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

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

                                   ----------

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

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


                         COMMISSION FILE NUMBER 1-11871

                      COMMODORE APPLIED TECHNOLOGIES, INC.
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

           DELAWARE                                                11-3312952   
-------------------------------                              -------------------
(State or Other Jurisdiction of                                 (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

    150 EAST 58TH STREET, SUITE 3400
           NEW YORK, NEW YORK                                       10155
----------------------------------------                        --------------
(Address of Principal Executive Offices)                          (Zip Code)

Registrant's telephone number, including area code:  (212) 308-5800

Securities registered pursuant to Section 12(b) of the Act:


         TITLE OF EACH CLASS                    NAME OF EACH  EXCHANGE  ON WHICH
                                                            REGISTERED
         -------------------                    --------------------------------
COMMON STOCK, PAR VALUE $0.001 PER SHARE            AMERICAN STOCK EXCHANGE     
REDEEMABLE COMMON STOCK PURCHASE WARRANTS           AMERICAN STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:  NOT APPLICABLE


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

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         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the 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 pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to be the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         Non-affiliates of the registrant held shares of Common Stock as of
March 31, 1999 with an aggregate market value of approximately $4,806,276 (based
upon the last sale price of the Common Stock on March 31, 1999 as reported by
the American Stock Exchange).

         As of March 31, 1999, 23,702,263 shares of the registrant's Common
Stock were outstanding.

                       -----------------------------------
                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

                                       ii
<PAGE>


<TABLE>
                      COMMODORE APPLIED TECHNOLOGIES, INC.

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<CAPTION>
                                TABLE OF CONTENTS


<S>  <C>      <C>                                                                      <C>
PART 1...................................................................................5
     ITEM 1.  BUSINESS...................................................................5
           General.......................................................................5
           Soil Decontamination--Commodore Solution Technologies, Inc....................7
           Liquid Waste Treatment--Commodore Separation Technologies, Inc...............12
           Environmental Management -Commodore Advanced Sciences, Inc...................13
           Markets and Customers........................................................15
           Raw Materials................................................................16
           Backlog......................................................................16
           Research and Development.....................................................16
           Intellectual Property........................................................16
           Competition..................................................................17
           Environmental Regulation.....................................................18
           Employees....................................................................20
     ITEM 2.  PROPERTIES................................................................20
     ITEM 3.  LEGAL PROCEEDINGS.........................................................20
     ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................21

PART II.................................................................................22
     ITEM 5.  MARKET  FOR  REGISTRANT'S  COMMON  EQUITY AND  RELATED  STOCKHOLDER
        MATTERS.........................................................................22
           Market Information...........................................................22
           Dividend Information.........................................................22
           Recent Sales of Unregistered Securities......................................23
     ITEM 6.  SELECTED FINANCIAL DATA...................................................27
     ITEM 7.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION  AND
        RESULTS OF OPERATIONS...........................................................28
           Overview.....................................................................28
           Results of Operations........................................................28
           Liquidity and Capital Resources..............................................30
           Net Operating Loss Carryforwards.............................................33
           Year 2000 Considerations.....................................................33
           New Accounting Pronouncements................................................34
           Forward Looking Statements...................................................34
     ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................34
     ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................35

                                      iii
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<CAPTION>
                          TABLE OF CONTENTS (Continued)


     ITEM 9. CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON ACCOUNTING  AND
        FINANCIAL DISCLOSURE............................................................35

PART III................................................................................36
     ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................36
           Executive Officers and Directors.............................................36
           Key Employees................................................................39
           Board Committees.............................................................40
           Compensation of Directors....................................................40
           Compliance with Section 16(a) of the Exchange Act............................40
     ITEM 11. EXECUTIVE COMPENSATION....................................................41
           Summary Compensation.........................................................41
           Stock Options................................................................44
           Employment Agreements........................................................46
           Compensation Committee Interlocks and Insider Participation..................48
           Report of the Compensation Committee on Executive Compensation...............49
     ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............53
           Security Ownership of Certain Beneficial Owners..............................53
           Security Ownership of Management.............................................54
     ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................56
           Organization and Capitalization of the Company...............................56
           Services Agreement...........................................................57
           Sale of Company Common Stock by Environmental................................58
           February 1998 Intercompany Note..............................................59
           September 1997 Intercompany Convertible Note.................................59
           Sale of Series D Preferred Stock by Environmental............................60
           License of SET Technology....................................................60
           Future Transactions..........................................................61

PART IV.................................................................................62
     ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...........62

SIGNATURES..............................................................................68
</TABLE>

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                                     PART I

ITEM 1.  BUSINESS


GENERAL

         Commodore Applied Technologies, Inc. (the "Company") is an
environmental treatment and services company which, through its operating
subsidiaries, provides a range of technologies and services directed principally
at remediating contamination in soils and other materials, protecting the
integrity of our nation's water and air and disposing or reusing certain waste
by-products through development of inert and environmentally sound technologies.
The Company believes it provides, through its wholly-owned subsidiary Commodore
Solution Technologies, Inc. ("Solution"), the only patented, non-thermal,
portable and scalable process, known as SET (solvated electron technology), for
treating and decontaminating soils and other materials containing PCBs,
pesticides, dioxins and other toxic contaminants. The Company, through Commodore
Advanced Sciences, Inc. ("Advanced Sciences"), also provides a full range of
services related to on-site waste containment, management of on-site and
off-site remediation and waste removal using environmentally safe methods and
through the use of the Company's technologies. The operations of Advanced
Sciences, which account for substantially all of the Company's current revenues,
also include engineering and technical services in connection with environment
waste management and waste minimization.

         The Company's SET technology is directed principally at treating and
decontaminating soils, as well as other materials and surfaces, by destroying
PCBs, pesticides, dioxins and other toxic contaminants to an extent sufficient
to satisfy current federal environmental guidelines for safe disposal. The
Company also believes that SET is capable of neutralizing chemical weapons and
warfare agents and concentrating certain radioactive wastes for more effective
disposal. In March 1997, Advanced Sciences entered into a teaming agreement with
ICF Kaiser Engineers, Inc. ("ICF Kaiser"), pursuant to which the Company's SET
technology will be used in connection with the remediation of mixed waste at Los
Alamos National Laboratory in New Mexico under ICF Kaiser's U.S. Department of
Energy ("DOE") contract. In December 1997, Advanced Sciences entered into a
memorandum of understanding with Lockheed Martin Advanced Environmental Systems,
Inc. to jointly pursue environmental remediation projects, and in August 1996,
the Company formed a 50/50 joint venture with a subsidiary of Allegheny
Teledyne, Inc., known as Teledyne-Commodore, LLC, to jointly pursue the chemical
weapons destruction and demilitarization market on a worldwide basis, in both
cases utilizing the SET technology. The Company operates under a Nationwide
Permit for PCB disposal (the "Nationwide Permit"), issued by the U.S.
Environmental Protection Agency ("EPA"), which allows the Company to use SET
on-site to treat PCB-contaminated soils, waste oils, organic materials and
metallic surfaces anywhere in the United States. Based on currently published
lists of EPA national operating permits, the Company believes that it possesses
the only non-thermal PCB treatment technology for multiple applications
permitted by the EPA. The Company's business strategy is to use SET on a select
number of industrial and governmental clean-up and related projects through
collaborative working arrangements with well-recognized companies in the
environmental industry.

         The Company acquired Advanced Sciences in October 1996 for the purpose
of coordinating the Company's existing technologies and services, as well as
developing, acquiring and utilizing new technologies, for the treatment, reuse
and ultimate disposal of by-products generated as a result of industrial and
governmental activities. Advanced Sciences, to the extent possible, has sought
to utilize the Company's technologies in connection with its environmental,
remediation and technical services performed for industrial and governmental
customers (particularly the DOE and U.S. Department of Defense ("DOD"), with a
view to increasing the quality and scope of services offered and providing the
Company with a broader customer base for its technologies. Advanced Sciences was
founded in 1977 and its services include the identification, investigation,
remediation and management of hazardous,


                                       5
<PAGE>


mixed and radioactive waste sites. Advanced Sciences has been awarded
environmental management contracts by the DOE and DoD, as well as Bechtel,
Westinghouse, ICF Kaiser and Lockheed Martin.

         The Company, through its publicly traded former subsidiary, Commodore
Separation Technologies, Inc. ("Separation"), has provided a system, known as
SLiM(TM) (supported liquid membrane), that has been proven in limited-scale
tests to separate and recover chromium, cadmium, silver, nickel, zinc, copper
and other targeted substances from aqueous waste streams. In December 1997 and
February 1998, Separation was awarded its first two commercial contracts from
Maryland Environmental Service ("MES") to use its SLiM(TM) technology in
connection with the removal OF chromium in water leaching from waste sites at
the Baltimore Harbor and potentially polluting the Chesapeake Bay. The Company
transferred its 87% interest in Separation to Environmental as part of a debt
swap transaction dated as of September 28, 1998. In addition, the Company
discontinued all business associated with its wholly-owned subsidiary, CFC
Technologies, Inc. ("CFC Technologies") in July 1998.

         Demand for the Company's environmental technologies and services arises
principally from two sources:

         o  need for alternative environmental treatment and disposal methods
            for toxic substances, such as the SET technology, which do not
            involve safety risks with respect to air pollution and
            transportation of hazardous materials, or result in large volumes of
            residual waste that require further treatment prior to disposal, and

         o  stricter legislation and regulations mandating new or increased
            levels of air and water pollution control and solid waste
            management.

         The Company's overall strategy is to provide a broad range of
"state-of-the-art" environmental technologies and services to solve its
customers' increasingly complex pollution and waste disposal problems. The
Company believes that its technological capabilities provide significant
marketing advantages to the Company and enable the Company to provide its
customers greater "value-added" services through the integration of its various
disciplines.

         The Company was incorporated in Delaware in March 1996. As used in this
Annual Report, and except as the context otherwise requires, the "Company" means
Commodore Applied Technologies, Inc. and its subsidiaries, including Solution,
CFC Technologies and Advanced Sciences. The Company's principal executive
offices are located at 150 East 58th Street, Suite 3400, New York, New York
10155, and its telephone number at that address is (212) 308-5800.


                                       6
<PAGE>


SOIL DECONTAMINATION--COMMODORE SOLUTION TECHNOLOGIES, INC.

         The Company, through Solution, has developed and is in the process of
commercializing its patented process known as SET. Based on the results of its
extensive testing, the Company believes that SET is capable of effectively
treating and decontaminating soils and other materials, including sludges,
sediments, oils and other hydrocarbon liquids, metals, clothing and porous and
non-porous structures and surfaces, by destroying PCBs, pesticides, dioxins,
chlorinated substances and other toxic contaminants to an extent sufficient to
satisfy current federal environmental guidelines. The Company also believes
that, based on the results of additional tests, SET is capable of neutralizing
substantially all known chemical weapons materials and warfare agents and
concentrating certain radioactive wastes for more effective disposal.

         THE SET TECHNOLOGY

         The SET technology, which is based upon solvated electron chemistry,
mixes anhydrous liquid ammonia and/or other similar solvents with reactive
metals and contaminated elements to effect the selective destruction or
neutralization of organic compounds (such as PCBs, pesticides and dioxins). The
Company has demonstrated that SET can achieve consistently high levels of
contaminant destruction when working with PCBs, dioxins and pesticides. SET has
treated soils containing up to 10,000 ppm of contaminants, and oils containing
up to 250,000 ppm, leaving residual soils and oils with contamination levels of
less than one ppm. In addition, SET has been successfully applied to other
PCB-contaminated surfaces such as concrete. The SET process can be used in
conjunction with selected post-treatment processes such that no hazardous or
toxic residues will result from the use of SET, nor will there be any toxic
emissions into the air, water, soils or other surfaces. For example, most
contaminated soils treated with SET can (subject, in some instances, to
reblending the soil with organic matter) be used subsequently for planting or
for any other use for which non-contaminated soils are appropriate.

         Equipment utilized in the SET process consists of tanks, pumps and
piping to handle anhydrous ammonia and other solvents in liquid and vapor forms,
and reactor vessels for holding contaminated materials and for the introduction
of solvating solutions. The system can be transported to field sites and
configured in numerous sizes.

         The SET process requires placing the contaminated materials into a
reactor where they are mixed with a solvent and charged with a base metal. The
chemical reaction produces metal salts such as calcium chloride, calcium
hydroxide and non-halogenated inert organics. The ammonia within the reactor is
then removed to a discharge tank for later reuse. The materials are removed,
sampled for residual traces of PCB or other halogenated organic compounds, and
placed in storage for disposal. In many cases, the decontaminated soil and
metals can be replaced in their original location, recycled or reused. The
solvents do not enter the chemical reaction, but merely serve as dissolving
liquids for the solvated electron solution.

         OPERATIONAL CHARACTERISTICS. Substantially all existing systems in use
for the destruction of PCBs and other halogenated compounds involve incineration
or other thermal processes, and either the permanent installation of highly
complex and expensive incinerators and waste disposal equipment at the affected
site, or the removal of contaminated materials to off-site facilities. The
Company believes that SET represents an approach to resolving serious
environmental remediation issues that does not create or entail the safety risks
of air pollution and transportation of hazardous materials. The Company believes
that SET is more effective than incineration and other destruction processes for
toxic substances in that:

         o  SET does not emit toxic fumes into the atmosphere, as is sometimes
            the case with thermal or incineration methods;


                                       7
<PAGE>


         o  SET is portable and can be moved directly to the contaminated site,
            thereby reducing the risk of off-site contamination;

         o  SET equipment can be customized and configured to address various
            treatment applications;


         o  SET's reaction time is substantially less than that of alternative
            processes, such as thermal destruction and other forms of chemical
            treatment;

         o  SET has been shown to neutralize or destroy all chemical weapons
            material and warfare agents in the United States stockpile, and
            Lewisite (the primary chemical weapons material and warfare agent of
            the former Soviet Union), in tests conducted by an independent,
            federally certified surety laboratory;

         o  SET equipment can be installed and operated inside industrial plant
            facilities to treat hazardous wastes on line as a continuation of
            the manufacturing process; and

         o  SET, when used to treat soils, yields nitrogen-enriched soils that
            can be reused on-site, avoiding replacement and the post-treatment
            costs of off-site disposal.

         The Company believes that SET is the only technology currently
available, which possesses all of these features and is capable of treating a
wide variety of contaminants. The above characteristics (non-thermal, no air
emissions, mobile) are particularly applicable when dealing with mixed waste.
Wastes that contain radioactive material and hazardous waste regulated by the
Resource Conservation and Recovery Act (RCRA) and the Toxic Substances Control
Act (TSCA), are particularly difficult to treat and have extremely limited
disposal options. By applying the SET process to remove the RCRA and TSCA
components, leaving only radioactive waste material, disposal options expand.
SET not only removes the hazardous components but does so by an efficient,
non-thermal process that can control and contain the radioactive material so
that it remains in the treated material, and does not enter the environment in
an uncontrolled fashion.

         EPA NATIONWIDE PERMIT. In order to treat PCBs within the United States
on all non-Superfund sites, a treating entity must obtain a permit from the EPA.
Most EPA permits granted to date for PCB destruction are solely for single-site
incineration treatment centers. In August 1995, SET was demonstrated to the EPA
in order to obtain the Nationwide Permit, which was issued to the Company in
March 1996. The Nationwide Permit allows the Company to use SET on-site to treat
PCB-contaminated soil at any location in the United States. In addition to soil
treatment, the Nationwide Permit allows the Company to treat PCB-contaminated
metallic surfaces and waste oils, as well as wastewater (the wastewater is
treated by a non-SET process). The Company has also successfully demonstrated
SET as a treatment process for organic materials contaminated with PCBs and
radionuclides, and has received a draft revised EPA permit for these matrices.
The revision is expected to issue in June 1999. When issued, this permit
revision will cover the destruction of PCBs in soils, waste oils, organic
materials, water, and on metallic surfaces.

         Based on currently published lists of EPA national operating permits,
the Company believes that it possesses the only non-thermal PCB treatment
technology for multiple applications permitted under the EPA's Alternate
Destruction Technology Program. EPA regulations governing permitting have been
in effect for more than 15 years, and according to the latest EPA published list
of non-thermal destructive processes, only seven companies have met EPA's
stringent requirements for commercial operation. Of these, only the Company is
permitted for the chemical destruction of such a wide range of PCB-


                                       8
<PAGE>


contaminated materials. The EPA's Alternative Destruction Technology Program is
designed to encourage remediation technologies as an alternative to
incineration.

         The Nationwide Permit expires in March 2001, and may be renewed subject
to providing any requested additional information to the EPA at the time of
renewal. The Nationwide Permit imposes certain continuing obligations on the
Company, including notification of all job sites, periodic reporting to the EPA
as to activities at the job sites, prior notification to and approval by the EPA
with respect to any single-site centralized remediation facility that the
Company may seek to establish, and certain restrictions on the disposal of
by-products from the use of SET. The Nationwide Permit further specifies that
the Company must continue to comply with all otherwise applicable federal, state
and local laws regarding the handling and disposition of hazardous substances.


         TEST RESULTS. In more than 1,000 tests using SET, various high levels
of contaminants, including PCBs, were reduced to levels approaching
non-detectable, with the destruction process occurring in a matter of minutes.
The following table lists selected results of these tests.

MATERIAL       CONTAMINANT        PRE-TREATMENT    POST-            DESTRUCTION
--------       -----------        -------------    TREATMENT        EFFICIENCY
                                                   ---------        -----------
Clay           PCB                290 ppm          Less than 1 ppm  99.996%
Sandy          PCB                6,200 ppm        Less than 1 ppm  99.9998%
Oil            PCB                250,000 ppm      Less than 1 ppm  99.99999%
Oil            Dioxin             418 ppm          2 ppt            99.99999%
Soil           Hexachlorobenzene  68 ppm           Less than 2ppm   99.97%
Soil           DDT                180 ppm          .3 ppm           99.998%
Soil           RDX Explosive      3500 ppm         .03 ppm          99.99999%
Mustard Agent                     Pure             299 ppb          99.9999%
Hexane         Acenapthlene                        .01 ppb          99.99999%
Corn Cobs      PCB                                 Less than 2 ppm  99.998%


         These tests were conducted on limited quantities of contaminated
material, and there can be no assurance that SET will be able to replicate any
of these test results on a large-scale commercial basis or on any specific
project.



JOINT VENTURES

         TELEDYNE ENVIRONMENTAL JOINT VENTURE. In August 1996, Commodore
Government Environmental Technologies, Inc. ("Government Technologies"), a
wholly-owned subsidiary of the Company, entered into a joint venture agreement
with Teledyne Environmental, Inc. ("Teledyne Environmental"), a subsidiary of
Allegheny Teledyne, Inc., as the exclusive means by which each party (and their
affiliates) will pursue the chemical weapons destruction and demilitarization
market on a worldwide basis.


                                       9
<PAGE>


Teledyne Environmental is a major provider of contract services to the DOD and
DOE. The purpose of the joint venture, known as Teledyne-Commodore, LLC ("the
LLC"), a Delaware limited liability company, encompasses all phases of chemical
weapons demilitarization including design, engineering, field work, ordinance
and residue (heel) neutralization and demilitarization, disposal and reclamation
through the use, application and commercialization of the SET process.

         The LLC was selected to participate in the Assembled Chemical Weapons
Assessment Program ("ACWA"), created in December 1996, a congressionally
mandated program to examine alternative technologies in place of the US Army's
baseline incineration technology. When the LLC was formed in 1996, the principal
objective was to achieve a level of maturity with the SET process for
demilitarization and destruction of chemical warfare agents that would make it
competitive within the ACWA program. The LLC was selected to participate in the
ACWA program. Fourteen technologies were submitted and seven were down-selected
in October of 1997. The LLC's SET technology was one of the seven included for
further evaluation.

         During 1998, the LLC optimized the SET process for the destruction of
chemical warfare agents. In government approved surety laboratories, the SET
process successfully destroyed over three liters of chemical agents, including
samples of all US stockpiled chemical warfare agents. Additionally, the LLC
demonstrated a patented fluid jet cutting and extraction system at the Redstone
Arsenal. The fluid jet cutting and extraction technology successfully
deactivated thirty-nine M60 rockets and several Howitzer (150mm) shells. A
further down-selection to six technologies was made on May 4, 1998. The LLC's
SET process was one of the technologies selected. The US Army briefed the US
Congress and the chemical weapons community that all six technologies would be
demonstrated in the spring of 1998.

         On July 30, 1998 the US Army announced that there was insufficient
funding for all six technologies to be demonstrated. The US Army stated there
was funding to demonstrate three technologies and that additional funding would
be procured for the other three technologies to be tested. The Army chose the
three technologies least expensive to demonstrate (these three were ranked on
technical merit 2nd, 5th, and 6th by the US Army). The LLC's SET process was not
selected for demonstration. The Company filed a formal protest with the
Government Accounting Office (GAO) on August 12, 1998. The protest was denied on
September 16, 1998 on the basis that the GAO did not have jurisdiction to review
the case. Upon the LLC's application for reconsideration, the GAO reinstated the
protest on November 25, 1998. The GAO denied the protest on March 10, 1999. An
effort by certain members of the US Congress has failed to secure additional
funding to date. The international efforts to utilize the LLC's SET process are
ongoing in both Russia and China. The LLC SET process is one of fourteen
technologies selected by the Japanese government eligible for consideration in
the Japanese government effort to demilitarize chemical warfare agents existing
in China.

         Government Technologies and Teledyne Environmental each owns 50% of the
equity, profit and losses of the LLC and the Company has made capital
contributions of approximately $4.38 million as of December 31, 1998. The
Company contributed an additional $204,000 in February 1999. From inception of
the LLC to March 31,1999 the Company has made capital contributions of
approximately $4.58 million. No additional capital contributions are budgeted
for the remainder of 1999. Under the terms of the joint venture agreement,
Government Technologies' role concentrates on engineering and site operations
relating to the SET process and related equipment. Teledyne Environmental is
primarily responsible for site development, facilities engineering, facilities
construction and maintenance, utility connections, materials recovery,
transportation, waste management and transport and site decommissioning.

