Agreement contains indemnification obligations for each party,
subject to certain caps and limits described in the Purchase Agreement, related
to matters including (i) any inaccuracy or breach of any representation or
warranty in the Purchase Agreement, (ii) a party's failure to perform or observe
fully any covenant, agreement or provision of the Purchase Agreement, or (iii)
any claims relating to the enforcement of a party's rights under the Purchase
Agreement. In addition, we agreed to indemnify Purchaser, Purchaser Sub and
Clean Earth for liabilities relating to certain environmental matters, certain
lawsuits, brokers fees incurred in connection with the Purchase Agreement, and
our welfare plans. In addition, each of Purchaser, Purchaser Sub and Clean Earth
agreed to indemnify us for our liabilities and obligations (i) under specified
guaranties or financial assurances and (ii) arising subsequent to the Closing
under the PNC Shareholder Guaranty (as defined in the Purchase Agreement).

CREDIT FACILITIES

On December 20, 2002, we completed the restructuring of our balance sheet
by entering into the transactions described below. The following brief summary
of certain agreements entered into by us or some of our direct or indirect
subsidiaries does not describe all material terms of these agreements and is
qualified in

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its entirety by reference to such agreements. See the Current Report on Form 8-K
filed with the SEC on January 7, 2003 for additional detail.

On December 20, 2002, U.S. Plastic Lumber Ltd., our wholly-owned subsidiary
("USPL Ltd."), obtained a secured senior credit facility pursuant to a certain
Loan and Security Agreement (the "Loan Agreement") with Guaranty Business Credit
Corporation, a Delaware corporation ("GBCC"), dated as of December 19, 2002 (the
"GBCC Credit Facility"). The GBCC Credit Facility is comprised of a $3.0 million
term loan and a commitment for up to $10.0 million in the form of a revolving
line of credit. The interest rate on the GBCC Credit Facility is 100 basis
points above the prime rate for the revolving line of credit and 150 basis
points above the prime rate for the term loan, subject to certain provisions as
set forth in the Loan Agreement. Advances under the revolving line of credit are
based upon a percentage of our accounts receivable and inventory subject to the
satisfaction of certain conditions set forth in the Loan Agreement.

Principal (amortized over a 7 year period) and interest on the term loan is
payable monthly with the remaining unpaid principal balance and all accrued
interest on the term loan due and payable on the earlier of (i) the payment of
the remaining unpaid principal balance on the revolving line of credit upon its
termination or (ii) the last day of the term of the Loan Agreement. The
aggregate unpaid principal balance of the advances under the revolving line of
credit is payable on the last day of the term of the Loan Agreement or upon the
early termination of the Loan Agreement in accordance with its terms.

The initial term of the Loan Agreement is three years subject to extension
from year to year after the expiration of the initial term unless either party
terminates the Loan Agreement. At December 31, 2002, approximately $3.2 million
was advanced under the GBCC Credit Facility, including the $3.0 million term
loan. See the Loan Agreement for the information regarding (i) the terms of the
term loan and the revolving line of credit and (ii) representations and
warranties and financial covenants entered into by USPL Ltd., including, but not
limited to, limitations on USPL LTD's ability to make any distributions to us
and a requirement that USPL Ltd. maintain liquidity (as defined in the Loan
Agreement) of at least $2.15 million during January 2003. Also see ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS for additional discussion on the financial covenants of the GBCC
Credit Facility. The GBCC Credit Facility is guaranteed by us and certain of our
subsidiaries (see Secured Continuing Corporate Guaranties) and are secured by
substantially all of our assets as well as the assets of certain of our
subsidiaries, excluding (i) certain options to purchase the real estate located
in Chicago, Illinois (the "Chicago Property"), (ii) our claim for payment
pursuant to an agreement with the Pennsylvania Department of Environmental
Protection (the "Quakertown Claim"), which we contributed to Quakertown, LLC, a
Nevada limited liability company, of which we are the sole member, and (iii) our
membership interest in Quakertown, LLC. In connection with the GBCC Credit
Facility and related guaranties, we and our wholly-owned direct subsidiaries,
USPL Ltd. and U.S. Plastic Lumber Finance Corporation, pledged 100% of the
equity interests in certain of our subsidiaries to GBCC.

In connection with the GBCC Credit Facility, we and certain of our
subsidiaries entered into deferred and/or subordinated payment arrangements with
certain creditors. GBCC also entered into subordination and intercreditor
arrangements with Halifax Fund, L.P., on the one hand, and General Electric
Capital Corporation ("General Electric") and the related equipment lenders, on
the other hand.

The GBCC Credit Facility replaced our senior credit facility (the "Senior
Credit Facility") with the Bank of America, N.A. ("Bank of America") and certain
other banks. We utilized part of the proceeds from the GBCC Credit Facility to
repay approximately $2.1 million of the outstanding balance under the Senior
Credit Facility (inclusive of costs and expenses), exclusive of $1.0 million in
notes (the "Remaining BOA Obligation") which are secured only by the Quakertown
Claim. In addition, upon the sale of Clean Earth and the replacement of the
Senior Credit Facility, the lenders agreed to forgo approximately $3.2 million
of deferred fees, penalties and accrued interest payable under the Senior Credit
Facility. In connection with entering into the agreements related to the GBCC
Credit Facility, we entered into the Amended and Restated Waiver and
Modification Agreement (the "GE Agreement") with General Electric and certain
other lenders, which had previously provided us with equipment financing (the
"Equipment Loans"). The GE Agreement amended and restated the Forbearance and
Modification Agreement, dated as of February 28, 2002, which

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was amended as of May 30, 2002 and June 14, 2002. See the GE Agreement for
information regarding the representations, warranties and financial covenants
entered into by us. Pursuant to the GE Agreement, General Electric and the other
lenders restructured the repayment schedule of the Equipment Loans. Principal
and interest on the Equipment Loans is payable monthly with the remaining unpaid
principal balance and all accrued interest on the Equipment Loans due and
payable on December 31, 2005. In consideration for the restructuring of the
Equipment Loans, General Electric and the other lenders received a waiver and
amendment fee of $500,000, $225,000 of which was paid at closing, additional
collateral in the form of a pledge of certain options to purchase the Chicago
Property and a junior security interest in other equipment owned by us which was
not financed with proceeds of the Equipment Loans. Under the terms of the GE
Agreement, our subsidiary, The Eaglebrook Group, Inc., is required to exercise
the purchase options related to the Chicago Property not later than May 1, 2003.
If our subsidiary fails to effect such purchase, General Electric has the right
to cause our subsidiary to exercise these options and to provide financing on
discretionary terms.

NASDAQ DELISTING NOTICE

We previously reported in a current report on Form 8-K that in May 2002, we
were notified by Nasdaq that we did not meet the Nasdaq maintenance criteria for
continued listing due to the decline in our stock price and that our common
stock would be delisted on May 24, 2002. We filed an application with Nasdaq to
transfer our securities to The Nasdaq SmallCap Market, and the initiation of the
delisting proceedings was stayed pending Nasdaq's review of our application. On
June 21, 2002, we were notified by Nasdaq that our application for listing on
The Nasdaq SmallCap Market was approved and effective June 25, 2002, our common
stock began trading on The Nasdaq SmallCap Market. As a result of the listing on
The Nasdaq SmallCap Market, we had until August 13, 2002 to regain compliance
with the $1.00 minimum bid price requirement.

By a letter, dated August 14, 2002, Nasdaq notified us that we had failed
to regain compliance with the $1.00 minimum bid price requirement. However, we
meet certain other initial listing requirements for The Nasdaq SmallCap Market,
including the $5.0 million stockholder's equity requirement, we were provided an
additional 180 calendar days, or until February 10, 2003, to regain compliance
with the $1.00 minimum bid price requirement. Although we were unable to meet
this bid price requirement by February 10, 2003, our common stock has not yet
been delisted from The Nasdaq SmallCap Market. On March 19, 2003 we were
notified by Nasdaq that they were providing us an additional 90 days, or until
May 12, 2003, to regain compliance with the $1.00 minimum bid requirement,
citing the same criterion as the August 14, 2002 letter. The Board of Directors
of Nasdaq has proposed extending the minimum bid price compliance periods from
180 days to 540 days. If approved by the Securities and Exchange Commission
("SEC"), the proposal will allow issuers that meet heightened financial
requirements to benefit from extended compliance periods for satisfying minimum
bid price requirements. If approved by the SEC, this may enable our Company to
remain listed on the Nasdaq SmallCap Market beyond May 12, 2003.

The Nasdaq Stock Market recently announced that it has proposed additional
corporate governance requirements in light of the requirements of the
Sarbanes-Oxley Act of 2002. These corporate governance requirements are subject
to the SEC approval. No assurance can be given as to whether we will be able to
achieve or maintain compliance with these new requirements.

HISTORY AND DEVELOPMENT OF THE COMPANY

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

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We completed the following acquisitions relative to our plastic lumber
operations during the period from 1997 through 2002:

CORPORATE STRUCTURE

We are a holding company for our wholly-owned subsidiaries: (i) U.S.
Plastic Lumber Ltd., a Delaware corporation, which has been formed to act as a
holding company for all operating recycled plastic lumber subsidiaries, (ii)
U.S. Plastic Lumber Finance Corporation, a Delaware holding company which was
established to provide financing to our subsidiaries, and (iii) Quakertown, LLC,
a Nevada limited liability company which was established to hold only one asset,
being the Quakertown litigation claim. A list of our indirect subsidiaries is
presented below.

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

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

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QUAKERTOWN, LLC SUBSIDIARY

OPERATIONS

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

PRODUCTS. During the past several years, we believe our recycled plastic
lumber division has positioned itself to be a leading manufacturer of recycled
plastic lumber, a newly emerging industry. Recycled plastic lumber is
manufactured in a variety of colors, profiles, and shapes including standard
lumber dimensions and a variety of custom engineered profiles and shapes.

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

- Environmentally friendly and non-toxic

- Virtually maintenance free

- Conservation of trees and reduce use of exotic rain forest hardwoods

- Can be worked with conventional tools

- Aesthetically pleasing wood-like textured surface

- Splinter proof -- never rots

- Not affected by termites, ants, or other woodborers

- Not affected by moisture

- No splitting, cracking, or chipping

- Holds nails and screws 40% better than wood

- No toxic leaching into soil or groundwater

- Most graffiti easily washes off

Products built with our recycled plastic lumber have the appearance of
freshly stained or painted wood but the longevity and maintenance-free qualities
of plastic. Recycled plastic products are an ideal replacement for wood, metal,
and concrete in numerous applications, including most non-structural exterior
functions. Some of the potential applications include:

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

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

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

- Trailer, farm equipment, and railroad box car flooring

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- Industrial applications such as pallets, walkways in chemical plants,
catwalks on factory roofs, coil cradles, and other specialized
applications

- Sanitary animal pen flooring

- Railroad ties

- Sea pilings and marine bulkheads

- Original Equipment Manufacture custom profiles

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

Manufacturing and Recycling Facilities. The Chicago, Illinois
manufacturing facility (approximately 400,000 sq. ft. on 10 acres of land)
currently operates thirty seven extruders that utilize a vacuum calibration
continuous flow forming manufacturing line. This process allows for the
manufacture of many special profiles, in any length, that cannot be produced
with conventional roll forming or closed mold systems. One of the primary
products produced at this facility is our 100% polyethylene deckboard, one of
three components to our "Carefree Xteriors"(R) product line portfolio. In
addition, a plastic slipsheet product and other packaging products are
manufactured at this facility to service the packaging industry. This facility
also produces fabricated products for marine and government applications and
products for Original Equipment Manufacturers, as well as providing processing
of post consumer and postindustrial plastics, which we utilize as raw material.

The Ocala, Florida manufacturing facility currently operates a total of
eleven extruders utilizing continuous flow production. One of the specialty
products developed at this facility is a composite deckboard, consisting of
plastic and wood, used for decks in commercial and residential applications. The
composite product line was developed to compete directly with several
manufacturers of composite deck product throughout the country. Four extruders
in this facility are used to manufacture this composite product as another
component to our "Carefree Xteriors"(R) product line portfolio. This facility
also produces cornerboards, a product for our packaging division, for the
produce shipping industry worldwide, and also produces our Trimax(R) structural
lumber and railroad tie product lines. The facility consists of approximately
157,000 sq. ft. on 40 acres of land.

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

Our manufacturing process involves proprietary technologies and specialized
manufacturing equipment that was custom built or modified to our specifications.
The manufacturing process utilizes granulated and/or densified recycled plastic,
which in some cases, contains additives formulated for desired end use
characteristics of the product. A key advantage of the process is the ability to
utilize recycled plastic waste to create a consistent material that can be
extruded into a desired shape. While the end product maintains many of the
desirable properties of traditional wood materials, it also has superior
characteristics such as moisture and insect resistance, which give it an
advantage over wood for many applications.

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

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The manufacturing process, which uses a substantial quantity of recycled
plastic raw material, consists of three stages. First, the recycled plastic
materials received at the plant are identified and categorized by resin type.
These materials are processed through a series of grinding, densifying and other
operations to a consistent particle size. The ground plastic resins are then
blended with other ingredients such as colorant and UV stabilizers to prepare
specific mixes for the products that the plant produces. Second, the plastics
are heated, mixed, and compounded into a thick molten composite which is
extruded through either closed mold, roll forming, or vacuum calibration
finishing lines into specified shapes or profiles using equipment specifically
designed for processing recycled materials. Finally, the extruded products are
cooled in a downstream process, and the resulting profiles are inspected and cut
to specific lengths. The product is then ready to be packaged for shipping. We
utilize only recycled polyethylenes and do not use plastics with PVC, toxic
chemicals, insecticide, or paint residues. We use composite materials for
manufacturing our structural lumber product line and our composite deckboard
line of products. Our manufacturing process produces no harmful environmental
by-products or hazardous waste.

Raw Materials Supply. We obtain our mixed plastics feedstock through our
own operations or from firms who obtain these materials from a large variety of
recycling facilities, including municipal recycling programs, as well as
plastics discarded in various industrial and manufacturing processes. We are not
dependent on any one source to obtain our supplies. We believe the raw material
feedstock is currently purchased from sources that are dependable and adequate
for at least short term and medium term manufacturing requirements. Generally,
we attempt to maintain raw material inventory sufficient to supply our
manufacturing requirements for approximately one to two months. Due to our
liquidity problems in the past, we have occasionally experienced brief
disruptions in availability of raw materials and other supplies. In addition,
the cost of recycled plastics has been subject to cyclical market fluctuations
over the past several years based on supply and demand. Therefore, no assurances
can be given that raw materials will always be available at commercially
reasonable prices. We are generally of the belief that if significant increases
in demand for recycled plastics of a lasting nature were to occur, the potential
supply of recycled plastics could easily be expanded to meet any lasting
increase in demand. We believe that both supply and demand will continue to
increase as public awareness of the need to recycle plastic waste increases.
However, any disruption of supply arrangements or significant lasting increases
in raw materials prices could have a material adverse effect on our operations.

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

Proprietary Technology. We are generally of the belief that maintaining
state of the art technology in our formulations, molds, and manufacturing
processes and maintaining the proprietary nature of that technology through
trade secrecy is more important to maintaining a competitive position in the
industry than seeking any legal protections that patents may provide. However,
we own two patents on our structural lumber product and have a worldwide license
on the Rutgers patent. We purchased the two patents as part of the
Polymerix/Trimax asset acquisition through the bankruptcy court. The first
Trimax patent expires on July 9, 2008, and the second patent expires on May 18,
2010. We have a patent application pending for process and composition relating
to the manufacture of wood fiber and polymer composite. We believe these patents
are important because they provide us with a competitive position in the market.

We have several license agreements relative to patented technologies of
others. The Rutgers patent expires on August 4, 2015. Our license agreement with
Rutgers has a duration that extends the life of the patent depending upon us
maintaining our contract rights with Rutgers. We have several registered
trademarks and several more currently pending application for registration. The
registered trademarks we currently use are as follows: Carefree Decking
System(R), Carefree Xteriors(R), Trimax(R), CycleX(TM), Durawood(R),

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Durapack(R), RecycleDesign(R), and Duratie(R). We take an aggressive attitude
toward the protection of our proprietary technology and trademarks.

Competition and Barriers to Entry. The recycled plastic lumber industry is
a young, highly fragmented industry with over 20 small manufacturers and many
more marketers of recycled plastic lumber. The competition is broken down into
two separate categories: plastic lumber manufacturers using strictly high
density polyethylene and manufacturers that use a mixture of high density and
other polymers and wood fiber to produce a less expensive composite product.

We primarily use only high-density polyethylene and additives at all of our
plants. The major competitors in this segment of the market include NEW Plastics
Corp., Luxemburg, Wisconsin and a variety of small "mom and pop" organizations.
We attempt to compete with these competitors on the basis of price, quality, and
service. Two competitors who manufacture commingled plastic are The Plastic
Lumber Company, Inc., Akron, Ohio and Hammer's Plastics Recycling, Iowa Falls,
Iowa.

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

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

We manufacture recycled plastic lumber that is in direct competition with
conventional wood in most of its applications. At present, the principal
competitive disadvantage of recycled plastic lumber compared to wood is that
recycled plastic lumber is generally more expensive to purchase. Recycled
plastic lumber is comparable in price to high-grade cedar and redwood. Composite
lumber is about 20% less expensive than recycled plastic lumber. Recycled
plastic lumber and composite lumber can be more expensive to initially purchase
than comparable wood, but recycled plastic lumber and composite lumber can be
more cost effective because they can substantially outlast wood, particularly in
applications where the lumber is exposed to the elements. We also believe that
environmental restrictions are presently impeding forestry operations in United
States forests. A second factor impeding the use of pressure treated wood is the
toxic leaching characteristics. Chemicals injected into pressure treated wood
contain hazardous constituents that are released into the soil and create
potentially hazardous conditions, which the U.S. Environmental Protection Agency
has recently taken action to address, by phasing out these chemicals by December
31, 2003. These factors may reduce, if not eliminate, any price advantage that
pressure treated wood presently has with respect to its initial cost.

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

Potential Markets. By producing a suitable recycled plastic lumber and
composite lumber product, we conserve natural resources, reduce the plastic
waste entering landfills, and provide a useful, maintenance-free product that
satisfies this growing market. One of the major markets for recycled plastic
lumber and composite lumber is as a substitute for pressure treated lumber. The
pressure treating process injects Chromated Copper Arsenate "CCA" (all
carcinogens) into the wood. The United States Environmental Protection Agency
previously announced that it intends to phase out the use of pressure treated
lumber containing chromated copper arsenate by December 31, 2003. In addition,
there are currently a number of states that have either

9

passed laws or have on their legislative agenda, restrictions on the use and
disposal of pressure treated lumber. We believe this phase out of pressure
treated lumber containing arsenic, which represents approximately 90% of
pressure treated lumber currently manufactured provides an excellent opportunity
for us. We are unable to predict the potential response by the pressure treated
lumber industry to the Environmental Protection Agency announcement. Although
the Environmental Protection Agency has determined to ban pressure treated
lumber, the Environmental Protection Agency has provided manufacturers time to
convert their plants to the alternative treatments that currently exist.
Assuming a nonarsenic alternative to pressure treated lumber is developed, there
is a significant question in the market place as to the cost of this
alternative. As a result, we believe that this announcement provides an
opportunity for us for two reasons. We believe that we have the largest
available production capacity for plastic lumber and that our plastic lumber
product will be price competitive with any new product developed. As a result,
we believe the Environmental Protection Agency announcement will have a
meaningful impact on sales growth over the next several years. Pressure treated
wood has legislative restrictions in some states on its disposal in toxic waste
landfills. Plastic and composite lumber is a safe alternative that is fully
recyclable and maintenance-free. Home Depot, Inc. and Lowes Inc. have announced
during the last year that they will curtail purchases of hardwood lumber that
are having an adverse environmental impact. Our product consists of both
structural and non-structural profiles, which are an excellent substitute for
many exterior uses for traditional wood lumber.

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

Presently, approximately 180,000 miles of class one railroad track are
being utilized in the United States, with approximately 3,334 crossties per mile
or a total of over 600,000,000 ties in place. In 1999, 15,000,000 crossties were
replaced in the United States, 93% of which were wood ties, and 65,000,000 cross
ties were replaced worldwide. In 1999, the worldwide market for replacing
crossties was approximately $2.5 billion. In some applications, the creosote
wood crosstie may have an expected useful life of less than 5 years, creating a
large demand for the more durable recycled plastic crossties that have an
estimated useful life in excess of 50 years. Moisture, extreme temperature
fluctuations, and location relative to curves and switches are some conditions
which shorten creosote wood tie life. Railroads know from extensive experience
which locations require highest maintenance. These locations will be the initial
target areas for our longer lasting polymer crossties.

Sufficient test data shows that the plastic railroad tie performs well
enough to enable us to market our railroad tie product to the railroad industry.
The primary issue in our growth plans regarding the plastic railroad tie is
cost. Our current pricing structure is approximately double the cost of a
comparable wood tie. We market our tie on the basis of life cycle cost savings.
During the past twelve months, we have experienced a growing level of sales of
crossties to the railroad industry, primarily to city transportation authorities
around the United States. We have also begun to experience sales of our
crossties in foreign markets, such as Brazil. We cannot assure you that our
marketing strategy will succeed in creating demand for our railroad tie product.

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

Marketing Strategies. Our business and operations are divided into two
distinct divisions: (i) building products, all of which are now marketed under
the Carefree Xteriors(R) name, which include high density polyethylene ("HDPE"),
composite and structural lumber products; and (ii) engineered products,
including fabricated products, railroad ties, marine & government, and Original
Equipment Manufacture "OEM"/industrial businesses; packaging products, including
plastic slipsheets, tier sheets, corner board, and other related packaging
products. All of our products are part of our CycleX(TM) process.

10

We employ market focused Sales Specialists and industry specific
representatives to market and sell our products. We utilize traditional sources
of sales including attending trade shows, select advertising, cold calling, and
customer referrals. We also market and sell through distributor relationships.
We are seeking to expand our distribution network nationwide in some markets.