         As a result of the decision by the GAO to deny the LLC's protest, and
the current financial status of the LLC, the Company has reevaluated the net
realizable value of its investment in the LLC. At December 31, 1998, the Company
has fully reserved for its investment in the LLC, approved capital contributions
outstanding and any receivables due from the LLC.


                                       10
<PAGE>


         In consideration for the Company's interest in the joint venture, the
Company licensed SET and corresponding know-how to the joint venture. The
Company also licensed the SET process and corresponding know-how to Teledyne
Brown Engineering, Inc. ("TBE"), a subsidiary of Allegheny Teledyne, Inc. for
use in TBE's existing United States Department of Army Small Burials Contract
(the "Small Burials Contract"). TBE's Small Burials Contract is an existing
contract covering demilitarization of non-stockpile caches of chemical munitions
at up to 25 sites to be designated by the United States Army. Under the terms of
such license, the Company receives a royalty equal to 8% of TBE's net sales
revenues derived from the Small Burials Contract. There have been no royalties
received through December 31, 1998.


         NEW BEDFORD HARBOR PROJECT. The New Bedford, Massachusetts harbor and
waterfront area contains some of the highest concentration of PCBs in the nation
and, in 1982, this 18,000-acre site was placed on the EPA's Superfund national
priorities list. In August 1995, the Company and RCC-Ionics submitted a proposal
to conduct a feasibility study in support of their respective technologies for
the extraction (utilizing the RCC technology) and destruction (utilizing the SET
technology) phases of this $80.0 million project. By the end of 1997, the
Citizens' Forum selected the SET technology as one of two destruction phase
technologies that would be recommended for further evaluation for the project.
The RCC technology was selected as one of two extraction phase technologies that
would be recommended for further evaluation for the project.

         Early in 1998, after the New Bedford Citizens' Forum had completed its
work of selecting the preferred separation and destruction remediation
technologies for the New Bedford Sawyer Street Superfund Site, two New Bedford
Councilmen and the City Solicitor asked that the group reconsider the use of
these technologies. They asked that options of off-site landfilling, and
off-site incineration be re-evaluated. The latter method was revised to include
off-site destruction, after Commodore pointed out that its EPA permit stated the
SET process was equivalent to incineration. In May 1998 the Forum decided to
hold public meetings covering these two options. These June meetings resulted in
a consensus that off-site treatment was preferred to on-site treatment
activities. In late June, the citizens abandoned their two major objectives for
the PCB contaminated wastes - all treatment and disposal to be done on-site and
without incineration. The citizens recommended to EPA that the sludge be
dewatered on-site and landfilled off-site. This selected option was also the
least costly, as had been pointed out by EPA several years earlier. However, at
that time, the Forum had summarily rejected off-site treatment and disposal. The
current EPA Record of Decision specifies dewatering and landfilling as the
preferred remediation method for this site.


CONTRACTS

         ICF KAISER TEAMING AGREEMENT. In March 1997, Advanced Sciences entered
into a teaming agreement with ICF Kaiser to utilize the Company's SET technology
to remediate mixed waste at Los Alamos National Laboratory ("LANL") in New
Mexico and provide support services. Under ICF Kaiser's primary contract with
the DOE, ICF Kaiser was investigating and cleaning-up soils at LANL and on
former LANL property that may have contained hazardous and radioactive
materials. The teaming agreement specifies that Advanced Sciences will provide
the SET technology under a subcontractual arrangement along with environmental
engineering and other services, including remediation and safety services,
technical task support and health physics for implementation of tasks. Pursuant
to the terms of the teaming agreement, Advanced Sciences will be reimbursed for
time and materials expended on projects completed pursuant to the agreement and
will receive fees averaging 5.5% of its costs. ICF Kaiser, Inc. announced that
it had been awarded a five-year contract valued at up to $40 million to conduct
environmental restoration and cleanup projects at Los Alamos National Laboratory
in New Mexico. CAS is a team member of this project having entered into a
teaming agreement with ICF Kaiser


                                       11
<PAGE>


to utilize the Company's SET Technology to remediate mixed waste and to provide
support services. ICF Kaiser is in the process of completing final negotiating
of their contract with Los Alamos.

         LOCKHEED MARTIN MEMORANDUM OF UNDERSTANDING. In December 1997, Advanced
Sciences also entered into a memorandum of understanding (MOU) with Lockheed
Martin Advanced Environmental Systems, Inc. to jointly pursue environmental
remediation projects utilizing the Company's SET technology. Under the MOU, the
companies agreed, beginning in late January 1998, to employ the SET technology
at Lockheed Martin's laboratory in Las Vegas, Nevada to treat certain mixed
waste streams. This work was successfully completed in October 1998.

         WASTE CONTROL SPECIALISTS (WCS) MEMORANDUM OF UNDERSTANDING (MOU):
Advanced Sciences signed an MOU with WCS in August, 1998. WCS operates a
broad-based waste treatment, storage and disposal facility in Texas. The
agreement is intended to establish the first permanent SET process installation
at a facility that is permitted and licensed to treat and store mixed waste as
well as hazardous waste.

         OPERATIONAL TECHNOLOGIES CORP (OPTECH) CONTRACT: In August 1998,
Advanced Sciences was awarded a contract to utilize the solvated electron
technology (SET) process to treat PCB-contaminated soil located at a
Pennsylvania Air National Guard Facility. The contract has a value of $229,650.
This contract will deploy the third generation SET process equipment, the SET
processing machinery capable of processing ten tons a day, named the S-10.


         DAMES & MOORE GROUP AGREEMENT (D&M): In January 1999, the Company
entered into a formal agreement with D&M for the use of its proprietary
technology to destroy radioactive contaminated sodium and sodium potassium
mixtures at several domestic DOE sites domestically and at selected
international locations, where D&M is already participating in site cleanup of
cold war legacy waste. Dames & Moore Group is identifying sodium metal stores
that can be combined with mixed waste contamination projects where the SET
technology can be reliably and cost-effectively applied.

         REFRIGERANT (CFC) CAPABILITIES

         Through CFC Technologies, the Company has licensed a patented
technology from Refrigerant Services, Inc., a Canadian corporation located near
Halifax, Nova Scotia, which can effectively separate several refrigerant and
Halon mixtures in a cost-effective manner, and employed this technology through
an operating joint venture with Solvents Australia Limited. The Company
discontinued all business associated with CFC Technologies in July 1998 due to
uncertainties in the market and because the Company wished to focus its
resources on its primary technology, SET.

LIQUID WASTE TREATMENT--COMMODORE SEPARATION TECHNOLOGIES, INC

         The Company, through Separation, had developed and was in the process
of commercializing its separation technology and recovery system known as
SLiM(TM). Based on its continuing research and development program, the Company
believes that SLiM(TM) can separate and recover solubilzed metals,
radionuclides, biochemicals and other targeted elements from aqueous waste
streams. The Company believes that SLiM(TM) is a superior and cost-effective
alternative to other existing forms of membrane filtration technology in that it
requires lower initial capital costs and lower operating costs; is
environmentally safe, in most instances producing no sludges or other harmful
by-products which would require additional post-treatment prior to disposal; can
extract metals, organic chemicals and other elements and compounds in degrees of
concentration and purity which permit their reuse.



                                       12
<PAGE>


         CONTRACTS

         PORT OF BALTIMORE CONTRACTS. In November 1997, Separation was awarded
its first commercial project by the State of Maryland and entered into a
multi-year, sole-source contract ($250,000 lump-sum 2 year lease payment plus an
annual royalty payment) with Maryland Environmental Service (MES) for the
removal of chromium-contaminated leachate at the Hawkins Point Hazardous Waste
Treatment Facility at the Port of Baltimore. The SLiM equipment was installed
and went into commercial operation in February 1999.

         In February 1998, Separation was awarded its second commercial project
by the State of Maryland and entered into another multi-year, sole-source
contract ($350,000 lump-sum 2 year lease payment plus an annual royalty payment)
with MES for the removal of chromium-contaminated leachate at Dundalk Marine
Terminal at the Port of Baltimore. Separation is scheduled to commission this
installation in April of 1999.

The Company transferred its 87% interest in Separation to Environmental as of
September 28, 1998. (See Recent Sales of Unregistered Securities--September 1998
Exchange of Debt for Series B, C, D, Preferred Stock and Separation Stock)

ENVIRONMENTAL MANAGEMENT--COMMODORE ADVANCED SCIENCES, INC.

         The Company, through Advanced Sciences, provides specialized technical
and project management products and services primarily to government-sector
customers, including the DOE and DOD, and also to private-sector domestic and
foreign industrial customers. Advanced Sciences engages in all aspects of
environmental regulation and compliance, as well as access to leading
technologies and innovative skills related to the identification, investigation,
remediation and management of hazardous, mixed and radiological waste sites.
Advanced Sciences currently operates a network of eight offices located in six
states, with its principal executive offices located in Albuquerque, New Mexico.

         The Company's strategy in acquiring Advanced Sciences was to
incorporate its process technology into the products and services offered to
Advanced Sciences' customers, with a view to increasing the quality and scope of
services offered and providing the Company with a broader customer base for its
technology.

         SERVICES

         ENVIRONMENTAL SERVICES. Advanced Sciences' analytic and scientific
abilities enable it to become involved in environmental issues and problems at
their outset. Initially, Advanced Sciences provides its customers with a broad
outline of the types of environmental problems, health risks and liabilities
associated with a particular activity. Advanced Sciences also conducts
environmental audits and assessments, underground storage tank site
investigations, remedial investigations/feasibility studies, environmental
impact assessments, and statements and studies to identify any potential
environmental hazards.

         REMEDIATION SERVICES. Having already established a competitive market
position in the consulting and front-end analysis phase, Advanced Sciences has
been able to follow market demand into remediation services. After an
environmental problem is identified, Advanced Sciences offers alternative
remediation approaches which may involve providing on-site waste containment or
management of on-site/off-site remediation and waste removal. Advanced Sciences
can also redesign its customers' ongoing production processes and develop
engineering plans and technical specifications to minimize or eliminate the
generation of hazardous waste. The Company believes that Advanced Sciences'
integration of engineering and environmental skills, plus its access to
innovative technologies, provide Advanced Sciences with a competitive advantage
in redesigning production processes.


                                       13
<PAGE>


         TECHNICAL SERVICES. New technologies play a critical role in both the
remediation of existing waste sites and in the reduction of waste generated by
ongoing production processes. Advanced Sciences has access to key technologies
that can help minimize waste, reduce costs and improve the quality of a finished
product. Advanced Sciences has also retained what it believes are among the most
qualified professionals in the environmental consulting business. Advanced
Sciences' scientists have participated on national boards for risk assessment
and quality assurance, were instrumental in the development of environmental
regulations for the DOE and DOD, and have served as expert witnesses before the
U.S. Congress and the Nuclear Regulatory Commission. To maintain its competitive
position, Advanced Sciences intends to continue to develop viable remediation
technologies and attract and retain qualified personnel.

         CONTRACTS

         WASTE ISOLATION PILOT PLANT (WIPP) CONTRACT EXTENSION: In November
1998, Advanced Sciences was awarded a two-year extension by the DOE on its
existing Carlsbad Area Office Technical Assistance Contract. Advanced Sciences
will provide technical assistance to the DOE's Carlsbad Area Office in support
of the permitting and operation of the Waste Isolation Pilot Plant (WIPP) in
Carlsbad, New Mexico. Pursuant to the WIPP Contract, Advanced Sciences manages
the efforts of approximately 80 personnel who provide support covering
functional areas such as regulatory assurance, waste packaging and
transportation, and facility operations. The WIPP Contract is structured as a
cost plus 5.25% fee agreement. Based on current billings under the WIPP Contract
of approximately $900,000 per month, Advanced Sciences estimates that revenues
will reach approximately $10 million per year over the next two years as a
result of the extension of the contract.

         ROCKY FLATS CONTRACT. Under a basic ordering agreement from Kaiser-Hill
Company, LLC, the site operating contractor, Advanced Sciences is currently
providing technical, engineering and scientific support for the closedown and
cleanup of the DOE facility at Rocky Flats, Colorado (the "Rocky Flats
Contract"). Pursuant to the Rocky Flats Contract, approximately 40 Advanced
Sciences personnel are involved in activities such as environmental monitoring,
health monitoring, engineering design and documentation support with respect to
the facility. The Rocky Flats Contract, which extends through the end of 1999,
is structured as a time and materials contract that provides for a fee averaging
5.5% of costs. Advanced Sciences' billings under the Rocky Flats Contract are
approximately $400,000 per month.

         TETRA TECH CONTRACT. In November 1998, Advanced Sciences was awarded a
five-year subcontract under Tetra Tech's $20 million contract with Bechtel
Jacobs Co, LLC for general engineering support on environmental management work
at the U.S. DOE's Oak Ridge, TN site. Advanced Sciences estimates that this
subcontract may have an estimated value of $3 to $5 million over a 5-year
period.


                                       14
<PAGE>


MARKETS AND CUSTOMERS

         GENERAL

         The Company markets its services and technologies to governmental and
industrial customers throughout the United States. The Company also plans to
target customers in markets abroad, particularly in the Far East. A majority of
the Company's sales are technical in nature and involve senior technical and
management professionals, supported by the Company's marketing groups. During
the year ended December 31, 1998, sales of approximately 12% of the Company's
environmental management services were to private sector customers and sales of
approximately 88% were derived from contracts with federal, state and municipal
government agencies. Contracts with these governmental customers generally may
be terminated at any time at the option of the customer. In 1998, Advanced
Sciences' WIPP Contract and Rocky Flats Contract accounted for approximately 62%
and 23%, respectively of the Company's sales. No other project accounted for
more than 10% of the Company's sales for such period. The Company benefits
substantially from its long-term relationships with many of its customers which
result in a significant amount of repeat business.


         SOIL DECONTAMINATION

         The Company anticipates that the initial market for commercial
applications of SET will be the hazardous and mixed waste and industrial
by-products treatment and disposal market. Mixed waste is material that contains
both a hazardous and radioactive component. The most common methods of treatment
and disposal of hazardous wastes and industrial by-products include landfilling,
chemical and biological treatment and incineration. Most of the current
treatment and disposal methods entail air pollution and transportation risks. In
a mixed waste, both hazardous and nuclear regulations apply, making disposal
difficult if not impossible. Currently, there exist very limited disposal
options and these may not provide a permanent solution. Certain of these
treatment and disposal methods result in large volumes of residual waste, which
may require further treatment prior to disposal. As a result, a number of these
methods are encountering increased public resistance and added regulatory
oversight.

         As with any new technology or process, there has been initial
resistance to the use of SET on a large scale, especially in connection with a
strong vested interest on the part of the United States military (based on
substantial expenditures and commitments previously made) to use incineration
for the destruction of weapons. In addition, other prospective projects for the
Company have already been committed to other forms of destruction technology,
including incineration, plasma arc, vitrification, molten metal, molten salt,
chemical neutralization, biological treatment, catalytic electrochemical
oxidation and supercritical wet oxidation. The Company, and its collaborative
partners, have been attempting to overcome such competition by introducing SET
in smaller clean-up projects and through feasibility studies demonstrating its
applicability to larger projects, such as the clean-up of hazardous waste at
Harrisburg, PA and performing mixed waste remediation at the WCS site in
Andrews, Texas. The SET process provides a significant advantage by allowing the
processed material to be disposed of as a non-mixed waste by destroying the
hazardous component.

         It may also be anticipated that, over an extended period, the market
for decontamination of hazardous materials will continue to decline as past
environmental degradation is corrected, and as the private and public sectors
limit further pollution through prohibitions on production and use of a broad
range of hazardous materials and through the modification and improved
efficiency of various manufacturing processes. The mixed waste market is one of
the few areas that shows growth and has limited competition when compared to the
general hazardous waste market. The SET process brings a unique solution to the
problem of remediating mixed waste.


                                       15
<PAGE>


         ENVIRONMENTAL MANAGEMENT

         Based on market data compiled by Advanced Sciences, the largest market
for environmental services today is the United States government, which is
expected to increase its annual spending level for environmental services to
approximately $11.2 billion by the end of 1999. The DOD and DOE are expected to
account for approximately 66% of such expenditures. Advanced Sciences currently
occupies has a long-term record for providing environmental services to the
United States government.

RAW MATERIALS

         The Company has historically experienced no difficulty in obtaining
components used in the SET process for which it relies on a broad range of
suppliers. Nevertheless, business disruptions or financial difficulties of such
suppliers, shortages or other causes beyond the Company's control, could
adversely affect the Company by increasing the cost of goods sold or reducing
the availability of such components. If the Company were unable to obtain a
sufficient supply of required components, it could experience significant delays
in the furnishing of components used in the SET process, which could result in
the loss of orders and customers and could have a material adverse affect on the
Company's business, financial condition and results of operations. In addition,
if the cost of finished components were to increase, there can be no assurance
that the Company would be able to pass such increase on to its customers. The
use of outside suppliers also entails risks of quality control and disclosure of
proprietary information.

BACKLOG

         At December 31, 1998, total backlog for the Company was approximately
$80,000,000, as compared with approximately $109,250,000 as of December 31,
1997. Approximately $46,000,000 of the total backlog represents work for which
the Company has entered into a signed agreement or purchase order with respect
thereto or has received an order to proceed with work up to a specified dollar
amount. The remaining backlog of approximately $34,000,000 represents the
Company's current estimate of work for which the Company has been notified that
it has been chosen for a project but where a contract has not yet been
finalized. The Company estimates that approximately $18,500,000 of the total
backlog represents work, which will be completed in the next 12 months. Backlog
amounts have historically resulted in revenue; however, no assurance can be
given that all amounts included in backlog will ultimately be realized, even if
covered by written contracts or work orders.

RESEARCH AND DEVELOPMENT

         Research and development activities are ongoing and utilize internal
technical staff, as well as independent consultants retained by the Company and
its subsidiaries. All such activities are company-sponsored. Research and
development expenditures for the Company and its subsidiaries were $2,722,000
and $3,074,000 for the years ended December 31, 1998 and 1997, respectively of
which approximately $1,299,000 and $1,390,000 respectively, were attributable to
Separation.

INTELLECTUAL PROPERTY

         Solution has sixteen United States and twenty foreign patents which
were issued from 1987 to 1998, and which relate to SET, electrochemistry of
halogenated organic compounds, separation and destruction of CFCs and
decontamination of soils containing mercury and radioactive metals. Solution
also has one Canadian and one Japanese patent relating to its SET technology.
The Company has patents pending relating to the destruction of chemical warfare
agents and explosives. The Company has four US patent applications pending.

         To protect its trade secrets and the unpatented proprietary information
in its development activities, the Company requires its employees, consultants
and contractors to enter into agreements


                                       16
<PAGE>

providing for the confidentiality and the Company's ownership of such trade
secrets and other unpatented proprietary information originated by such persons
while in the employ of the Company. The Company also requires potential
collaborative partners to enter into confidentiality and non-disclosure
agreements.

         There can be no assurance that any patents which may hereafter be
obtained, or any of the Company's confidentiality and non-disclosure agreements,
will provide meaningful protection of the Company's confidential or proprietary
information in the case of unauthorized use or disclosure. In addition, there
can be no assurance that the Company will not incur significant costs and
expenses, including the costs of any future litigation, to defend its rights in
respect of any such intellectual property.


COMPETITION

         SOIL DECONTAMINATION. The Company anticipates that the initial market
for commercial private sector applications of SET will be the hazardous and
non-hazardous waste and industrial by-products treatment and disposal market.
This market is characterized by several large domestic and international
companies and numerous small companies, many of whom have substantially greater
financial and other resources than the Company. Although the Company believes
that it possesses the only Nationwide Permit for destroying PCBs, any one or
more of the Company's competitors or other enterprises not presently known may
develop technologies which are superior to the technologies utilized by the
Company. To the extent that the Company's competitors are able to offer
comparable services at lower prices or of higher quality, or more cost-effective
remediation alternatives, the Company's ability to compete effectively could be
adversely affected.

         The domestic and international governmental public sector of the market
is dominated by many large multinational corporations who are presently engaged
in providing incineration and other conventional technologies in decontaminating
chemical weapons and warfare agents, concentration of nuclear wastes and the
decontamination of military vessels and other hardware. These competitors
include Raytheon Corporation (the current general contractor for the Johnston
Atoll incinerator), EG&G, Inc. (the general contractor for the Tooele Army
Depot), Mason and Hanger (the general contractor for the Newport News naval
facility), Waste Management Corporation (a bidder for domestic "large burial"
stockpile weapons decontamination), and others, including Browning-Ferris
Industries, Inc., Jacobs Engineering, Inc., Fluor Daniel Corporation and
Lockheed Martin Marietta Corporation. All of these corporations have
substantially greater financial, personnel and other resources than the Company.
In addition, many prospective users of SET have already committed substantial
resources to other forms of environmental remediation technology, including
incineration, plasma arc, vitrification, molten metal, molten salt, chemical
neutralization, catalytic electrochemical oxidation and supercritical wet
oxidation.

         The Company believes that its ability to compete in both the commercial
private and governmental public sectors is dependent upon SET being a superior,
more cost-effective method to achieve decontamination of a variety of materials.

         ENVIRONMENTAL MANAGEMENT. Advanced Sciences has been primarily engaged
in providing environmental engineering and scientific support services to United
States government agencies, such as the DOE and DOD. Based on market data
compiled by Advanced Sciences, the largest market for environmental services
today is the United States government, which is expected to increase its
spending level for environmental services to approximately $11.2 billion by the
end of 1999. The DOE and DOD are expected to account for approximately 66% of
such expenditures. Advanced Sciences currently occupies a position in the waste
management and environmental services arena by virtue of its long-term record
for providing environmental services to the United States government.

         External developments and forces affecting Advanced Sciences include
competition from its competitors, as well as demographic and technological
trends that influence the composition and needs of


                                       17
<PAGE>


its customer base and the usefulness and competitive position of its services.
In addition, in order to maintain its position in its market, Advanced Sciences
must be able to respond to economic trends and regulatory actions that affect
the usefulness and accessibility of its services and control its costs of doing
business.

         In the hazardous waste management market, Advanced Sciences'
competitors include such firms as Roy F. Weston, Jacobs Engineering, Science
Applications International Corp., CH2M Hill, and CDM. In providing environmental
impact assessment services, Advanced Sciences' principal competition in this
market sector include Tetra Tech, The Earth Technology Corp., Dames & Moore and
Woodward-Clyde. Primary factors affecting Advanced Sciences' competitiveness in
this market are its ability to continue to attract and retain qualified
technical and professional staff with quality project performance records and to
control its costs of doing business.

         In an effort to maintain its competitive position, Advanced Sciences
has developed a solid infrastructure, acquired a qualified professional staff,
and developed aggressive marketing objectives to provide hazardous waste
management and environmental sciences to the United States government and
private sector industrial customers. The Company believes its competitive
position with the United States government is enhanced by the physical proximity
of Advanced Sciences' plants to DOE and DOD sites, its skilled professional
staff, prior project experience with the United States government, numerous
existing multi-year contracts with the United States government, integrated
services, and high quality performance.

ENVIRONMENTAL REGULATION

         The environmental legislation and policies which the Company believes
are applicable to SET in the United States primarily include the Toxic
Substances Control Act ("TSCA"), and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), and may include, on a case
by case basis, the Clean Air Act of 1970, as amended (the "Clean Air Act").
These laws regulate the management and disposal of toxic and hazardous
substances, provide for the protection of land and groundwater resources, and
control the discharge of pollutants into the air. Many of these laws have
international counterparts, particularly in Europe and elsewhere in North
America.

         TSCA regulates the manufacture, distribution, and sale of chemical
substances, and requires testing of new chemicals and new uses of known
chemicals that may present an unreasonable risk of injury to health or the
environment. The EPA, through TSCA, has adopted comprehensive regulations for
PCB's and other halogenated substances, as part of a vast regulatory program
covering thousands of chemicals.

         CERCLA and subsequent amendments under SARA (often referred to
collectively as Superfund) impose strict, retroactive liability upon persons who
generated, transported or arranged for the transportation of hazardous
substances or owned or operated the vessels or facilities at which such
substances were disposed. CERCLA provides for the investigation and remediation
of hazardous substance sites and mandates that any hazardous substances
remaining on-site must meet certain regulatory requirements, with a preference
for innovative technology. These program regulations may create an incentive to
utilize environmental-friendly technologies such as SET, which destroy targeted
wastes without creating additional residual waste product. Moreover, to the
extent hazardous substances are effectively destroyed, potential liability can
be eliminated or significantly reduced.

         The Clean Air Act empowered the EPA to establish and enforce ambient
air quality standards and limitations on emissions of air pollutants from
specific facilities. In 1987, the EPA began to enforce stricter standards for
incineration emissions. With more stringent regulations on waste reduction


                                       18
<PAGE>


technologies, the Company believes that SET could obtain a desired market share
since, in most cases, it produces little or no air emissions.

         CERCLA imposes strict, joint and several liability upon owners or
operators of facilities when a release or threatened release of a hazardous
substance has occurred, upon parties who generated hazardous substances that
were released at such facilities and upon parties who arranged for the
transportation of hazardous substances to and from such facilities. The
Company's plans to own and operate SET at on-site installations expose the
Company to potential liability under CERCLA for releases of hazardous substances
at those sites. In the event that off-site treatment, storage or disposal
facilities utilized by the Company for final disposition of residues from SET
are targeted for investigation and clean-up under CERCLA, the Company could
incur liability as a generator of such materials or by virtue of having arranged
for their transportation and disposal.

         In light of such potential liability, the Company has designed the SET
technology to minimize the potential for release of hazardous substances into
the environment. In addition, the Company has developed plans to manage the risk
of CERCLA liability, including training of operators, use of operational
controls and structuring of its relationships with the entities responsible for
the handling of waste materials and by-products. The Company also maintains
insurance with respect to environmental claims, although there can be no
assurance that such insurance will be adequate.

         The Clean Air Act Amendments of 1990 impose strict requirements upon
owners and operators of facilities that discharge pollutants into the
environment. These amendments may require that certain air emission control
technology be installed on the SET systems in the event that there is any
discharge of non-recovered gases into the environment. Such additional air
emission controls can be costly and require an air permit to construct and
operate.

         In April 1996, the Company was selected by the White House as one of
nine companies to participate in the Rapid Commercialization Initiative ("RCI"),
which is a component of the Clinton Administration's efforts to streamline the
commercialization process for new environmental technologies, and to build
cooperative interactions between business and government to bring environmental
technologies to market more rapidly and efficiently. Under the RCI, the Company
intends to form "working partnerships" with the EPA and other governmental
agencies for the purpose of developing and implementing policies and strategies
for the commercialization of SET. Although there is no funding through the RCI,
it is expected that the EPA and other governmental agencies will provide
permitting and siting assistance under the program to facilitate and expedite
the issuance of permits for site specific demonstrations of SET, as well as
assistance to certify and publish the on-site test results of such
demonstrations.

         The Company possesses a Nationwide Permit issued by the EPA under the
Alternative Destruction Technology Program that allows it to use SET on-site to
treat PCB-contaminated soils and metallic surfaces. The Nationwide Permit
contains numerous conditions for maintaining the Nationwide Permit and there can
be no assurance that the Company will be able to comply with such conditions to
maintain and/or secure renewal of the Nationwide Permit. In addition, if
environmental legislation or regulations are amended, or are interpreted or
enforced differently, the Company may be required to meet stricter standards of
operation and/or obtain additional operating permits or approvals. Failure to
obtain such permits or otherwise comply with such regulatory requirements could
have a material adverse effect on the Company and its operations.


                                       19
<PAGE>


EMPLOYEES

         As of March 31, 1999, the Company (including all of its direct and
indirect subsidiaries) had a total of 111 full-time employees, of which
approximately 82 are engineers, scientists and other professionals. None of such
employees are covered by collective bargaining agreements and the Company's
relations with its employees are believed to be good.


ITEM 2.  PROPERTIES. 

         The Company's principal executive offices are located in New York City
in approximately 2,000 square feet of space leased by an affiliate of Bentley J.
Blum, a director and principal stockholder of Environmental and a director of
the Company, Solution, Separation, Advanced Sciences and certain other
subsidiaries and affiliates of the Company. Such space also serves as the
principal executive offices of Environmental and certain of its affiliates. The
lease for the New York City space expired in December 1998.

         The Company leased marketing offices located in approximately 2,200
square feet of office space in McLean, Virginia under a lease expiring in May
2002. The Company paid $2,500 per month under the lease. The lease was
terminated effective December of 1998 with the payment of a lease termination
fee of $40,000. All marketing functions were transferred to the Advanced
Sciences principal offices in Albuquerque, New Mexico in late 1998.

         The Company leased approximately 21,000 square feet of space in
Houston, Texas, for testing, additional research and development, equipment
demonstration and assembly, and executive and administrative offices. Such space
also served as the principal accounting offices of Solution. The Company paid
$6,800 per month under the lease for the Houston space, which expires in June
2000. The leased offices were sublet in January 1999. The Company continues to
pay approximately $3000 per month for the Houston space after the sublet
off-set. All accounting functions were transferred to the Advanced Sciences
principal offices in Albuquerque, New Mexico in January 1999.

         The Company rents approximately 5000 square feet of space in Marengo,
Ohio, for testing, additional research and development, equipment demonstration
and assembly and executive offices. The Company pays $2500 per month under the
rental agreement for the Marengo space, which is on a month to month basis. All
laboratory research and development functions were transferred to the Marengo
facility in November 1998.

         Advanced Sciences' principal executive and administrative offices are
located in approximately 7,500 square feet of space in Albuquerque, New Mexico
under a lease expiring in November 2001. Advanced Sciences also leases small
space for field operations in Carlsbad and Los Alamos, New Mexico, Oak Ridge,
Tennessee and Lakewood, Colorado.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is involved in litigation incidental to the conduct of its
business. Management believes that none of this litigation, individually or in
the aggregate, is material to the Company's financial condition or results of
operations.


                                       20
<PAGE>


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

         No matters were submitted to a vote of security holders during the
fourth fiscal quarter of the year ended December 31, 1998.


                                       21
<PAGE>


                                     PART II

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

MARKET INFORMATION

         The Company's Common Stock and Warrants began trading publicly on June
28, 1996 at initial public offering prices of $6.00 per share and $0.10 per
Warrant and are traded on the American Stock Exchange ("Amex") under the symbols
CXI and CXIW, respectively. On March 31, 1999, there were 113 holders of record
of Common Stock and 35 holders of record of Warrants.

         The following table sets forth, for the fiscal periods shown, the high
and low sale prices (rounded to the nearest cent) for the Common Stock and
Warrants as reported on the Amex.

                                            COMMON STOCK         WARRANTS
                                          -----------------   ----------------
                                            HIGH     LOW       HIGH     LOW   
                                          -------- --------  -------- --------
FISCAL 1997
    First Quarter........................   9.00     4.00      3.75     1.00
    Second Quarter.......................   8.25     5.25      2.88     1.13
    Third Quarter........................   5.94     4.13      1.63     0.81
    Fourth Quarter.......................   5.25     1.50      1.63     0.31

FISCAL 1998
    First Quarter........................   6.75     2.56      2.06     0.75
    Second Quarter.......................   5.19     1.75      1.50     0.63
    Third Quarter........................   2.81     0.19      0.81     0.06
-   Fourth Quarter.......................   0.75     0.25      0.25     0.03


DIVIDEND INFORMATION

         The holders of the Company's 7% Series A Convertible Redeemable
Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock"),
were entitled to receive if, when and as declared by the Board of Directors out
of funds legally available therefor, cumulative dividends at the rate of $7.00
per share per annum, payable at the time of conversion, either in cash or, at
the election of the Company, by delivery of shares of Common Stock at the
conversion price then in effect. As of December 31, 1998, the Company had issued
a total of 15,173 shares of Common Stock as dividends in kind with respect to
the Series A Preferred Stock, the total dollar value of which is approximately
$37,318. Of this total amount, 6,252 shares of the Company's Common Stock were
issued in 1998, the total value of which is approximately $14,000. See 
"-- Recent Sales of Unregistered Securities -- August 1997 Private Placement of
Series A Preferred Stock."

         The Company has never paid cash dividends on its capital stock. Any
future determination as to the payment of cash dividends on the capital stock of
the Company will depend on the ability of the Company to service its outstanding
indebtedness and future earnings, capital requirements, the financial condition
of the Company and such other factors as the Company's Board of Directors may
consider. The Company currently intends to retain its earnings to finance the
growth and development of its business and to repay outstanding indebtedness and
does not anticipate paying cash dividends on its capital stock in the
foreseeable future.


                                       22
<PAGE>


RECENT SALES OF UNREGISTERED SECURITIES

         SEPTEMBER 1998 EXCHANGE OF DEBT FOR SERIES B,C,D, PREFERRED STOCK AND
SEPARATION STOCK

         On December 25, 1998, the Company consummated the transfer of all
10,000,000 of its shares of Common Stock, par value $.001 per share (the
"Separation Stock"), of Separation, representing approximately 87% of the issued
and outstanding shares of capital stock of Separation, to Environmental as part
of a debt repayment plan between the Company and Environmental. The transfer was
effective as of September 28, 1998. Environmental currently owns approximately
35% of the outstanding shares of Common Stock of the Company.

         As a result of the repayment, the Company has repaid all of its
$6,756,000 debt to Environmental by exchanging the debt for (i) the Separation
Stock (as repayment of $1,250,000 of debt); (ii) 20,909 shares of newly created
6% Series B Convertible Preferred Stock of the Company (as repayment of
$2,090,870 of debt); (iii) 10,189 shares of newly created 6% Series C
Convertible Preferred Stock of the Company (as repayment of $1,018,864 of debt);
(iv) 20,391 shares of newly created 6% Series D Convertible Preferred Stock of
the Company (as repayment of $2,039,100 of debt); (v) assignment to
Environmental of an account receivable due to the Company from Separation in the
amount of $357,000 (as repayment of $357,000 of debt); and (vi) amendment of an
existing warrant owned by Environmental to purchase 1,500,000 shares of the
Company's Common Stock to reduce the exercise price of such warrant from $10.00
per share to $1.50 per share. The terms of the debt restructuring were
determined as a result of arm's-length negotiations between representatives of
both the Company and Environmental, and were supported by fairness opinions by
an independent, third-party appraiser.


         FEBRUARY 1998 INTERCOMPANY NOTE

         In February 1998, Environmental provided a $5,450,000 unsecured loan to
the Company, evidenced by the Company's 8% non-convertible note (the
"Intercompany Note"). Pursuant to the terms of the Intercompany Note, interest
on the unpaid principal balance of the Intercompany Note is payable at the rate
of 8% per annum, semiannually in cash. The unpaid principal amount of the
Intercompany Note is due and payable, together with accrued and unpaid interest,
on the earlier to occur of (a) December 31, 1999, or (b) consummation of any
public offering or private placement of securities of the Company with net
proceeds aggregating in excess of $6.0 million, other than in respect of working
capital financing or secured financing of assets received by the Company in the
ordinary course of business from any bank or other lending institution, subject
to certain conditions. The Company used the net proceeds of the loan solely for
working capital and general corporate purposes and not for the satisfaction of
any portion of Company debt or to redeem any Company equity or equity-equivalent
securities. This Intercompany Note was fully paid off effective September 28,
1998. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Certain
Relationships and Related Transactions--February 1998 Intercompany Note."

         In connection with the loan, the Company amended and restated in its
entirety a five-year warrant to purchase 7,500,000 shares of Common Stock issued
to Environmental on December 2, 1996 to, among other things, reduce the exercise
price of the warrant from $15.00 per share to $10.00 per share. In addition, the
Company issued to Environmental an additional five-year warrant to purchase
1,500,000 shares of Common Stock at an exercise price of $10.00 per share. See
"Certain Relationships and Related Transactions--February 1998 Intercompany
Note."


                                       23
<PAGE>


         OCTOBER 1997 PRIVATE PLACEMENT OF COMMON STOCK

         In October 1997, the Company sold 700,000 shares (the "Private
Placement Shares") of Common Stock (of which 600,000 shares were sold at $3.675
per share and 100,000 shares were sold at $3.93125 per share) for an aggregate
purchase price of approximately $2.6 million in a private placement (the
"October 1997 Private Placement") to certain "accredited investors" as such term
is defined in Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to the terms of such sale, if, during the 12-month
period ending September 30, 1998 (the "Reset Period") the Company (i) sells any
shares of Common Stock, (ii) issues any securities convertible into or
exercisable for Common Stock, or (iii) issues any shares of Common Stock during
such Reset Period (but not thereafter) upon conversion of the Series A Preferred
Stock, in each case, for a selling price, conversion price or exercise price per
share which shall be lower than the per share purchase price of the Private
Placement Shares (such lower price being the "Reset Price"), the per share
purchase price will be adjusted downward at the end of the Reset Period to equal
the Reset Price. At December 31, 1997, the aggregate price reset liability was
$1,198,000. This amount was recorded as an adjustment to the original purchase
price and accrued as a liability. The Company issued an additional 599,063
shares to the holders of the Private Placement Shares on October 2, 1998 in
connection with the Price Reset Provision. The Reset Price and the subsequent
share issuance was at $2.00 per share of Common Stock.

         In December 1997, an aggregate of 326,760 shares of Common Stock were
issued by the Company to investors upon conversion of certain of their shares of
Series A Preferred Stock at a conversion price of $2.00 per share. See "--August
1997 Private Placement of Series A Preferred Stock." As a result, the per share
purchase price of the Private Placement Shares will be adjusted downward at the
end of the Reset Period to equal $2.00. Pursuant to the terms of the October
1997 Private Placement, the Company is required either to refund approximately
$1.2 million (representing the difference between the aggregate purchase price
of the Private Placement Shares and the aggregate purchase price of such shares
based on a $2.00 Reset Price), or to issue approximately 600,000 additional
shares of Common Stock (representing the number of additional shares of Common
Stock the investors would have received in October 1997 had the purchase price
thereof been $2.00 per share) to the investors in the October 1997 Private
Placement, for no additional consideration, at the end of the Reset Period. The
Company has recorded a liability of approximately $1.2 million to reflect the
cost of such price reset.

         Affiliates of the placement agent in connection with the October 1997
Private Placement received warrants to purchase an aggregate of 60,000 shares of
Common Stock at $3.675 per share. The Company has an effective registration
statement on file with the Securities and Exchange Commission (the "Commission")
covering the 700,000 shares of Common Stock issued in the October 1997 Private
Placement, as well as the 60,000 shares of Common Stock issuable upon exercise
of the foregoing warrants. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."


                                       24
<PAGE>


         AUGUST 1997 PRIVATE PLACEMENT OF SERIES A PREFERRED STOCK

         In August 1997, the Company sold 18,000 shares of its Series A
Preferred Stock for an aggregate purchase price of $1.8 million in a private
placement (the "August 1997 Private Placement") to "accredited investors" as
such term is defined in Rule 501 under the Securities Act. The Series A
Preferred Stock was convertible into that number of shares of Common Stock equal
to $100 divided by the Conversion Price. The "Conversion Price" was defined as
the amount equal to the lesser of (i) $4.64, representing 100% of the average of
the closing sale prices of the Common Stock for the five consecutive trading
days preceding the issuance date of the Series A Preferred Stock, or (ii) 88% of
the average of the closing sale prices of the Common Stock for the five
consecutive trading days immediately prior to the date of conversion. Subject to
customary anti-dilution provisions, the minimum conversion price was $2.00 per
share; provided that if the average of the closing sale prices of the Common
Stock for any 60 consecutive calendar days was less than $2.00, such investors
had the right either to demand mandatory redemption of their shares of Series A
Preferred Stock (at $100 per share plus accrued and unpaid dividends) or convert
their shares of Series A Preferred Stock into shares of Common Stock without
regard to such minimum $2.00 conversion price.

         As of March 26, 1998, all 18,000 shares of Series A Preferred Stock had
been converted into an aggregate of 753,200 shares of Common Stock, based upon
Conversion Prices ranging from $2.00 to $3.685 per share.

         The placement agent in connection with the August 1997 Private
Placement received warrants to purchase 19,407 shares of Common Stock at $5.80
per share. The Company has an effective registration statement on file with the
Commission covering the 753,200 shares of Common Stock into which the Series A
Preferred Stock were converted, as well as the 19,407 shares of Common Stock
issuable upon the exercise of the foregoing warrants. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

         SEPTEMBER 1997 INTERCOMPANY CONVERTIBLE NOTE

         In September 1997, Environmental provided a $4.0 million unsecured loan
to the Company, evidenced by the Company's 8% convertible subordinated note (the
"Convertible Note"). Pursuant to the terms of the Convertible Note, the Company
is obligated to pay Environmental interest only at the rate of 8% per annum,
payable quarterly. Unless converted into Common Stock at any time, the unpaid
principal amount of the Convertible Note is due and payable, together with
accrued and unpaid interest, on August 31, 2002. Payment of principal and
accrued interest under the Convertible Note is subordinated to all other
indebtedness for money borrowed of the Company. Environmental has the right to
convert the Convertible Note into shares of Common Stock at a conversion price
of $3.89 per share. Such conversion price was fixed at approximately 85% of the
five-day average closing bid price of Common Stock ($4.575 per share) prior to
August 22, 1997, the date that the Executive and Finance Committees of the
respective Boards of Directors of the Company and Environmental authorized such
loan. In connection with the $4.0 million loan, the Company issued Environmental
a five-year warrant to purchase 1,000,000 shares of Common Stock at an exercise
price of $5.0325 per share (approximately 110% of the $4.575 five-day average
closing bid price of Common Stock prior to August 22, 1997).

         In March 1998, the Company prepaid $2.0 million of the Convertible Note
by (i) paying Environmental the sum of $500,000 in cash and (ii) transferring to
Environmental a promissory note, dated August 30, 1996, in the principal amount
of $1.5 million (the "LPM Note") from Lanxide Performance Materials, Inc.
("LPM"), a wholly-owned subsidiary of Lanxide Corporation, a Delaware
corporation ("Lanxide"). Lanxide, which specializes in the manufacture of
ceramic bonding and refractory materials, is related to the Company by
significant common beneficial ownership. To induce Environmental to accept the
Company's prepayment of $2.0 million of the Convertible Note (and thereby


                                       25
<PAGE>


give up the right to convert $2.0 million of the Convertible Note into Common
Stock), the Company issued to Environmental an additional warrant to purchase up
to 514,000 shares of Common Stock at an exercise price of $4.50 per share. Such
exercise price was fixed at approximately 110% of the closing sale price of the
Common Stock on February 20, 1998, the trading day immediately prior to the date
the Board of Directors of the Company approved such prepayment. The estimated
fair value of such warrant is approximately $340,000. The remaining balance of
this Intercompany Convertible Note was paid off effective September 28, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions--September 1997 Intercompany Note."

         The above transactions were deemed exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) thereof as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate restrictive legends were affixed
to the warrants and the certificates representing the shares issued in such
transactions. The Company made available to all recipients of securities written
information about the Company in accordance with Rule 502 of the Securities Act
and advised such recipients of the limitations on resale of such securities. In
addition, all recipients were offered the opportunity, prior to purchasing any
securities, to ask questions of, and receive answers from, the Company
concerning the terms and conditions of the transactions and to obtain additional
relevant information about the Company.