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

We have historically experienced a seasonal slow-down in the winter months
during the past three years. We believe we can reduce the seasonality of our
sales by increasing our marketing efforts in warmer climates of the U.S. during
winter months, by supplying product for custom items which are not as seasonal,
and by increasing our industrial products sales, which tend to be less seasonal
in nature.

Government Regulation and Environmental Matters. Although the recycled
plastic and composite lumber operations do not generate significant quantities
of waste materials or hazardous substances, our operations are and will in the
future be subject to numerous existing and proposed laws and regulations
designed to protect the environment from waste materials and particularly
hazardous wastes emissions. We are subject to federal, state and local laws
regarding the environment, occupational health and safety, and other regulations
applicable to our business. See "-- Environmental Recycling
Division -- Regulatory Matters" for additional discussion of environmental
regulations affecting our business. The primary regulations affecting the
plastic lumber divisions are air quality emissions from our manufacturing
plants, disposal of solid and liquid wastes, wastewater, and storm water
discharge. We do not believe that our waste disposal practices and manufacturing
processes will be in violation of any existing or presently proposed law or
regulation or require special handling permits or procedures or otherwise result
in significant capital expenditures that would have a material adverse effect on
operations. Currently, costs of compliance with regulatory requirements for the
plastic lumber division do not materially impact our financial condition,
although many times the delays in approving permit modifications can delay our
ability to quickly adapt to changing market conditions. Consequently, we cannot
assure you that regulatory requirements will not in the future adversely affect
our operations or require the introduction of costly additional manufacturing or
waste disposal practices, which could adversely affect our financial condition.
Additionally, as with manufacturing practices in general, if we release any
hazardous substance, such a release could have a material adverse effect whether
we (i) directly or indirectly cause the release; or (ii) the release comes from
any of our owned or leased properties; or (iii) the release comes from any
associated offsite disposal of our wastes; or (iv) the release comes from prior
activities on our owned or leased property.

EMPLOYEES

As of December 31, 2002, the Company and its subsidiaries employed on a
full time basis a total of approximately 458 employees through the United
States. Of this number, approximately 449 employees are full time regular
employees of the plastic lumber operations. There are 9 full time regular
employees at the corporate headquarters. None of our employees are covered by
collective bargaining agreements.

11

RISK FACTORS

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

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

We incurred operating losses during much of our history. Our accumulated
deficit totaled approximately $77.0 million as of December 31, 2002. We reported
operating losses in our plastic lumber division in both 2002 and 2001 of $8.7
million and $14.0 million respectively, exclusive of restructuring and asset
impairment charges of $0.5 million and $11.5 million respectively. We also
incurred a consolidated loss from continuing operations for fiscal 2002 of $16.4
million, inclusive of restructuring and asset impairment charges, and a
consolidated loss from continuing operations of $38.5 million for fiscal 2001.

If we are not able to restore our profitability, which will depend largely
on our ability to substantially increase sales, reduce fixed operating costs,
and limit the growth of overhead and direct expenses, the market price of our
common stock could decrease and our business and operations could be negatively
impacted.

OUR INABILITY TO OBTAIN FINANCING IN ADEQUATE AMOUNTS AND ON ACCEPTABLE TERMS
NECESSARY TO OPERATE OUR BUSINESS OR REPAY OUR DEBT OBLIGATIONS COULD NEGATIVELY
IMPACT OUR BUSINESS, FINANCIAL CONDITION AND LIQUIDITY.

Capital requirements relating to the implementation of our business plan
have been and will continue to be significant. We believe that our ability to
generate cash from operations is dependent upon, among other things, increased
demand for our products and services and the successful development of direct
marketing and product distribution capabilities. Although we retired a
substantial portion of our outstanding indebtedness in 2002, primarily as a
result of the sale of Clean Earth, and received a new credit facility from GBCC,
there can be no assurance that we will have sufficient capital resources to
permit us to continue implementation of our business plan, and we may need to
seek additional external debt and/or equity financing to fund our operations in
2003 and beyond.

If we are unable to obtain additional capital on terms that are acceptable
to us, it will negatively impact our business, financial condition and
liquidity.

OUR INABILITY TO COMPLY WITH THE COVENANTS CONTAINED IN OUR DEBT AGREEMENTS IN
2003 COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS.

Our new credit facility with GBCC and the GE Agreement both contain
significant financial covenants, including but not limited to the requirement to
achieve specified levels of earnings before interest, taxes, depreciation and
amortization ("EBITDA"), which is measured periodically throughout the term of
these agreements. Because of our history of operating losses, we cannot assure
you that we will be able to comply with these financial covenants. Although we
did not comply with the January EBITDA covenant under the credit facility with
GBCC, to date the lender has not taken any action against us.

If we are unable to maintain compliance with the financial covenants in our
debt agreements we may be required to significantly curtail our operations and
it would have a material adverse impact on our liquidity and financial
condition.

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

We previously reported in a current report on Form 8-K that in May 2002, we
were notified by Nasdaq that we did not meet the Nasdaq maintenance criteria for
continued listing due to the decline in our stock price and that our common
stock would be delisted on May 24, 2002. We filed an application with Nasdaq to
transfer our securities to The Nasdaq SmallCap Market, and the initiation of the
delisting proceedings was
12

stayed pending Nasdaq's review of our application. On June 21, 2002, we were
notified by Nasdaq that our application for listing on The Nasdaq SmallCap
Market was approved and effective June 25, 2002, our common stock began trading
on The Nasdaq SmallCap Market. As a result of the listing on The Nasdaq SmallCap
Market, we had until August 13, 2002 to regain compliance with the $1.00 minimum
bid price requirement.

By a letter, dated August 14, 2002, Nasdaq notified us that we had failed
to regain compliance with the $1.00 minimum bid price requirement. However, we
meet certain other initial listing requirements for The Nasdaq SmallCap Market,
including the $5.0 million stockholder's equity requirement, we were provided an
additional 180 calendar days, or until February 10, 2003, to regain compliance
with the $1.00 minimum bid price requirement. Although we were unable to meet
this bid price requirement by February 10, 2003, our common stock has not yet
been delisted from The Nasdaq SmallCap Market. On March 19, 2003 we were
notified by Nasdaq that they were providing us an additional 90 days, or until
May 12, 2003, to regain compliance with the $1.00 minimum bid requirement,
citing the same criterion as the August 14, 2002 letter. The Board of Directors
of Nasdaq has proposed extending the minimum bid price compliance periods from
180 days to 540 days. If approved by the Securities and Exchange Commission
("SEC"), the proposal will allow issuers that meet heightened financial
requirements to benefit from extended compliance periods for satisfying minimum
bid price requirements. If approved by the SEC, this may enable our Company to
remain listed on the Nasdaq SmallCap Market beyond May 12, 2003.

If we are delisted, we would likely lose some of the market makers making a
market in our stock, as well as coverage by our existing analysts, which would
reduce your ability to resell our shares. Further, our efforts to seek new
analyst coverage would be significantly impaired and the market price for shares
of our common stock could decrease.

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

Our plastic lumber products are fairly new, have not been on the market for
long periods of time, and may be used in applications for which we may have no
knowledge or limited experience. Our plastic lumber products may be used in
applications that we have little or no historical track record to measure our
potential liability as it relates to product warranty or product liability
issues. During fiscal 2000, our gross profit declined primarily due to returns
of a product by a major customer. We believe we have addressed the issues that
resulted in these returns and have established an accrued liability that we
believe is sufficient to handle product warranty and liability issues, based
upon our historical experience to date. However, there can be no assurance that
our current accrual will be sufficient. If our products fail to perform over the
extended warranty periods, which for some products on a limited basis are as
long as 50 years, we may not have the ability to adequately protect ourselves
against this potential liability, which could reduce our operating income and
our stock price.

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

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

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

Several of our directors, officers, and employees are affiliated, through
ownership or otherwise, with the Stout Partnership, which is a significant
stockholder, or other entities that have an equity interest in us. See
"Transactions with Related and Certain Other Parties." When our directors who
are affiliated with these entities are faced with decisions where we have
interests adverse to those entities, a conflict of interest could

13

arise. Since a majority of our directors are affiliated with those entities,
agreements related to monies provided by some of those entities may not have
been the result of arm's-length negotiations and may include terms and
conditions that may be less favorable to us than terms contained in similar
agreements negotiated with third parties.

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

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

- Reduced costs of operations;

- Increased consumer acceptance of alternative wood products;

- An increased distribution network;

- Increased sales; and

- Ability to finance growth.

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

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

- Develop and expand our customer base;

- Hire, train, and retain skilled employees;

- Strengthen brand identity and successfully implement our marketing
campaigns;

- Continue to expand in the face of increasing competition;

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

- Create sufficient demand for plastic lumber and other products.

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

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

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

14

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

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

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

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

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

The reclamation and recycling of plastic and the manufacture of plastic
lumber for use in construction, and other composite materials containing
recycled plastics, are relatively new. A general reluctance exists in the
construction industry to use new products before they have been extensively
tested, particularly in segments of the construction industry that have exacting
performance standards for component materials. In the case of our recycled
plastic lumber and composite materials in particular, this testing may be
extensive for each prospective customer and may require substantial additional
time and resources. In addition, we may experience resistance from prospective
customers who are accustomed to more conventional, non-artificial wood
materials. Moreover, we may not have sufficient financial and other resources to
undertake extensive marketing and advertising activities or to afford the cost
of the necessary marketing and sales personnel when it becomes appropriate to
broaden our marketing efforts.

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

The availability of low-cost raw materials, namely post-consumer and
industrial plastic waste products, is a material factor in our costs of
operations. The unavailability, scarcity, or increased cost of these raw
materials could affect our profitability. We purchase most of our raw materials
through generators of post-consumer and industrial recycled plastic materials.
We do not rely on contractual arrangements with our raw materials suppliers and
we have no long-term supply contracts. Disruption of our supply sources could
reduce our earnings and result in a decrease in our stock price.

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

Our products and services involve newly developing technologies and we may
be unable to compete effectively in developing and marketing new products and
services or in developing or maintaining the know-how, technology, and patents
to compete effectively. The public is unaware of these newly developing products
and services generally, or as alternatives to more traditional and well-
established products. To compete effectively, we must increase public knowledge
and acceptance of our products and services and develop and maintain appropriate
levels of know-how and technical expertise. Our failure to develop new
technologies

15

could have an adverse effect on our ability to compete and our business could
suffer causing a decrease in our stock price.

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

The American Society for Testing and Materials and other industry trade
organizations have established general standards and methods for measuring the
characteristics of specific building materials. Users of building materials (and
frequently, issuers of building codes) generally specify that the building
materials comply with the standards relative to the proposed applications. Since
uniform, recognized standards or methods have only recently been established for
measuring the characteristics of plastic lumber, potential users may not be
aware of this method of judging whether or not plastic lumber may be suitable
for their particular requirements, without being informed of these standards by
the plastic lumber supplier or otherwise becoming aware of them. The fact that
these standards are not well known for plastic lumber may limit the market
potential for our building materials and make potential purchasers of these
building materials reluctant to use them and result in decreased revenues and a
decline in our stock price.

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

Our businesses are subject to extensive laws and regulations designed to
protect the environment from toxic wastes and hazardous substances or emissions
and to provide a safe workplace for employees. Under current federal
regulations, the Resource Conservation & Recovery Act, and Comprehensive
Environmental Responsibility, Compensation, and Liability Act, the generator of
toxic or hazardous waste is financially and legally responsible for that waste
forever, and strictly liable for the clean up and disposal costs. We believe we
are either in material compliance with all currently applicable laws and
regulations or that we are operating in accordance with appropriate variances or
similar arrangements, but we cannot be sure that we will always be deemed in
compliance, nor can we be sure that compliance with current laws and regulations
will not require significant capital expenditures that could have a material
adverse effect on our operations. These laws and regulations are subject to
change and could become more stringent in the future. Although state and federal
legislation currently provide for procurement preferences for recycled
materials, the preferences for materials containing waste plastics are dependent
upon the eventual promulgation of product or performance standard guidelines by
state or federal regulatory agencies. The guidelines for recycled plastic
building materials may not be released or, if released, the product performance
standards required by those guidelines may be incompatible with our
manufacturing capabilities. It may be necessary to expend considerable time,
effort and money to keep our existing or acquired facilities in compliance with
applicable environmental, zoning, health, and safety regulations as to which
there may not be adequate insurance coverage. In addition, due to the
possibility of unanticipated factual or regulatory developments, the amounts and
timing of future environmental expenditures and compliance could vary
substantially from those currently anticipated.

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

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

We have obtained licensing rights with respect to patent technology related
to manufacturing railroad crossties and structural lumber, but we may be unable
to maintain those rights for any length of time. We will seek protection against
known infringement of our patents, but our efforts may be unsuccessful.
Additionally,

16

our patents may not adequately protect us from similar technology being
developed with different formulations or from use of our technology in countries
in which we do not have patent protection.

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

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

- Terrorist activities or military responses;

- Fires, explosions, or blowouts;

- Environmental hazards;

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

- Product liability occurrences.

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

- Injury;

- Loss of life;

- Severe damage;

- Clean-up responsibilities;

- Regulatory investigation; or

- Penalties and suspension of operations.

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

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

A substantial portion of our outstanding indebtedness is at variable
interest rates. We currently do not engage in any hedging activities with
respect to our interest rate risk. Because of our variable rate debt, interest
expense will increase by approximately $175,000 for each 1% increase in interest
rates. As a result, a substantial increase in interest rates could increase our
cost of borrowed money, which could reduce our cash flow and earnings and result
in a decrease in stock price.

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

Our business operates in highly competitive industries. For example, our
recycled plastic lumber business faces competition from other producers of
recycled plastic lumber as well as producers of vinyl and aluminum decking, and
traditional wood, especially pressure treated wood. We compete against other
makers of recycled plastic principally upon the basis of price and quality, as
well as the immediate availability of the product. We compete against other
products such as pressure treated lumber by emphasizing the superior suitability
characteristics of plastic lumber for some of the applications, as well as
appealing to the environmental consciousness of consumers.

17

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

There were 64,427,416 shares of our common stock outstanding as of December
31, 2002 and 64,429,216 shares of our common stock outstanding as of February
28, 2003. In addition, we will issue common stock in connection with our
outstanding convertible debt and convertible securities or in other
transactions. Future sales of substantial amounts of our common stock in the
public market, or the perception that these sales could occur, could adversely
affect prevailing market prices of our common stock and could impair our ability
to raise capital through future offerings of equity securities. The sale by
selling stockholders of significant amounts of shares at any given time could
cause the trading price of our common stock to decline.

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

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

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

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

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

WE HAVE FILED LITIGATION AGAINST CLEAN EARTH, INC. AND CEI HOLDING CORPORATION
RELATIVE TO APPROXIMATELY $4,000,000 IN ADJUSTMENTS TO THE PURCHASE PRICE
ARISING FROM THE CLEAN EARTH SALE.

The purchase price remains subject to various adjustments set forth in the
Purchase Agreement based upon a final audited closing date balance sheet that
was delivered after the Closing if the adjusted long-term debt and adjusted
working capital set forth on the final audited closing date balance sheet differ
from the amounts of such items set forth on the estimated closing date balance
sheet, upon which adjustments to the cash portion of the purchase price at the
Closing were based.

A dispute has arisen between the parties regarding the final audited
closing date balance sheet as the Purchaser and Clean Earth have sought a
purchase price adjustment in the amount of approximately $4,000,000 to the
purchase price due to certain closing adjustments. We filed litigation against
the Purchaser and Clean Earth on January 2, 2003, in a case entitled U.S.
Plastic Lumber Corp. v. CEI Holding Corporation and Clean Earth, Inc., in the
United States District Court for the District of Delaware, Civil Action No.
03-0001, alleging that the audit process had been subverted through fraud as it
related to certain adjustments and entries claimed by the Purchaser and Clean
Earth. If we are unsuccessful in our litigation, the purchase price received at
Closing of the Clean Earth sale could be reduced by up to $4,000,000, including
the loss of the $1,000,000 in cash escrow, a reduction of the principal amount
of the Junior Preferred Stock or reimbursement in the form of cash to Clean
Earth equal to the amount of the adjustment in the purchase price.

DIRECTORS AND OFFICERS OF THE REGISTRANT

The following table sets forth our directors and executive officers, their
ages, terms of office and all positions as of December 31, 2002. Directors are
divided into classes which are elected for staggered terms of

18

three years, and serve until the annual meeting of the year in which the terms
expire, or until their successors are duly elected by the shareholders and
qualify. Officers serve generally pursuant to employment agreements, and, if no
written agreement exists, then until the next annual meeting of the Board of
Directors or until their successor is elected.

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

(1) As of December 31, 2002.

DIRECTORS

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

Mark S. Alsentzer. Mr. Alsentzer has been our President and Chief
Executive Officer since December 1996 and Chairman since January 2000. He has
overseen the growth of the Company through acquisitions and the divestiture of
obsolete facilities during the past two years. Mr. Alsentzer has served as a
director since May 1994. From 1980 to 1992, Mr. Alsentzer served as President of
Stout Environmental, Inc., a full service hazardous waste environmental service
company. In 1992, Stout Environmental merged with Republic Industries, where Mr.
Alsentzer remained as Vice President of Republic Environmental Systems, Inc. In
addition, Mr. Alsentzer was Director of Cemtech, an environmental company sold
to Waste Management in 1991. Mr. Alsentzer founded Clean Earth, Inc., our former
subsidiary and a leading recycler of contaminated soil and debris located in the
northeast, which we sold in September of 2002. Mr. Alsentzer was Chief Executive
Officer of Clean Earth from 1993 to 1996. Mr. Alsentzer has a BS degree in
Chemical Engineering from Lehigh University and an MBA from Farleigh Dickinson
University.

August C. Schultes III. Mr. Schultes has served as a director since
February 1997. Since 1991, Mr. Schultes has been the Chairman of the Board and
Chief Executive Officer of A.C. Schultes, Inc., a contracting and service
organization specializing in water well drilling, water and waste water
treatment, and pump and motor repair services with offices in Maryland, Delaware
and two locations in New Jersey for over seventy-five years. He is also the
Chairman of the Board and Chief Executive Officer of Life Care Institute, a
medical diagnostic center with facilities to perform stress tests, CAT scans,
MRI scans and physical therapy located in New Jersey. He was also the founder,
Chairman of the Board and Chief Executive Officer of Stout Environmental, Inc.,
a full service hazardous waste environmental company, which was merged with
Republic Industries. Mr. Schultes graduated from Penn State University and has a
BS degree in Civil Engineering.

Gary J. Ziegler. Mr. Ziegler has served as a director since February 1997.
Since 1992, Mr. Ziegler has been President of Consultants and Planners, Inc.,
which provides operating services to several water utility companies in New
Jersey. Mr. Ziegler is a Professional Engineer and Professional Planner in New
Jersey, a Professional Engineer in Maryland, Pennsylvania, Ohio and New York and
a member of the American Society of Civil Engineers and the National Society of
Professional Engineers. He was President of W.C. Services, Inc. and Vice
President of Stout Environmental, Inc. Mr. Ziegler graduated from Clemson
University with a BS degree in Civil Engineering.

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

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

Michael T. McCann was named Chief Operating Officer in February 2002. Mr.
McCann joined the Company in July 1999 and has been primarily responsible for
managing the engineering plastics division of U.S. Plastic Lumber Ltd.,
inclusive of sales and operational responsibilities. Prior to joining USPL, Mr.
McCann was President of Brigadoon Industries, Inc., an extrusion manufacturer of
recyclable plastic profiles for the produce industry. He served as President of
Brigadoon Industries, Inc. from November 1993 until its acquisition by USPL on
June 30, 1999. From January 1990 to June of 1993, he served as President of
Surface Concepts of South Florida (a commercial floor covering products
distributor), in which his primary function was full P&L responsibility,
including multi-site operations, sales and vendor recruiting and management.

Michael D. Schmidt is Treasurer and Chief Financial Officer, positions he
has held since 1997. Mr. Schmidt joined us in December 1997. Mr. Schmidt has
over 20 years of public and private accounting experience including ten years in
the environmental industry. Prior to joining us, Mr. Schmidt served as Chief
Financial Officer of Republic Environmental Systems, Inc., a publicly traded
company and a leading environmental service provider, headquartered in Blue
Bell, Pennsylvania, a position he held for approximately ten years. Mr. Schmidt
has a BS degree in Business Administration from Rowan University and is a
Certified Public Accountant in the State of New Jersey.

Bruce C. Rosetto is Executive Vice President and General Counsel/Secretary,
a position he has held since 1997. Mr. Rosetto joined us in January 1997 and his
primary responsibilities are acting as General Counsel, providing management
support and performing the functions as corporate secretary. Mr. Rosetto is also
the sole principal of the law firm Rosetto and Associates, LLC. Mr. Rosetto was
a partner in a New Jersey law firm, Paschon, Feurey, and Rosetto from 1982 to
1986. In 1986, Mr. Rosetto became Chairman and Chief Executive Officer of
Consolidated Waste Services of America, Inc., a fully integrated environmental
company. Mr. Rosetto built that company primarily through mergers and
acquisitions into one of the largest privately owned environmental companies in
New Jersey until its acquisition by USA Waste Services. In 1994, he became
Chairman and Chief Executive Officer of Hemo Biologics International, Inc., a
biologic products company. He graduated from LaSalle University in 1979 with a
B.A. Degree in Political Science, and from Villanova University School of Law in
1982, with a J.D. degree. He is currently a member of both the Florida and New
Jersey Bars.

ITEM 2. PROPERTIES

Our properties consist of administrative offices, manufacturing plants,
fabrication and assembly facilities, and sales offices. All of our properties
are leased with the exception of the facility in Ocala, Florida. We have options
to purchase on the properties we lease in Chicago.

20

Our primary properties as of February 28, 2003 were as follows:

CORPORATE OFFICES

Boca Raton, Florida: This location consists of approximately 3,300 sq. ft.
and serves as our corporate offices. There are presently approximately 9 people
employed in this location. The property is in good condition and we lease it.
The monthly rental is approximately $7,500 and the lease expires on March 31,
2004.

Jacksonville, Florida: This location consists of approximately 2,732 sq.
ft. and serves as our sales offices. Warranty claim administration and inside
sales personnel are located at this office. There are presently approximately 6
people employed in this location. The property is in good condition and we lease
it. The monthly rental is approximately $4,200 and the lease expires on May 31,
2004.

OPERATING FACILITIES

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

Ocala, Florida: This property consists of approximately 157,000 sq. ft and
we own it. The facility is used for manufacturing, as a distribution warehouse
and for recycling of resins for use as raw material.

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

Auburn, Massachusetts: This location consists of approximately 34,000 sq.
ft. The property is in good condition but we no longer utilize the facility. We
are seeking to sublease the facility to a third party or negotiate an early
termination with the landlord.

FACILITY LEASED TO THIRD PARTIES

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

ITEM 3. LEGAL MATTERS

In December 1998, the Company purchased Clean Earth of North Jersey
("CENJ", then known as S&W Waste, Inc.) in a stock purchase transaction.
Pursuant to such purchase, we could be responsible for liabilities resulting
from matters wherein CENJ has been named as a potentially responsible party
("PRP") in matters involving the possible disposal of hazardous waste at certain
disposal sites as we kept these liabilities as part of the sale transaction of
Clean Earth, Inc. on September 9, 2002. At December 31, 2002, we have accrued
approximately $289,000 for estimated liabilities related to these matters. We
believe the accrual is sufficient to cover the aggregate liability that may be
incurred in these matters; however, there can be no assurances that the accrual
will be sufficient.

On February 28, 2002 a judgment in the amount of $1,760,000 plus
administrative fees, arbitrators' compensation and interest was awarded to
Southern Wood Services due to our breach of a purchase contract. As a result, we
accrued $1,844,000 at December 31, 2001 in connection with this ruling. On June
18, 2002, we entered into a settlement agreement with Southern Wood Services
whereby we agreed to pay $1,590,000 payable in 53 equal monthly payments of
$30,000, commencing with the date of the settlement agreement. As of February
28, 2003, 45 monthly payments remain to be made.

21

On April 15, 2002, we filed a Complaint, entitled Integrated Technical
Services, Inc. v Pennsylvania Department of Environmental Protection, Board of
Claims, Commonwealth of Pennsylvania, Civil Action No. 3484, seeking $7.5
million in a contract claim arising from the Quakertown foundry site clean-up.
We assumed this litigation as part of the Clean Earth sale. The PADEP has
offered approximately $980,000 to settle our claim. We rejected the offer and
are proceeding with discovery. A hearing is currently scheduled for November
2003.

A dispute has arisen between us and the purchasers of Clean Earth, Inc.
("Purchaser") regarding the final audited closing date balance sheet as the
Purchaser and Clean Earth have sought a purchase price adjustment in the amount
of approximately $4,000,000 to the purchase price due to accounting entry
adjustments and reclassification adjustments. We filed litigation against the
Purchaser and Clean Earth on January 2, 2003, in a case entitled U.S. Plastic
Lumber Corp. v. CEI Holding Corporation and Clean Earth, Inc., in the United
States District Court for the District of Delaware, Civil Action No. 03-0001,
alleging that the audit process had been subverted through fraud as it related
to certain adjustments and entries claimed by the Purchaser and Clean Earth. If
we are unsuccessful in our litigation, the purchase price received at Closing of
the Clean Earth sale could be reduced by up to $4,000,000, including the loss of
the $1,000,000 in cash escrow, a reduction of the principal amount of the Junior
Preferred Stock or reimbursement in the form of cash to Clean Earth equal to the
amount of the adjustment in the purchase price.

On January 31, 2003, Zimmer Lucas Partners filed a demand for Arbitration
pursuant to a Stock purchase Agreement dated July 3, 2001 arising from their
purchase of shares of stock from us in a private placement. The arbitration
action seeks rescission of the purchase agreement and return of $1,000,000 due
to our failure to register their shares. We will aggressively defend this matter
as we were not eligible to file an S-3 registration statement in 2001 or 2002
due to outstanding defaults on our credit facilities and the pending sale of
Clean Earth. We may be liable for penalty damages since we were not able to
register these shares in a timely fashion. The penalty under the Agreement was
equal to 1.5% per month for each month the shares were not registered commencing
with 60 days subsequent to the closing date. This penalty has been fully accrued
for on our balance sheet. All of the shares of Zimmer Lucas have been saleable
since July 3, 2002 under Rule 144 of the Exchange Act of 1933.

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

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

During the fourth quarter of the fiscal year ended December 31, 2002, no
matters were submitted to a vote of the security holders, through proxy
solicitation or otherwise.

PART II

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

MARKET INFORMATION

Our common stock is currently traded on The Nasdaq SmallCap Market under
the symbol "USPL." Prior to June 1998, we traded sporadically on the OTC
Electronic Bulletin Board under the symbol "ECPL." Effective June 25, 2002, our
common stock began trading on The Nasdaq SmallCap Market. We are not currently
in compliance with Nasdaq due to the minimum price of our stock being less than
$1.00 per share. We had until February 10, 2003, to regain compliance. Although
we were unable to meet this bid price requirement by February 10, 2003, our
common stock has not yet been delisted from The Nasdaq SmallCap Market. On March
19, 2003 we were notified by Nasdaq that they were providing us an additional 90
days, or until May 12, 2003, to regain compliance with the $1.00 minimum bid
requirement, citing the same criterion as the August 14, 2002 letter. The Board
of Directors of Nasdaq has proposed extending the minimum bid

22

price compliance periods from 180 days to 540 days. If approved by the
Securities and Exchange Commission ("SEC"), the proposal will allow issuers that
meet heightened financial requirements to benefit from extended compliance
periods for satisfying minimum bid price requirements. If approved by the SEC,
this may enable our Company to remain listed on the Nasdaq SmallCap Market
beyond May 12, 2003. The following table sets forth the high and low sales
prices of our common stock for the periods indicated. On February 28, 2003, the
closing price of the common stock on the Nasdaq SmallCap Market was $0.21.

The above prices reflect interdealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.

As of February 28, 2003, there were 800 holders of record and approximately
8,500 beneficial holders of our common stock.

DIVIDEND POLICY

The Company has not previously paid any cash dividends on its common stock
and does not anticipate or contemplate paying dividends on common stock in the
foreseeable future. It is the present intention of management of the Company to
utilize all available funds for the development of the Company's business. Under
Nevada corporate law, no dividends or other distributions may be made which
would render the Company insolvent or reduce assets to less than the sum of its
liabilities plus the amount needed to satisfy outstanding liquidation
preferences. The terms of our credit agreements also prevent us from paying cash
dividends on our common stock.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The Company does not have any equity compensation plans, other than the
Employee Stock Option plan previously approved by our stockholders. See PART
III, Item 10 for further detail.

RECENT SALES OF SECURITIES DURING THE LAST THREE YEARS

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

In January 2000, the Company issued 632,833 shares to the shareholders in
settlement of the earnout agreements related to the Company's merger with Clean
Earth, Inc. in 1996. These transactions were not registered under the Act in
reliance on the exemption from registration in Section 4(2) of the Act, as
transactions not involving any public offering. This offering was completed
without any general or public solicitation. In each case the offering was made
to a very limited number of officers, directors and shareholders of the company
being acquired. The officers, directors and few shareholders had strong
knowledge and experience in business matters as well as pre-existing business
relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.

On February 2, 2000, the Company raised $7,500,000 in the form of a
subordinated convertible debenture issued to Halifax Fund, L.P. This private
placement transaction was not registered under the Act in reliance

23

upon the exemption from registration in Section 4(2) of the Act, as a
transaction not involving a public offering. This offering was completed without
any general or public solicitation; the offering was made to a shareholder of
the Company. The shareholder had strong knowledge and experience in business
matters as well as pre-existing business relationships with the Company. The
knowledge and experience of shareholder enabled it to evaluate the risks and
merits of the investment.

On February 10, 2000, the Company acquired certain assets and certain
liabilities of Baron Enterprises for 202,376 shares of common stock. Baron
manufactures slipsheets and tier sheets for material handling systems within the
beverage industry. At the time of the Closing, Baron had two facilities, one in
Denver, Colorado and the other in Reidsville, North Carolina. We recently closed
the Reidsville facility and moved the assets to our Chicago facility as part of
our plan to consolidate smaller plants into our regional hubs. These
transactions were not registered under the Act in reliance on the exemption from
registration in Section 4(2) of the Act, as transactions not involving any
public offering. This offering was completed without any general or public
solicitation. In each case the offering was made to a very limited number of
officers, directors and shareholders of the company being acquired. The
officers, directors and few shareholders had strong knowledge and experience in
business matters as well as pre-existing business relationships with the
Company. The knowledge and experience of these individuals enabled them to
evaluate the risks and merits of the investment.

In September of 2000 the Company issued 1,187,285 shares of its Series D
Preferred Stock. The Series D Preferred Stock pays a quarterly cash dividend at
an annual rate of 15%, with the initial dividend payable on March 31, 2001. Each
share of Series D Preferred Stock is convertible into one share of the Company's
common stock at the option of the holder, subject to the rights of the Company.
In addition, if the common stock of the Company is trading at an average closing
price of $3.50 per share or higher for 20 consecutive trading days at any time
prior to March 1, 2002, the Company has the right to require conversion of the
Series D Preferred Stock into common stock. Otherwise, the Series D Preferred
Stock automatically converts into common stock on March 1, 2002. The net
proceeds of $4.1 million from the issuance of Series D Preferred Stock were used
for general corporate purposes. These transactions were not registered under the
Act in reliance on the exemption from registration in Section 4(2) of the Act,
as transactions not involving any public offering. This offering was completed
without any general or public solicitation. The shareholders had strong
knowledge and experience in business matters as well as pre-existing business
relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment. On
March 1, 2002, all outstanding shares of Series D Preferred Stock were converted
into an equal number of shares of our common stock.

From November 2000 through March 2001, the Company issued 1,714,285 shares
of its Series E Preferred Stock to the Stout Partnership, our largest
shareholder. Several members of our board of directors and a member of our
management are affiliated with Stout Partnership. The Series E Preferred Stock
pays a monthly cash dividend at an annual rate of 10%, with the initial dividend
payable on January 15, 2001. Each share of Series E Preferred Stock is
convertible into one share of the Company's common stock. The Series E Preferred
Stock automatically converts into common stock on March 31, 2002. The net
proceeds of $3 million from the issuance of Series E Preferred Stock were used
for general corporate purposes. These transactions were not registered under the
Act in reliance on the exemption from registration in Section 4(2) of the Act,
as transactions not involving any public offering. This offering was completed
without any general or public solicitation. The shareholders had strong
knowledge and experience in business matters as well as pre-existing business
relationships with the Company. The knowledge and experience of these
individuals enabled them to evaluate the risks and merits of the investment.

On December 7, 2000, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC pursuant to which Fusion Capital
agreed to purchase up to $6.0 million of the Company's common stock subject to
increase, at the Company's discretion, by an additional $6.0 million, subject to
certain conditions. As of March 31, 2002, no shares have been purchased by
Fusion Capital under this agreement. On March 2, 2001 under the terms of the
common stock purchase agreement, Fusion Capital Fund II, LLC was issued 200,000
shares of the Company's common stock as a commitment fee. Unless an event of
default occurs, these shares must be held by Fusion Capital until the common
stock purchase

24

agreement has been terminated. On August 31, 2001 the common stock purchase
agreement was amended whereby the Company granted Fusion Capital warrants to
purchase 100,000 shares of the Company's common stock at an exercise price of
$1.00 per share in exchange for Fusion Capital's agreement to revise the terms
under which Fusion Capital could terminate the agreement.

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

On July 3, 2001, the Company issued 476,191 shares of common stock to ZLP
Master Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology
Fund, LTD. at a purchase price of $1.05 per share. The Company also issued
35,000 shares of common stock to a third party as a fee in connection with the
above transaction. This private placement transaction was not registered under
the Act in reliance upon the exemption from registration in Section 4(2) of the
Act, as a transaction not involving any public offering. This offering was
completed without any general or public solicitation. The shareholders had
strong knowledge and experience in business matters and the knowledge and
experience of these individuals enabled them to evaluate the risks and merits of
the investment. Net proceeds after issuance costs of approximately $983,000 were
used for general corporate purposes.

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

In December of 2001 the Company issued 45,000 shares of common stock in
connection with a license agreement with Rutgers University. This transaction
was not registered under the Act in reliance on the exemption from registration
in Section 4(2) of the Act, as transactions not involving any public offering.
These offerings were completed without any general or public solicitation. The
shareholders had strong knowledge and experience in business matters as well as
pre-existing business relationships with the Company. The knowledge and
experience of these shareholders enabled them to evaluate the risks and merits
of the investment.

On February 4, 2002, Halifax Fund, L.P. converted a portion of its
principal and accrued interest related to the $7.5 million 5% convertible
debenture issued in February of 2000 into 1,001,924 shares of the Company's
common stock.

On February 4, 2002, the Company issued 800,000 shares of common stock to
Roger McOmber at a purchase price of $.50 per share. This private placement
transaction was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. This offering was completed without any general or public
solicitation. The shareholder had strong knowledge and experience in business
matters and the knowledge and experience of these individuals enabled him to
evaluate the risks and merits of the investment. Net proceeds after issuance
costs of approximately $354,000 were used for general corporate purposes.

On March 1, 2002 all 1,187,285 shares of outstanding Series D Preferred
Stock were converted into an equal number of shares of common stock pursuant to
mandatory redemption provisions exercised by the Company.

On March 31, 2002 all 1,714,285 shares of outstanding Series E Preferred
Stock were converted into an equal number of shares of common stock pursuant to
mandatory redemption provisions exercised by the Company.

On September 11, 2002, the Company issued 19,935,808 shares of common stock
to the Stout Partnership arising from a mandatory conversion of a $5.0 million
convertible subordinated debenture, which

25

was due on July 1, 2003. The Stout Partnership is the Company's largest
stockholder. Several members of the Company's board of directors and Mark S.
Alsentzer, the Company's Chief Executive Officer, are affiliated with Stout
Partnership. On May 29, 2002 the Stout Partnership agreed to convert the entire
debenture plus accrued interest of approximately $183,000 into 19,935,808 shares
of the Company's common stock. The conversion price of $0.26 per share is in
accordance with the conversion formula as stated in the terms of the debenture,
and the transaction was subject to shareholder approval and the completion of
the sale of Clean Earth, Inc., both of which occurred on August 26, 2002. This
transaction was a requirement of the Company's senior lenders as a condition of
extending new credit to the Company after the sale of Clean Earth, Inc. In
connection with the conversion, the Company recognized as interest expense a
beneficial conversion feature of approximately $2,791,000.

In addition to the above, the Company issued 462,436 shares of common stock
for miscellaneous reasons, including but not limited to settlements of
litigation, reductions in trade payables in lieu of cash payments, employee
severance, and directors' compensation. These transactions were not registered
under the Act in reliance on the exemption from registration in Section 4(2) of
the Act, as transactions not involving any public offering. These offerings were
completed without any general or public solicitation. The shareholders had
strong knowledge and experience in business matters as well as pre-existing
business relationships with the Company. The knowledge and experience of these
shareholders enabled them to evaluate the risks and merits of the investment.

OPTIONS AND WARRANTS

There are numerous members of the management, directors, employees and
consultants of the Company and its subsidiaries who have been granted options in
2002 to purchase 811,000 shares of common stock subject to the terms for vesting
and exercise prices. As of December 31, 2002, options to purchase 2,577,500
shares of common stock were outstanding.

During the twelve month period ending December 31, 2002, the Company issued
warrants to purchase 345,000 shares of common stock to a private placement
investor and investment bankers for services rendered to the Company. As of
December 31, 2002 warrants to purchase 3,160,795 shares of common stock were
outstanding.

These transactions were not registered under the Act in reliance on the
exemption from registration in Section 4(2) of the Act, as transactions not
involving any public offering. These offerings were completed without any
general or public solicitation. The option and warrant holders had strong
knowledge and experience in business matters as well as pre-existing business
relationships with the Company. The knowledge and experience of these holders
enabled them to evaluate the risks and merits of the investment.

ITEM 6. SELECTED FINANCIAL DATA

The information below was derived from the audited consolidated financial
statements included in this report and in reports previously filed with the SEC.
This information should be read together with these financial statements and the
notes to the financial statements. On September 9, 2002 we completed the sale of
our environmental recycling and remediation business, Clean Earth, Inc. As a
result, we have restated the Statement of Operations Data for all periods
presented to account for Clean Earth, Inc. as a Discontinued Operation. We
adopted Statement of Financial Accounting Standard No. 142 and ceased
amortization of goodwill on January 1, 2002. In addition, due to our adoption of
Statement of Financial Accounting Standard No. 145, the extraordinary loss on
the early extinguishment of debt recorded in 2000 of approximately $1.0 million,
net of taxes, has been reclassified to interest expense from continuing
operations. For more

26

information regarding this financial data, see the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section also included
in this report.

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

The following discussion is intended to assist in the understanding of the
Company's financial position and results of operations for the years ended
December 31, 2002, 2001 and 2000. This discussion should be read in conjunction
with the consolidated financial statements and notes thereto provided under Part
II, Item 8 of this Annual Report on Form 10-K.

BUSINESS OPERATIONS

We are a manufacturer of structural and non-structural plastic lumber and a
variety of accessory products such as park and site amenities and products for
original equipment manufacturers, made from recycled high density polyethylene
and in some instances, composite materials. The structural plastic lumber is
manufactured under processes that are protected by patents. Please see
OPERATIONS in ITEM 1 of this Annual Report on Form 10-K for further details on
our manufacturing, sales and marketing operations. We are not dependent upon a
single customer or a few customers for the continuation of our business. No
single customer accounts for sales equal to or greater than 10% of our
consolidated revenues.

SALE OF CLEAN EARTH, INC.

On June 14, 2002, we entered into an amended and restated purchase
agreement to sell all of the issued and outstanding capital stock of Clean
Earth, Inc., our wholly-owned subsidiary which together with its subsidiaries
comprised our environmental recycling division ("Clean Earth"), to a subsidiary
of CEI Holding Corporation ("Purchaser"), a corporation recently formed by Eos
Partners, L.P. and BancAmerica Capital

27

Investors, two private equity investment groups. The closing of the Clean Earth
sale transaction took place on September 9, 2002.

The purchase price that we received in the Clean Earth sale transaction
consisted of approximately $45.2 million in cash paid at the closing, net of
purchase price adjustments, of which $1.0 million was placed in escrow, and a
5.0% subordinated promissory note issued by Purchaser in the original principal
amount of $3.5 million maturing on September 9, 2012, subject to certain
adjustments and rights of set-off. The purchase price remains subject to various
adjustments set forth in the Purchase Agreement based upon a final audited
closing date balance sheet that was delivered after the closing if the adjusted
long-term debt and adjusted working capital set forth on the final audited
closing date balance sheet differ from the amounts of such items set forth on
the estimated closing date balance sheet, upon which adjustments to the cash
portion of the purchase price at the closing were based. A dispute has arisen
between the parties regarding the final audited closing date balance sheet as
the Purchaser and Clean Earth have sought a purchase price adjustment in the
amount of approximately $4,000,000 to the purchase price due to various closing
adjustments. This matter is currently in litigation (see ITEM 3 LEGAL MATTERS
for further information.) In the event that a portion or the entire amount of
the purchase price adjustment sought by the purchaser and Clean Earth are
ultimately upheld, the adjustments would be paid first out of the $1.0 million
held in escrow, and second, at the option of the purchaser, as a reduction in
the principal amount of the $3.5 million subordinated promissory note or
immediate cash reimbursement to the purchaser from the Company. If most or all
of the aggregate amount of the purchase price adjustments sought by the
purchaser are upheld, and the purchaser chooses to demand cash from the Company,
we would not have sufficient resources to satisfy the purchaser's demand without
obtaining new debt or equity capital or selling some of our assets.

The net proceeds from the sale of Clean Earth were approximately $41.5
million, after the $1.0 million escrow withholding and transaction expenses, and
were used to retire the entire principal balance of the Senior Credit Facility
dated June 30, 2000 (the "Original Senior Credit Facility") in the amount of
$37.9 million, and to pay down certain other indebtedness. As a result of the
sale of Clean Earth and subsequent transactions that followed, our total debt
decreased from $71.6 million at December 31, 2001 to $30.0 million at December
31, 2002.

The results of operations of Clean Earth from January 1, 2002 through the
date of the sale is included in "Income from operations of discontinued
environmental recycling segment" on our 2002 consolidated statement of
operations. In addition, all prior periods presented in this Form 10-K have been
restated to reflect the environmental recycling and remediation business as a
discontinued operation.

LIQUIDITY AND CAPITAL RESOURCES

The completion of the sale of Clean Earth allowed us to enter into several
transactions in the latter part of 2002 that we believe substantially strengthen
our balance sheet and liquidity.

Upon the retirement of the Original Credit Facility on September 9, 2002 we
replaced it with a smaller revolving credit line with the same lending group. On
December 20, 2002 we terminated this credit agreement and entered into a new
three-year senior secured credit facility (the "GBCC Credit Facility") with
Guaranty Business Credit Corporation. The GBCC Credit Facility is comprised of a
$3.0 million term loan and a commitment for up to $10.0 million in the form of a
revolving line of credit. Advances under the revolving line of credit are based
upon a percentage of our accounts receivable and inventory. At December 31,
2002, $3.0 million was outstanding under the term loan and approximately
$161,000 was advanced under the revolving line of credit. The revolving line of
credit pays monthly interest at a rate of prime plus 1.0%, and the term loan
pays monthly interest at a rate of prime plus 1.5%. We used a portion of the net
proceeds from the term loan to repay $2 million of outstanding principal under
the replacement revolving credit line with the participants in the Original
Senior Credit Facility. The remaining $1 million was converted into notes
payable to these same lenders on a pro rata basis relative to their respective
lending commitments under the Original Senior Credit Facility. These notes (the
"Quakertown Notes") are secured by the Quakertown Claim and mature December 19,
2005. The Quakertown notes pay interest at 25%, of which 10% is payable monthly
in cash and the remainder may, at the option of the Company, be paid in kind in
the form of additional principal

28

on the Quakertown Notes until the notes mature or are retired. In addition,
depending upon the timing and amount of the settlement of the Quakertown Claim,
the lenders under the Original Senior Credit Facility may receive an additional
payment of up to 80% of the proceeds of the Quakertown Claim after giving effect
to payment of legal fees not to exceed $150,000 and the $1.0 million principal
amount due under the Quakertown Notes.