                                       26
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA. 

         The following table presents selected financial data of the Company, as
of December 31, 1998, for the fiscal years ended December 31, 1994, 1995, 1996,
1997 and 1998. The following selected historical data is derived from the
Company's Consolidated Financial Statements and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report.

<TABLE>
<CAPTION>
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

                                                    YEAR ENDED DECEMBER 31,
                                   ----------------------------------------------------
                                     1994       1995       1996       1997       1998
                                   --------   --------   --------   --------   --------
<S>                                <C>        <C>        <C>        <C>        <C>     
Revenue:
  Contract revenue ..............  $   --     $   --     $  5,123   $ 19,493   $ 17,470
Cost of sales:
  Cost of sales .................      --         --        4,136     16,325     15,421
  Research and development ......       380      1,815      2,022      3,074      2,722
  General and administrative ....     1,369      1,773      3,412     12,196      8,118
  Depreciation and
    amortization ................      --         --          561      1,282      1,150
  Minority interests ............      --         --         --          (82)       300
  Write-off of in-process
    technology ..................     2,424       --         --         --         --  
                                   --------   --------   --------   --------   --------

Loss from operations ............    (4,173)    (3,588)    (5,008)   (13,302)   (10,241)

  Gain on sale of affiliate .....      --         --         --         --        4,664
  Interest income ...............         7          6        477        745        337
  Interest expense ..............      (551)      (274)      (617)    (1,310)    (1,066)
  Equity  in net  losses  of
    subsidiary ..................      --         --         (495)    (1,827)    (2,383)
                                   --------   --------   --------   --------   --------
Loss before income taxes
  and extraordinary item ........    (4,717)    (3,856)    (5,643)   (15,694)    (8,689)
  Income taxes, benefit .........      --         --         --         --        1,262
                                   --------   --------   --------   --------   --------
Net loss-before extraordinary
  item ..........................    (4,717)    (3,856)    (5,643)   (15,694)    (7,427)

  Extraordinary item Gain on
    troubled debt restructuring .      --         --         --         --        1,892
                                   --------   --------   --------   --------   --------
Net loss ........................  $ (4,717)  $ (3,856)  $ (5,643)  $(15,694)  $ (5,535)
                                   ========   ========   ========   ========   ========

Net loss per share--basic .......  $  (0.31)  $  (0.26)  $  (0.31)  $  (0.73)  $  (0.32)
  and diluted Extraordinary
    item per share ..............      --         --         --         --         0.08
                                   --------   --------   --------   --------   --------
Net loss per share--basic 
  and diluted ...................  $  (0.31)  $  (0.26)  $  (0.31)  $  (0.73)  $  (0.24)
                                   ========   ========   ========   ========   ========
  
Weighted  average  number  of
  shares ........................    15,000     15,000     18,100     21,844     23,194
                                   ========   ========   ========   ========   ========
</TABLE>



<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA:
                                                          DECEMBER 31,
                                   ----------------------------------------------------
                                     1994       1995       1996       1997       1998
                                   ---------  --------   --------   --------   --------

<S>                                <C>        <C>        <C>        <C>        <C>     
Cash and cash equivalents .......  $   --     $      4   $ 12,076   $ 13,151   $  1,798
Total assets ....................       856      1,091     33,456     29,696     15,617
Long term debt ..................      --         --           29         19       --
Total liabilities ...............     5,542      9,633     13,380     10,521      3,709
Minority interests ..............      --         --         --        6,645       --
Stockholders' equity ............    (4,686)    (8,542)    20,076     11,654     11,908

</TABLE>


                                       27
<PAGE>


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

OVERVIEW

         Through its operating subsidiaries, the Company provides a range of
technologies and services directed principally at treating soil contamination,
protecting the integrity of our nation's water and air and the disposal or reuse
of certain waste by-products through development of inert and environmentally
sound technologies. The Company is currently in the process of commercializing
these technologies through various acquisitions, licensing agreements and joint
ventures.

         Since Environmental's acquisition of the Company's predecessor,
Commodore Laboratories, Inc. (formerly A.L. Sandpiper Corporation), in December
1993, the Company has not generated material revenues, except from the
operations of Advanced Sciences, or any profits. Prior to the Company's
acquisition of Advanced Sciences, the Company was considered to be a development
stage company. See "Certain Relationships and Related Transactions--Organization
and Capitalization of the Company."

RESULTS OF OPERATIONS

         YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         Revenues were $17,470,000 for the year ended December 31, 1998,
compared to $19,493,000 for the year ended December 31, 1997. Revenues in 1998
were primarily from engineering and scientific services performed for the United
States government under a variety of contracts similar to those in place in
1997. The decline in revenues is primarily the result of less subcontract work
being performed in 1998. The government decided to deal directly with the
subcontractor rather than having Advanced Sciences subcontract this work on
behalf of the government. The government took this action, as the subcontracts
became too large. Cost of sales decreased from $16,325,000 for 1997 to
$15,421,000 for 1998. A reduction in cost of sales at Advanced Sciences resulted
from decreased revenues. Anticipated losses on contracts are provided for by a
charge to income during the period such losses are first identified.

         For the year ended December 31, 1998, the Company incurred research and
development costs of $2,722,000, as compared to $3,074,000 for the year ended
December 31, 1997. In 1998, the Company invested more money in capital
expenditures and less in laboratory work and consultants than it had in 1997.
Research and development costs include salaries, wages, other related costs of
personnel engaged in research and development activities, contract services and
materials, test equipment and rent for facilities involved in research and
development activities. Research and development costs are expensed when
incurred, except that those costs related to the design or construction of an
asset having an economic useful life are capitalized, and then depreciated over
the estimated useful life of the asset.

         General and administrative expenses for the year ended December 31,
1998 were $8,118,000, as compared to $12,196,000 for the year ended December 31,
1997. This decrease reflects the impact of some restructuring steps the Company
made in 1997 and the fourth quarter of 1998. Also, the Company only shows nine
months of expenses for Separation as this subsidiary was sold September 28,
1998. In 1998, the Company recorded a $486,000 reserve through general and
administrative expenses to reflect the costs to be incurred in 1999 for
severance pay for laid off employees. This reserve also recognizes the liability
for certain administrative and laboratory offices that have been closed, but for
which some lease commitments continue.

         In 1998, the Company completed a debt restructuring plan which, in
part, had the Company transfer all 10,000,000 of its shares of Separation stock
(representing approximately 87% of the issued


                                       28
<PAGE>


and outstanding shares of capital stock of Separation) to an LLC wholly owned by
Environmental. The transfer was effective as of September 28, 1998. Accordingly,
the 1998 consolidated financial statements of the Company include the activity
of Separation only through September 28, 1998. As a result of this sale, the
Company recognized a gain of $4,664,000.

         The debt-restructuring plan also included an exchange of the Company's
preferred stock for debt it owed to Environmental. The Company recorded an
extraordinary gain before tax from this early extinguishment of debt of
$3,154,000. This represents the difference between the value assigned to the
preferred stock (based on a third-party appraisal) and the net book value of the
debt forgiven.

         The decrease in interest income of $408,000 from 1997 to 1998
reflects the reduction in cash reserves of the Company and its subsidiaries
and therefore the reduction of funds available for investing. The decrease in
interest expense of $244,000 from 1997 to 1998, represents savings from the
reduction of the average line of credit balance between years.

         Equity in net loss from unconsolidated subsidiary for the year ended
December 31, 1998 was $2,383,000 as compared to $1,827,000 for the year ended
December 31, 1997. This was due to increased cost of revenues and increased bid
and proposal costs incurred by the LLC in 1998 while protests were being filed
with the GAO. See BUSINESS--Joint Ventures.

         YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

         Revenues were $19,493,000 for the year ended December 31, 1997,
compared to $5,123,000 for the year ended December 31, 1996. 1997 revenues were
primarily due to the Company's acquisition of Advanced Sciences in October 1996
and consisted of engineering and scientific services performed for the United
States government under a variety of contracts, most of which provide for
reimbursement of cost plus fixed fees. Revenue under cost-reimbursements
contracts is recorded under the percentage of completion method as costs
incurred and includes estimated fees in the proportion that costs to date bear
to total estimated costs. Cost of sales increased to $16,325,000 for 1997 from
$4,136,000 for 1996. Anticipated losses on contracts are provided for by a
charge to income during the period such losses are first identified.

         For the year ended December 31, 1997, the Company incurred research and
development costs of $3,074,000, as compared to $2,022,000 for the year ended
December 31, 1996. Research and development costs include salaries, wages, other
related costs of personnel engaged in research and development activities,
contract services and materials, test equipment and rent for facilities involved
in those costs related to the design or construction of an asset having an
economic useful life are capitalized, and December 31, 1997, as compared to the
year ended December 31, 1996, primarily due to the continued use of independent
consultants in the development of SET. In addition, the Company hired additional
technical and operational personnel to develop the SET and SLiM(TM) processes.

         General and administrative expenses for the year ended December 31,
1997 were $12,196,000, as compared to $3,412,000 for the year ended December 31,
1996. The increase was primarily due to hiring executives and staff to support
the increased activities of the Company caused by its and Separation's change to
"public" status and efforts to commercialize its technologies. Approximately
$5,696,000 of the increase relates to expenses incurred by Advanced Sciences and
Separation. In 1997, the Company recorded an $800,000 valuation reserve for the
LPM Note receivable which is included in general and administrative expenses. In
April 1997, Separation completed an initial public offering of its equity
securities which reduced the Company's ownership interest from 100% to 87%.


                                       29
<PAGE>


         Interest income was $745,000 for the year ended December 31, 1997, as
compared to $477,000 for the year ended December 31, 1996. The increase resulted
from the investment of the proceeds of the Company's and Separation's initial
public offerings.

         Interest expense for the year ended December 31, 1997 was $1,310,000,
as compared to $617,000 for the year ended December 31, 1996. Interest charges
in 1996 result from indebtedness to Environmental for advances made to the
Company and from indebtedness by Separation. Interest expense in 1997 was due to
the debt assumed in connection with the acquisition of Separation. In addition,
$750,000 of interest expense was recognized in September 1997 related to the
beneficial conversion privilege attached to the Convertible Note payable to
Environmental.


LIQUIDITY AND CAPITAL RESOURCES


         From its inception through the second quarter of 1996, the Company's
operations were financed principally by loans and investments from its
stockholders. In June 1996, the Company successfully completed its IPO from
which it received net proceeds of approximately $30,500,000. The Company
allocated approximately $12.0 million of the net proceeds for the funding of
proposed collaborative joint ventures, $2.0 million of which was allocated to
Teledyne-Commodore, LLC. See "Certain Relationships and Related
Transactions--Organization and Capitalization of the Company."

         In July 1996, the Company utilized a portion of the net proceeds from
its IPO to repay an outstanding line of credit of $2.0 million, as well as a
$5,925,426 promissory note to its principal stockholder (the "Environmental
Funding Note"). The Company set aside $1.0 million cash collateral to support a
loan made by a commercial bank to the Company's principal stockholder in
December 1993. In September 1996, such cash collateral was released by the bank.
See "Certain Relationships and Related Transactions--Organization and
Capitalization of the Company."

         In August 1996, the Company loaned $1.5 million to LPM, a wholly-owned
subsidiary of Lanxide, evidenced by the LPM Note. Lanxide is related to the
Company by significant common beneficial ownership. The LPM Note is
collateralized by the assets of PLM and guaranteed by Lanxide. The PLM Note
became due on February 28, 1998. In March 1998, the Company transferred the PLM
Note to Environmental, together with $500,000 in cash, as partial prepayment of
the $4.0 million unsecured loan from Environmental to the Company in September
1997. See "Market for Registrant's Common Equity and Related Stockholder Matters
Recent Sales of Unregistered Securities" September 1997 Intercompany Convertible
Note" and "Certain Relationships and Related Transactions September 1997
Intercompany Convertible Note."

         In December 1996, the Company acquired (i) all of the outstanding
capital stock of Separation and (ii) all of the outstanding capital stock of CFC
Technologies from Environmental, as part of a corporate restructuring of
Environmental to consolidate all of its current environmental technology
businesses with the Company. In addition, Environmental assigned to the Company
outstanding Separation notes aggregating $976,200 at December 2, 1996,
representing advances previously made by Environmental to Separation, which the
Company has contributed to the equity of Separation. In consideration for the
transfer of all of the outstanding capital stock of Separation and CFC
Technologies to the Company, the Company paid Environmental $3.0 million in cash
and issued to Environmental a warrant expiring December 2, 2003 to purchase
7,500,000 shares of Company Common Stock at an exercise price of $15.00 per
share, valued at $2.4 million. See "Certain Relationships and Related
Transactions Organization and Capitalization " and "February 1998 Intercompany
Note."


                                       30
<PAGE>


         In April 1997, Separation completed an initial public offering of its
equity securities, from which it received net proceeds of approximately
$11,100,000. Such funds were used primarily to finance Separation's operations
through 1998.

         In August 1997, the Company completed the August 1997 Private Placement
from which it received net proceeds of approximately $1.6 million. In connection
with the sale, the Company incurred cash transaction costs of approximately
$117,000 and issued warrants, expiring on August 15, 2002, to the placement
agent. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities."

         In October 1997, the Company completed the October 1997 Private
Placement from which it received aggregate net proceeds of approximately $2.4
million. In connection with the October 1997 Private Placement, the Company
incurred cash transaction costs of approximately $209,000 and issued warrants,
expiring on September 30, 2002, to the placement agent. See "Market for
Registrant's Common Equity and Related Stockholder Matters--Recent Sales of
Unregistered Securities."

         In September 1997, Environmental provided the Company with a $4.0
million unsecured loan, evidenced by the Convertible Note due August 31, 2002.
In connection with the Convertible Note, the Company issued warrants to purchase
1,000,000 shares of Common Stock to Environmental valued at $660,000 and
provided a beneficial conversion privilege with an intrinsic value of $750,000
as of the date of the transaction. In March 1998, the Company prepaid $2.0
million of the Convertible Note by (i) paying Environmental the sum of $500,000
in cash and (ii) transferring to Environmental a promissory note, dated August
30, 1996, in the principal amount of $1.5 million (the "LPM Note") from Lanxide
Performance Materials, Inc. ("LPM"), a wholly-owned subsidiary of Lanxide
Corporation, a Delaware corporation ("Lanxide"). Lanxide, which specializes in
the manufacture of ceramic bonding and refractory materials, is related to the
Company by significant common beneficial ownership. To induce Environmental to
accept the Company's prepayment of $2.0 million of the Convertible Note (and
thereby give up the right to convert $2.0 million of the Convertible Note into
Common Stock), the Company issued to Environmental an additional warrant to
purchase up to 514,000 shares of Common Stock at an exercise price of $4.50 per
share. Such exercise price was fixed at approximately 110% of the closing sale
price of the Common Stock on February 20, 1998, the trading day immediately
prior to the date the Board of Directors of the Company approved such
prepayment. The estimated fair value of such warrant is approximately $340,000.
The remaining balance of this Intercompany Convertible Note was paid off by
December 31, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Certain Relationships and Related Transactions--September 1997 Intercompany
Note."

         At December 31, 1998 and 1997, ASI had a $361,000 and $1,199,000
outstanding balance, respectively, on various revolving lines of credit. In
August 1998, ASI refinanced their line of credit. The line of credit is not to
exceed 75% of eligible receivable or $2,000,000 and is due August 4, 2000 with
interest payable monthly at prime plus 1.5 percent (9.25 percent as of December
31, 1998). The credit line is collateralized by the assets of CASI and is
guaranteed by Applied. This line of credit contains certain financial covenants
and restrictions including minimum ratios that ASI must satisfy. ASI was in
compliance with the covenants at December 31, 1998 and 1997.

         In addition, the line of credit agreement stipulates that no payments
shall be made to the Company other than monthly scheduled payments of principal
with respect to $6,300,000 of subordinated indebtedness owed by ASI to the
company (which is eliminated in consolidation) and intercompany indebtedness not
to exceed $20,000 in any month. In addition, ASI shall not incur indebtedness in
excess of $25,000, other than trade payables, the above subordinated
indebtedness and other contractual obligations to suppliers and customers
incurred in the ordinary course of business.

         In February 1998, Environmental provided the Company with a $5,450,000
uncollateralized loan, evidenced by the Intercompany Note due on the earlier to
occur of (a) December 31, 1999, or (b) consummation of any public offering or
private placement of securities of the Company with net proceeds aggregating in
excess of $6.0 million, other than in respect of working capital financing or
secured financing of assets received by the Company in the ordinary course of
business from any bank or other lending institution, subject to certain
conditions. The Company has used the net proceeds of the loan solely for working
capital and general corporate purposes and not for the satisfaction of any
portion of Company debt or to redeem any Company equity or equity-equivalent
securities. During 1998, the Company repaid $828,000 of the principle balance on


                                       31
<PAGE>


this Note before the Note was paid off in its entirety through the September 28,
1998 transaction described below. In connection with the loan, the Company
amended and restated in its entirety a five-year warrant to purchase 7,500,000
shares of Common Stock issued to Environmental on December 2, 1996 to, among
other things, reduce the exercise price of the warrant from $15.00 per share to
$10.00 per share. In addition, the Company issued to Environmental an additional
five-year warrant to purchase 1,500,000 shares of Common Stock at an exercise
price of $10.00 per share. See "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered Securities" and
"Certain Relationships and Related Transactions."

         Effective September 28, 1998, the Company repaid $6,756,000 of its debt
to Environmental (representing the balances on the September, 1997 Convertible
Note and the February, 1998 Intercompany Note) by exchanging the debt for (i)
10,000,000 shares of Separation Common Stock (as repayment of $1,250,000 of
debt; (ii) 20,909 shares of newly created 6% Series B Convertible Preferred
Stock of the Company (as repayment of $2,090,870 of debt); (iii) 10,189 shares
of newly created 6% Series C Convertible Preferred Stock of the Company (as
repayment of $1,018,864 of debt); (iv) 20,391 shares of newly created 6% Series
D Convertible Preferred Stock of the Company (as repayment of $2,039,100 of
debt); (v) assignment to Environmental of an account receivable due to the
Company from Separation in the amount of $357,000 (as repayment of $357,000 of
debt); and (vi) amendment of an existing warrant owned by Environmental to
purchase 1,500,000 shares of the Company's Common Stock at $10.00 per share,
reducing the exercise price to $1.50 per share. The terms of the debt
restructuring were determined as a result of arm's length negotiations between
representatives of both the Company and Environmental, and were supported by
fairness opinions by an independent, third-party appraiser. Environmental
currently owns approximately 35% of the outstanding shares of the Company's
common stock. See "Certain Relationships and Related Transaction" and "Market
for Registrant's Common Equity and Related Stockholder Matters Recent Sales of
Unregistered Securities."

         As part of this restructuring plan, the Company consummated the
transfer of all 10,000,000 of its shares of Common Stock, par value $.001 per
share (the "Separation Stock"), of Separation, representing approximately 87% of
the issued and outstanding shares of capital stock of Separation to Commodore
Environmental Services LLC, a Delaware limited liability company wholly owned by
Commodore. The transfer is effective as of September 28, 1998. Accordingly, the
1998 consolidated financial statements of the Company, include the activity of
Separation only through September 28, 1998. As a result of this sale, the
Company recognized a gain of $4,664,000.

         Also, the Company has entered into a non-binding letter of intent to
purchase Global Energy Investors, LLC ("GEI"). The Company believes that this
transaction will be received positively by the investment community and will
allow the merged companies to raise $10,000,000 in new equity capital. This
transaction is scheduled to be completed in the third quarter of 1999.

         For the year ended December 31, 1998, the Company incurred a net loss
of $5,535,000. As compared to a net loss of $15,694,000 for the year ended
December 31, 1997.

         As shown in the financial statements for the years ended December 31,
1998, 1997 and 1996, the Company incurred losses exclusive of their gain on the
sale of affiliate and extraordinary item of $13,353,000, $15,694,000 and
$5,643,000,respectively. The Company has also experienced net cash outflows from
operating activities of $9,155,000, $8,220,000 and $7,159,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, 1997
and 1996 the Company had working capital of $1,817,000, $11,170,000 and
$8,838,000, respectively, and stockholders' equity of $11,908,000, $11,654,000
and $20,076,000, respectively. The Company's decrease in working capital and
stockholders' equity from December 31, 1996 to December 31, 1998 is principally
due to the net loss for the period.

         Although the Company believes its capital requirements for the
remainder of 1999 will be met through the development of its business, the
Company will be required to obtain financing through external sources. The
Company is currently looking at various alternatives to fund its cash needs
until its operations generate an adequate positive cash flow. It is the intent


                                       32
<PAGE>


of the Company to have its subsidiary, Advanced Sciences, begin repayment of an
intercompany loan by borrowing funds through its line of credit to maximize use
of the funds available under the line of credit. The Company anticipates that
the funds available from full utilization of the line of credit are
approximately $500,000. Also, the Company is in final negotiations to complete
an equipment financing loan which will provide the Company with approximately
$1,400,000 working capital and sufficient funds to complete a second S10 (SET
technology, 10 ton a day) unit. This financing should be available in the
second quarter of 1999. There can be no assurance that such financing will be
available or, if available, that it will be on terms satisfactory to the
Company.



NET OPERATING LOSS CARRYFORWARDS

         The Company has net operating loss carryforwards of approximately
$31,000,000, which expire in the years 2000 through 2018. The amount of net
operating loss carryforward that can be used in any one year will be limited by
the applicable tax laws which are in effect at the time such carryforward can be
utilized. A full valuation allowance has been established to offset any benefit
from the net operating loss carryforwards. It cannot be determined when or if
the Company will be able to utilize the net operating losses.