As a result of the sale of Clean Earth and our entering into the GBCC
Credit Facility, the lenders under the Original Senior Credit Facility agreed to
forgo approximately $3.2 million of deferred interest, fees and penalties that
were payable under the Original Senior Credit Facility.

The GBCC Credit Facility required us to maintain excess levels of
availability, as defined, under the revolving credit line of $2,550,000 and
$2,150,000 for the months ending December 31, 2002 and January 31, 2003
respectively. In addition, the financial covenants contained in the GBCC Credit
Facility require, among other things, a minimum level of earnings before
interest, taxes, depreciation and amortization ("EBITDA") to be achieved in the
month of January 2003, and to maintain certain ratios of debt service to EBITDA,
as defined, measured monthly throughout the term of the facility. We were not in
compliance with the January minimum EBITDA covenant and have notified the lender
that we will not be in compliance with the February 2003 covenant. Although we
have yet to obtain a waiver for these covenant violations, to date Guaranty
Business Credit Corporation has taken no action against us. After giving effect
to the aforementioned excess availability requirements, approximately $391,000
and $819,000 was available under the revolving credit line as of December 31,
2002 and February 28, 2003.

Also on December 20, 2002, we amended our Master Credit Facility with a
group of lenders led by GE Capital Corporation (the "GE Lending Group"). The
revised terms of the facility include resumption of monthly principal payments
in July of 2003. Aggregate scheduled principal payments under the Master Credit
Facility are $225,000 in 2003, $750,000 in 2004 and $1,025,000 in 2005, with the
remainder of the outstanding principal balance due December 31, 2002. In
consideration for amending the terms of the Master Credit Facility, which
includes a waiver of all past defaults and financial covenant violations, we
agreed to pay the GE Lending Group a waiver and amendment fee of $500,000,
$225,000 of which was paid at closing, and the remainder of which will be paid
in monthly installments through June of 2003. The outstanding principal balance
on the Master Credit Facility as of December 31, 2002 was approximately
$11,356,000.

On September 24, 2002 we entered into an Exchange and Repurchase Agreement
with Halifax Fund, L.P. ("Halifax") whereby:

- The two outstanding convertible subordinated debentures held by Halifax,
whose carrying amounts net of discounts at the time of the exchange were
$5,503,000 and $4,000,000 respectively, were terminated

- All unpaid default charges, fees, penalties, preferred dividends in
arrears and accrued interest, which totaled approximately $1.7 million at
the time of the exchange, were waived by Halifax

- Halifax released us from any action Halifax had against the Company
relative to the outstanding convertible subordinated debentures

- Halifax released its second lien on the Company's assets that were sold
in connection with the sale of Clean Earth

In exchange for the preceding, we:

- Paid $2.5 million in cash to Halifax from the proceeds of the sale of
Clean Earth

- Issued a 10% convertible subordinated debenture in the principal amount
of $2,831,558 due March 24, 2006, with interest being paid in kind for
the first two years and paid in cash for the third year. Subject to
certain adjustments as more fully described in the debenture agreement,
one third of the principal amount of the debenture will be convertible
into shares of the Company's common stock at $0.75 per share, one third
will be convertible at $1.00 per share and one third will be convertible
at $1.25 per share.

29

- Issued a 10% subordinated note with no conversion rights in the principal
amount of $5.6 million due March 24, 2006, with interest being paid in
kind for the first two years and paid in cash for the third year

- Canceled 285,714 shares of common stock held by Halifax

- Agreed to file a registration statement to register the shares underlying
the new convertible debenture and the warrants previously issued to
Halifax no later than April 15, 2003

This transaction was accounted for as a modification of debt terms under a
troubled debt restructuring, and the $1.7 million of unpaid interest and other
items waived by Halifax were added to the carrying value of the newly issued
debt instruments. As a result, at December 31, 2002 the carrying value of the
subordinated note and the convertible subordinated debenture was $6,807,000 and
$3,441,000 respectively.

On May 29, 2002 the Stout Partnership signed an agreement to convert its
$5.0 million convertible subordinated debenture that was due July 1, 2002, plus
accrued interest of approximately $183,000, into 19,935,808 shares of the
Company's common stock. The conversion price of $0.26 per share is in accordance
with the conversion formula as stated in the terms of the debenture and is based
on the May 29, 2002 date of the agreement. Mark S. Alsentzer, our Chief
Executive Officer, is affiliated with Stout Partnership. The transaction was
approved by the Company's shareholders at a Special Meeting of Shareholders on
August 27, 2002, and the conversion took place on September 11, 2002.

Although we believe that our financial condition has significantly improved
as a result of these transactions, our liquidity and ability to meet our
financial obligations and maintain our current operations in 2003 and beyond
will be dependent on our ability to meet the payment obligations under and
maintain compliance with the financial covenants in our debt agreements and
provide financing for working capital. The GBCC Credit Facility and the Master
Credit Facility both contain significant financial covenants, including but not
limited to the requirement to achieve specified levels of earnings before
interest, taxes, depreciation and amortization ("EBITDA"), which is measured
periodically throughout the term of these agreements. Because of our history of
operating losses and past inability to comply with similar financial performance
and repayment requirements, there can be no assurances that we will be able to
comply with the current financial covenants. We were not in compliance with the
January minimum EBITDA covenant and have notified the lender that we will not be
in compliance with the February 2003 covenant. Although we have yet to obtain a
waiver for these covenant violations, to date Guaranty Business Credit
Corporation has taken no action against us. In the absence of a written waiver,
any failure to comply with such covenants would be an event of default under our
credit facilities, which could lead to a demand for immediate repayment of the
outstanding balance due under the facility. Such an occurrence would have a
material adverse effect upon the Company as we would not have the resources to
repay these amounts should they become immediately due without obtaining
additional debt and/or equity financing.

Capital requirements relating to the implementation of our business plan
have been and will continue to be significant. We believe that our ability to
generate cash from operations is dependent upon, among other things, increased
demand for our products and services and the successful development of direct
marketing and product distribution capabilities. Although we retired a
substantial portion of our outstanding indebtedness in 2002 and substantially
restructured our balance sheet as previously described, there can be no
assurance that we will have sufficient capital resources to permit us to
continue implementation of our business plan. As a result, we may need to seek
additional external debt and/or equity financing to fund our operations in 2003
and beyond. Because we have incurred operating losses during much of our history
and because substantially all of our assets have been pledged as collateral
under our current debt agreements, we may not be able to obtain such financing
on commercially acceptable terms. If we are unable to obtain additional capital
on terms that are acceptable to us, it will negatively impact our business,
financial condition and liquidity.

Our independent certified public accountants have included an explanatory
paragraph in their report with respect to our consolidated financial statements
at December 31, 2002. The paragraph states that our recurring

30

losses from operations, accumulated deficit, working capital deficit and failure
to achieve compliance with the GBCC Credit Facility raise substantial doubt
about our ability to continue as a going concern.

We expect to incur approximately $2 million in capital expenditures in
2003, primarily for manufacturing equipment. We also have approximately $654,000
of principal payments on long-term debt that are due in 2003, with an additional
$2,732,000 of indebtedness that is callable due to our failure to comply with
the covenants in the GBCC Credit Facility. We are also required by the amended
terms of the Master Credit Facility to exercise the purchase option on our
leased property in Chicago, IL where our primary manufacturing operations are
located. This purchase option must be exercised no later than May 1, 2003, and
the purchase price is $3.0 million. We are currently in discussions with an
investment banking firm regarding a sale leaseback arrangement to satisfy this
requirement.

Net cash used in operating activities from continuing operations for the
year ended December 31, 2002 was $2,626,000 as compared to $8,979,000 for the
prior year, a decrease of $6,353,000. The following table summarizes the
different components of cash used in operating activities from continuing
operations for the years ended December 31, 2002 and 2001.

Dollar amounts in thousands:

Non cash charges consist primarily of depreciation expense, amortization of
goodwill and other intangibles, deferred income tax provision, amortization of
deferred financing costs and discounts on convertible debentures, beneficial
conversion features and non-cash restructuring and asset impairment charges. The
reduction in non-cash charges in 2002 was mainly due to the $9.8 million
restructuring and asset impairment charge in 2001, compared to a $0.5 million
asset impairment charge in 2002. We also ceased amortizing goodwill effective
January 1, 2002. In addition, since the fourth quarter of 2000, we have operated
under significant liquidity restraints which have impacted our ability to build
inventory. As a result, inventory decreased by approximately $4.1 in 2001 and
inventory levels did not change significantly in 2002, nor do we expect a
significant change in overall inventory levels in 2003. We also experienced
larger increases in accrued expenses and other liabilities in 2001 as compared
to 2002 due to higher interest expense and penalties associated with our
Original Senior Credit Facility that was incurred but not paid, and the accrual
in 2001 for our liability in the Southern Wood arbitration case (see ITEM
3. LEGAL MATTERS). Net cash provided by investing activities from continuing
operations for the year ended December 31, 2002 was $38,908,000, as compared to
$1,392,000 used in investing activities for the year ended December 31, 2001, as
we realized $40.5 million (net of cash held in the disposed business) in net
cash proceeds from the sale of Clean Earth. Capital expenditures from continuing
operations in 2002 was $2,460,000, compared to $1,602,000 in 2001.

Net cash used in financing activities from continuing operations during
2002 totaled $35,960,000, as we repaid $40,533,000 of notes payable, partially
offset by $4,219,000 of new borrowings and $354,000 of proceeds received from a
common stock private placement. Net cash used in financing activities from
continuing operations in 2001 was $961,000, as debt repayments of $7,435,000
were largely offset by proceeds received from the sale of a convertible
debenture and private placements of common and preferred stock.

At December 31, 2002 we had a working capital deficit of $9,729,000, as
compared to a working capital deficit of $60,525,000 at December 31, 2001. We
had cash and cash equivalents on hand in the amount of $563,000 at December 31,
2002.

31

On July 3, 2001, we issued 476,191 shares of common stock to ZLP Master
Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology Fund,
LTD. at a purchase price of $1.05 per share. This private placement transaction
was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. Net proceeds after issuance costs of approximately $983,000
were used for general corporate purposes. Because we did not file a registration
statement with the SEC to register the resale of these shares as required under
the stock purchase agreement, we incurred a cash penalty fee payable to the
purchasers of these shares in the amount of $150,000, and this amount has been
accrued as of December 31, 2002 (see ITEM 3. LEGAL MATTERS). On November 1, 2001
we raised an additional $752,000, net of issuance costs, through the issuance of
1,334,000 shares of common stock. On February 19, 2002, we issued 800,000 shares
of common stock at a purchase price of $0.50 per share. Net proceeds after
issuance costs of $354,000 were used for general corporate purposes. 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.

In September of 2000 we issued 1,187,285 shares of our Series D Preferred
Stock. The Series D Preferred Stock was to have paid a quarterly cash dividend
at an annual rate of 15%, with the initial dividend payable on March 31, 2001.
Each share of Series D Preferred Stock was convertible into one share of the
Company's common stock at the option of the holder, subject to certain rights of
the Company. We did not pay any of the required cash dividends on the Series D
Preferred Stock due to a deterioration in our financial condition. On March 1,
2002 all of the 1,187,285 shares of outstanding Series D Preferred Stock were
automatically converted into an equal number of shares of common stock, in
accordance with the original terms of the preferred stock. During 2002
promissory notes were given to all of the former holders of Series D Preferred
Stock, except for Halifax in connection with the debenture exchange agreement,
for these dividends in arrears. The outstanding balance of these notes as of
December 31, 2002 was $753,000.

In November of 2000 through March 2001, we issued 1,714,285 shares of our
Series E Preferred Stock to the Stout Partnership, our largest shareholder. Our
CEO, Mark S. Alsentzer, is affiliated with Stout Partnership. The Series E
Preferred Stock paid a monthly cash dividend at an annual rate of 10%, with the
initial dividend payable on January 15, 2001. Each share of Series E Preferred
Stock was convertible into one share of our common stock at the option of the
holder, subject to the rights of the Company. If these rights are not exercised,
the Series E Preferred Stock was to have automatically converted into common
stock on March 1, 2002. The net proceeds of $3,000,000 from the issuance of
Series E Preferred Stock were used for general corporate purposes. Dividends in
arrears on the Series E Preferred Stock were $44,000 and $0 as of December 31,
2002 and 2001 respectively. On March 4, 2002 our Board of Directors extended the
automatic conversion date of the Series E Preferred Stock to March 31, 2002, and
all 1,714,285 shares of Series E Preferred Stock was converted into an equal
number of shares of common stock on that date.

CONTRACTUAL OBLIGATIONS

The table below shows our known contractual obligations as of December 31,
2002 (in thousands):

Long-term Debt Obligations include principal payments on notes payable and
debentures, as well as the requirement to exercise the $3 million purchase
option on our leased property in Chicago, IL no later than May 1, 2003. Other
Long-term Obligations pertains to the settlement of the Southern Wood
arbitration claim

32

(see ITEM 3. LEGAL MATTERS). The above table does not give effect to any
acceleration of indebtedness that may occur in the event of a default.

TRANSACTIONS WITH RELATED AND CERTAIN OTHER PARTIES

On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company bearing interest at 10%, with an original maturity date of June
30, 2001. Several members of our board of directors and a member of our
management are affiliated with the Stout Partnership. The Stout Partnership
borrowed the $5,000,000 from PNC Bank and the individual partners have
personally guaranteed the loan. The Company paid $529,000 in interest on this
loan in 2000.

On December 1, 2000 the Stout Partnership exchanged the $5,000,000
unsecured loan into a subordinated convertible debenture of an equal dollar
amount with a maturity date of July 1, 2002, with interest payable monthly in
arrears at 11.5% per annum. The Company paid $111,000 and $573,000 of interest
on this loan in 2002 and 2001 respectively. The debenture was convertible into
common stock at any time, in whole or part, at the option of the holder, at the
lower of $2.00 per share or the lowest closing price of the Company's common
stock during the four trading days prior to but not including the conversion
date. These conversion terms were similar to that of a convertible subordinated
debenture issued to an unrelated third party in early 2000. In consideration of
the Stout Partnership exchanging its unsecured loan for a subordinated
convertible debenture and providing funding through Series E Preferred Stock,
the Company granted 250,000 warrants at the exercise price of $1.50 per share.
In consideration for extending the maturity date of the debenture from December
1, 2001 to July 1, 2002, and because some of the assets of the Company were not
disposed of as of June 1, 2001, on June 1, 2001 the Company granted an
additional 250,000 warrants to purchase the Company's common stock to the Stout
Partnership at an exercise price of $1.50 per share. The debenture was
converted, along with $183,000 of accrued interest into 19,935,808 shares of
common stock in 2002, in accordance with the terms of the debenture. In
addition, during 2000 and 2001 Stout Partnership provided the Company with
additional funding of $3,000,000 through the Series E Preferred stock private
placement.

On March 1, 2002 all of the Company's outstanding Series D Preferred Stock
was automatically converted into an equal amount of the Company's common stock
in accordance with the Series D Certificate of Designation. The dividends in
arrears pertaining to the Series D Preferred Stock was converted into a note
payable to each holder of the Series D Preferred Stock in pro rata amounts based
on the amount of shares held by each party. In connection with this conversion,
A.C. Schultes, Inc., a corporation controlled by August C. Schultes, III, a
director of the Company, received a note payable in the amount of approximately
$120,000. Also in connection with the conversion, a note payable in the amount
of approximately $36,000 was issued to Consultants and Planners, Inc. Gary
Ziegler, a director of the Company, is affiliated with Consultants and Planners,
Inc.

On March 4, 2002 the Company's Board of Directors extended the automatic
conversion date of the Series E Preferred Stock to March 31, 2002. All of the
Series E Preferred Stock, which was converted into an equal number of shares of
common stock on March 31, 2002, was held by the Stout Partnership.

In December 2001, Barbella Environmental Technology, a subsidiary of Clean
Earth, ("BET") received notice regarding its award of a contract with the City
of New York to perform environmental services at the Brooklyn Landfill on
Pennsylvania Avenue in the Borough of Brooklyn (the "Brooklyn Contract"),
subject to the satisfaction of certain conditions. These conditions included the
issuance of a performance bond on behalf of BET in the amount of $57.5 million
at the time of the execution of the Brooklyn Contract. Due to the deterioration
in our financial condition during 2001, the insurance company underwriting the
performance bond requested a $4.0 million letter of credit and personal
guarantors with liquid net worth of approximately $15.0 million in order to
issue the performance bond. Neither BET nor the Company was able to deliver the
required letter of credit or to obtain any third parties interested in providing
collateral and/or guarantees on the Company's behalf. In order to permit BET to
obtain the Brooklyn Contract and to avoid the termination of negotiations
related to the Clean Earth sale transaction Mark S. Alsentzer, our director,
Chairman, and Chief Executive Officer, and Mr. Schultes established a group of
personal indemnitors, including family members and affiliates of the two
directors as well as third parties, who were willing to provide the letter of
credit and

33

guarantee for the issuance of the performance bond in exchange for a fee. Upon
the completion of the sale of Clean Earth, approximately $469,000 of the
aforementioned fee was paid from the proceeds of the sale transaction.

We have a professional services contract with Rosetto & Associates LLC, a
private law firm, that performs legal work for us as well as unrelated third
parties. Mr. Rosetto, Executive Vice President, General Counsel and Secretary
for the Company, is the sole principal of Rosetto & Associates. Rosetto &
Associates billed us $399,000, $523,000 and $465,000 for legal services for the
years ended December 31, 2002, 2001 and 2000 respectively. We billed $134,000,
$161,000, $161,000 to Rosetto & Associates for use of office space, office
equipment and other shared services during the years ended December 31, 2002,
2001 and 2000 respectively. In addition, Rosetto & Associates has paid out of
pocket expenses on behalf of the Company for outside attorneys', consulting fees
and other expenses on behalf of the Company, of approximately $127,182,
$250,000, and $200,000 for the years ended December 31, 2002, 2001 and 2000
respectively, for which he is not reimbursed by the Company.

On November 28, 2002 a $500,000 trade note payable to a company controlled
by Mr. Schultes was converted into a promissory note due May 31, 2006, with
interest at 8% payable in monthly installments.

Kenneth Leung, a director of the Company, is a managing director of Sanders
Morris Harris, the investment banking firm that rendered the fairness opinion in
connection with the sale of Clean Earth. Neither Sanders Morris Harris nor its
affiliates received any compensation from us during the past two years, other
than fees and expenses totaling $80,000, related to the fairness opinion, except
for board fees and reimbursement of travel expenses paid to Kenneth Leung.

In December of 2002 one of our directors made a cash advance to the Company
in the amount of $449,000, which remains outstanding and is repayable upon
demand.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE

Revenues from our plastic lumber division are recognized at the date the
products are shipped and risk of ownership transfers to the customer. Title
passes to the customer upon shipment of the goods. We generally do not accept
returns or issue credits for damaged or defective merchandise if not notified by
the customer within five days from the date of delivery. In the event we accept
a claim from a customer, we have sole discretion with regard to replacing the
goods, repairing the product or issuing a credit to the customer. Although we
provide for the estimated cost of product warranties at the time revenue is
recognized, some of our plastic lumber products have warranty periods that
extend up to fifty years and because these products are relatively new, there is
not a significant history with which to assist management with their estimates
of warranty liability. We currently accrue for the cost of product warranties
based on a percentage of sales of our building products. We determine that
percentage based upon factors which include our historical experience in this
industry since 1997, the prior experience of businesses we have acquired and
current and estimated future trends that we believe to be indicative of future
warranty claims. However, as we continue to develop a longer-

34

term performance history with respect to these products, this percentage could
change significantly, and could have a material impact on our results of
operations.

We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history and the customers' current credit worthiness,
as determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and we record an allowance
for doubtful accounts based on specifically identified amounts that are believed
to be uncollectible. An additional allowance is also recorded based on certain
percentages of our aged receivables, which are determined based on historical
experience and our assessment of the general financial conditions affecting our
customer base. If actual collections experience changes, revisions to the
allowance may be required. We have a limited number of customers with
individually large amounts due at any given balance sheet date. Any
unanticipated change in one of those customer's credit worthiness or other
matters affecting the collectibility of amounts due from such customers, could
have a material affect on our results of operations in the period in which such
changes or events occur. After all attempts to collect a receivable have failed,
the receivable is written off against the allowance.

While such credit losses have historically been within our expectations and
the provisions established, we cannot guarantee that we will continue to
experience the same credit loss rates that have occurred in the past. Our
accounts receivable balance as of December 31, 2002 was approximately $8.6
million, and our allowance for doubtful accounts was approximately $3.7 million.

INVENTORY

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

PROPERTY, PLANT AND EQUIPMENT

We record our property, plant and equipment at cost and depreciate over the
estimated useful life of the asset on a straight-line basis. We periodically
test our property, plant and equipment for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. The conditions that would trigger an impairment assessment of our
property, plant and equipment would include, but not be limited to, a
significant, sustained negative trend in our operating results or cash flows, a
decrease in demand for our products, a change in the competitive environment and
other industry and economic factors. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the asset to future
net cash flows expected to be generated by the asset. If such assets are deemed
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets
based on the projected net cash flows discounted at a rate commensurate with the
risk of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. We recorded impairment charges
on property, plant and equipment from continuing operations of approximately
$0.5 million, $8.7 million and $2.3 million for the years ended December 31,
2002, 2001 and 2000, respectively.

GOODWILL AND OTHER INTANGIBLES

We continually evaluate whether events and changes in circumstances warrant
revised estimates of useful lives or recognition of an impairment loss of
goodwill that was acquired in a previous business combination or our other
intangibles, which consist mainly of patent rights. The conditions that would
trigger an impairment assessment of goodwill or our other intangible assets
include a significant, sustained negative trend in our operating results or cash
flows, a decrease in demand for our products, a change in the competitive
environment and other industry and economic factors. We annually test our
goodwill for impairment by comparing the fair value, based upon factors which
include analyses of discounted cash flows, comparable transactions and
comparable publicly traded companies, of the reporting units to which our
goodwill is

35

assigned to the reporting unit's carrying value. If the carrying value of a
particular reporting unit exceeds its fair value, we determine the implied fair
value of the reporting unit's goodwill as if a business combination were taking
place, and compare it to the carrying amount of the goodwill. If the carrying
amount of the goodwill is greater than the implied fair value we record an
impairment loss for the difference between the implied fair value and the
carrying amount. We also consider our market capitalization as one indicator of
fair value. We do not believe that our market capitalization is representative
of the fair value of the reporting units, as we believe that our stock price
reflects certain issues regarding the Company that would not necessarily exist
if the reporting unit were to be valued as a separate business or entity. The
issues include but are not limited to the fact that our stock is thinly traded,
and that our directors and officers have a beneficial ownership stake in excess
of 44% of our common stock, which allows them to exercise significant influence
over the composition of our board of directors. We measure impairment of our
other intangibles utilizing the undiscounted cash flow method. The estimated
cash flows are then compared to our intangible amounts; if the unamortized
balance of the intangible exceeds the estimated cash flows, the intangible asset
is written down to its fair value or discounted cash flow. We did not record any
impairment for goodwill or other intangibles for the year ended December 31,
2002. For the year ended December 31, 2001, we recorded a continuing operations
charge of approximately $1.1 million in connection with impairment of goodwill.

ACCOUNTING FOR INCOME TAXES

As part of the process of preparing our consolidated financial statements,
we are required to estimate our income taxes. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the consolidated statement of operations.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $24.1 million as of December 31, 2002, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward before they
expire and restructuring accrual and other accrued expenses, which are deferred
for income tax purposes until paid. The valuation allowance is based on our
estimates of taxable income and the period over which our deferred tax assets
will be recoverable. In the event that actual results differ from these
estimates, or we adjust these estimates in future periods, we may need to
establish an additional valuation allowance which could materially impact our
financial position and results of operations. The net deferred tax asset as of
December 31, 2002 was $0, net of the valuation allowance.

BUSINESS COMBINATIONS

The Company makes its decisions to acquire or invest in businesses based on
financial and strategic considerations. The Company did not undertake any
acquisitions in 2002 or 2001 and made one acquisition in early 2000 that is more
fully described in Note 4 to the consolidated financial statements.

RESTRUCTURING, AND ASSET IMPAIRMENT CHARGES

2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

In September of 2001 we announced the closing of three of our manufacturing
facilities and the leasing of two of our resin processing plants to third
parties in an effort to reduce fixed costs, improve customer service and narrow
management's focus to a smaller number of manufacturing facilities, without
reducing total manufacturing capacity. With the exception of activities
associated with exiting the facilities, the Fontana, California, Denton,
Maryland, and Trenton, Tennessee plants were closed on September 28, 2001 and
the

36

equipment and manufacturing processes at these plants were transferred to the
Chicago, Illinois and Ocala, Florida manufacturing locations. We have obtained a
buyout or sublease of all of these facilities. In addition, we discontinued raw
material processing at our Auburn, Massachusetts and Chino, California resin
plants sub-leased these operations, including the manufacturing equipment
installed at these locations, to other raw material processors. 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. The following is a summary of the restructuring and asset
impairment charge recorded in the third quarter of 2001:

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
Severance component of 2000 restructuring charge............ 182,000
Change in estimate related to 2000 restructuring accrual.... (155,000)
-----------
Total restructuring and asset impairment
charges......................................... $11,493,000
===========

During 2001 we paid approximately $761,000 in employee termination, lease
termination and other exit costs in connection with the restructuring and
approximately $895,000 remained in the accrual as of December 31, 2001,
primarily for lease termination expenses. The remaining amount was paid in 2002
and no balance remained in this accrual at December 31, 2002.

In August of 2002 the party to the sublease agreement for the Auburn,
Massachusetts plant and equipment terminated their sublease agreement with the
Company in accordance with its terms. As a result, we recorded an impairment
charge on the fixed assets at that location of approximately $453,000. We are
currently attempting to obtain a new sublease agreement or buyout of our lease
obligation with respect to this facility.

2000 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

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

Write-down for equipment impairment......................... $2,319,000
Lease termination and other exit costs in connection with
the restructuring......................................... 1,098,000
Change in estimate related to 1999 restructuring accrual.... (232,000)
----------
Total restructuring charges in 2000............... $3,185,000
==========

As of December 31, 2000, we had accrued $1,098,000 in connection with lease
termination costs. During 2001 we paid approximately $564,000 in lease
termination payments and charged this amount against the accrual. In addition,
we reversed approximately $155,000 of the accrual for other exit costs related
to the 2000 restructuring due to a change in estimate in 2001. As of December
31, 2001, we had approximately $380,000 remaining in our 2000 restructuring
accrual for lease termination payments. During 2002 we paid approximately
$316,000 in lease termination payments and approximately $64,000 remained in
this accrual at December 31, 2002. During 2000 and early 2001, we eliminated
approximately 300 employees as part of the 2000 restructuring plan. The
severance component of the restructuring plan was communicated to the employees
in early January 2001. As a result, we recorded a charge of $182,000 in the
first quarter of 2001 in connection with severance. The entire $182,000 cost of
these severance benefits was paid in 2001 and no balance remains in this
accrual.

37

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

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Consolidated Revenues

Revenues from continuing operations were $48,984,000, compared $57,830,000
in 2001, a decrease of $8,846,000, or 15.3%. The decrease was due primarily to
lower sales of our building products. Sales of building products declined by
$6,629,000, or 37.4%. We believe that our liquidity issues and related
customers' concerns about our long-term viability that existed throughout most
of 2002 were a significant factor in the sales decline. We expect that the sale
of Clean Earth and the refinancing transactions that were completed in the
latter part of 2002 to restructure our balance sheet should alleviate many of
those concerns. In addition, during the third quarter of 2002 the Company
introduced a new formulation to improve the performance of our building
products. We believe this formulation change will result in fewer warranty
claims and, with respect to our composite decking products, the retention of
more of their original color than those of our competitors. As a result,
revenues were negatively impacted by approximately $1,249,000 in 2002 as we
allowed some of our customers to return product containing the older
formulation. While many of these returns were accepted outside of our normal
return policy, we felt this action was necessary in order to maintain our
distributor relationships with respect to residential decking made from
alternative wood sources, a market that we believe presents significant
long-term opportunities for us. To a lesser degree, sales of building products
were also negatively impacted due to delays in reinstalling the second of our
two structural lumber production lines in our Ocala, Florida plant subsequent to
their relocation from Trenton, Tennessee, due to liquidity restraints.

In addition, revenues were negatively impacted in 2002 by our decision to
exit the lower margin resin trading business. We had $5.2 million in resin
revenues in 2001 that were not present in 2002.

The revenue declines discussed above were partially offset by sales
increases of our commercial and industrial profile products and rail road ties.
Changes in selling prices of our products in 2002 were not significant.

Gross Profit

Gross profit from continuing operations in 2002 decreased by $493,000 to
$4,641,000, or 9.6%, compared with 2001. This decrease is primarily a result of
lower revenues largely offset by a decrease in fixed manufacturing costs
resulting from the restructuring plan which commenced in the fourth quarter of
2000 and completed in 2002. Gross margin as a percentage of sales increased from
8.9% in 2001 to 9.5% in 2002, despite being negatively impacted by an
underabsorption of manufacturing overhead resulting from decreased revenues and
from inefficiencies in purchasing and procurement of raw materials due to our
liquidity constraints. Our ability to realize further benefits from our
restructuring plan in 2003 and beyond and increase our gross margin is dependent
upon our ability to correct these inefficiencies and increase our sales. In
addition, two fires temporarily disrupted our operations at one of our
manufacturing facilities in 2002, which resulted in maintenance and cleanup
costs of approximately $284,000.

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

Selling, general and administrative expenses from continuing operations
("SG&A"), exclusive of restructuring and asset impairment charges, decreased by
$5,763,000 in 2002, or 30.2%, to $13,346,000 compared to $19,109,000 in 2001. As
a percentage of net sales, SG&A from continuing operations, excluding
restructuring and asset impairment charges, decreased from 33% in 2001 to 27% in
2002. In 2001 we accrued $1,844,000 in connection with the Southern Wood
arbitration award and reversed $254,000 of this accrual in 2002 as a result of
the final terms of the settlement of this case (see "Legal Matters"). We also
incurred $555,000 of expenses in 2001 related to the common stock purchase
agreement with Fusion Capital that were
38

not present in 2002, as well as $509,000 in goodwill amortization in 2001 that
was not present in 2002 as a result of our adoption of SFAS No. 142. In
addition, general and administrative salaries, benefits and travel expenses at
the Plastic Lumber operation decreased by $1,040,000 in 2002, or 31.8%, mainly
due to headcount reductions and the closing of some of our manufacturing plants,
and sales and marketing expenses decreased by $1,651,000 in 2002, or 31.2%, as
we curtailed our discretionary spending in this area due to liquidity
constraints.

Operating Loss

Operating loss from continuing operations was $9,158,000 in 2002 as
compared to $25,468,000 in 2001, a decrease of $16,310,000. The decrease was
mainly due to asset impairment charges in 2002 of $453,000 compared to
restructuring and asset impairment charges in 2001 of $11,493,000 and to the
decrease in SG&A.

Interest Expense

Interest expense decreased by $920,000 in 2002 to $11,563,000 as compared
to $12,483,000 in 2001. We saved approximately $2,880,000 of interest expense in
2002 due to the retirement of our Original Senior Credit Facility in September
of 2002, the letter agreement dated as of May 29, 2002 to convert the $5 million
Stout debenture whose interest rate was 11.5% into equity and lower interest
rates. In addition, we recorded a $1,080,000 charge for the termination of our
interest rate swap derivative agreements in 2001 that was not present in 2002.
These amounts were largely offset by $2,761,000 in higher beneficial conversion
feature charges in 2002, $502,000 in forbearance fees for the Master Credit
Facility and $280,000 in increased interest expense in 2002 resulting from
penalties for failure to file registration statements for some of our debt and
equity offerings.

Income Tax Provision (Benefit)

We recorded an income tax benefit from continuing operations of $4,093,000
in 2002, as compared to an income tax provision of $435,000 from continuing
operations in 2001. The provision in 2001 was primarily due to an increase in
the valuation allowance for our deferred tax assets, as we determined that it
was more likely than not that we would not be able to generate sufficient
taxable income to use any of our net deferred tax assets. However, the sale of
Clean Earth in 2002 and the results of discontinued operations prior to the
completion of the sale transaction resulted in sufficient taxable income within
the current period to realize an immediate benefit from a portion of the loss
from continuing operations in 2002.

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

Revenues

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

Gross Profit

Gross profit from continuing operations decreased by $1,591,000, or 24%
compared to 2000, mainly due to lower sales. The gross margin as a percentage of
sales also declined, from 9.2% in 2000 to 8.9% in 2001. Our performance was
negatively impacted by an underabsorption of manufacturing overhead resulting
from operating as many as nine different manufacturing and recycling facilities
while experiencing sales declines in several product lines. We concluded from
these events that in order to provide the appropriate level of customer service
and achieve the operating margins that are necessary to compete in the
businesses in which we operate, we needed to restructure our manufacturing
"footprint" by reducing the number of facilities we

39

operate in without reducing our overall manufacturing capacity. We believe we
have accomplished this with the final phase of our restructuring plan which
began in the fourth quarter of 2000 (see "-- Restructuring, Equipment and
Inventory Impairment Charges").

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

Selling, general and administrative expenses ("SG&A") from continuing
operations, exclusive of restructuring and asset impairment charges, increased
by $856,000 in 2001 to $19,109,000 compared to $18,253,000 in 2000. Significant
reductions in marketing, selling and administrative expenses in 2001 were more
than offset by an accrual of $1,844,000 in connection with the Southern Wood
arbitration award, expenses related to the common stock purchase agreement with
Fusion Capital ($555,000) and increased legal expenses due to the Southern Wood
case and other litigation, an increase in workers' compensation liabilities
($662,000) and increased legal, printing and audit fees ($150,000) in connection
with our filing a registration statement and the subsequent review by the SEC.
As a percentage of net sales, SG&A increased to 33.0% in 2001 from 24.9% in
2000.

Operating Loss

Operating loss from continuing operations was $25,468,000 in 2001 as
compared to $14,713,000 in 2000, an increase of $10,755,000. The increase was
mainly due to asset impairment charges in 2001 of $11,493,000 compared to
restructuring and asset impairment charges in 2000 of $3,185,000 and, to a
lesser extent, higher SG&A expenses and lower gross profit.

Interest Expense

Interest expense increased by $4,306,000 in 2001 to $12,483,000 as compared
to $8,177,000 in 2000. The change was due primarily to an increase in
amortization of deferred financing costs ($1,606,000), increased amortization of
discounts on convertible subordinated debentures ($588,000), termination of our
interest rate swap derivative agreements ($1,080,000) and penalties associated
with our failure to file a registration statement in connection with the
issuance of a convertible subordinated debenture and a common stock private
placement ($410,000) in 2001. The $4,000,000 convertible subordinated debenture
issued on June 15, 2001 paid interest at 18% through August 15, 2001 and 25%
thereafter. The remainder of the increase was mainly due to amendments in our
Senior Credit Facility in 2001 whereby we were prohibited from borrowing based
on the more favorable LIBOR rates that were available to us in 2000, and which
increased the spread over the prime rate by an additional 150 basis points. In
addition, we recorded a charge of $1,684,000 in 2000 for prepayment penalties
and the write off of deferred loan costs for the early termination of certain
debt that was not present in 2001.

Income Tax Expense (Benefit)

We recorded a provision for income taxes from continuing operations in 2001
of $435,000, as compared to an income tax benefit of $5,251,000 in 2000. During
2001 we determined that it was more likely than not that we would not be able to
generate sufficient taxable income to use any net deferred tax assets. As such,
we fully reserved for the net deferred tax asset that existed at December 31,
2000 and increased our valuation allowance so that no net tax benefit was
recorded in 2001.

Effect of New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121.

40

We adopted the provisions of SFAS No. 142 on January 1, 2002. Upon adoption
of SFAS No. 142 we were required to evaluate our 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 new criteria for
recognition apart from goodwill. SFAS No. 142 also required us to perform an
assessment of whether there is an indication that goodwill is impaired as of the
date of adoption. To accomplish this, we identified our reporting units and
determined 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. Based on an independent third party
valuation of each of our reporting units (which included discounted cash flow
analysis and a review of comparable publicly traded companies and comparable
merger and acquisition transactions) and a comparison to each reporting unit's
carrying amount as of January 1, 2002, we did not record any goodwill
impairment. In addition, we performed our required annual impairment test of
goodwill as of October 31, 2002 and did not record any goodwill impairment.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". That standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002, with earlier
adoption permitted. We do not expect the adoption of SFAS No. 143 to have a
material effect on our consolidated results of operation or financial position.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. We adopted the provisions of SFAS No.
144 on January 1, 2002 and the adoption did not have a material effect on our
statement of financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 will rescind SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result of SFAS No.
145, the criteria in APB No. 30 will now be used to classify those gains and
losses. We have elected early application of the provisions of the Statement
related to the rescission of Statement 4. As a result, we reclassified the
extraordinary loss on early extinguishment of debt in 2000 of $1,684,000 net of
tax benefit of $656,000 into loss from continuing operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit (including restructuring) or disposal
activities at fair value when the related liability is incurred rather than at
the date of a commitment to an exit or disposal plan under current practice.
Costs covered by the standard include certain contract termination costs,
certain employee termination benefits and other costs to consolidate or close
facilities and relocate employees that are associated with an exit activity or
disposal of long-lived assets. The new requirements are effective prospectively
for exit or disposal activities initiated after December 31, 2002 and will be
adopted by the Company effective January 1, 2003. The adoption of SFAS No. 146
is expected to impact the timing of recognition of costs associated with future
exit and disposal activities.

41

In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." The Statement amends the transition
provisions of SFAS No. 123 for companies that choose to adopt the fair value
based method of accounting for stock based employee compensation. The Statement
does not amend the provisions of SFAS No. 123 which allow for entities to
continue to apply the intrinsic value-based method as prescribed in APB No. 25,
"Accounting for Stock Issued to Employees", however it does amend some of the
disclosure requirements regardless of the method used to account for stock-based
employee compensation.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation addresses the
disclosures required to be made by a guarantor in its interim and annual
financial statements. It also clarifies that a guarantor is required to
recognize at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. This interpretation was
effective for disclosure purposes as of December 31, 2002 and the recognition
provisions are effective for all guarantees issued or modified after December
31, 2002. As of December 31, 2002 we had no material guarantees for disclosure
purposes.

Interpretation No. 46, "Consolidation of Variable Interest Entities",
clarifies the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. Interpretation No.
46 is applicable immediately for variable interest entities created after
January 31, 2003. For variable interest entities created prior to January 31,
2003, the provisions of Interpretation No. 46 are applicable no later than July
1, 2003. We do not expect this Interpretation to have an effect on our
consolidated financial statements.

Seasonality

Sales of some of our building products tend to be significantly lower in
the winter months, which can materially impact our results of operations in the
first and fourth quarters of our fiscal year.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our major market risk exposure is to changing interest rates. We currently
do not engage in any hedging activities to manage this risk. At December 31,
2002, we had outstanding indebtedness of approximately $30.0 million, of which
approximately $17.5 million was debt with variable interest rates. A 100 basis
point increase in interest rates would reduce our annual earnings and cash flow
by approximately $175,000 based on our outstanding debt at December 31, 2002. We
also have market risk exposure with respect to petroleum prices. Petroleum
prices impact the cost of our raw materials.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

42

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
U.S. Plastic Lumber Corp.
Boca Raton, Florida

We have audited the accompanying consolidated balance sheet of U.S. Plastic
Lumber Corp. and subsidiaries as of December 31, 2002 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The accompanying financial statements
of U.S. Plastic Lumber Corp. and subsidiaries as of December 31, 2001, and for
each of the years in the two-year period ended December 31, 2001 were audited by
other auditors whose report dated March 22, 2002, expressed an unqualified
opinion on those statements, before the restatements and reclassifications
related to the discontinued operations and the adoption of Statement of
Financial Accounting Standards No. 145 described in the summary of significant
accounting policies to the financial statements. Their report contained an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of U.S. Plastic
Lumber Corp. and subsidiaries at December 31, 2002 and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

As discussed above, the financial statements of U.S. Plastic Lumber Corp.
and subsidiaries as of December 31, 2001, and for each of the years in the
two-year period then ended were audited by other auditors. As described in the
summary of significant accounting policies to the financial statements, those
financial statements have been restated and reclassified for the discontinued
operations and the adoption of Statement of Financial Accounting Standards No.
145. We audited the adjustments that were applied to restate and reclassify the
2001 and 2000 annual financial statements. Our procedures included (a) agreeing
the restated and reclassified consolidated balance sheet, statements of
operations and statements of cash flows to the Company's underlying analysis
obtained from management and (b) testing the mathematical accuracy of the
underlying analysis. In our opinion, such adjustments are appropriate and have
been properly applied. However, we were not engaged to audit, review, or apply
any procedures to the 2001 and 2000 financial statements of the Company other
than with respect to such adjustments and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 and 2000 financial statements
taken as a whole.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has an accumulated deficit of $77 million and a working capital deficit of $9.7
million at December 31, 2002, and has not achieved compliance with the financial
covenants contained in its credit facility that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 7 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" on January 1, 2002.

BDO SEIDMAN, LLP

Miami, Florida
April 11, 2003

43

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of U.S.
Plastic Lumber Corp. (a Nevada Corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the two year
period ended December 31, 2001, before the restatements and reclassifications
related to the discontinued operations and the adoption of Statement of
Financial Accounting Standard No. 145 described in the summary of significant
accounting policies to the financial statements. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the 2001 and 2000 consolidated financial statements (before
the restatements and reclassifications) referred to above present fairly, in all
material respects, the financial position of U.S. Plastic Lumber Corp. and
subsidiaries as of December 31, 2001 and the results of their operations and
their cash flows for each of the years in the two year period ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations, has an accumulated deficit and a working capital deficit
of approximately $61.0 million and $60.5 million, respectively, and has not made
its scheduled principal and interest payments on its Senior Credit Facility. The
Company's failure to make its principal and interest payments constitute an
event of default that permits the lenders under the Senior Credit Facility to
accelerate their maturity. The Company currently does not have the financial
resources to repay its debt obligations as they become due. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ KPMG LLP
--------------------------------------
KPMG LLP

Miami, Florida
March 22, 2002

44

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001

See accompanying summary of significant accounting policies and notes
to consolidated financial statements.

45

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying summary of significant accounting policies and notes
to consolidated financial statements.

46

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying summary of significant accounting policies and notes
to consolidated financial statements.

47

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

See accompanying summary of significant accounting policies and notes
to consolidated financial statements

48

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

U.S. Plastic Lumber Corp. and its subsidiaries (collectively the "Company")
are engaged in the manufacturing of alternative wood and other specialty
products made primarily from recycled plastic. Prior to September 9, 2002, the
Company also provided environmental remediation services, including recycling of
soils that had been exposed to hydrocarbons and the beneficial reuse of dredge
materials. The Company's customers are located throughout the United States,
however the Company does have a small number of international customers. The
Company's environmental recycling customers were located primarily in the
Northeastern United States.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
U.S. Plastic Lumber Corp. and its wholly-owned subsidiaries U.S. Plastic Lumber
LTD, Eaglebrook Group, Inc., US Plastic Lumber Finance Corporation, US Plastic
Lumber IP Corporation and Quakertown LLC. The accompanying consolidated
financial statements also include the accounts of the joint venture between the
Company and Interstate Industrial Corp. (see note 2), for which the Company held
a 51.1% ownership interest during 2002, 2001 and 2000. The joint venture was
terminated as of December 31, 2002. All significant intercompany balances and
transactions have been eliminated in consolidation.