YEAR 2000 CONSIDERATIONS

         Many existing computer systems and software products are coded to
accept only two-digit entries in the date code field. As the year 2000
approaches, these code fields will need to accept four digit entries to
distinguish between years beginning with "19" from those beginning with "20." As
a result, in less than two years, computer systems and/or software products used
by many companies may need to be upgraded to comply with such year 2000
requirements. If uncorrected, many computer applications could fail or create
erroneous results by or at the year 2000.

         The Company believes that its mainframe database and operating systems
are year 2000 compliant, meaning that they may be able to operate without error
in dates and date-related data, including calculating, comparing, indexing and
sequencing, prior to on and after January 1, 2000. However, certain of the
Company's software applications utilized to bill customers and maintain finance
and accounting records are coded using two digits rather than four to define the
applicable year. The Company is working with its major software vendor to assure
that proper modifications will be made to such applications and anticipates such
modifications will be completed by June 1999. The Company also relies, directly
and indirectly, on external systems of its customers (primarily U.S. government
agencies and contractors), suppliers, creditors, financial organizations and
governmental entities. Consequently, the Company could be affected through the
disruptions in the operations of the enterprises with which the Company
interacts. Furthermore, the purchasing frequency and volume of customers or
potential customers may be affected by year 2000 issues as companies expend
significant resources to make their current systems year 2000 compliant.

         The Company has not quantified the total costs required to become year
2000 compliant, but does not expect that the cost of addressing any year 2000
issues will be a material event or uncertainty that would cause its reported
financial information not to be necessarily indicative of future operating
results or future financial condition, or that the costs or consequences of
incomplete or untimely resolution of any year 2000 issue represent a known
material event or uncertainty that is reasonably likely to affect its future
financial results, or cause its reported financial information not to be
necessarily indicative of future operating results or future financial
condition. As of December 31, 1998, the total costs incurred to address the
Company's year 2000 issues have not been material (approximately $61,500).
However, if the Company, its customers or vendors encounter any unanticipated
delays in, or costs associated with, the resolution of any year 2000 issue, the


                                       33
<PAGE>


Company's business, financial condition and results of operations could be
materially adversely affected. Accordingly, the Company plans to devote the
necessary resources to becoming year 2000 compliant in a timely manner and
intends to create a contingency plan by July 1999 to handle any year 2000
problems.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires
that an entity recognize all derivative instruments as either assets or
liabilities on its balance sheet at their fair value. Changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The Company
will adopt SFAS 133 by the first quarter of 2000. Due to the Company's limited
use of derivative instruments, SFAS 133 is not expected to have a material
effect on the financial position or results of operations of the Company.

FORWARD-LOOKING STATEMENTS

         Certain matters discussed in this Annual Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements. Such statements
may address future events and conditions concerning, among other things, the
Company's results of operations and financial condition; the consummation of
acquisition and financing transactions and the effect thereof on the Company's
business; capital expenditures; litigation; regulatory matters; and the
Company's plans and objectives for future operations and expansion. Any such
forward-looking statements would be subject to the risks and uncertainties that
could cause actual results of operations, financial condition, acquisitions,
financing transactions, operations, expenditures, expansion and other events to
differ materially from those expressed or implied in such forward-looking
statements. Any such forward-looking statements would be subject to a number of
assumptions regarding, among other things, future economic, competitive and
market conditions generally. Such assumptions would be based on facts and
conditions as they exist at the time such statements are made as well as
predictions as to future facts and conditions, the accurate prediction of which
may be difficult and involve the assessment of events beyond the Company's
control. Further, the Company's business is subject to a number of risks that
would affect any such forward-looking statements. These risks and uncertainties
include, but are not limited to, the ability of the Company to commercialize its
technology; product demand and industry pricing; the ability of the Company to
obtain patent protection for its technology; developments in environmental
legislation and regulation; the ability of the company to obtain future
financing on favorable terms; and other circumstances affecting anticipated
revenues and costs. These risks and uncertainties could cause actual results of
the Company to differ materially from those projected or implied by such
forward-looking statements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.


                                       34
<PAGE>


ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The consolidated financial statements of the Company are included on
pages F-1 through F-30 of this Annual Report and are incorporated herein by
reference. The financial statements of the Company's significant subsidiary,
Teledyne-Commodore, LLC, are also included on pages F-31 through F-42 of this
Annual Report and are incorporated herein by reference.



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

         During the Company's fiscal year ended December 31, 1998, there were no
disagreements between the Company and its independent accountants,
PricewaterhouseCoopers LLP, on any matters of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused PricewaterhouseCoopers LLP to make reference to the
subject matter of the disagreements in connection with its report.


                                       35
<PAGE>


PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


EXECUTIVE OFFICERS AND DIRECTORS


         The names and ages of the executive Officers and Directors of the
Company, and their positions with the Company as of March 31, 1999, are as
follows:

NAME                          AGE    POSITION
----                          ---    --------
Paul E. Hannesson             58     Chairman of the Board, President and Chief
                                     Executive Officer

Peter E. Harrod, P.E.         49     President of Commodore Advanced Sciences

William E. Ingram             53     Vice President and Controller

James M. DeAngelis            38     Vice President-Finance and Treasurer

Kenneth L. Adelman            50     Director

Bentley J. Blum               57     Director

Herbert A. Cohen              65     Director

David L. Mitchell             77     Director

William R. Toller             67     Director

Edward L. Palmer              81     Director

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

         PAUL E. HANNESSON has been a director of the Company since March 1996
and was appointed Chairman of the Board in November 1996. Mr. Hannesson also
served as Chief Executive Officer of the Company from March to October 1996 and
as President from March to September 1996, and was re-appointed Chief Executive
Officer in November 1996 and President in May 1997. Mr. Hannesson has been a
director of Environmental since February 1993 and was appointed its Chairman of
the Board and Chief Executive Officer in November 1996. Mr. Hannesson also
served as President of Environmental from February 1993 to July 1996 and was
re-appointed President in May 1997. In July 1998 Mr. Hannesson resigned as
Director and Officer of Environmental. Mr. Hannesson also currently serves as
the Chairman of the Board and Chief Executive Officer of Separation and
Solution. Mr. Hannesson was a private investor and business consultant from 1990
to 1993, and was also an officer and director of Specialty Retail Services, Inc.
from 1989 to August 1991. He served as Chairman of the Board of Lanxide, a
research and development company developing metal and ceramic materials, from
1983 to February 1998. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a
director of the Company.

         PETER E. HARROD, P.E. has served as an executive officer of Advanced
Sciences since 1991 and as its President since October 1996. Mr. Harrod has also
served as Senior Vice President of Solution since November 1997. Prior to such
time, Mr. Harrod held numerous executive positions in environmental engineering,
hazardous waste remediation, design engineering and construction management
companies, including ABB Environmental Services, Inc. from 1983 to 1991, Neil &
Gunter, Inc. from 1981 to 1983 and E.C. Jordan Co. from 1975 to 1981. Mr. Harrod
is currently a


                                       36
<PAGE>


member of the National Society of Professional Engineers and the American
Society of Civil Engineers, and is the author of several environmental,
remediation and design engineering publications. Mr. Harrod received M.S. and
B.S. degrees in Civil Engineering from the University of Vermont.

         WILLIAM E. INGRAM served as the Company's Vice President and Controller
from October 1996 to March 1997, as its Vice President--Finance from March to
May 1997, and was re-appointed Vice President and Controller in June 1997. Mr.
Ingram has also served as Vice President and Controller of Separation, Solution
and CFC Technologies since June 1997 and served as Vice President and Controller
of Environmental from June 1997 to June 1998. Prior to such time, Mr. Ingram was
Chief Financial Officer of HydroChem Industrial Services, Inc., a privately
owned company providing high pressure water and chemical cleaning services
primarily to the petrochemical industry, from January 1995 to September 1996.
Mr. Ingram was Vice President and Region Controller for Chemical Waste
Management, Inc. (CWM) from September 1983 to December 1994. CWM, a subsidiary
of Waste Management, Inc., provides hazardous waste treatment and disposal
services to a wide range of government and industrial customers. Mr. Ingram also
spent two years with the solid waste operations of Waste Management, Inc. Mr.
Ingram is a Certified Public Accountant and has a M.B.A. from the University of
Florida and a B.S. in Accounting from Florida Southern College.

         JAMES M. DEANGELIS was appointed Vice President-Finance and Treasurer
of the Company in July 1998. Mr. DeAngelis has also served as Senior Vice
President-Sales & Marketing of Separation since July 1996, after having served
as its Vice President-Marketing since November 1995. Mr. DeAngelis has also
served as the President of CFC Technologies since September 1994, and served as
Vice President-Marketing of Environmental from September 1992 to September 1995.
Prior to September 1992, Mr. DeAngelis holds a Masters in International
Management degree from the American Graduate School of International Management.
Mr. DeAngelis holds B.S. degrees in Biology and Physiology from the University
of Connecticut.

         KENNETH L. ADELMAN, PH.D. joined the Board of Directors of the Company
and Environmental in July 1996 and was appointed Executive Vice
President--Marketing and International Development of the Company in May 1997.
Dr. Adelman resigned his management positions effective December 31, 1998. Dr.
Adelman was appointed President and Chief Operating Officer of Solution in
November 1997. Dr. Adelman also joined the Board of Directors of Separation in
April 1997. Since 1987, Dr. Adelman has been an independent consultant on
international issues to various corporations, including Lockheed Martin Marietta
Corporation and Loral Corporation. Previously, Dr. Adelman held positions of
responsibility in arms control during most of the Reagan Administration. From
1983 to the end of 1987, he was Director of the United States Arms Control and
Disarmament Agency. Dr. Adelman was a Professor at Georgetown University and
writer for Washingtonian Magazine from 1987 to 1991. Dr. Adelman accompanied
President Ronald Reagan on summits with Mikhail Gorbachev, and negotiated with
Soviet diplomats on nuclear and chemical weapons control issues, from 1985 to
1987. He also headed the United States team on annual arms control discussions
with top-level officials of the People's Republic of China from 1983 through
1986. From 1981 to 1983, he served as Deputy United States Representative to the
United Nations with the rank of Ambassador Extraordinary and Plenipotentiary.
Dr. Adelman holds M.A. and Ph.D. degrees from Georgetown University.

         BENTLEY J. BLUM has served as a director of the Company since March
1996 and served as its Chairman of the Board from March to November 1996. Mr.
Blum has served as a director of Environmental since 1984 and served as its
Chairman of the Board from 1984 to November 1996. Mr. Blum also currently serves
as a director of Separation, Solution and CFC Technologies. For more than 15
years, Mr. Blum has been actively engaged in real estate acquisitions and
currently is the sole stockholder and director of a number of corporations which
hold real estate interests, oil drilling interests and other corporate
interests. Mr. Blum is a director of Lanxide; Federal Resources Corporation, a
company formerly engaged in manufacturing, retail distribution and natural
resources development;


                                       37
<PAGE>


Specialty Retail Services, Inc., a former distributor of professional beauty
products; and North Valley Development Corp., an inactive real estate
development company. Mr. Blum is a principal stockholder of Environmental. Mr.
Blum is the brother-in-law of Paul E. Hannesson, the Chairman of the Board,
President and Chief Executive Officer of the Company.

         HERBERT A. COHEN has served as a director of the Company and
Environmental since July 1996 and joined the Board of Directors of Separation in
March 1998. Mr. Cohen has been a practicing negotiator for the past three
decades acting in an advisory capacity in hostage negotiations and crisis
management. He has been an advisor to Presidents Carter and Reagan in the
Iranian hostage crisis, the government's response to the skyjacking of TWA
Flight 847 and the seizure of the Achille Lauro. Mr. Cohen's clients have
included large corporations and government agencies such as the Department of
State, the Federal Bureau of Investigation, the Conference of Mayors, the Bureau
of Land Management, Lands and Natural Resources Division in conjunction with the
EPA, and the United States Department of Justice. In addition, Mr. Cohen was an
advisor and consultant to the Strategic Arms Reduction Talks negotiating team.
Mr. Cohen holds a law degree from New York University School of Law, and has
lectured at numerous academic institutions.

         DAVID L. MITCHELL has served as a director of the Company and
Environmental since July 1996 and as a director of Separation since April 1997.
Mr. Mitchell has also served as a consultant to the Company from July 1997 to
July 1998. For the past sixteen years, Mr. Mitchell has been President and
co-founder of Mitchell & Associates, Inc., a banking firm providing financial
advisory services in connection with corporate mergers, acquisitions and
divestitures. Prior to forming Mitchell & Associates in 1982, Mr. Mitchell was a
Managing Director of Shearson/American Express Inc. from 1979 to 1982, a
Managing Director of First Boston Corporation from 1976 to 1978, and a Managing
Director of the investment banking firm of S.G. Warburg & Company from 1965 to
1976. Mr. Mitchell holds a bachelor's degree from Yale University.

         WILLIAM R. TOLLER joined the Board of Directors of the Company in March
1998. Mr. Toller has also served as a member of the Board of Directors of
Separation since April 1997 and has served as a consultant to Environmental
since July 1997. Mr. Toller served as the Vice Chairman of Lanxide from July
1997 to February 1998. Mr. Toller also currently serves as Chairman and Chief
Executive Officer of Titan Consultants, Inc. Mr. Toller had been the Chairman
and Chief Executive Officer of Witco Corporation since October 1990 and retired
in July 1996. Mr. Toller joined Witco in 1984 as an executive officer when it
acquired the Continental Carbon Company of Conoco, Inc., where he had been its
President and an officer since 1955. Mr. Toller is a graduate of the University
of Arkansas with a Bachelor's degree in Economics, and the Stanford University
Graduate School Executive Program. Mr. Toller serves on the board of Directors
of Chase Industries, Inc., Fuseplus, Inc., where he is also Chairman of the
Organization and Compensation Committee, and the United States Chamber of
Commerce, where he is also a member of the Labor Relations and International
Policy Committees. Mr. Toller is also a member of the Board of Trustees and the
Executive and Finance Committees of the International Center for the Disabled, a
member of the Board of Associates of the Whitehead Institute for Biomedical
Research, a member of the National Advisory Board of First Commercial Bank in
Arkansas, a member of the Dean's Executive Advisory Board and the International
Business Committee at the University of Arkansas, College of Business
Administration, and a member of the Board of Presidents of the Stamford Symphony
Orchestra.

         EDWARD L. PALMER joined the board in August 1998. Mr. Palmer is the
retired Chairman of the Executive Committee and former Director of CitiCorp and
Citibank, N.A. Mr. Palmer was Trustee Emeritus of Brown University, New York
Philharmonic and The Metropolitan Museum of Art. Mr. Palmer served as Director
of Borg-Warner Corp., CitiCorp, Corning Incorp., Del Monte Corp., First Boston
Corp., Grindlays Banks, plc Kissinger Associates, Monsanto Co., Mutual Life
Ins., Phelps DoDge Corp., Union Pacific Corp., and Washington National Bank
Corp.


                                       38
<PAGE>


         Each director is elected to serve for a term of one year or until his
or her successor is duly elected and qualified. The Company's Officers are
elected by, and serve at the pleasure of, the Board of Directors, subject to the
terms of any employment agreements. Messrs. Hannesson and Blum are
brothers-in-law. No family relationship exists among any other Directors or
executive Officers of the Company.

KEY EMPLOYEES


         The names and ages of the key employees of the Company, and their
positions with the Company as of March 31, 1999, are as follows:

         NAME                    AGE   POSITION
         ----                    ---   --------
         Vincent Valeri          63    Senior Vice President and Chief Engineer

         Gerry D. Getman, Ph.D.  51    Vice President and Director of Research
                                       and Development

         Mack Jones              58    Vice President-Field Operations

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

         VINCENT VALERI has served as Senior Vice President and Chief Engineer
of the Company since June 1996 and as Vice President and Chief Engineer of
Solution since November 1997. From July 1993 to November 1994, he was a private
consultant for Environmental. From 1992 to July 1993, Mr. Valeri served as Vice
President of Manufacturing at Moen, Inc., a manufacturer of faucets and plumbing
parts, and for five years prior thereto was Vice President and a co-founder of
General Management Technologies, Inc., a management consulting firm. From 1965
to 1987, Mr. Valeri served in various capacities with Westinghouse Electric
Corporation, and was Director and General Manager of its Factory Automation
Systems Division from 1984 to 1987.

         GERRY D. GETMAN, PH.D. has served as Vice President and Director of
Research and Development of the Company since June 1996 and of Solution since
November 1997. Prior to that he was employed by Calgon Corporation from 1991 to
1995 as Director of Research. From January to March 1996, he was a private
consultant for Environmental. From 1982 to 1991, Dr. Getman served in various
capacities at Calgon including ISO 9000 Director, Quality Assurance Director,
and Analytical Laboratory Manager. From 1975 to 1981, he was employed by
Velsicol Chemical Corporation in several capacities including Manager of
Analytical Research. Dr. Getman received his Ph.D. in Chemistry from Rensselaer
Polytechnic Institute and a B.S. in chemistry from Florida Southern College.

         MACK JONES has served as Vice President of Field Operations since early
1998. Mr. Jones is a professional mechanical engineer who in his twenty-six
years with General Electric Company held several managerial operating positions
in power generation and distribution arenas. His experience includes commercial
nuclear, fossil, and hydro power construction and maintenance, industrial power
delivery systems, and industrial drives and controls. He was Vice
President-Operations with Quadrex Environmental Company for five years, managing
the company's field remediation businesses. In 1991 he founded an environmental
consulting company, Florida Vector Services, which provided both consulting and
hands-on remediation services primarily in TSCA-related areas. Through this
company he began working with Commodore in 1994, assisting in the
commercialization of solvated electron technology. He joined Commodore in
February 9, 1998, managing its field treatability and commercial projects.


                                       39
<PAGE>


BOARD COMMITTEES


         The Company's Board of Directors has (i) an Audit Committee, (ii) a
Compensation, Stock Option and Benefits Committee and (iii) an Executive and
Finance Committee. The responsibilities of the Audit Committee, which, as of
December 31, 1998, was composed of David L. Mitchell (Chairman), Herbert A.
Cohen and William R. Toller, include recommending to the Board of Directors the
firm of independent accountants to be retained by the Company, reviewing with
the Company's independent accountants the scope and results of their audits,
reviewing with the independent accountants and management the Company's
accounting and reporting principles, policies and practices, as well as the
Company's accounting, financial and operating controls and staff, supervising
the Company's policies relating to business conduct and dealing with conflicts
of interest relating to Officers and Directors of the Company. The Compensation,
Stock Option and Benefits Committee, which, as of December 31, 1998, was
composed of Herbert A. Cohen (Chairman), David L. Mitchell and William R.
Toller, has responsibility for establishing and reviewing employee and
consultant/advisor compensation, bonuses and incentive compensation awards,
administering and interpreting the Company's 1996 Stock Option Plan, and
determining the recipients, amounts and other terms (subject to the requirements
of the 1996 Stock Option Plan) of options which may be granted under the 1996
Stock Option Plan from time to time and providing guidance to management in
connection with establishing additional benefit plans. The Executive and Finance
Committee was composed of Paul E. Hannesson (Chairman), Bentley J. Blum and
David L. Mitchell as of March 26, 1998, and has the authority and responsibility
of the full Board of Directors to supervise and oversee the financial practices
and policies of the Company, to oversee the adoption of significant accounting
policies, and to manage the Company between meetings of the Board of Directors,
subject to certain limitations. The Executive and Finance Committee also has the
authority and responsibility for making recommendations to the Board of
Directors regarding nominees to serve as Directors of the Company.

COMPENSATION OF DIRECTORS

         Non-management Directors of the Company receive director's fees of $500
per meeting for attendance at Board of Directors' meetings, and are reimbursed
for actual expenses incurred in respect of such attendance. The Company does not
separately compensate employees for serving as Directors.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Section 16(a) of the Exchange Act requires the Company's Directors and
executive Officers, and persons who own more than 10% of the outstanding shares
of the Company's Common Stock, to file initial reports of beneficial ownership
and reports of changes in beneficial ownership of shares of Common Stock with
the Commission and the Amex. Such persons are required by Commission regulations
to furnish the Company with copies of all Section 16(a) forms they file.

         Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company during the year ended December 31, 1997, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 1998, or upon written representations received by
the Company from certain reporting persons that no Forms 5 were required for
those persons, the Company believes that no director, executive officer or
holder of more than 10% of the outstanding shares of Common Stock failed to file
on a timely basis the reports required by Section 16(a) of the Exchange Act
during, or with respect to, the year ended December 31, 1998 except for Edward
Romero, a director of the Company, who inadvertently failed to file a Form 4
with respect to a transaction that occurred in March, 1998 (such transaction was
reported on Form 4 filed with the Commission on May 7, 1998).


                                       40
<PAGE>


ITEM 11. EXECUTIVE COMPENSATION.


SUMMARY COMPENSATION


         The following table sets forth the amount of all compensation paid by
the Company and/or its affiliates and allocated to the Company's operations for
services rendered during each of 1998, 1997, and 1996 to all persons serving as
the Company's Chief Executive Officer during 1998, to each of the Company's four
most highly compensated executive Officers other than the Chief Executive
Officer whose total salary and bonus compensation exceeded $100,000 during any
such year, and to two additional individuals who served as executive Officers of
the Company during 1998, but not at December 31, 1998.