RESTATEMENTS AND RECLASSIFICATIONS

As discussed in Note 2, the Company completed the sale of its environmental
recycling and remediation business on September 9, 2002 and the effects of the
sale are reflected in the Company's consolidated financial statements. The
results of operations of this business segment from January 1, 2002 through the
date of the sale is included in Income from Discontinued Operations in the
Company's Consolidated Statement of Operations for 2002. All prior periods
presented in the consolidated financial statements have been restated to reflect
the environmental recycling and remediation business as a discontinued
operation. As a result of the Company's adoption of Statement of Financial
Accounting Standard No. 145, the extraordinary loss on the early extinguishment
of debt recorded in 2000 of approximately $1.0 million, net of taxes, has been
reclassified to interest expense from continuing operations. In addition, where
appropriate, certain amounts in 2001 and 2000 have been reclassified to conform
to the 2002 presentation.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company records an allowance for doubtful accounts based on
specifically identified amounts that are believed to be uncollectible. An
additional allowance is also recorded based on certain percentages of the
Company's aged receivables, which are determined based on historical experience
and the Company's assessment of the general financial conditions affecting its
customer base. If actual collections experience

49

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

changes, revisions to the allowance may be required. The Company has a limited
number of customers with individually large amounts due at any given balance
sheet date. Any unanticipated change in one of those customer's credit
worthiness or other matters affecting the collectibility of amounts due from
such customers, could have a material affect on the Company's results of
operations in the period in which such changes or events occur. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.

INVENTORIES

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

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renewals, improvements and betterments are capitalized.
Leasehold improvements are amortized over the shorter of the underlying lease
term or the asset's useful life. Applicable interest charges incurred during the
construction of new facilities are capitalized and amortized over the asset's
estimated useful lives.

Property, plant and equipment held for sale amounting to $637,960 and
$1,070,966 at December 31, 2002 and 2001 respectively is stated at estimated net
realizable value and is not being depreciated.

IMPAIRMENT OF LONG LIVED ASSETS

It is the Company's policy to review the carrying value of patents and
patent rights and property, plant and equipment based on an evaluation of such
factors as the occurrence of a significant adverse event or changes in the
environment in which the business operates. The Company accounts for long-lived
assets in accordance with the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long
Lived Assets." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. See note 11 for asset impairment charges for 2002, 2001 and 2000.

GOODWILL

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121. The Company adopted the provisions of SFAS No. 142
on January 1, 2002.

50

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

REVENUE RECOGNITION

Revenues are recognized at the date products are shipped and risk of
ownership transfers to the buyer. Title passes to the customer upon shipment of
goods. The Company generally does not accept returns or issue credits for
damaged or defective goods if not notified by the customer within five days from
the date of delivery. In the event that the Company accepts a claim from a
customer, the Company has sole discretion with regard to replacing the goods,
repairing the product or issuing a credit to the customer. The Company has a
warranty policy for its plastic lumber products which includes a warranty period
ranging from seven to fifty years, depending on the type of product, for
structural damage. The Company's liability for warranty claims is limited to the
replacement of substitute product. The cost of product warranties are accrued
for based on a percentage of sales of the applicable products. Factors that
impact this percentage include the Company's historical experience in this
industry since 1997, the prior experience of businesses it has acquired and
current and estimated future trends that are believed to be indicative of future
warranty claims.

STOCK-BASED COMPENSATION

The Company has granted stock options to key employees and directors under
stock option plans that are more fully described in note 10. The Company
accounts for those plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Stock-based employee compensation cost reflected in net income is
not significant, as substantially all options granted under those plans had an
exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect on
net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation:

For purposes of the above disclosure, the determination of the fair value
of stock options granted in 2002, 2001 and 2000 was based on the following: (i)
a risk free interest rate of 2.5% to 5%, 5% and 7% respectively; (ii) expected
option lives of three to ten years, four years and four years respectively;
(iii) expected volatility in the market price of the Company's common stock of
85%, 100% and 100% respectively; and (iv) expected dividends on the underlying
common stock of 0%, 0% and 2.5% respectively.

The weighted average fair value of options granted to employees were $0.14,
$0.93 and $2.96 per share for the years ended December 31, 2002, 2001 and 2000
respectively.

The Company has no other equity based compensation plans for its employees.

INCOME TAXES

The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires the recognition of deferred
tax liabilities and assets for the expected future tax

51

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

consequences of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities.

ADVERTISING COSTS

Advertising production costs are expensed the first time the advertisement
is run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising costs charged to operations were $880,000,
$1,817,000 and $3,551,000 in 2002, 2001 and 2000 respectively.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade receivables. The Company maintains its cash and cash equivalents with
various financial institutions throughout the United States. At December 31,
2002, the Company had bank balances of approximately $354,000 in excess of
amounts insured by federal deposit insurance. Trade receivables are concentrated
primarily in the United States. The Company does not normally require collateral
from its customers. The Company is not dependent upon a single customer or a few
customers for the continuation of its business. No single customer accounts for
sales equal to or greater than 10% of the Company's consolidated revenues for
the years ended December 31, 2002, 2001 and 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments include cash and cash equivalents, receivables, note
receivable, accounts payable, accrued expenses, senior secured notes payable,
subordinated notes and debentures and other non-current liabilities. For certain
instruments, including cash and cash equivalents, trade accounts receivable,
accounts payable and accrued expenses, the carrying amount approximates fair
value due to their short maturity. The carrying value of the note receivable
(included in other assets in the consolidated balance sheet) approximates its
fair value due to the relative stability in interest rates since its issuance
date of September 2002. The carrying amount of senior secured notes payable also
approximates their fair value due to variable interest rates. The estimated fair
value of the Company's other financial instruments at December 31, 2002 are as
follows:

At December 31, 2001 the carrying value of the above financial instruments
approximated their fair value.

EARNINGS (LOSS) PER SHARE

Basic earnings or loss per share is computed by dividing net earnings or
loss attributable to common stockholders by the weighted average number of
shares outstanding during the year. Diluted earnings or loss per share
attributable to common stockholders further considers the impact of dilutive
common stock equivalents. Diluted loss per share is equal to basic loss per
share for 2002, 2001 and 2000 because the effect of the additional shares which
would be issued assuming conversion of convertible debentures, convertible
preferred stock and outstanding common stock options and warrants are
anti-dilutive in each of the three years.

The aggregate amount of securities that could potentially dilute EPS in
future years at December 31, 2002, 2001 and 2000 were 8,963,603, 56,512,033 and
6,902,329 respectively.

52

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

COMPREHENSIVE INCOME

During the years ended December 31, 2002, 2001 and 2000 the Company did not
have any changes in its stockholders equity resulting from non-owner sources.
Accordingly, comprehensive income was equal to the net income/loss amounts
presented in the statements of operations. See note 16 for further information.

SEGMENT REPORTING

On September 9, 2002 the Company completed the sale of its Clean Earth,
Inc. subsidiary, whose subsidiaries comprised the Company's Environmental
recycling division. As a result the Company has determined that it has only one
operating segment. This determination is based primarily on the similar nature
of the Company's remaining products and production processes utilized.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". That standard requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. When the liability is initially recorded, the entity will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the obligation
for its recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002, with earlier
adoption permitted. The Company does not expect the adoption of SFAS No. 143 to
have an effect on its consolidated results of operation and financial position.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, it retains many of the fundamental
provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business. However,
it retains the requirement in APB Opinion No. 30 to report separately
discontinued operations and extends that reporting to a component of an entity
that either has been disposed of (by sale, abandonment, or in a distribution to
owners) or is classified as held for sale. The Company adopted the provisions of
SFAS No. 144 on January 1, 2002 and the adoption did not have a material effect
on the Company's statement of financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 will rescind SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result of SFAS No.
145, the criteria in APB No. 30 will now be used to classify those gains and
losses. The Company has elected early application of the provisions of the
Statement related to the rescission of Statement 4. As a result, the Company
reclassified the extraordinary loss on early extinguishment of debt in 2000 of
$1,684,000 net of tax benefit of $656,000 into loss from continuing operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit (including restructuring) or disposal
activities at fair value when the related liability is incurred rather than at
the date of a commitment to an exit or disposal plan under current practice.
Costs covered by the standard include certain contract termination costs,
certain employee termination benefits and other costs to consolidate or close
facilities and relocate employees that are associated with an exit activity or
disposal of long-lived assets. The new

53

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

requirements are effective prospectively for exit or disposal activities
initiated after December 31, 2002 and will be adopted by the Company effective
January 1, 2003. The adoption of SFAS No. 146 is expected to impact the timing
of recognition of costs associated with future exit and disposal activities.

In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." The Statement amends the transition
provisions of SFAS No. 123 for companies that choose to adopt the fair value
based method of accounting for stock based employee compensation. The Statement
does not amend the provisions of SFAS No. 123 which allow for entities to
continue to apply the intrinsic value-based method as prescribed in APB No. 25,
"Accounting for Stock Issued to Employees", however it does amend some of the
disclosure requirements regardless of the method used to account for stock-based
employee compensation. See "STOCK-BASED COMPENSATION."

54

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity and ability to meet its financial obligations and
maintain its current operations in 2003 and beyond will be dependent on its
ability to meet the payment obligations under and maintain compliance with the
financial covenants in its various debt agreements and provide financing for
working capital. The Company's senior secured credit facility with Guaranty
Business Credit Corporation (the "GBCC Credit Facility") and its Master Credit
Facility equipment term loans both contain significant financial covenants,
including but not limited to the requirement to achieve specified levels of
earnings before interest, taxes, depreciation and amortization ("EBITDA"), which
is measured periodically throughout the term of these agreements. The Company
did not meet its EBITDA requirement under the GBCC Credit Facility for the month
of January 2003 and has notified the lender that it will not be in compliance
with the February 2003 covenant. Although the Company has yet to obtain a waiver
for these covenant violations, to date the lender under that facility has not
taken any action against the Company. The Company has a history of operating
losses and past inability to comply with similar financial covenant
requirements. In the absence of a written waiver, any failure to comply with the
covenants under the Company's GBCC Credit Facility and Master Credit Facility in
2003 could lead to a demand for immediate repayment of the outstanding balance
due under the facility. Such an occurrence would have a material adverse effect
upon the Company as it does not have the resources to repay these amounts should
they become immediately due without obtaining additional debt and/or equity
financing.

Notwithstanding the January and February 2003 covenant violations with
respect to the GBCC Credit Facility, the Company believes that the steps taken
in 2002 to restructure its balance sheet, as more fully described in notes 2, 8
and 9, as well as improvements made to its products in 2002 and increased demand
for such products that is anticipated in 2003 and beyond, will allow the Company
to meet its financial obligations in 2003. The Company will also look to obtain
additional financing from its Chicago Property, which currently is not held as
collateral by any of the Company's creditors, or through the sale of selected
assets. There can be no assurances that this course of action will be
successful.

At December 31, 2002 the Company has a working capital deficit and
accumulated deficit of $9.7 million and $77.0 million respectively. Capital
requirements relating to the implementation of the Company's business plan have
been and will continue to be significant. As a result of the Company's past
financial performance, and because substantially all of its assets have been
pledged as collateral under its current debt agreements, the Company may not be
able to obtain additional external debt and/or equity financing to fund its
operations in 2003 and beyond should it become necessary, which raises
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

2. DISCONTINUED OPERATIONS

On September 9, 2002, the Company completed the sale of all of the issued
and outstanding capital stock of Clean Earth, Inc., its wholly-owned subsidiary
which together with its subsidiaries comprised the Company's environmental
recycling division ("Clean Earth"), to a subsidiary of two private equity
investment groups.

The purchase price received in the Clean Earth sale transaction consisted
of: $45,155,124 in cash paid at the closing, net of purchase price adjustments,
of which $1.0 million was placed in escrow, and a 5.0% subordinated promissory
note issued by the purchaser in the original principal amount of $3.5 million
maturing on September 9, 2012, subject to certain adjustments and rights of
set-off. The purchase price remains subject to various adjustments set forth in
the purchase agreement based upon a final audited closing date balance sheet
that was delivered after the closing if the adjusted long-term debt and adjusted
working capital set forth on the final audited closing date balance sheet differ
from the amounts of such items set forth on the estimated closing date balance
sheet, upon which adjustments to the cash portion of the purchase price at the
closing

55

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

were based. A dispute has arisen between the Company and the purchaser regarding
the final audited closing date balance sheet as the purchaser and Clean Earth
have sought a purchase price adjustment in the amount of approximately
$4,000,000 to the purchase price due to various closing adjustments. The Company
filed litigation against the purchaser and Clean Earth on January 2, 2003,
alleging that the audit process had been subverted through fraud as it relates
to certain adjustments claimed by the purchaser and Clean Earth. The Company
cannot predict the outcome of this litigation. In the event that a portion or
the entire amount of the purchase price adjustment sought by the purchaser and
Clean Earth are upheld, the adjustments would be paid first out of the $1.0
million held in escrow, and second, at the option of the purchaser, as a
reduction in the principal amount of the $3.5 million subordinated promissory
note or cash reimbursement to the purchaser from the Company.

The Company realized net cash proceeds, after the $1.0 million escrow
withholding and transaction expenses, of approximately $41.5 million, and
recorded a pre-tax gain on the sale transaction of $1,076,000, and a loss after
taxes of $2,431,000. The net proceeds from the sale of Clean Earth were used to
retire the entire principal balance of the Senior Credit Facility dated June 30,
2000 (the "Original Senior Credit Facility") in the amount of $37,900,000, and
to pay down certain other indebtedness. The $3.5 million subordinated promissory
note has been valued by the Company at $500,000, based on the advice of the
investment banking firm which provided a fairness opinion on the sale
transaction and taking into account the specific characteristics and inherent
risks of the note. This amount is recorded in Other Assets in the Company's
balance sheet at December 31, 2002.

In addition, the receivables pursuant to (i) the Company's ownership
interest in the joint venture between Interstate Industrial Corp. and the
Company; and (ii) the Quakertown Foundry Site Agreement between Integrated
Technical Services, a subsidiary of Clean Earth, and the Pennsylvania Department
of Environmental Protection (see note 4) were not included as part of the
purchase agreement. The net book value of these receivables was $1,000,000 as of
December 31, 2002. Net revenues from the discontinued environmental recycling
business are summarized as follows (in thousands):

3. ACQUISITIONS

2000 ACQUISITIONS

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

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

56

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

The unaudited pro forma combined results of operations of the Company and
all of its subsidiaries for the year ended December 31, 2000 after giving effect
to certain pro forma adjustments as if the Baron acquisition had taken place on
January 1, 2000, are as follows (in thousands except share data):

The foregoing unaudited pro forma results of operations reflect adjustments
for amortization of goodwill, depreciation on re-valued buildings and equipment
and interest on cash paid to the sellers. Per share amounts are calculated after
preferred dividends are subtracted from loss from continuing operations and net
loss. They do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions occurred at January 1, 2000 or
of future results of operations of the consolidated entities.

4. ACCOUNTS RECEIVABLE, NET

Accounts receivable consist of the following at December 31, 2002 and 2001
(in thousands):

Trade receivables are customer obligations due under normal trade terms.
The Company sells its products to distributors and original equipment
manufacturers involved in a variety of industries including traditional lumber,
transportation, produce and beverage distributors, and window, door and outdoor
spa manufacturers. The Company continually performs credit evaluations of its
customers' financial condition and although the Company generally does not
require collateral, letters of credit may be required from some customers in
certain circumstances.

Management reviews accounts receivable on a monthly basis to determine if
any receivables will potentially be uncollectible. The allowance for doubtful
accounts include any accounts receivable balances that are determined to be
uncollectible, along with a general reserve. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on the information available to the

57

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company, management believes the allowance for doubtful accounts as of December
31, 2002 is adequate. However, actual write-offs might exceed the recorded
allowance.

In 1999 and 2000 the Company's environmental recycling division was
involved in a project with the Pennsylvania Department of Environmental
Protection ("PaDEP") in which work was performed beyond the original scope of
the project. The additional work was required in order to meet the objectives of
the project, which were mutually agreed upon by the PaDEP and the Company, and
to avoid further consequential damages. When the project was completed, the
Company put in a claim to PaDEP for approximately $6.7 million as compensation
for this additional work, an amount which was disputed by PaDEP. The Company
retained outside counsel and two independent consulting firms with experience in
these matters to represent it, and at December 31, 2000 had a receivable balance
of approximately $4.2 million in connection with this claim. This amount was
based on management's expectation of recovery of the extra costs, as well as the
advice of outside counsel as to what the Company was likely to recover upon
completion of the dispute resolution process. On July 19, 2001 PaDEP offered to
pay the Company approximately $284,000 in full and complete settlement of this
claim. The Company rejected this offer and demanded a pre-settlement hearing on
this matter, which took place on November 19, 2001. On January 4, 2002 PaDEP
rendered a pre-settlement hearing decision and recommended a payment to the
Company of approximately $1 million. Because the Company strongly believes in
the merits of its claim and its ability to support it with the appropriate
facts, documentation and expert opinions, the Company also rejected this offer
and proceeded with the next step in the dispute resolution process, which is a
formal hearing with the Board of Claims for Pennsylvania. In January of 2003
PaDEP reiterated its offer to settle this claim with the Company for
approximately $1,000,000. The Company rejected this offer and the hearing with
the Board of Claims for Pennsylvania is scheduled to take place later in 2003.
As discussed in note 2, the Company retained all of the rights to this claim for
payment after the sale of Clean Earth. At December 31, 2001 the Company
established an allowance for this receivable to reduce its carrying amount to
the amount that PaDEP has offered for settlement, resulting in a $3,180,000
charge to bad debt expense in 2001. This charge is currently reflected within
Income (loss) from discontinued operations for 2001 in the Company's
consolidated Statement of Operations.

5. INVENTORIES

Inventories consist of the following at December 31, 2002 and 2001 (in
thousands):

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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment consist of the following at December 31, 2002
and 2001 (in thousands):

7. GOODWILL AND OTHER INTANGIBLE ASSETS

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121.

The Company adopted the provisions of SFAS No. 142 on January 1, 2002. Upon
adoption of SFAS No. 142 the Company was required to 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 new criteria for recognition apart from goodwill.

In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 required 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 identified its reporting units and determined 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. Based on an independent third party valuation of each of the
Company's reporting units (which included discounted cash flow analysis and a
review of comparable publicly traded companies and comparable merger and
acquisition transactions) and a comparison to each reporting unit's carrying
amount as of January 1, 2002, the Company did not record any goodwill
impairment. In addition, the Company performed its required annual impairment
test of goodwill as of October 31, 2002 and did not record any goodwill
impairment.

At December 31, 2002, the Company has approximately $12.7 million of
unamortized goodwill and unamortized patent rights in the amount of
approximately $0.5 million which are subject to the annual impairment testing
provisions of SFAS No. 142. These patent rights, the majority of which were
acquired in 1998 and are primarily related to the manufacture of some of the
Company's structural lumber and

59

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

transportation products, are being amortized over twelve years. The following
table summarizes the carrying value of the Company's amortizable intangible
assets as of December 31, 2002 and 2001:

Aggregate amortization expense from continuing operations for these
intangible assets was $69,000, $68,000 and $72,000 for the years ended December
31, 2002, 2001 and 2000 respectively. Aggregate amortization expense is expected
to be approximately $69,000 per year for each of the next five years.

At December 31, 2001 the Company had an unamortized permit in the amount of
approximately $8.1 million, which was acquired in a purchase business
combination by the Company's discontinued environmental recycling division in
1999. Upon adoption of SFAS No. 142 on January 1, 2002 the Company determined
that the permit had a useful life of 18 years as of January 1, 2002 and adjusted
its amortization from 25 years effective with that date. In connection with the
adoption of SFAS 142, the Company ceased amortization of goodwill effective
January 1, 2002. Had SFAS No. 142 been in effect for the twelve months ended
December 31, 2001, and 2000, net loss from continuing operations, net loss and
loss per share would have been as follows (in thousands except per share data):

During 2001, the Company recorded approximately $1.1 million in goodwill
impairment pertaining to its continuing operations (see note 11).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. NOTES AND CAPITAL LEASES PAYABLE

Notes payable and capital leases consist of the following at December 31,
2002 and 2001 (in thousands):

On June 30, 2000 the Company entered into the Original Senior Credit
Facility with three banks. The Original Senior Credit Facility provided for a
$30,000,000 term loan and a $15,000,000 revolving credit line. While the
Original Senior Credit Facility, as amended, was to have terminated on July 2,
2002, the lenders under the facility agreed to defer payment until the sale of
Clean Earth could be completed. The sale of Clean Earth closed on September 9,
2002 and the Company used a portion of the net proceeds from the transaction to
retire the outstanding balance on the facility of $37,900,000. The weighted
average interest rate on the Original Senior Credit Facility was approximately
8.0% and 9.1% during 2002 and 2001 respectively.

Upon the retirement of the Original Senior Credit Facility, the Company
entered into a new Senior Credit Facility (the Replacement Senior Credit
Facility) with the same lending group, which provided for a revolving line of
credit, secured by the Company's receivables, inventory and certain property,
plant and equipment. The Company borrowed $3 million under this facility in
2002. When the facility was terminated on December 20, 2002, the Company repaid
$2 million of the outstanding principal. The remaining $1 million was converted
into notes payable to these same lenders on a pro rata basis relative to their
respective lending commitments under the Replacement Senior Credit Facility.
These notes (the "Quakertown Notes") are secured by the Quakertown claim
receivable (see note 4) and mature December 19, 2005. Under the terms of the
Original Senior Credit Facility and subsequent agreements entered into by the
Company and the lenders, the lenders agreed to forgo approximately $3.2 million
in deferred interest, fees and penalties that were accrued and payable under the
Original Senior Credit Facility. The Quakertown notes pay interest at 25%, of
which 10% is payable monthly in cash and the remainder may, at the option of the
Company, be paid in kind in the form of additional principal on the Quakertown
Notes until the notes mature or are retired. In addition, depending upon the
timing and amount of the settlement of the Quakertown claim receivable, the
lenders under the Original Senior Credit Facility may receive an additional
payment of up to 80% of the proceeds of the Quakertown claim receivable after
giving effect to payment of legal fees not to exceed $150,000 and the $1.0
million principal amount due under the Quakertown Notes. This transaction is
accounted for as a modification of debt terms under a troubled debt
restructuring, and the $3.2 million that the lenders agreed to forgo is carried
on the Company's balance sheet in Other Non-current Liabilities.

On December 20, 2002, the Company obtained a three-year secured senior
credit facility with Guaranty Business Credit Corporation (the "GBCC Credit
Facility"), dated as of December 19, 2002. The GBCC Credit Facility is comprised
of a $3.0 million term loan and a commitment for up to $10.0 million in the form

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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of a revolving line of credit. Principal on the term loan is amortized over a
seven year period and payable monthly, with the remaining amount due at the end
of the three-year term of the facility. Advances under the revolving line of
credit are based upon a percentage of the Company's accounts receivable and
inventory and subject to the satisfaction of certain conditions set forth in the
loan agreement. The initial term of the loan agreement is three years subject to
extension from year to year after the expiration of the initial term unless
either party terminates the loan agreement. The revolving line of credit pays
monthly interest at a rate of prime plus 1.0%, and the term loan pays monthly
interest at a rate of prime plus 1.5%. The prime rate of interest was 4.25% as
of December 31, 2002.

The GBCC Credit Facility is guaranteed by the Company and these guaranties
are secured by substantially all of the Company's assets, excluding (i) certain
options to purchase the real estate located in Chicago, Illinois (the "Chicago
Property"), (ii) the Quakertown claim receivable. The facility required the
Company to maintain excess levels of availability, as defined, under the
revolving credit line of $2,550,000 and $2,150,000 for the months ending
December 31, 2002 and January 31, 2003 respectively. After giving effect to this
excess availability requirement, approximately $391,000 was available under the
revolving credit line as of December 31, 2002. In addition, the financial
covenants contained in the GBCC Credit Facility require, among other things, a
minimum level of earnings before interest, taxes, depreciation and amortization
("EBITDA") to be achieved in the month of January 2003, and to maintain certain
ratios of debt service to EBITDA, as defined, measured monthly throughout the
term of the facility. The Company was not in compliance with the January minimum
EBITDA covenant and has notified the lender that it will not be in compliance
with the February 2003 covenant. Although the Company has yet to obtain a waiver
for these covenant violations, to date Guaranty Business Credit Corporation has
taken no action against the Company. At December 31, 2002, $3.0 million was
outstanding under the term loan and approximately $161,000 was advanced under
the revolving line of credit, and these obligations are classified as current
liabilities in the accompanying consolidated balance sheet.

The Company has not made principal payments on equipment term loans of its
Master Credit Facility since December of 2001 and, as of September 30, and
December 31, 2001, was not in compliance with the tangible net worth covenant
under the Master Credit Facility. On February 28, 2002 the Company and the
lending group under the facility, led by GE Capital Corporation ("the GE Lending
Group") agreed to and signed a Forbearance and Modification Agreement which
restructures the Master Credit Facility by allowing the Company to defer
principal payments while continuing to make interest payments, and providing a
waiver of the September 30, and December 31, covenant violations. The
forbearance and Modification Agreement was subsequently amended on May 30, 2002
and again on June 14, 2002 to, among other things, extend the forbearance period
and modify certain other terms of the agreement. The Company continued to make
regularly scheduled interest payments under the Master Credit Facility
throughout 2002, and the outstanding balance on the facility at December 31,
2002 is approximately $11,356,000, and the interest rate was approximately 4.9%

In connection with entering into the agreements related to the GBCC Credit
Facility, the Company entered into the Amended and Restated Waiver and
Modification Agreement (the "GE Agreement") with the GE Lending Group. Under the
terms of the GE Agreement, monthly principal payments will resume in July 2003.
Aggregate scheduled principal payments under the agreement are $225,000 in 2003,
$750,000 in 2004 and $1,025,000 in 2005, with the remainder of the outstanding
principal balance due and payable on December 31, 2005. In consideration for
restructuring the terms of the Master Credit Facility, which includes a waiver
of all past defaults and financial covenant violations, the GE Lending Group
received a waiver and amendment fee of $500,000, $225,000 of which was paid at
closing, and the remainder of which will be paid in monthly installments through
June of 2003, and additional collateral in the form of a pledge of certain
options to purchase the Chicago Property and a junior security interest in other
equipment owned by the Company. Under the terms of the GE Agreement, the Company
is required to exercise the purchase options related to the Chicago Property not
later than May 1, 2003. If the Company fails to effect such purchase, General

62

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Electric Capital Corp. has the right to cause the Company to exercise these
options and to provide financing on discretionary terms. The purchase price of
the Chicago Property under these purchase options is $3 million.

In connection with the GBCC Credit Facility, the Company has entered into
subordination agreements with the GE Lending Group and Halifax Fund, L.P. (see
note 9), whereby these lenders have subordinated liens on assets secured by the
GBCC Credit Facility. In addition, Guaranty Business Credit Corporation has
entered into subordination and intercreditor arrangements with both the GE
Lending Group and Halifax Fund, L.P.

Other Notes Payable in 2002 consists of dividends in arrears on preferred
stock of approximately $754,000 (see note 10) and a $500,000 trade payable that
were converted into three-year promissory notes paying quarterly interest
ranging from 5% to 8%. Other Notes Payable in 2001 pertained to notes securing
certain equipment obtained in the Baron's acquisition (see Note 3), Which were
paid off with the proceeds from the GBCC Credit Facility.

The purchaser of Clean Earth assumed approximately $4.3 million of notes
and capital leases payable for which the Company was either the borrower or
guarantor.

Notes payable and capital leases mature as follows:

Legal, consulting and other expenses incurred by the Company in obtaining
its credit agreements are amortized over the life of the agreement. Unamortized
deferred financing costs were $817,000 and $1,759,000 at December 31, 2002 and
2001 respectively, and are reflected in Other assets on the Company's balance
sheet.

9. SUBORDINATED NOTES AND CONVERTIBLE DEBENTURES

On February 2, 2000 the Company issued a 5% $7,500,000 convertible
subordinated debenture (the "Fiscal 2000 Debenture") which is convertible into
the Company's common stock to Halifax. On February 20, 2001, Halifax exercised
its rights under the terms of the debenture to require the Company to (a)
repurchase the debenture for cash at 110% of the outstanding principal amount
plus all accrued, unpaid interest, or (b) have the Minimum Floating Conversion
Price permanently re-set to zero. The Company did not elect option (a),
therefore the Minimum Floating Conversion Price was permanently re-set to zero.
The effect of re-setting the Minimum Floating Conversion Price to zero was 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 SmallCap 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 was
limited in that the holder could not convert the debenture if upon such
conversion the holder would become a beneficial owner more than 9.9% of the
total issued and outstanding shares of the Company's common stock. If the holder
elected to convert and the entire debenture could not be converted due to this
limitation, the Company would have been required to settle in cash that portion
of the debenture which could not be converted to stock when the debenture
matured in February of 2005, at 110% of the sum of

63

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the outstanding balance of the debenture that is in excess of the limitation and
accrued but unpaid interest and default payments.

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

During 2001 the holder of the Fiscal 2000 Debenture converted $2,191,494 of
the debenture and $23,801 of unpaid interest into 2,134,742 shares of common
stock at prices ranging from $1.00 to $1.05 per share. Unamortized debenture
issuance costs and debt discounts of $12,475 and $120,558 respectively were
charged to additional paid-in capital. As a result of these conversions, the
Company recorded an additional beneficial conversion feature benefit granted to
the holder of approximately $280,000, which was charged to interest expense
during 2001. Also during 2001, the balance of the Fiscal 2000 Debenture
increased by $201,764 resulting from interest that was paid in kind. As of
December 31, 2001 the outstanding balance on the Fiscal 2000 Debenture was
$5,584,000, net of unamortized discounts.

During 2002 an additional $349,000 of principal and approximately $2,000 of
unpaid interest were converted into 1,001,923 shares of common stock. The
Company recorded an additional beneficial conversion feature benefit in
connection with this conversion in 2002 of approximately $250,000. In addition,
approximately $164,000 of interest was paid in kind, increasing the principal
balance of the debenture.

On June 15, 2001, the Company issued a convertible subordinated debenture
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, to Halifax. Halifax paid the Company $4.0 million for
these securities. The principal amount of the Fiscal 2001 Debenture paid
interest at an annual rate of 25% and was due on July 1, 2002. The debenture was
convertible into shares of the Company's common stock at a conversion price per
share equal to the average of the lowest trading price of the common stock
during any three trading days during the twenty-two trading days immediately
prior to the conversion date. Because the Company did not meet certain
conditions related to the issuance of this debenture prior to August 15, 2001,
the Company issued an additional warrant on that date 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. The
$195,000 and $170,000 values assigned to the warrants issued on June 15, 2001
and August 15, 2001 respectively were recorded as discounts to the debenture. On
August 15, 2001 the Company recognized a beneficial conversion feature in the
amount of $534,000 in connection with the warrants issued on that date, which
was recorded as a discount to the debenture. These discounts were accreted as
interest expense through June 30, 2002. At December 31, 2001 the carrying value
of this debenture, net of unamortized discounts, was $3,579,000. The Company did
not make the required quarterly interest payments on this debenture of $250,000
for the three-month periods ending December 31, 2001, March 31, 2002 and June
30, 2002.

The Fiscal 2001 Debenture Purchase Agreement provided that the Company pay
in cash a default payment of 2.5% of the sum of the outstanding principal amount
of the Fiscal 2001 Debenture plus the accrued interest for each thirty day
period that the shares underlying the Fiscal 2000 and Fiscal 2001 debentures,
and the associated warrants issued in conjunction with them, were not
registered. As of June 30, 2002 the Company had not filed a registration
statement to register these shares and the Company had accrued $950,000 in
penalties due Halifax as a result of the Company's failure to register these
shares.

64

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On September 24, 2002 the Company entered into an Exchange and Repurchase
Agreement with Halifax whereby:

- The Fiscal 2000 and Fiscal 2001 Halifax debentures, whose carrying
amounts net of discounts at the time of the exchange were $5,503,000 and
$4,000,000 respectively, were terminated

- All unpaid default charges, fees, penalties, preferred dividends in
arrears and accrued interest were waived by Halifax

- Halifax released the Company from any action Halifax had against the
Company relative to the Fiscal 2000 and Fiscal 2001 Halifax Debentures

- Halifax released its second lien on the Company's assets that were sold
in connection with the sale of Clean Earth while retaining its second
lien on the Company's remaining assets granted to Halifax under the terms
of the Fiscal 2001 Debenture

In exchange for the preceding, the Company:

- Paid $2.5 million in cash to Halifax

- Issued a 10% convertible subordinated debenture in the principal amount
of $2,831,558 due March 24, 2006, with interest being paid in kind for
the first two years and paid in cash for the third year. Subject to
certain adjustments as more fully described in the debenture agreement,
one third of the principal amount of the debenture will be convertible
into shares of the Company's common stock at $0.75 per share, one third
will be convertible at $1.00 per share and one third will be convertible
at $1.25 per share.

- Issued a 10% subordinated note with no conversion rights in the principal
amount of $5.6 million due March 24, 2006, with interest being paid in
kind for the first two years and paid in cash for the third year

- Canceled 285,714 shares of common stock held by Halifax

- Agreed to file a registration statement to register the shares underlying
the new convertible debenture and the warrants previously issued to
Halifax no later than April 15, 2003

This transaction was accounted for as a modification of debt terms under a
troubled debt restructuring. As a result, the approximately $1.7 million of
unpaid default charges, fees, penalties, preferred dividends in arrears and
accrued interest that were waived by Halifax were added to the carrying value of
the subordinated note and convertible subordinated debenture. At December 31,
2002 the carrying value of the subordinated note and the convertible
subordinated debenture was $6,807,000 and $3,441,000 respectively.

10. CAPITAL STOCK

SERIES D CONVERTIBLE PREFERRED STOCK

In September of 2000 the Company issued 1,187,285 shares of its Series D
Preferred Stock and received net proceeds of $4.1 million. The Series D
Preferred Stock contained a quarterly cash dividend at an annual rate of 15%,
with the initial dividend payable on March 31, 2001. Each share of Series D
Preferred Stock was convertible into one share of the Company's common stock at
the option of the holder any time after March 31, 2001, and the Company had
certain rights to redeem or require conversion of the Series D Preferred Stock
prior to March 1, 2002. Otherwise, the Series D Preferred Stock would
automatically convert into common stock on March 1, 2002.

The Company did not pay any of the required cash dividends on the Series D
Preferred Stock due to a deterioration in the Company's financial condition.
Dividends in arrears on the Series D Preferred Stock

65

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounted to approximately $809,000 at December 31, 2001 and $911,000 immediately
prior to the conversion of the Series D Preferred Stock. Promissory Notes were
given to all of the former holders of the Series D Preferred Stock with the
exception of Halifax, (see note 9) at varying rates of interest and maturity
dates. All but one of the remaining former holders have accepted the terms and
executed their respective notes. The outstanding balance of these notes as of
December 31, 2002 was approximately $754,000. On March 1, 2002 all 1,187,285
shares of outstanding Series D Preferred Stock were converted into an equal
number of shares of common stock.

SERIES E CONVERTIBLE PREFERRED STOCK

Between November 2000 and March 2001, the Company issued a total 1,714,285
shares of its Series E Preferred Stock to the Stout Partnership, the Company's
largest shareholder, in exchange for payments to the Company in the aggregate of
$3,000,000. Mark S. Alsentzer, the Company's Chief Executive Officer, is
affiliated with the Stout Partnership. The stock paid a monthly cash dividend at
an annual rate of 10%. Each share of Series E Preferred Stock was 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 to redeem
or require conversion of the Series E Preferred Stock prior to March 1, 2002.
Otherwise, the Series E Preferred Stock was to have automatically converted into
common stock on March 1, 2002. On March 4, 2002 the Company's Board of Directors
extended the automatic conversion date of the Series E Preferred Stock to March
31, 2002. On March 31, 2002 all 1,714,285 shares of outstanding Series E
Preferred Stock were converted into an equal number of shares of common stock.

COMMON STOCK PRIVATE PLACEMENTS

On July 3, 2001, the Company issued 476,191 shares of common stock to ZLP
Master Fund, LTD. and 476,190 shares of common stock to ZLP Master Technology
Fund, LTD. at a purchase price of $1.05 per share. This private placement
transaction was not registered under the Act in reliance upon the exemption from
registration in Section 4(2) of the Act, as a transaction not involving any
public offering. Net proceeds after issuance costs of approximately $983,000
were used for general corporate purposes. Because the Company did not, within 60
days of July 3, 2001, file a registration statement with the SEC to register the
resale of these shares as required under the stock purchase agreement, the
Company is required to pay a cash penalty fee to the purchasers of these shares
at a rate equal to 1.5% of the outstanding amount purchased for each 30-day
period that a registration statement is not filed. As of December 31, 2002 the
Company had not filed a registration statement to register these shares for
resale and $150,000 has been accrued in connection with this penalty fee. On
November 1, 2001 the Company raised an additional $752,000, net of issuance
costs, through the issuance of 1,334,000 shares of common stock. These private
placement transactions were not 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.

On February 19, 2002, the Company issued 800,000 shares of common stock at
a purchase price of $0.50 per share. This private placement transaction was not
registered under the Securities and Exchange Act of 1933 (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 $354,000 were used for general corporate purposes.

CONVERSION OF STOUT DEBENTURE

On May 29, 2002 the Stout Partnership signed an agreement to convert its
$5.0 million convertible subordinated debenture due July 1, 2002, plus accrued
interest of approximately $183,000, into 19,935,808 shares of the Company's
common stock. The conversion price of $0.26 per share is in accordance with the
conversion formula as stated in the terms of the debenture and is based on the
May 29, 2002 date of the

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U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement. Mark S. Alsentzer, the Company's Chief Executive Officer, is
affiliated with Stout Partnership. The transaction was approved by the Company's
shareholders at a Special Meeting of Shareholders on August 27, 2002. The
conversion took place on September 11, 2002 and the Company recognized as
interest expense a beneficial conversion feature of approximately $2,791,000
based on the September 9, 2002 commitment date.

OTHER COMMON STOCK TRANSACTIONS

On February 10, 2000 the Company acquired certain assets and liabilities of
Baron Enterprises, Inc. for 202,376 shares of the Company's common stock,
including 42,358 shares held in escrow pending the resolution of outstanding
issues within the purchase agreement. On June 30, 2002 the Company determined
that these issues had been resolved and that the Company would not be required
to release these shares. As such, the Company reduced its number of common
shares outstanding by 42,358 and reduced acquisition goodwill and additional
paid-in capital by approximately $381,000, based on a market price of $9.00 per
share as of February 10, 2000. In addition, during 2002 the Company issued an
aggregate of 420,173 shares of common stock valued at approximately $139,000 in
settlement of previously recorded accounts payable and issued 84,621 shares
valued at approximately $48,000 in connection with employment and other services
rendered to the Company.

EMPLOYEE STOCK OPTIONS

The Company has granted stock options to key employees and directors. The
option price at the date of grant is determined by the Board of Directors and is
generally tied to the market price of the Company's freely trading shares. The
term for exercising the stock options is generally ten years. Stock options
granted by the Company generally vest ratably over a period of three years.
Employee stock option activity in 2002, 2001 and 2000 is as follows:

67

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average remaining contractual life of all outstanding employee
stock options is 7.0 years at December 31, 2002. Additional information
regarding options outstanding at December 31, 2002, 2001 and 2000 follows:

NON-EMPLOYEE STOCK OPTIONS

The Stout Partnership was granted 320,000 options at $2.25 per share in
January 1998 in exchange for enabling the Company to obtain a line of credit by
providing guarantees (see note 14). Stout Partnership exercised 250,000 shares
in September 1999. The remaining 70,000 options expired during 2001.

Non-employee stock option activity in 2002, 2001 and 2000 is summarized as
follows:

68

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK WARRANTS

The company issued warrants to purchase 200,000 common shares at $10.09 in
conjunction with the issuance of $7,500,000 of convertible subordinated
debentures in February 2000 (see note 9). In December 2000, the company granted
250,000 warrants to the Stout Partnership at an exercise price of $1.50 per
share. The warrants were granted in consideration of the Stout Partnership for
exchanging the unsecured loan to a convertible subordinated debenture and
providing the additional funding of Series E Preferred Stock (see note 14). Mark
S. Alsentzer is Chairman and CEO of the Company as well as an individual partner
in Stout Partnership. At December 31, 2000 a total of 1,260,000 warrants were
outstanding.

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

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

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

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

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

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

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

During the twelve-month period ending December 31, 2002, the Company issued
warrants to purchase 145,000 shares of common stock to an investor in connection
with a private placement transaction for the Company's common stock. Also during
2002, the Company issued 200,000 warrants to investment bankers for services
rendered to the Company. These warrants were valued at approximately $34,000 and
are reflected in the Company's statement of operations for 2002. As of December
31, 2002 warrants to purchase 3,160,795 shares of common stock were outstanding.

69

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK RESERVED

At December 31, 2002, common stock was reserved for the following:

Non employee stock options.................................. 107,500
Employee stock options...................................... 2,470,000
Warrants.................................................... 3,554,545
Convertible debentures...................................... 2,831,558
---------
8,963,603
=========

11. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

2001 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

In September of 2001 the Company announced the closing of three of its
manufacturing facilities and the leasing of two of its resin processing plants
to third parties in an effort to reduce fixed costs, improve customer service
and narrow management's focus to a smaller number of manufacturing facilities,
without reducing total manufacturing capacity. With the exception of activities
associated with exiting the facilities, the Fontana, California, Denton,
Maryland, and Trenton, Tennessee plants were closed on September 28, 2001 and
the equipment and manufacturing processes at these plants were transferred to
the Chicago, Illinois and Ocala, Florida manufacturing locations. The Company
has obtained a buyout or sublease of all of these facilities. In addition, the
Company discontinued raw material processing at its Auburn, Massachusetts and
Chino, California resin plants and agreed to lease these operations, including
the manufacturing equipment installed at these locations, to other raw material
processors. 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:

Write-down for equipment impairment......................... $ 8,694,000
Write-down for goodwill impairment.......................... 1,116,000
Severance component of 2000 restructuring charge............ 182,000
Change in estimate related to 2000 restructuring accrual.... (155,000)
Lease termination, severance and other exit costs........... 1,656,000
-----------
Total restructuring and asset impairment charges.......... $11,493,000
===========

During 2001 the Company paid approximately $761,000 in employee
termination, lease termination and other exit costs in connection with the
restructuring and approximately $895,000 remained in the accrual as of December
31, 2001, primarily for lease termination expenses. The remaining amount was
paid in 2002 and no balance remained in this accrual at December 31, 2002.

In August of 2002 the party to the sublease agreement for the Auburn,
Massachusetts plant and equipment terminated their sublease agreement with the
Company in accordance with its terms. As a result, the company recorded an
impairment charge on the fixed assets at that location of approximately
$453,000. The Company is currently attempting to obtain a new sublease agreement
or buyout of its lease obligation with respect to this facility. The Company
estimates that its obligation under this lease at December 31, 2002 will be
approximately $231,000 and this amount is reflected within Accrued expenses on
the Company's balance sheet.