<TABLE>
<CAPTION>
                                                       SUMMARY COMPENSATION TABLE
                         ------------------------------------------------------------------------------------------
                                      ANNUAL COMPENSATION                          LONG-TERM COMPENSATION
                         -------------------------------------------    -------------------------------------------
                                                              OTHER                SECURITIES
                                                             ANNUAL     RESTRICTED    UNDER-              ALL OTHER
                                                             COMPEN-      STOCK       LYING       LTIP     COMPEN-
NAME AND PRINCIPAL                 SALARY         BONUS      SATION      AWARD(S)    OPTIONS     PAYOUTS   SATION
     POSITION            YEAR       ($)           ($)         ($)          ($)         (#)         ($)       ($)
-----------------------  ----      -------       ------       ------    ---------- ----------    -------  ---------
<S>                      <C>       <C>           <C>         <C>        <C>        <C>           <C>      <C>
Paul E. Hannesson        1998      250,526(1)       -0-        7,700(3)     -0-      577,500       -0-       -0-
Chief Executive Officer  1997      250,256(1)    63,356(2)    15,205(3)     -0-          -0-       -0-       -0-
                         1996      265,836(1)    50,000(2)       -0-        -0-      400,000       -0-       -0-

Kenneth L. Adelman,      1998      179,854(4)       -0-          -0-        -0-       70,000(6)    -0-       -0-
Ph.D.                    1997       83,444(4)    54,937(5)       -0-        -0-      150,000       -0-       -0-
Executive Vice           1996          -0-          -0-          -0-        -0-       67,500(6)    -0-       -0-
President                                                                                          -0-       -0-
Michael D. Fullwood      1998       52,067(7)       -0-          -0-        -0-          -0-       -0-       -0-
Former Senior Vice       1997       68,620(7)    38,463(8)       -0-        -0-      125,000       -0-       -0-
President                1996          -0-          -0-          -0-        -0-          -0-       -0-       -0-
Rayburn Hanzlik(9)       1998       69,779(10)   13,750(11)      -0-        -0-          -0-       -0-       -0-
Former Chief             1997       79,123(10)   16,481(11)      -0-        -0-       75,000       -0-       -0-
Administrative Officer   1996          -0-          -0-          -0-        -0-          -0-       -0-       -0-
Carl Magnell (12)        1998       54,124(13)      -0-          -0-        -0-          -0-       -0-       -0-
Former Vice President    1997       94,430(13)   13,750(14)      -0-        -0-      107,500       -0-       -0-
                         1996          -0-          -0-          -0-        -0-          -0-       -0-       -0-
William E. Ingram (15)   1998       82,500(16)      -0-          -0-        -0-      150,000       -0-       -0-
Vice President &         1997       82,500(16)   16,500(17)      -0-        -0-      150,000       -0-       -0-
Controller               1996          -0-          -0-          -0-        -0-          -0-       -0-       -0-
Peter E Harrod(18)       1998      170,653(19)      -0-          -0-        -0-      255,000       -0-       -0-
Former Vice President    1997      150,807(19)   45,000(20)      -0-        -0-      125,000       -0-       -0-
& Controller             1996       33,625(19)    4,125(20)      -0-        -0-          -0-       -0-       -0-
</TABLE>

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

                                       41
<PAGE>




(1)     Represents the amount of Mr. Hannesson's base salary allocated to the
        Company. Mr. Hannesson's total base salary for 1997 and 1998 was
        $395,000 and $434,500, (25% of base salary was deferred as of October 5,
        1998; base salary adjusted to $330,000 ), respectively. Certain portions
        of such base salary were also allocated to Environmental and Separation.
        See "Certain Relationships and Related Transactions--Services
        Agreement."

(2)     Represents the amount of Mr. Hannesson's annual incentive bonus
        allocated to the Company. Mr. Hannesson's total annual incentive bonus
        for 1997 and 1998 was $100,000 and $0 respectively. Certain portions of
        his 1997 annual incentive bonus was allocated to Environmental and
        Separation.

(3)     Represents the amount of Mr. Hannesson's automobile allowance allocated
        to the Company. Mr. Hannesson's total automobile allowance for 1997 was
        $24,000 and for 1998 was $12,000, certain portions of which were also
        allocated to Environmental and Separation.

(4)     Represents the amount of Dr. Adelman's base salary allocated to the
        Company. Dr. Adelman's total base salary for 1997 and 1998 was $151,980
        and $400,500 respectively. Certain portions of such base salary were
        also allocated to Environmental and Separation. Dr. Adelman resigned his
        management positions effective December 31, 1998.

(5)     Represents the amount of Dr. Adelman's annual incentive bonuses
        allocated to the Company. Dr. Adelman's total annual incentive bonus for
        1997 and 1998 was $100,000 and $0 respectively. Certain portions of such
        annual incentive bonuses were also allocated to Environmental and
        Separation. Dr. Adelman resigned his management positions effective
        December 31, 1998.

(6)     Represents shares of Common Stock underlying stock options granted to
        Dr. Adelman by the Company in his capacity as a director of the Company.

(7)     Represents the amount of Mr. Fullwood's base salary allocated to the
        Company. Mr. Fullwood's total base salary for 1997 and 1998 was $133,805
        and $260,000 respectively. Mr. Fullwood resigned his position as Senior
        Vice President of the Company in July of 1998. Certain portions of such
        base salary were also allocated to Environmental and Separation.

(8)     Represents the amount of Mr. Fullwood's annual incentive bonus allocated
        to the Company. Mr. Fullwood's total annual incentive bonuses for 1997
        and 1998 was $75,000 and $0 respectively. Certain portions of his 1997
        annual incentive bonus were also allocated to Environmental and
        Separation. Mr. Fullwood resigned his position as an Officer of the
        Company in July of 1998.

(9)     Mr. Hanzlik served as General Counsel, Chief Administrative Officer and
        Secretary of the Company from January to April 1997. Mr. Hanzlick served
        as Chief Administrative Officer of the Company from April 1997 to August
        1998. Mr. Hanzlick resigned his position as an Officer of the Company in
        August of 1998.

(10)    Represents the amount of Mr. Hanzlik's base salary allocated to the
        Company. Mr. Hanzlik's total base salary for 1997 and 1998 was $144,025
        and $165,000 respectively. Certain portions of such base salary were
        also allocated to Environmental and Separation. Mr. Hanzlick resigned
        his position as an Officer of the Company in August of 1998.

(11)    Represents the amount of Mr. Hanzlik's annual incentive bonuses
        allocated to the Company. Mr. Hanzlik's total annual incentive bonus for
        1997 and 1998 was $30,000 and $25,000 respectively. Certain portions of
        such annual incentive bonuses were also allocated to Environmental and
        Separation. Mr. Hanzlick resigned his position as an Officer of the
        Company in August of 1998.

(12)    Mr. Magnell served as Vice President, Business Development of the
        Company from January 1997 to July 1998. Mr. Magnell resigned his
        position as Vice President, Business Development, of the Company in July
        of 1998.

(13)    Represents the amount of Mr. Magnell's base salary allocated to the
        Company. Mr. Magnell's total base salary for 1997 and 1998 was $165,000
        and $180,000 respectively. Certain portions of such base salary were
        also allocated to Environmental and Separation. Mr. Magnell resigned his
        position as an Officer of the Company in July of 1998.

(14)    Represents the amount of Mr. Magnell's annual incentive bonuses
        allocated to the Company. Mr. Magnell's total annual incentive bonus for
        1997 and 1998 was $25,000 and $0 respectively. Certain portions of his
        1997 annual incentive bonus was allocated to Environmental and
        Separation. Mr. Magnell resigned his position as an Officer of the
        Company in July of 1998.

(15)    Mr. Ingram served as Vice President and Controller from October 1996 to
        March 1997, as Vice President- Finance from March to May 1997, and as
        Vice President and Controller of the Company from June 1997 to present.

(16)    Represents the amount of Mr. Ingram's base salary allocated to the
        Company. Mr. Ingram's total base salary for both 1997 and 1998 was
        $150,000. Certain portions of such base salary were also allocated to
        Environmental and Separation.

                                       42
<PAGE>

(17)    Represents the amount of Mr. Ingram's annual incentive bonuses allocated
        to the Company. Mr. Ingram's total annual incentive bonus for 1997 and
        1998 was $30,000 and $0 respectively. Certain portions of his 1997
        annual incentive bonus was allocated to Environmental and Separation.

(18)    Mr. Harrod served as President of Advanced Sciences, a wholly owned
        subsidiary of the Company, from November 1996 to present and serves as
        President of Commodore Solution Technologies, Inc., a wholly owned
        subsidiary of the Company since January 1999.

(19)    Represents the amount of Mr. Harrod's base salary allocated to the
        Company, through its wholly owned subsidiary, Advanced Sciences. Mr.
        Harrod's total base salary for 1996, 1997 and 1998 was $134,500,
        $150,000, and $170,000 respectively.

(20)    Represents the amount of Mr. Harrod's annual incentive bonus allocated
        to the Company. Mr. Harrod's total annual incentive bonus, under
        Advanced Sciences (a wholly owned subsidiary of the Company) management
        bonus program, for 1996 , 1997, and 1998 was $16,500, $45,000, and $0
        respectively.



                                       43

<PAGE>




STOCK OPTIONS

        The following table sets forth certain information concerning options
granted during the year ended December 31, 1998 to the individuals listed in the
Summary Compensation Table pursuant to the Company's 1998 Stock Option Plan (the
"1998 Plan"). The Company has no outstanding stock appreciation rights and
granted no stock appreciation rights during the year ended December 31, 1998.

<TABLE>
                                          OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
                                                  INDIVIDUAL GRANTS                           POTENTIAL REALIZABLE  
                            -------------------------------------------------------------           VALUE AT        
                                                PERCENT OF                                   ASSUMED ANNUAL RATES OF
                               NUMBER OF          TOTAL                                     STOCK PRICE APPRECIATION
                               SECURITIES        OPTIONS          EXERCISE                             FOR          
                               UNDERLYING        GRANTED             OF                          OPTION TERM(7)     
                                OPTIONS        TO EMPLOYEES      BASE PRICE    EXPIRATION   ------------------------
              NAME             GRANTED (#)   IN FISCAL YEAR(6)     ($/SH)         DATE           5% ($)      10% ($)
        -----------------   ---------------  ----------------  --------------  ----------   ----------  ----------  
<S>                          <C>              <C>               <C>            <C>          <C>         <C>         
   Paul E. Hannesson......      577,500(1)         16%             0.4375       12/14/08        75,872      718,093 
   Peter E. Harrod........      255,000(2)          7%             0.4375       12/14/08        33,502      317,800 
   James M. DeAngelis.....      181,250(3)          5%             0.4375       12/14/08        23,813      225,376 
   Kenneth L. Adelman, Ph.D.     70,000(4)          2%             0.4375       12/14/08         9,197       87,042 
   William E.Ingram.......      150,000(5)          4%             0.4375       12/14/08        19,707      186,518 

</TABLE>
----------
(1)     Options to purchase 577,000 shares of Common Stock were granted to Mr.
        Hannesson in December, 1998 pursuant to the 1998 Plan and are fully
        vested.

(2)     Options to purchase 255,000 shares of Common Stock were granted to Mr.
        Harrod in December, 1998 pursuant to the 1998 Plan and are exercisable
        at the accumulated vestment rate of the 1996 Plan (of 20% in each of
        calendar year 1997 through 2001, inclusive, beginning in May 1997), of
        which 40% (102,000 shares) have vested, with the remaining shares
        vesting over the next three year period in equal amounts (51,000 shares
        each anniversary of the grant date of December 14, 1998) and, unless
        exercised, expire on December 14, 2008 (subject to prior termination in
        accordance with the applicable stock option agreements). Upon
        announcement of a Change in Control (pursuant to and as defined in the
        Plan), such options will become immediately exercisable. Upon
        consummation of a Change in Control, all unexercised options will
        terminate.

(3)     Options to purchase 181,250 shares of Common Stock were granted to Mr.
        DeAngelis in December, 1998 pursuant to the 1998 Plan and are fully
        vested.

(4)     Options to purchase 70,000 shares of Common Stock were granted to Dr.
        Adelman as a Director in December, 1998 pursuant to the 1998 Plan and
        are fully vested as in the case of all stock options granted to the
        Directors (70,000 each).

(5)     Options to purchase 150,000 shares of Common Stock were granted to Mr.
        Ingram in December, 1998 pursuant to the 1998 Plan and are exercisable
        at the accumulated vestment rate of the 1996 Plan (of 20% in each of
        calendar year 1997 through 2001, inclusive, beginning in May 1997), of
        which 40% (60,000 shares) have vested, with the remaining shares vesting
        over the next three year period in equal amounts (30,000 shares each
        anniversary of the grant date of December 14, 1998) and, unless
        exercised, expire on December 14, 2008 (subject to prior termination in
        accordance with the applicable stock option agreements). Upon
        announcement of a 


                                       44
<PAGE>

        Change in Control (pursuant to and as defined in the Plan), such options
        will become immediately exercisable. Upon consummation of a Change in
        Control, all unexercised options will terminate.

(6)     Percentages based on 3,576,412 stock options granted (the 1998
        Plan)during the year ended December 31, 1998. Such number does not
        include any of the options granted under the 1996 Plan, and those
        awarded in 1997, which were rescinded with the acceptance of the 1998
        Plan.

(7)     The closing price for the Company's Common Stock on December 31, 1998
        was $0.31. The closing price is used for all the subsequent stock
        appreciation calculations.


                                       45
<PAGE>



        The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the Plan at
December 31, 1998 by the individuals listed in the Summary Compensation Table.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>

                                                                       NUMBER OF                VALUE OF
                                                                      SECURITIES              UNEXERCISED
                                                                      UNDERLYING              IN-THE-MONEY
                                                                      UNEXERCISED               OPTIONS
                                                                        OPTIONS             AT FISCAL YEAR-
                                SHARES           VALUE           AT FISCAL YEAR-END(#)           END($)
                             ACQUIRED ON        REALIZED             EXERCISABLE/             EXERCISABLE/
           NAME              EXERCISE (#)        ($)(1)              UNEXERCISABLE          UNEXERCISABLE(2)
           ----              ------------        ------              -------------          ----------------

<S>                                 <C>             <C>                  <C>     <C>             <C> <C>
Paul E. Hannesson......            -0-             -0-                   577,500/0              -0-/-0-
Kenneth L. Adelman, Ph.D.          -0-             -0-                   70,000/0               -0-/-0-
Michael D. Fullwood....            -0-             -0-                      0/0                 -0-/-0-
Rayburn Hanzlik........            -0-             -0-                      0/0                 -0-/-0-
Carl Magnell...........            -0-             -0-                      0/0                 -0-/-0-
William E. Ingram......            -0-             -0-                 60,000/90,000            -0-/-0-
James M. DeAngelis.....            -0-             -0-                   181,250/0              -0-/-0-
</TABLE>

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

        (1)     Represents the difference between the last reported sale price
                of the Common Stock on December 31, 1998 ($0.31), and the
                exercise price of the option ($0.4375) multiplied by the
                applicable number of options exercised.

        (2)     Represents the difference between the exercise price and the
                closing price on the date of exercise, multiplied by the number
                of shares acquired.


EMPLOYMENT AGREEMENTS

        Paul E. Hannesson, the Company's Chairman of the Board, President and
Chief Executive Officer, entered into an employment agreement with Environmental
on November 18, 1996 for a term expiring on December 31, 1999. Pursuant to such
employment agreement, Mr. Hannesson agreed to devote his business and
professional time and efforts to the business of Environmental as a senior
executive officer, and to serve in senior executive positions with one or more
of Environmental's subsidiaries at the time, including the Company. The
employment agreement provides that Mr. Hannesson shall receive, among other
things, a base salary at an annual rate of $395,000 through December 31, 1997,
and will receive not less than $434,500 through December 31, 1998 and not less
than $477,950 through December 31, 1999, for services rendered to Environmental
and certain of its affiliates, including the Company. Pursuant to the employment
agreement, Mr. Hannesson received, among other things: (i) a signing bonus of
(a) $150,000 cash and (b) options to purchase 950,000 shares of Common Stock of
Environmental, which options vested on the date of his employment agreement; and
(ii) options to purchase an aggregate of 2,500,000 shares of Environmental
Common Stock, exercisable in installments over a period of five years commencing
on the date of his employment agreement. Mr. 


                                       46
<PAGE>

Hannesson also received options to purchase Common Stock of the Company and
Separation in the amount of 1.0% of each company's total outstanding shares of
Common Stock on the date of grant, and is eligible to receive incentive
compensation of up to $225,000 per year for achieving certain goals.

In June 1998, Mr. Hannesson's Employment Agreement was assigned from
Environmental to Applied. On September 28, 1998, Separation was sold by Applied
to Environmental and effective as of that date the costs associated with Mr.
Hannesson's employment agreement ceased being allocated to Separation. Effective
June 30, 1998, the Company accepted an Assignment from Commodore Environmental
Services, Inc. ("COES") of the Employment Agreement between Mr. Hannesson, the
Company's Chairman and CEO, and COES. The Company accepted the Assignment in
view of the fact that Mr. Hannesson had resigned as an officer and director of
COES and for some time had been and has continued to devote full time as a
director and officer of the Company. The Company's Board of Directors approved
the Company's acceptance of the assignment of Mr. Hannesson's Employment
Agreement. Mr. Hannesson's Employment Agreement is scheduled to expire on
December 31, 1999 and provides for an annual base salary of $477,950.00 in the
third year of that contract ending December 31, 1999. A portion of Mr.
Hannesson's base salary for 1998 (25% of base salary $434,500, was deferred as
of October 5, 1998; base salary adjusted to $330,000). A portion of Mr.
Hannesson's base salary for 1999 ( 31% of $477,950, was deferred as of January
1, 1999; base salary adjusted to $330,000).

        The employment agreements also provide for termination by the Company
upon death or disability (defined as three aggregate months of incapacity during
any 365-consecutive day period) or upon conviction of a felony crime of moral
turpitude or a material breach of their obligations to the Company. In the event
any of the employment agreements are terminated by the Company or elimination of
the executive's position, without cause, such executive will be entitled to
compensation for the balance of the term.

        The employment agreements also contain covenants (a) restricting the
executive from engaging in any activities competitive with the business of the
Company during the terms of such employment agreements and one year thereafter,
(b) prohibiting the executive from disclosure of confidential information
regarding the Company at any time, and (c) confirming that all intellectual
property developed by the executive and relating to the business of the Company
constitutes the sole and exclusive property of the Company. See "Certain
Relationships and Related Transactions--Services Agreement."

               Michael D. Fullwood, the Company's Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel, entered
into an employment agreement with Environmental on May 7, 1997 for an initial
term expiring on April 30, 1999. Pursuant to such employment agreement, Mr.
Fullwood agreed to devote his business and professional time and efforts to the
business of Environmental as its Senior Vice President, Chief Financial and
Administrative Officer, Secretary and General Counsel, and to serve as a senior
executive officer of certain of Environmental's subsidiaries at the time,
including the Company. The employment agreement provides that Mr. Fullwood would
receive, among other things, a base salary at an annual rate of $225,000 for
services rendered to Environmental and certain of its affiliates, including the
Company, which base salary shall be increased by not less than 5% per year
during the term of his agreement. Pursuant to the employment agreement, Mr.
Fullwood received options to purchase an aggregate of 500,000 shares of
Environmental Common Stock, exercisable in installments over a period of five
years commencing on the date of his employment agreement. Mr. Fullwood also
received options to purchase 125,000 shares of Common Stock of the Company and
67,500 shares of Common Stock of Separation, exercisable in installments over a
period of five years commencing on the date of his employment agreement. Mr.
Fullwood is also eligible to receive incentive compensation of up to $75,000 per
year for achieving certain goals, which incentive compensation shall be
increased by 5% per year during the term of his agreement. Mr. Fullwood resigned
as an employee of the Company effective July 10, 1998.


                                       47
<PAGE>

         Kenneth L. Adelman, Ph.D., the Company's Executive Vice
President--Marketing and International Development, entered into an employment
agreement with the Company on May 7, 1997 for a term expiring on April 30, 2000.
Pursuant to such employment agreement, Dr. Adelman agreed to devote his business
and professional time and efforts to the business of the Company as its
Executive Vice President--Marketing and International Development. The
employment agreement provided that Dr. Adelman would receive, among other
things, a fixed base salary at an annual rate of $250,000 for services rendered
to the Company. Pursuant to the employment agreement, Dr. Adelman received
options to purchase an aggregate of 150,000 shares of Common Stock of the
Company, exercisable in installments over a period of five years commencing on
the date of his employment agreement. Dr. Adelman also received options to
purchase 700,000 shares of Common Stock of Environmental, exercisable in
installments over a period of five years commencing on the date of his
employment agreement. Dr. Adelman is also eligible to receive incentive
compensation of up to $150,000 per year for achieving certain goals, but in no
event less than $100,000, regardless of whether such goals are attained. Dr.
Adelman resigned his management positions in the Company as of December 31, 1998
and is currently receiving severance pay and benefits which will terminate June
30, 1999.

         James M. DeAngelis, the Company's Vice President of Finance and
Treasurer, entered into an Employment Agreement with Separation in September of
1996. Effective June 30, 1998, the Company accepted an Assignment from the
Company's then 70%-owned subsidiary, Commodore Separation Technologies, Inc.
("Separation") of an Employment Agreement between James M. DeAngelis and
Separation. The Company accepted the Assignment of Mr. DeAngelis' Employment
Agreement in view of the fact that Mr. DeAngelis was appointed as the Vice
President Finance of the Company effective June 30, 1998, and on that date began
to work almost exclusively for the Company. The Company's Board of Directors
approved the Company's acceptance of the assignment of Mr. DeAngelis' Employment
Agreement. Mr. DeAngelis' Employment Agreement is scheduled to expire on
December 31, 1999, provides for an annual base salary of $145,000 and contains
the same provisions with respect to termination without cause, change of control
or elimination of his position as are contained in Mr. Hannesson's agreement.

         William E. Ingram, the Company's Vice President and Controller, entered
into an Employment Agreement with the Company in September of 1996. Mr. Ingram's
Employment Agreement, which is scheduled to expire on December 31, 1999,
provides for an annual base salary of $150,000.