70

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2000 RESTRUCTURING AND ASSET IMPAIRMENT CHARGE

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

Write-down for equipment impairment......................... $2,319,000
Lease termination and other exit costs in connection with
the restructuring......................................... 1,098,000
Change in estimate related to 1999 restructuring accrual.... (232,000)
----------
Total restructuring and asset impairment charges in
2000................................................... $3,185,000
==========

As of December 31, 2000, the Company had accrued $1,098,000 in connection
with lease termination costs. During 2001 the Company paid approximately
$564,000 in lease termination payments and charged this amount against the
accrual. Also during 2001, the Company reversed $155,000 of the accrual for
other exit costs due to a change in estimate. As of December 31, 2001, the
Company had approximately $380,000 remaining in its 2000 restructuring accrual
for lease termination payments. During 2002 the Company paid approximately
$316,000 in lease termination payments and approximately $64,000 remained in
this accrual at December 31, 2002. During 2000 and early 2001, the Company
eliminated approximately 300 employees as part of the 2000 restructuring plan.
The severance component of the restructuring plan was communicated to the
employees in early January 2001. As a result, the Company recorded a charge of
$182,000 in the first quarter of 2001 in connection with severance. The entire
$182,000 cost of these severance benefits was paid in 2001 and no balance
remains in this accrual.

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

12. EMPLOYEE BENEFIT PLANS

The Company has defined contribution 401(k) and profit sharing plans that
cover substantially all employees who have met the eligibility requirements.
Employees may contribute up to the maximum allowable under current regulations
to the 401(k). There are no employee contributions to the profit sharing plan.
The Company's contribution to each plan is at the discretion of the Company. The
Company contributed $144,000, $183,000 and $127,000 in 2002, 2001 and 2000,
respectively.

13. INCOME TAXES

The provision (benefit) for income taxes includes federal and state taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax basis of assets and liabilities. In accordance
with SFAS 109, the benefit of the current utilization of the net operating loss

71

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

generated by continuing operations has been allocated to continuing operations.
The components of the provision for income taxes (benefit) included in the
consolidated statements of operations is as follows:

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

The total provision (benefit) for income taxes differed from the amount
obtained by applying the federal statutory income tax rate to pre-tax accounting
earnings (loss) from discontinued operations and, for 2002, to the pre-tax gain
of $1,076,000 on disposal of discontinued operations.

72

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Temporary differences between financial statement carrying amounts and tax
basis of assets and liabilities that give rise to significant deferred tax
assets and liabilities as of December 31, 2002 and 2001 are as follows:

A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
determines a valuation allowance based on its analysis of amounts available in
the statutory carryback period, consideration of future deductible amounts, and
assessment of future profitability. As a result of the substantial operating
losses incurred during 2001 and 2002, the Company established valuation
allowances for the entire net deferred tax asset as of December 31, 2001 and
2002. There was no exercise of non-qualified stock options in 2002, 2001 and
2000. As of December 31, 2002 the Company had federal net operating loss
carryforwards of approximately $43,388,000, and state net operating loss
carryforwards of $54,863,000, both of which begin to expire in 2010. A portion
of these losses is subject to limitations regarding the offset of the Company's
future taxable income, including limitations resulting from changes in ownership
of greater than 50% of the Company's common stock as a result of the issuance by
the Company of additional common or preferred stock. The Company does not expect
any recent changes in the tax code to have a material effect upon the Company's
statement of operations or financial condition.

14. RELATED PARTY TRANSACTIONS

On February 2, 1999 the Stout Partnership made a $5,000,000 unsecured loan
to the Company bearing interest at 10%, with an original maturity date of June
30, 2001. The Stout Partnership borrowed the $5,000,000 from PNC Bank and the
individual partners have personally guaranteed the loan. The Company paid
$529,000 in interest on this loan in 2000.

73

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On December 1, 2000 the Stout Partnership exchanged the $5,000,000
unsecured loan into a subordinated convertible debenture of an equal dollar
amount with a maturity date of July 1, 2002, with interest payable monthly in
arrears at 11.5% per annum. The Company paid $111,000 and $573,000 of interest
on this loan in 2002 and 2001 respectively. The debenture was convertible into
common stock at any time, in whole or part, at the option of the holder, at the
lower of $2.00 per share or the lowest closing price of the Company's common
stock during the four trading days prior to but not including the conversion
date. In consideration of the Stout Partnership exchanging its unsecured loan
for a subordinated convertible debenture and providing funding through Series E
Preferred Stock, the Company granted 250,000 warrants at the exercise price of
$1.50 per share. In consideration for extending the maturity date of the
debenture from December 1, 2001 to July 1, 2002, and because some of the assets
of the Company were not disposed of as of June 1, 2001, on June 1, 2001 the
Company granted an additional 250,000 warrants to purchase the Company's common
stock to the Stout Partnership at an exercise price of $1.50 per share. The
debenture was converted, along with $183,000 of accrued interest into 19,935,808
shares of common stock in 2002 (see note 10). In addition, during 2000 and 2001
Stout Partnership provided the Company with additional funding of $3,000,000
through the Series E Preferred stock private placement (see note 10).

On March 1, 2002 all of the Company's outstanding Series D Preferred Stock
was automatically converted into an equal amount of the Company's common stock
in accordance with the Series D Certificate of Designation. The dividends in
arrears pertaining to the Series D Preferred Stock was converted into a note
payable to each holder of the Series D Preferred Stock in pro rata amounts based
on the amount of shares held by each party (see note 10). In connection with
this conversion, A.C. Schultes, Inc., a corporation controlled by August C.
Schultes, III, a director of the Company, received a note payable in the amount
of approximately $120,000. Also in connection with the conversion, a note
payable in the amount of approximately $36,000 was issued to Consultants and
Planners, Inc. Gary Ziegler, a director of the Company, is affiliated with
Consultants and Planners, Inc.

On March 4, 2002 the Company's Board of Directors extended the automatic
conversion date of the Series E Preferred Stock to March 31, 2002 (see note 10).
All of the Series E Preferred Stock was held by the Stout Partnership.

In December 2001, Barbella Environmental Technology, a subsidiary of Clean
Earth, ("BET") received notice regarding its award of a contract with the City
of New York to perform environmental services at the Brooklyn Landfill on
Pennsylvania Avenue in the Borough of Brooklyn (the "Brooklyn Contract"),
subject to the satisfaction of certain conditions. These conditions included the
issuance of a performance bond on behalf of BET in the amount of $57.5 million
at the time of the execution of the Brooklyn Contract. Due to the deterioration
in the Company's financial condition during 2001, the insurance company
underwriting the performance bond requested a $4.0 million letter of credit and
personal guarantors with liquid net worth of approximately $15.0 million in
order to issue the performance bond. Neither BET nor the Company was able to
deliver the required letter of credit or to obtain any third parties interested
in providing collateral and/or guarantees on the Company's behalf. In order to
permit BET to obtain the Brooklyn Contract and to avoid the termination of
negotiations related to the Clean Earth sale transaction (see note 2), Mark S.
Alsentzer, the Company's director, Chairman, and Chief Executive Officer, and
Mr. Schultes established a group of personal indemnitors, including family
members and affiliates of the two directors as well as third parties, who were
willing to provide the letter of credit and guarantee for the issuance of the
performance bond in exchange for a fee. Upon the completion of the sale of Clean
Earth, approximately $469,000 of the aforementioned fee was paid from the
proceeds of the sale transaction.

The Company has a professional services contract with Rosetto & Associates
LLC, a private law firm, that performs legal work for the company as well as
unrelated third parties. Mr. Rosetto, Executive Vice President, General Counsel
and Secretary for the Company, is the sole principal of Rosetto & Associates.
Rosetto & Associates billed the Company $399,000, $523,000 and $465,000 for
legal services for the years

74

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ended December 31, 2002, 2001 and 2000 respectively. These amounts include
expenses paid on behalf of the Company for outside attorneys' fees, consulting
fees and other expenses for which Rosetto and Associates is not reimbursed. In
addition, the Company billed $134,000, $161,000, $161,000 to Rosetto &
Associates for use of office space, office equipment and other shared services
during the years ended December 31, 2002, 2001 and 2000 respectively.

On November 28, 2002 a $500,000 trade note payable to a company controlled
by Mr. Schultes was converted into a promissory note due May 31, 2006, with
interest at 8% payable in monthly installments.

Kenneth Leung, a director of the Company, is a managing director of Sanders
Morris Harris, the investment banking firm that rendered the fairness opinion in
connection with the sale of Clean Earth. Neither Sanders Morris Harris nor its
affiliates received any compensation from the Company during the past two years,
other than fees and expenses totaling $80,000 related to the fairness opinion,
except for board fees and reimbursement of travel expenses paid to Kenneth
Leung.

In December of 2002 a director of the Company made a cash advance to the
Company in the amount of $449,000, which remains outstanding and is repayable on
demand.

15. COMMITMENT AND CONTINGENCIES

OPERATING LEASES

The Company leases office space, equipment, manufacturing facilities, and
land under non-cancelable operating leases that expire at various dates through
year 2006. Rent expense from continuing operations for all operating leases for
the years ended December 31, 2002, 2001 and 2000 was approximately $1,055,000,
$1,338,000 and $520,000 respectively.

Future minimum payments are as follows for the year ending December 31 (in
thousands):

2003........................................................ $1,252
2004........................................................ 998
2005........................................................ 432
2006........................................................ 35
------
Total............................................. $2,717
======

A portion of the minimum rental payments shown above will be offset by
sublease agreements that are in place for some of the Company's rental
properties. The Company expects to receive sublease rental income from third
parties in the amounts of approximately $664,000, $551,000, $203,000 and $35,000
for the years ending December 31, 2003, 2004, 2005 and 2006 respectively. In the
event of default or termination of any of the sublease agreements by these third
parties, the Company will be obligated to assume the scheduled lease payments.

LEGAL PROCEEDINGS

In December 1998, the Company purchased Clean Earth of North Jersey
("CENJ", then known as S&W Waste, Inc.) in a stock purchase transaction.
Pursuant to such purchase, the Company could be responsible for liabilities
resulting from matters wherein CENJ has been named as a potentially responsible
party ("PRP") in matters involving the possible disposal of hazardous waste at
certain disposal sites. At December 31, 2002, the Company has accrued
approximately $289,000 for estimated liabilities related to these matters. While
the Company believes this accrual is sufficient to cover the aggregate liability
that may be incurred in these matters, there can be no assurances that the
accrual will be sufficient.

75

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On February 28, 2002 a judgment in the amount of $1,760,000 plus
administrative fees, arbitrators' compensation and interest was awarded to
Southern Wood Services due to the Company's breach of a purchase contract. As a
result, the Company accrued $1,844,000 at December 31, 2001 in connection with
this ruling. On June 18, 2002 the Company entered into a settlement agreement
with Southern Wood Services whereby the Company agreed to pay $1,590,000 payable
in 53 equal monthly payments of $30,000, commencing with the date of the
settlement agreement, and the remainder of the 2001 accrual was reversed in
2002. As of December 31, 2002, 46 monthly payments remain to be made, and are
accrued for in Other liabilities and Other non-current liabilities in the
Company's balance sheet.

On April 15, 2002, the Company filed a Complaint, entitled Integrated
Technical Services, Inc. v Pennsylvania Department of Environmental Protection,
Board of Claims, Commonwealth of Pennsylvania, Civil Action No. 3484, seeking
$7.5 million in a contract claim arising from the Quakertown foundry site
clean-up. This litigation was assumed as part of the Clean Earth sale. The PADEP
has offered approximately $980,000 retroactive to September 7, 2001 to settle
this claim (see note 4). The Company rejected this offer and is proceeding with
discovery. Trial is currently scheduled for November 2003.

A dispute has arisen between the Company and the purchaser of Clean Earth
regarding the final audited closing date balance sheet as the purchaser and
Clean Earth have sought an adjustment to the purchase price in the amount of
approximately $4,000,000 due to audit adjustments to the closing balance sheet
(see note 2). The Company filed litigation against the purchaser and Clean Earth
on January 2, 2003, in a case entitled U.S. Plastic Lumber Corp. v. CEI Holding
Corporation and Clean Earth, Inc., in the United States District Court for the
District of Delaware, Civil Action No. 03-0001, alleging that the audit process
had been subverted through fraud as it related to certain adjustments to the
closing balance sheet claimed by the purchaser and Clean Earth. If the Company
is unsuccessful in its litigation, the purchase price received at the closing of
the Clean Earth sale could be reduced by up to $4,000,000, including the loss of
the $1,000,000 in cash escrow, a reduction of the principal amount of the $3.5
million Promissory Note or reimbursement in the form of cash to Clean Earth
equal to the amount of the adjustment in the purchase price.

On January 31, 2003, Zimmer Lucas Partners filed a demand for Arbitration
pursuant to a Stock purchase Agreement dated July 3, 2001 arising from their
purchase of shares of stock from the Company in a private placement (see note
10). The arbitration action seeks rescission of the purchase agreement and
return of $1,000,000 due to the Company's failure to register these shares. The
Company intends to aggressively defend this matter as it was not eligible to
file an S-3 registration statement in 2001 or 2002 due to outstanding defaults
on its credit facilities and the pending sale of Clean Earth. The Company may be
liable for penalty damages since it was not able to register these shares in a
timely fashion, and the Company has accrued for these damages. The penalty under
the Agreement was equal to 1.5% per month for each month the shares were not
registered commencing with 60 days subsequent to the closing date. All of the
shares of Zimmer Lucas have been saleable since July 3, 2002 under Rule 144 of
the Securities and Exchange Act of 1933.

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

LOSS CONTINGENCIES

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

76

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. DERIVATIVES

As part of its overall interest rate risk management activities, the
Company utilized interest rate related derivatives during 2001 to manage its
exposure to various types of interest rate risks. The Company does not speculate
using derivative instruments. The Company's risk management policies emphasized
the management of interest rate risk within acceptable guidelines. The Company's
objective in maintaining these policies was to limit volatility arising from
changes in interest rates. Risks to be managed were 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 various credit facilities whose interest payments are based on floating rate
indices. The Company continually monitors changes in these exposures and their
impact on its risk management activities. The Company had entered into interest
rate swap agreements under which the Company paid a fixed rate of interest and
received a floating rate of interest over the term of the interest rate swap
agreement without the exchange of the underlying notional amounts. The financial
institutions that were party to these interest rate swap agreements were two of
the banks which provided loans under the Company's Original Senior Credit
Facility (see note 8) in 2001 and 2002. These agreements allowed the Company to
offset the variability of floating rate loan interest with the variable interest
payments due on the interest rate swaps. The Company assessed the effectiveness
of these hedges by comparing the timing, frequency, and magnitude of changes in
its interest rate to that of the interest rate referenced in the swap
agreements, and no portion of the hedging instruments' gain or loss was excluded
from the assessment of hedge effectiveness. During 2001 no gain or loss was
recognized as a result of any ineffectiveness of the cash flow hedging
instruments.

The Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a net-of-tax cumulative-effect loss of $454,000 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 $1,124,000. In December of 2001 the
Company received notice from the banks that they were exercising their rights to
terminate the interest rate swap agreements due to the Company's failure to
comply with the terms of the Original Senior Credit Facility. In accordance with
the termination notice, the banks demanded compensation for their costs of
liquidating their corresponding derivative obligations in the amount of
$1,080,000. The Company accrued this amount as interest expense in 2001 and
reversed the amounts included in other comprehensive loss in connection with the
fair value of the interest rate swap derivatives. As a result of the termination
of the interest swap agreements in 2001, comprehensive income for the twelve
months ended December 31, 2001 was equal to the net income/loss amounts
presented in the Company's statements of operations. The $1,080,000 was paid in
2002 using a portion of the proceeds from the sale of Clean Earth.

The Company did not enter into any interest rate swap agreements or any
other derivatives during 2002, and did not engage in any hedging activities.

77

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. CHANGES IN VALUATION ACCOUNTS

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

(1) Charge-off of accounts receivable

(2) $17,000 recovered in 2002 from accounts previously written off

(3) Operating segment disposed of September 9, 2002

(4) Valuation allowance reflected in loss on sale of discontinued operations

78

U.S. PLASTIC LUMBER CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. QUARTERLY FINANCIAL DATA (UNAUDITED)

Following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001, restated to reflect the environmental
recycling and remediation business as a discontinued operation due to its
disposal in September 2002:

79

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

On April 24, 2002 the Company notified its principal accountants, KPMG LLP,
that it was terminating their engagement as principal accountants and engaging
BDO Seidman, LLP as its new principal accountants. The termination of KPMG LLP
and the engagement of BDO Seidman, LLP were both recommended by the Company's
Audit Committee and approved by the Company's Board of Directors. The reports of
KPMG LLP on the Company's consolidated financial statements for the past two
fiscal years did not contain an adverse opinion or a disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope, or accounting
principles, except as follows:

KPMG LLP's report on the consolidated financial statements of U.S. Plastic
Lumber Corp. and subsidiaries as of and for the years ended December 31,
2001 and 2000 contained a separate paragraph stating that "the accompanying
consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring
losses from operations, has an accumulated deficit and a working capital
deficit of approximately $61.0 million and $60.5 million respectively and
has not made its scheduled principal and interest payments on its Senior
Credit Facility. The Company's failure to make its principal and interest
payments constitutes an event of default that permits the lenders under the
Senior Credit Facility to accelerate their maturity. The Company currently
does not have the financial resources to repay its debt obligations as they
become due. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plan in regard to
these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty."

In connection with its audits of the two fiscal years ended December 31,
2001, and the subsequent interim period through April 24, 2002, there were no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreements, if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.

The Company engaged the firm of BDO Seidman, LLP as its new independent
principal accountants to audit the Company's financial statements for the 2002
fiscal year.

During the two most recent fiscal years and the subsequent interim period
prior to April 24, 2002, the Company, or anybody on its behalf, did not consult
the newly engaged accountants regarding the application of accounting principles
to a specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors of the Company is incorporated by
reference from the Proxy Statement for the 2003 Annual Meeting which will be
filed with the SEC within 120 days of the Company's fiscal year end.

The information contained in the Proxy Statement under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" relating to the 2003 Annual
Meeting is incorporated herein by reference.

Information regarding the officers of the Company can be found in ITEM 1,
DIRECTORS AND OFFICERS OF THE REGISTRANT.

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The Company does not have any equity compensation plans, other than the
Employee Stock Option plan previously approved by our stockholders. The
following table details information regarding the company's existing equity
compensation plans as of December 31, 2002:

Securities to be issued under equity compensation plans not approved by
shareholders pertain to Warrants issued to third parties in exchange for
services rendered to the Company.

The Company has adopted a written code of ethics that applies to all of the
company's employees, including all principal executive officers, as well as the
company's directors. The Company has attached a copy of its current Code of
Conduct to this Form 10K as an exhibit hereto.

ITEM 11. EXECUTIVE COMPENSATION

The information contained in the Proxy Statement under the caption
"Executive Compensation" relating to the 2003 Annual Meeting is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated by reference from the Proxy Statement
for the 2003 Annual Meeting which will be filed with the SEC within 120 days
after the Company's fiscal year-end.

ITEM 13. CERTAIN TRANSACTIONS

The information contained in the Proxy Statement under the caption "Certain
Transactions" relating to the 2003 Annual Meeting is incorporated herein by
reference.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

Evaluation of the Company's Disclosure Controls and Internal
Controls. Within the 90 days prior to the date of this Annual Report on Form
10-K, the Company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"). This evaluation
("Controls Evaluation") was done under the supervision and with the
participation of management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"). As a result of this review, the Company adopted
guidelines respecting disclosure controls and the establishment of a disclosure
control committee made up of senior management.

Limitations on the Effectiveness of Controls. The Company's management,
including the CEO and CFO, does not expect that its Disclosure Controls or its
"internal controls and procedures for financial

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reporting" ("Internal Controls") will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.

Conclusions. Based upon the Controls Evaluation, the CEO and CFO have
concluded that, subject to the limitations noted above, the Disclosure Controls
are effective to timely alert management to material information relating to the
Company during the period when its periodic reports are being prepared.

In accordance with SEC requirements, the CEO and CFO note that, since the
date of the Controls Evaluation to the date of this Annual Report, there have
been no significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

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ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

REPORTS ON FORM 8-K

On October 3, 2002 the Company filed a Report on Form 8-K to report that
the Company had executed an Exchange and Repurchase Agreement with respect to
the convertible debentures held by Halifax Fund, L.P.

On January 7, 2003 the Company filed a Report on Form 8-K to report that
the Company had secured a new senior secured credit facility with Guaranty
Business Credit Corp. and had terminated its previously existing credit facility
with a group of lenders led by Bank of America, N.A.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

U.S. Plastic Lumber Corporation

By: /s/ MARK S. ALSENTZER
------------------------------------
Mark S. Alsentzer, Chairman of the Board
Chief Executive Officer and President

Date: March 31, 2003

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

/s/ MARK S. ALSENTZER March 31, 2003
- -----------------------------------------------------
Mark S. Alsentzer, Chairman of the Board Chief
Executive Officer and President

/s/ MICHAEL D. SCHMIDT March 31, 2003
- -----------------------------------------------------
Michael D. Schmidt, Chief Financial Officer and Chief
Accounting Officer

/s/ AUGUST C. SCHULTES III March 31, 2003
- -----------------------------------------------------
August C. Schultes III, Director

/s/ GARY J. ZIEGLER March 31, 2003
- -----------------------------------------------------
Gary J. Ziegler, Director

/s/ KENNETH LEUNG March 31, 2003
- -----------------------------------------------------
Kenneth Leung, Director

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CERTIFICATION

I, Mark S. Alsentzer, Chief Executive Officer of U.S. Plastic Lumber Corp.,
certify that:

1. I have reviewed this annual report on Form 10-K of U.S. Plastic Lumber
Corp.,;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ MARK S. ALSENTZER
--------------------------------------
Mark S. Alsentzer
Chief Executive Officer

Date: March 31, 2003

92

CERTIFICATION

I, Michael D. Schmidt, Chief Financial Officer of U.S. Plastic Lumber Corp.,
certify that:

1. I have reviewed this annual report on Form 10-K of U.S. Plastic Lumber
Corp.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):

(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and

(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

/s/ MICHAEL D. SCHMIDT
--------------------------------------
Michael D. Schmidt
Chief Financial Officer

Date: March 31, 2003

93