         All of the foregoing employment agreements require the full-time
services of the employees, subject to permitted service with
professional-related service organizations and other outside activities that do
not materially interfere with the individual's duties to the Company. The
agreements also contain covenants (a) restricting the employee from engaging in
any activities competitive with the business of the Company during the term of
such employment agreements and one year thereafter, (b) prohibiting the employee
from disclosure of confidential information regarding the Company, and (c)
confirming that all intellectual property developed by the employee and relating
to the business of the Company constitutes the sole property of the Company.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The individuals who served as members of the Compensation, Stock Option
and Benefits Committee (the "Compensation Committee") during the year ended
December 31, 1998 were Herbert A. Cohen (Chairman), David L. Mitchell, and
William R. Toller. At December 31, 1998, the members of the Compensation
Committee were Messrs. Cohen (Chairman), Mitchell and Toller. Messrs. Cohen,
Mitchell and Toller also constituted the Compensation, Stock Option and Benefits
Committee of Environmental, and Messrs. Mitchell and Toller also constituted the
Compensation, Stock Option and Benefits Committee of Separation at December 31,
1998. Mr. Mitchell served as a consultant to the


                                       48
<PAGE>

Company from July 15, 1997 to August 14, 1998, and received compensation in the
amount of $10,000 per month for services rendered to the Company in such
capacity.


REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

        The Compensation Committee was established in November 1996 and is
responsible for, among other things, establishing the compensation policies
applicable to executive Officers of the Company. The Compensation Committee was
composed of Herbert A. Cohen (Chairman), David L. Mitchell and William R. Toller
at December 31, 1998, of whom were non-employee Directors of the Company. All
decisions of the Compensation Committee relating to the compensation of the
Company's executive Officers are reviewed by, and are subject to the final
approval of, the full Board of Directors of the Company. Set forth below is a
report prepared by Mr. Cohen, Mr. Mitchell and Mr. Toller in their capacities as
members of the Compensation Committee at December 31, 1998, addressing the
Company's compensation policies for 1998 as they affected the Company's
executive Officers.

        OVERVIEW AND PHILOSOPHY

        The Company's executive compensation program is designed to be linked to
corporate performance and returns to stockholders. Of particular importance to
the Company is its ability to grow and enhance its competitiveness for the rest
of the decade and beyond. Shorter-term performance, although scrutinized by the
Compensation Committee, stands behind the issue of furthering the Company's
strategic goals. To this end, the Company has developed an overall compensation
strategy and specific compensation plans that tie a significant portion of
executive compensation to the Company's success in meeting specified performance
goals.

        The objectives of the Company's executive compensation program are to:

        o   attract, motivate and retain the highest quality executives;

        o   motivate them to achieve tactical and strategic objectives in a
            manner consistent with the Company's corporate values; and

        o   link executive and stockholder interest through equity-based plans
            and provide a compensation package that recognizes individual
            contributions as well as overall business results.

        To achieve these objectives, the Company's executive compensation
        program is designed to:

        o   focus participants on high priority goals to increase stockholder
            value;

        o   encourage behavior that exemplifies the Company's values relating to
            customers, quality of performance, employees, integrity, teamwork
            and good citizenship;

        o   assess performance based on results and pre-set goals that link the
            business activities of each individual to the goals of the Company;
            and

        o   increase stock ownership to promote a proprietary interest in the
            success of the Company.


                                       49
<PAGE>

        EXECUTIVE OFFICER COMPENSATION

        Each year the Compensation Committee conducts a full review of the
Company's executive compensation program. This review includes a comprehensive
evaluation of the competitiveness of the Company's compensation program and a
comparison of the Company's executive compensation to certain other public
companies, which in the view of the Compensation Committee represent the
Company's most direct competitors for executive talent. It is the Compensation
Committee's policy to target overall compensation for executive Officers of the
Company taking into account the levels of compensation paid for such positions
by such other public companies. A variety of other factors, however, including
position and time in position, experience, and both Company performance and
individual performance, will have an impact on individual compensation amounts.

        The key elements of the Company's executive compensation program in 1998
consisted of base salary, annual incentive compensation and long-term incentive
compensation in the form of stock options. The Compensation Committee's policies
with respect to each of these elements, including the basis for the compensation
awarded to the Company's Chief Executive Officer, are discussed below.

        BASE SALARIES.Base salaries for executive Officers are established by
evaluating, on an annual basis, the performance of such individuals (which
evaluation involves management's consideration of such factors as
responsibilities of the positions held, contribution toward achievement of the
Company's strategic plans, attainment of specific individual objectives and
interpersonal managerial skills), and by reference to the marketplace for
executive talent, including a comparison to base salaries for comparable
positions at other similar public companies.

        In 1998, total compensation was paid to executives primarily based upon
the terms of their employment agreements with the Company, if any, and upon
individual performance and the extent to which the business plans for their
areas of responsibility were achieved or exceeded. On balance, performance goals
were substantially met or exceeded and therefore compensation was paid
accordingly.

        Mr. Hannesson, the Chairman of the Board, President and Chief Executive
Officer of the Company and Environmental, and the Chairman of the Board and
Chief Executive Officer of Solution, Separation and CFC Technologies, receives
annual compensation based upon, among other things, the terms of his employment
agreement with Environmental. Pursuant to the terms of his employment agreement,
Mr. Hannesson is entitled to receive a base salary at an annual rate of not less
than $434,500 through December 31, 1998. Mr. Hannesson agreed to a base salary
deferment so that he will receive a base salary at an annual rate of $330,000
October 5, 1998 for services rendered to the Company.

        The members of the Compensation Committee establish the amount actually
received by Mr. Hannesson each year as base salary for services rendered to the
Company and its affiliates. In establishing Mr. Hannesson's base salary for
1998, the Compensation Committee took into account the salaries of chief
executive Officers at other similar public companies, future objectives and
challenges, and Mr. Hannesson's individual performance, contributions and
leadership. The Compensation Committee reviewed in detail Mr. Hannesson's
achievement of his 1997 goals and his individual contributions to the Company
and its affiliates. The Compensation Committee concluded that he had achieved
his 1997 goals and had provided a leadership role in achieving the Company's and
its affiliates' strategic priorities for 1997. The Compensation Committee also
considered Mr. Hannesson's decisive management of operational and strategic
issues, his drive to reinforce a culture of innovation and his ability and
dedication to enhance the long-term value of the Company and its affiliates for
their respective stockholders. In making its salary decisions with respect to
Mr. Hannesson, the Compensation Committee exercised its discretion and judgement
based on the above factors, and no specific formula was applied to determine the
weight of each factor.


                                       50
<PAGE>

        Mr. Hannesson's base salary increased from $395,000 for 1997 to $434,500
for 1998, representing an increase of approximately 10%. On October 5, 1998, Mr.
Hannesson agreed to defer a portion of his base salary (25%), reducing his base
salary to $330,000. Starting base salary was allocated among the Company,
Environmental and Separation based upon the amount of time and effort devoted by
Mr. Hannesson to the respective businesses of such companies. Consequently, the
Company, Environmental and Separation paid $260,526, $58,658 and $94,504,
respectively, of such salary. Mr. Hannesson also received an automobile
allowance of $12,000 for 1998, and the Company, Environmental and Separation
paid $7,700, $1,620 and $2,610, respectively, of such allowance.

        ANNUAL INCENTIVE BONUS. Annual incentive bonuses for executive Officers
are intended to reflect the Compensation Committee's belief that a significant
portion of the annual compensation of each executive officer should be
contingent upon the performance of the Company. For 1998, no annual incentive
bonuses were paid to the individuals named in the Summary Compensation Table.

Pursuant to his employment agreement with Environmental, Mr. Hannesson is
eligible to receive incentive compensation of up to $225,000 per year for
achieving certain of the performance goals set forth above. For 1998, Mr.
Hannesson was awarded an incentive bonus of $0.

        STOCK OPTIONS. The Compensation Committee has the power to grant stock
options under the Plan. With respect to executive Officers, it has been the
Compensation Committee's practice to grant, on an annual basis, stock options
that vest at the rate of 20% upon grant and 20% in each calendar year thereafter
for four years, and that are exercisable over a ten-year period at exercise
prices per share set at the fair market value per share on the date of grant.
Generally, the executives must be employed by the Company at the time the
options vest in order to exercise the options and, upon announcement of a Change
in Control (pursuant to and as defined in the 1998 Plan), such options become
immediately exercisable. The Compensation Committee believes that stock option
grants provide an incentive that focuses the executives' attention on managing
the Company from the perspective of an owner with an equity stake in the
business. The Company's stock options are tied to the future performance of the
Company's stock and will provide value to the recipient only when the price of
the Company's stock increases above the option grant price.

        A total of 3,576,412 stock options were granted pursuant to the 1998
Plan in 1998, 577,500 of which were granted to Mr. Hannesson and 978,750 of
which were granted (in the aggregate) to six other individuals named in the
Summary Compensation Table. Such number does not include 1,295,000 stock options
granted to general employees under the 1996 Plan, which were rescinded on the
issuance of the 1998 Plan. The number of stock options granted in 1998 were
determined by reference to the long-term compensation for comparable positions
at other similar public companies and based upon an assessment of individual
performance.

        IMPACT OF SECTION 162(M) OF THE INTERNAL REVENUE CODE

        The Compensation Committee's policy is to structure compensation awards
for executive Officers that will be consistent with the requirements of Section
162(m) of the U.S. Internal Revenue Code of 1986 (the "Code"). Section 162(m)
limits the Company's tax deduction to $1.0 million per year for certain
compensation paid in a given year to the Chief Executive Officer and the four
highest compensated executives other than the Chief Executive Officer named in
the Summary Compensation Table. According to the Code and corresponding
regulations, compensation that is based on attainment of pre-established,
objective performance goals and complies with certain other requirements will be
excluded from the $1.0 million deduction limitation. The Company's policy is to
structure compensation awards for covered executives that will be fully
deductible where doing so will further the purposes of the Company's executive
compensation program. However, the Compensation Committee also considers it
important to retain flexibility to design compensation programs that recognize a
full range of performance criteria important to the Company's success, even
where compensation payable under such


                                       51
<PAGE>

programs may not be fully deductible. The Company expects that all compensation
payments in 1998 to the individuals listed in the Summary Compensation Table
will be fully deductible by the Company.

        CONCLUSION

        The Compensation Committee believes that the quality of executive
leadership significantly affects the long-term performance of the Company and
that it is in the best interest of the stockholders to compensate fairly
executive leadership for achievement meeting or exceeding the high standards set
by the Compensation Committee, so long as there is a corresponding risk when
performance falls short of such standards. A primary goal of the Compensation
Committee is to relate compensation to corporate performance. Based on the
Company's performance in 1998, the Compensation Committee believes that the
Company's current executive compensation program meets such standards and has
contributed, and will continue to contribute, to the Company's and its
stockholders' long-term success.

                            COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE
                                                  Herbert A. Cohen (Chairman)
                                                            David L. Mitchell
                                                            William R. Toller


        The Report of the Compensation Committee on Executive Compensation shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Annual Report into any filing under the Securities Act, or
under the Exchange Act, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such acts.



                                       52
<PAGE>




ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

        The following table sets forth certain information, as of March 31,
1999, with respect to the beneficial ownership of Common Stock by each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock of the Company. Unless otherwise indicated,
the owners have sole voting and investment power with respect to their
respective shares.
<TABLE>
<CAPTION>

                                         NUMBER OF SHARES           PERCENTAGE OF OUTSTANDING
      NAME AND ADDRESS OF                OF COMMON STOCK              SHARES OF COMMON STOCK
      BENEFICIAL OWNER (1)            BENEFICIALLY OWNED (2)            BENEFICIALLY OWNED
      --------------------            ----------------------            ------------------

Commodore Environmental
<S>                                        <C>                              <C>  
  Services, Inc.................           8,198,144(3)                     34.6%

Bentley J. Blum.................           4,331,277(4)                     34.9%

Paul E. Hannesson...............           1,454,282(5)                      5.9%
</TABLE>

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

(1) The address of Commodore Environmental Services, Inc., Bentley J. Blum and
    Paul E. Hannesson is 150 East 58th Street, Suite 3400, New York, New York
    10155. Messrs. Blum and Hannesson are brothers-in-law.

(2) As used herein, the term beneficial ownership with respect to a security is
    defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared
    voting power (including the power to vote or direct the disposition of) with
    respect to the security through any contract, arrangement, understanding,
    relationship or otherwise, including a right to acquire such power(s) during
    the next 60 days. Unless otherwise noted, beneficial ownership consists of
    sole ownership, voting and investment rights.

(3) Excludes warrants to purchase an aggregate of 10,514,000 shares of Common
    Stock at exercise prices ranging from $1.50 per share to $10.00 per share.
    See "Market for Registrant's Common Equity and Related Stockholder
    Matters--Recent Sales of Unregistered Securities" and "Certain Relationships
    and Related Transactions."

(4) Consists of: (i) 70,000 shares of the Company Common Stock underlying
    currently exercisable options granted to Mr. Blum by the Company under the
    Plan; and (ii) Mr. Blum's indirect beneficial ownership of Common Stock
    based upon his beneficial ownership of 28,479,737 shares and his spouse's
    ownership of 2,000,000 shares of Environmental Common Stock, representing
    together 49.4% of the outstanding shares of Environmental Common Stock at
    March 31, 1999, and 4,500,000 shares of Environmental Common Stock
    underlying currently exercisable stock options, representing together 52% of
    the outstanding shares of Environmental. Does not include 450,400 shares of
    Environmental Common Stock owned by Simone Blum, the mother of Mr. Blum, and
    385,000 shares of Environmental Common Stock owned by Samuel Blum, the
    father of Mr. Blum. Mr. Blum disclaims any beneficial interest in the shares
    of Environmental Common Stock owned by his spouse, mother and father.

(5) Consists of: (i) 577,500 shares of Common Stock underlying currently
    exercisable stock options granted to Mr. Hannesson by the Company under the
    Plan; and (ii) Mr. Hannesson's indirect beneficial ownership of Common Stock
    based upon his ownership of an aggregate of (a) 2,650,000 shares of
    Environmental Common Stock owned by Suzanne Hannesson, the spouse of Mr.
    Hannesson, (b) 2,650,000 shares of Environmental Common Stock owned by the
    Hannesson Family Trust (Suzanne Hannesson and John D. Hannesson, trustees)
    for the benefit of Mr. Hannesson's spouse and (c) 500,000 shares of
    Environmental Common Stock in exchange for options to purchase 950,000
    shares of Environmental Common Stock, issued to Hannesson Family Trust, (d)
    currently exercisable options to purchase 525,705 shares of Environmental
    Common Stock, representing together 10% of the outstanding shares of
    Environmental Common Stock. Does not include 1,000,000 shares of
    Environmental Common Stock owned by each of Jon Paul and Krista Hannesson,
    the adult children of Mr. Hannesson. Mr.


                                       53
<PAGE>

    Hannesson disclaims any beneficial interest in the shares of Environmental
    Common Stock owned by or for the benefit of his spouse and children.


SECURITY OWNERSHIP OF MANAGEMENT

        The following table sets forth certain information, as of March 31,
1999, with respect to the beneficial ownership of the Common Stock of the
Company by each director, each individual listed in the Summary Compensation
Table and all executive Officers and Directors of the Company as a group, as
reported by such persons. Unless otherwise indicated, the owners have sole
voting and investment power with respect to their respective shares.
<TABLE>
<CAPTION>

                                         NUMBER OF SHARES           PERCENTAGE OF
                                         OF COMMON STOCK             OUTSTANDING
NAME OF  BENEFICIAL OWNER             BENEFICIALLY OWNED(1)    SHARES OF COMMON STOCK
-------  ----------------             ---------------------       BENEFICIALLY OWNED
                                                                  ------------------
<S>                                       <C>                           <C>  
Bentley J. Blum........................   4,331,277(2)                  34.9%
Paul E. Hannesson......................   1,454,282(3)                   5.9%
Kenneth L. Adelman, Ph.D...............     291,225(4)                   1.2%
James M. DeAngelis.....................     256,970(5)                   1.1%
Herbert A. Cohen.......................      71,000(6)                    *
David L. Mitchell......................      70,000(7)                    *
William E. Ingram......................      60,000(8)                    *
Peter E. Harrod........................     102,000(9)                    *
Edward L. Palmer.......................      70,000(10)                   *
William R. Toller......................      70,000(11)                   *
All executive Officers
  And Directors as
  a group (10 persons).................  10,655,810                     45.0%
</TABLE>

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

*    Percentage ownership is less than 1%.

(1)  As used herein, the term beneficial ownership with respect to a security is
     defined by Rule 13d-3 under the Exchange Act as consisting of sole or
     shared voting power (including the power to vote or direct the disposition
     of) with respect to the security through any contract, arrangement,
     understanding, relationship or otherwise, including a right to acquire such
     power(s) during the next 60 days. Unless otherwise noted, beneficial
     ownership consists of sole ownership, voting and investment rights.

(2)  Consists of: (i) 70,000 shares of the Company Common Stock underlying
     currently exercisable options granted to Mr. Blum by the Company under the
     Plan; and (ii) Mr. Blum's indirect beneficial ownership of Common Stock
     based upon his beneficial ownership of 28,479,737 shares and his spouse's
     ownership of 2,000,000 shares of Environmental Common Stock, representing
     together 49.4% of the outstanding shares of Environmental Common Stock at
     March 31, 1999; and 4,500,000 shares of Environmental Common Stock
     underlying currently exercisable stock options, representing together 52%
     of the outstanding shares of Environmental Common Stock. Does not include
     450,400 shares of Environmental Common Stock owned by Simone Blum, the
     mother of Mr. Blum, and 385,000 shares of Environmental Common Stock owned
     by Samuel Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial
     interest in the shares of Environmental Common Stock owned by his spouse,
     mother and father.

                                       54
<PAGE>

(3)  Consists of: (i) 577,000 shares of Common Stock underlying currently
     exercisable stock options granted to Mr. Hannesson by the Company under the
     Plan; and (ii) Mr. Hannesson's indirect beneficial ownership of Common
     Stock based upon his beneficial ownership of an aggregate of (a) 2,650,000
     shares of Environmental Common Stock owned by Suzanne Hannesson, the spouse
     of Mr. Hannesson, (b) 2,650,000 shares of Environmental Common Stock owned
     by the Hannesson Family Trust (Suzanne Hannesson and John D. Hannesson,
     trustees) for the benefit of Mr. Hannesson's spouse and (c) 500,000 shares
     of Environmental Common Stock in exchange for options to purchase 950,000
     shares of Environmental Common Stock, issued to Hannesson Family Trust, and
     (d) currently exercisable options to purchase 525,705 shares of
     Environmental Common Stock, representing together 10% of the outstanding
     shares of Environmental Common Stock. Does not include 1,000,000 shares of
     Environmental Common Stock owned by each of Jon Paul and Krista Hannesson,
     the adult children of Mr. Hannesson. Mr. Hannesson disclaims any beneficial
     interest in the shares of Environmental Common Stock owned by or for the
     benefit of his spouse and children.

(4)  Consists of: 291,225 shares of Common Stock underlying currently
     exercisable stock options granted to Dr. Adelman by the Company under the
     Plan.

(5)  Represents shares of Common Stock underlying currently exercisable stock
     options granted to Mr. DeAngelis by the Company under the 1998 Plan.

(6)  Consists of: (i) 70,000 shares of Common Stock underlying currently
     exercisable stock options granted to Mr. Cohen by the Company under the
     1998 Plan; and 1,000 shares of Common Stock.

(7)  Represents shares of Common Stock underlying currently exercisable stock
     options granted to Mr. Mitchell by the Company under the 1998 Plan.

(8)  Represents shares of Common Stock underlying currently exercisable stock
     options granted to Mr. Ingram by the Company under the 1998 Plan.

(9)  Represents shares of Common Stock underlying currently exercisable stock
     options granted to Mr. Harrod by the Company under the 1998 Plan.

(10) Represents shares of Common Stock underlying currently exercisable stock
     options granted to Mr. Palmer by the Company under the 1998 Plan.

(11) Represents shares of Common Stock underlying currently exercisable stock
     options granted to Mr. Toller by the Company under the 1998 Plan.


     Messrs. Blum and Hannesson are brothers-in-law.


                                       55
<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

         Since its acquisition of the capital stock of Commodore Laboratories,
Inc. (the Company's predecessor) in 1993, Environmental has advanced an
aggregate of $8,925,426 to the Company, which has been used to finance the
development of SET, including salaries of personnel, equipment, facilities and
patent prosecution. These cash advances by Environmental were evidenced by
successive unsecured 8% promissory notes of the Company's predecessor, and, at
December 31,1995, by the Environmental Funding Note. Kraft Capital Corporation
("Kraft"), a corporation wholly owned by Bentley J. Blum, a principal
stockholder of Environmental and a director of the Company and of Environmental,
provided approximately $656,000 of such financing to Environmental.
Environmental provided additional advances to the Company of $978,896 for the
first fiscal quarter of 1996, which were repaid by the Company subsequent to its
obtaining a line of credit from a commercial bank in April 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Liquidity and Capital Resources."

         In March 1996, the Company was formed as a wholly-owned subsidiary of
Environmental. Prior to its IPO, in exchange for the issuance of 15,000,000
shares of Common Stock, Environmental contributed to the Company (i) all of the
assets and properties (including joint working proposals, quotations and bids in
respect to projects and contracts awarded for feasibility studies), subject to
all of the liabilities, of its operating divisions relating to SET and the
exploitation of the SET technology and processes in all commercial and
governmental applications; (ii) all of the outstanding shares of the capital
stock of each of Commodore Laboratories, Inc., Commodore Remediation
Technologies, Inc., Commodore Government Environmental Technologies, Inc.,
Commodore Technologies, Inc. and Sandpiper Properties, Inc. (except for a 9.95%
minority interest in Commodore Laboratories, Inc. which at the time was held by
Albert E. Abel); and (iii) a portion of the Environmental Funding Note in the
amount of $3.0 million.

         In April 1996, Bentley J. Blum personally guaranteed a $2.0 million
line of credit for the Company from a commercial bank. The initial borrowings
under the line of credit, in the approximate amount of $1.0 million, were
utilized to repay advances made by Environmental to the Company in 1996, and
Environmental, in turn, utilized such funds to repay Kraft the funds provided by
Kraft to Environmental for purposes of the advances to the Company. The Company
applied $2.0 million of the net proceeds of its IPO to repay the line of credit,
and Mr. Blum's guarantee was released at such time. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

         Upon completion of the IPO in June 1996, Environmental acquired from
Albert E. Abel the remaining 9.95% of the outstanding shares of Common Stock of
Commodore Laboratories, Inc. and contributed such shares to the Company for no
additional consideration. To acquire the remaining shares of Commodore
Laboratories, Inc., Environmental paid Mr. Abel the sum of $750,000 in cash, and
issued a ten-year, 8% promissory note to Mr. Abel in the principal amount of
$2,250,000, payable as to interest only until the maturity of the note on the
tenth anniversary of the date of issuance. Simultaneously, the Company settled
all outstanding obligations for accrued compensation payable to Mr. Abel and for
amounts receivable by the Company from Mr. Abel, and the net payment to Mr. Abel
arising therefrom approximated $120,000. The Company paid such amount to Mr.
Abel from the proceeds of its IPO.

         In October 1996, the Company acquired all of the outstanding shares of
capital stock of Advanced Sciences. Advanced Sciences, together with its
subsidiaries, provides a full range of environmental and technical services,
including identification, investigation, remediation and management of hazardous
and mixed waste sites, to government agencies, including the DOD and DOE, and to
private companies located in the United States and abroad. In consideration for
all of the outstanding shares of capital stock of Advanced Sciences, the former
shareholders of Advanced Sciences received an aggregate of 450,000 shares of
Common Stock. Simultaneously, the Company also acquired all of the


                                       56
<PAGE>

outstanding shares of capital stock of ASE. ASE, a newly formed entity with no
history of operations, had an option to purchase all of the outstanding capital
stock of Advanced Sciences and was acquired by the Company for the purpose of
enabling the Company to effect its acquisition of Advanced Sciences. The former
shareholders of ASE received, in consideration for all of the outstanding shares
of capital stock of ASE, an aggregate of 450,000 shares of Company's Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

         In December 1996, the Company transferred certain of its operating
assets related to its SET technology to Solution, subject to certain liabilities
related to such assets, in exchange for 100 shares of Common Stock of Solution,
representing all of the issued and outstanding shares of capital stock of
Solution. Solution agreed to assume all of the net assets of the Company
relating to its SET technology at December 1, 1996, which assets had an
aggregate value of approximately $4.0 million at such date, and all known or
unknown contingent or unliquidated liabilities of and claims against the Company
and its subsidiaries to the extent they relate to or arise out of the
transferred assets. The Company retained, among other things, (a) all temporary
cash investments of the Company at December 1, 1996, aggregating approximately
$14.1 million, and (b) the principal executive offices and related assets of the
Company which, at the time, were located in McLean, Virginia. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

         In December 1996, as part of a corporate restructuring to consolidate
all of its current environmental technology businesses within the Company,
Environmental transferred to the Company all of the capital stock of Separation
and CFC Technologies. In addition, Environmental assigned to the Company notes
aggregating $976,200 at December 2, 1996, representing advances previously made
by Environmental to Separation. Such advances have been capitalized by the
Company as its capital contribution to Separation. In consideration for such
transfers, the Company paid Environmental $3.0 million in cash and issued to
Environmental a warrant expiring December 2, 2003 to purchase 7,500,000 shares
of the Company's Common Stock at an exercise price of $15.00 per share, valued
at $2.4 million. Such warrant was subsequently amended to, among other things,
reduce the exercise price thereof to $10.00 per share. See "--February 1998
Intercompany Note" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

SERVICES AGREEMENT

         In September 1997, the Company, Environmental, Separation, Advanced
Sciences, and certain other affiliates of the Company (the "Affiliated Parties")
entered into a services agreement, dated as of September 1, 1997 (the "Services
Agreement"), whereby the Company and the Affiliated Parties agreed to cooperate
in sharing, where appropriate, costs related to accounting services, financial
management, human resources and personnel management and administration,
information systems, executive management, sales and marketing, research and
development, engineering, technical assistance, patenting, and other areas of
service as are appropriately and necessarily required in the operations of the
Company and the Affiliated Parties (collectively, the "Services"). Pursuant to
the Services Agreement, services provided by professional employees of the
Company and the Affiliated Parties to one another are charged on the basis of
time actually worked as a percentage of salary (including cost of benefits)
attributable to that professional. In addition, charges for rent, utilities,
office services and other routine charges regularly incurred in the normal
course of business are apportioned to the professionals working in the office on
the basis of salary, and then charged to any party in respect of whom the
professional devoted such time based upon time actually worked. Furthermore,
charges from third parties, including, without limitation, consultants,
attorneys and accountants, are levied against the party actually receiving the
benefit of such services. Pursuant to the Services Agreement, the Company acts
as the coordinator of billings and payments for Services on behalf of itself and
the other Affiliated Parties.


                                       57
<PAGE>

SALE OF COMPANY COMMON STOCK BY ENVIRONMENTAL

         In February 1998, Environmental sold (i) 1,381,692 shares of Common
Stock of the Company and (ii) three-year warrants to purchase an aggregate of
150,000 shares of Company Common Stock at an exercise price equal to $6.00 per
share, for an aggregate purchase price of $6.0 million (the "First Tranche
Sale") in a private placement (the "Environmental Private Placement") to certain
"accredited investors" as defined in Rule 501 of the Securities Act. After
deduction of fees and transaction costs associated with the First Tranche Sale
totaling approximately $550,000, Environmental received aggregate net proceeds
of approximately $5,450,000 from the First Tranche Sale. The shares of Company
Common Stock issued and to be issued to the investors in connection with the
Environmental Private Placement have been and will be issued from the account of
Environmental, which, immediately prior to the First Tranche Sale, owned
approximately 52% of the outstanding shares of Company Common Stock. As of March
31, 1999, Environmental owned approximately 35% of the outstanding shares of
Company Common Stock.

         Pursuant to the terms of the Environmental Private Placement,
Environmental was required to issue up to a maximum of 1,618,308 additional
shares of Company Common Stock to the investors, for no additional
consideration, in the event that 90% of the average closing bid price of the
Common Stock for a certain period of time is less than the $4.3425 per share
purchase price of the Common Stock sold in the First Tranche Sale. Environmental
was required to issue an additional 1,400,981 shares of the Company's Common
Stock in satisfaction of the price reset provisions. Environmental will, for a
certain period of time, have the right and option (but not the obligation) to
require the investors to purchase (i) an aggregate amount of additional shares
of Company Common Stock equal to 4,000,000 divided by 90% of the average closing
price per share of the Common Stock for the five trading days immediately prior
to the closing date of such sale and (ii) warrants to purchase an aggregate of
100,000 shares of Company Common Stock at an exercise price per share equal to
the greater of $6.00 or 125% of the per share purchase price of the shares of
Common Stock sold pursuant to (i) above, for an aggregate purchase price of $4.0
million (the "Second Tranche Sale"). As in the case of the First Tranche Sale,
Environmental may be required to issue additional shares of Company Common Stock
to the investors in connection with the Second Tranche Sale, for no additional
consideration, in the event that 90% of the average closing bid price of the
Common Stock for a certain period of time is less than the per share purchase
price of the Common Stock sold in the Second Tranche Sale.

         Pursuant to the terms of the Environmental Private Placement, if during
a certain period of time Environmental sells, or the Company issues, any shares
of Common Stock ("First Future Shares") at a price per share that is less than
the per share purchase price of the Common Stock sold in the First Tranche Sale
or Environmental sells, or the Company issues, any shares of Common Stock
("Second Future Shares") at a price per share that is less than the per share
purchase price of the Common Stock sold in the Second Tranche Sale,
Environmental will issue to the investors, for no additional consideration, a
number of additional shares of Company Common Stock equal to (a) with respect to
First Future Shares, an amount equal to the difference between (i) 6,000,000
divided by the price at which the First Future Shares were sold or issued and
(ii) 1,381,692, and (b) with respect to Second Future Shares, an amount equal to
the difference between (i) 4,000,000 divided by the price at which the Second
Future Shares were sold or issued and (ii) the amount equal to the number of
shares of Common Stock sold in the Second Tranche Sale. Notwithstanding the
foregoing, the terms "First Future Shares" and "Second Future Shares" do not
include any shares of Common Stock which may be issued in the future upon
conversion or exercise of, or pursuant to the terms of any agreement entered
into by the Company or Environmental in respect of, securities of the Company
and/or Environmental which have been issued prior to February 9, 1998.

         The Company has agreed to file registration statements (the
"Registration Statements") on Form S-3, or other applicable form of registration
statement, under the Securities Act covering all of the shares 


                                       58
<PAGE>

of Common Stock that have been and may be issued to the investors in the
Environmental Private Placement, and to keep such Registration Statements
continuously effective under the Securities Act for a period of two years after
their respective effective dates or such earlier date when all shares covered by
the Registration Statements have been sold or may be sold without volume
restrictions under the Securities Act (the "Effective Period").

FEBRUARY 1998 INTERCOMPANY NOTE

        Upon receipt of the net proceeds of the Environmental Private Placement,
Environmental provided a $5,450,000 uncollateralized loan to the Company,
evidenced by the Intercompany Note. Pursuant to the terms of the Intercompany
Note, interest on the unpaid principal balance of the Intercompany Note was
payable at the rate of 8% per annum semiannually in cash. The unpaid principal
amount of the Intercompany Note was due and payable, together with accrued and
unpaid interest, on the earlier to occur of (a) December 31, 1999, or (b)
consummation of any public offering or private placement (other than the
Environmental Private Placement) of securities of the Company with net proceeds
aggregating in excess of $6.0 million, other than in respect of working capital
financing or secured financing of assets received by the Company in the ordinary
course of business from any bank or other lending institution, provided that if
such funds are raised in a private placement during the period commencing on
February 9, 1998 and ending on the last day of the Effective Period, then the
Intercompany Note was not payable unless a Registration Statement had been
effective for 75 consecutive days and is effective on the date of such
repayment. The Company will use the net proceeds of the loan solely for working
capital and general corporate purposes and not for the satisfaction of any
portion of Company debt or to redeem any Company equity or equity-equivalent
securities. The Intercompany Note was fully paid off effective September 28,
1998. See "Market for Registrant's Common Equity and Related Stockholder
Matters--Recent Sales of Unregistered Securities--February 1998 Intercompany
Note" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."

        In connection with the loan, the Company amended and restated in its
entirety a five-year warrant to purchase 7,500,000 shares of Common Stock issued
to Environmental on December 2, 1996 to, among other things, reduce the exercise
price of the warrant from $15.00 per share to $10.00 per share. In addition, the
Company issued to Environmental an additional five-year warrant to purchase
1,500,000 shares of Common Stock at an exercise price of $10.00 per share. See
"Market for Registrant's Common Equity and Related Stockholder Matters--Recent
Sales of Unregistered Securities--February 1998 Intercompany Note."

SEPTEMBER 1997 INTERCOMPANY CONVERTIBLE NOTE

        In September 1997, Environmental provided a $4.0 million
uncollateralized loan to the Company, evidenced by the Convertible Note.
Pursuant to the terms of the Convertible Note, the Company is obligated to pay
Environmental interest only at the rate of 8% per annum, payable quarterly.
Unless converted into Common Stock at any time, the unpaid principal amount of
the Convertible Note is due and payable, together with accrued and unpaid
interest, on August 31, 2002. Payment of principal and accrued interest under
the Convertible Note is subordinated to all other indebtedness for money
borrowed of the Company. Environmental has the right to convert the Convertible
Note into shares of Common Stock at a conversion price of $3.89 per share. Such
conversion price was fixed at approximately 85% of the five day average closing
bid price of Common Stock ($4.575 per share) prior to August 22, 1997, the date
that the executive committees of the respective boards of Directors of the
Company and Environmental authorized such loan. In connection with the $4.0
million loan, the Company issued Environmental a five-year warrant to purchase
1,000,000 shares of Common Stock at an exercise price of $5.0325 per share
(approximately 110% of the $4.575 five day average closing bid price of Common
Stock prior to August 22, 1997).


                                       59
<PAGE>

         In March 1998, the Company prepaid $2.0 million of the Convertible Note
by (i) paying Environmental the sum of $500,000 in cash and (ii) transferring to
Environmental the LPM Note. To induce Environmental to accept the Company's
prepayment of $2.0 million of the Convertible Note (and thereby give up the
right to convert $2.0 million of the Convertible Note into Common Stock), the
Company issued to Environmental an additional warrant to purchase up to 514,000
shares of Common Stock at an exercise price of $4.50 per share. Such exercise
price was fixed at approximately 110% of the closing sale price of the Common
Stock on February 20, 1998, the trading day immediately prior to the date the
Board of Directors of the Company approved such prepayment. The estimated fair
value of such warrant is approximately $340,000. The remaining balance of this
Intercompany Convertible Note was paid off effective September 28, 1998. See
"--Transactions with Lanxide," "Market for Registrant's Common Equity and
Related Stockholder Matters--Recent Sales of Unregistered Securities--September
1997 Intercompany Convertible Note" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

SALE OF SERIES D PREFERRED STOCK BY ENVIRONMENTAL

         In May and August 1997, Environmental sold an aggregate of 88,000
shares of its 7% Series D Convertible Preferred Stock, par value $0.01 per
share, with a liquidation preference of $100 per share (the "Series D Preferred
Stock"), for an aggregate purchase price of approximately $7.8 million. The
Series D Preferred Stock is convertible into shares of the Company's Common
Stock held by Environmental, at a conversion price equal to 85% of the lower of
(a) the average of the low prices, or (b) the average of the closing bid prices
of the Common Stock of the Company for the previous five business days ending on
the day prior to conversion (the "Average Closing Bid Price"). The conversion
price of the Series D Preferred Stock will be equal to certain amounts set forth
in the Certificate of Designation, Rights and Preferences for the Series D
Preferred Stock if the Average Closing Bid Price of the Common Stock for any
consecutive 30 days is equal to or less than $2.00, provided that in no event
will the conversion price of the Series D Preferred Stock be less than $1.50. As
of December 31, 1998, the 88,000 shares of Series D Preferred Stock were
converted into an aggregate 4,019,210 shares of the Company's Common Stock.

    The purchasers of the Series D Preferred Stock also received five-year
warrants to purchase an aggregate of 1,175,000 shares of the Company's Common
Stock held by Environmental at exercise prices ranging from $5.15 per share to
$7.14 per share. Such exercise prices were reset on August 18, 1998 to an
exercise price of $0.825. In addition, if the Common Stock trades at less than
50% of the August 17, 1998 closing bid price for any 10 consecutive trading
days, the exercise price is subject to further reset (on one occasion only) to
50% of such August 17, 1998 closing bid price. In addition, affiliates of the
finder received warrants to purchase an aggregate of 85,000 shares of Common
Stock from Environmental at exercise prices ranging from $5.15 per share to
$7.14 per share. The Company has an effective registration statement on file
with the Commission covering the shares of Common Stock into which the Series D
Preferred Stock are convertible, as well as the 1,260,000 shares of Common Stock
transferable by Environmental upon exercise of the foregoing warrants.

LICENSE OF SET TECHNOLOGY

        As a result of its acquisition of the capital stock of Commodore Labs,
the Company acquired all patents, discoveries, technology and other intellectual
property in connection with the SET process which it later transferred to
Solution effective December 1, 1996. Environmental licenses from Solution the
exclusive worldwide right with the right to sublicense, to make, use, sell and
exploit, itself or jointly with other third parties, for the life of all patents
now or hereafter owned by Solution, the SET process and all related technology
underlying such patents and intellectual property in all domestic and
international commercial and industrial applications, in connection with the
destruction of CFCs and other ozone-depleting substances (the "CFC Business");
provided that such license expressly limits the rights of the licensee(s) and
others who may be sub-licensees or users of the Company's patents and
technologies to the CFC Business.


                                       60
<PAGE>

FUTURE TRANSACTIONS

        In June 1996, the Company's Board of Directors adopted a policy whereby
any future transactions between the Company and any of its subsidiaries,
affiliates, Officers, Directors and principal stockholders, or any affiliates of
the foregoing, will be on terms no less favorable to the Company than could
reasonably be obtained in "arm's-length" transactions with independent
third-parties, and any such transactions will also be approved by a majority of
the Company's disinterested non-management Directors.


                                       61
<PAGE>



                                     PART IV


ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 
           REPORTS ON FORM 8-K
<TABLE>
<CAPTION>

        The following documents are filed as part of this Annual Report:
                                                                            Page No.
                                                                            --------
Financial Statements.
---------------------
<S>                                                                         <C>
Commodore Applied Technologies, Inc.

        Report of Independent Accountants..................................   F-1

        Consolidated Balance Sheets as of December 31, 1998 and 1997.......   F-2

        Consolidated Statements of Operations and Comprehensive Loss
               for the years ended December 31, 1998,
               1997 and 1996 ..............................................   F-3

        Consolidated Statements of Stockholders' Equity for the years
               ended December 31, 1998, 1997 and 1996......................   F-4

        Consolidated Statements of Cash Flows for the years ended
               December 31, 1998, 1997 and 1996............................   F-5

        Notes to Consolidated Financial Statements.........................   F-6

Teledyne-Commodore, LLC                                                       

        Independent Auditors' Report ......................................   F-32

        Balance Sheet as of December 31, 1998 and 1997 (Unaudited).........   F-33

        Statement of Operations for the years ended December 31, 1998,
               1997 (Unaudited) and the period from August 6, 1996
               (Date of Inception) to December 31, 1996 (Unaudited)........   F-34

        Statement of Members' Capital (Deficit) for the years ended
               December 31, 1998, 1997 (Unaudited) and the period from
               August 6, 1996 (Date of Inception) to December 31, 1996
               (Unaudited) ................................................   F-35

        Statement of Cash Flows for the years ended December 31, 1998,
               1997 (Unaudited) and the period from August 6, 1996
               (Date of Inception) to December 31, 1996 (Unaudited) .......   F-36

        Notes to Teledyne-Commodore, LLC Financial Statements .............   F-38


        
</TABLE>

         Except for the unconsolidated financial statements of
Teledyne-Commodore, LLC included herein, all other financial statement schedules
for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and, therefore, have been omitted.


Exhibits.

EXHIBIT NO.       DESCRIPTION
-----------       -----------

1.1     Form of Underwriting Agreement between the Company and National
        Securities Corporation, as Representative of the several Underwriters
        listed therein (the "Representative"). (1)

3.1     Certificate of Incorporation of the Company. (1)

3.2     By-Laws of the Company. (1)

4.1     Specimen Common Stock Certificate. (3)

4.2     Form of Warrant Agreement between the Company and The Bank of New York.
        (1)


                                       62
<PAGE>


4.3     Specimen Warrant Certificate. (1)

4.4     Form of Representative's Warrant Agreement between the Company and the
        Representative, including form of Representative's Warrant therein. (1)

4.5     Registration Rights Agreement, dated September 27, 1996, among the
        Company, CXI-ASI Acquisition Corp., and certain stockholders. (5)

4.6     Registration Rights Agreement, dated September 27, 1996, among the
        Company, CXI-ASE Acquisition Corp., and certain stockholders. (5)

4.7     Series A Convertible Preferred Stock Purchase Agreement, dated as of
        August 15, 1997, among the Company and the Series A Preferred Stock
        purchasers listed therein. (9)

4.8     Certificate of Designations, Rights and Preferences of Series A
        Preferred Stock. (9)

4.9     Registration Rights Agreement between the Company and the Series A
        Preferred Stock purchasers. (9)

4.10    Warrant to purchase 1,000,000 shares of Common Stock issued to
        Environmental. (9)

4.11    Common Stock Purchase Agreements, dated as of September 26, 1997, by and
        between the Company and each of certain private investors listed
        therein. (9)

4.12    Warrant to purchase 7,500,000 shares of Common Stock issued to
        Environmental. (10)

4.13    Warrant to purchase 1,500,000 shares of Common Stock issued to
        Environmental. (10)

4.14    Registration Rights Agreement, dated as of February 9, 1998, among the
        Company, Environmental and certain private investors listed therein.
        (10)

4.15    Amended Warrant to purchase 1,500,000 shares of Common Stock issued to
        Environmental. (15)

4.16    Certificate of Designation of 6% Series B Convertible Preferred Stock of
        the Company. (15)

4.17    Certificate of Designation of 6% Series C Convertible Preferred Stock of
        the Company. (15)

4.18    Certificate of Designation of 6% Series D Convertible Preferred Stock of
        the Company. (15)

10.1    Employment Agreement, dated June 1, 1995, between Environmental and Neil
        L. Drobny, and conditional assignment thereof by Environmental to the
        Company, dated March 29, 1996. (1)

10.2    Employment Agreement, dated August 31, 1995, between Environmental and
        Carl O. Magnell, and conditional assignment thereof by Environmental to
        the Company, dated March 29, 1996. (1)

10.3    Form of Employment Agreement, dated July 28, 1993, between Commodore
        Laboratories, Inc. and Albert E. Abel, with conditional assignment
        thereof by Commodore Labs to the Company, dated March 29, 1996. (1)

10.4    Employment Agreement, dated October 3, 1994, between Environmental and
        Vincent Valeri, and conditional assignment thereof by Environmental to
        the Company, dated March 29, 1996. (1)

10.5    Non-Competition, Non-Disclosure and Intellectual Property Agreement,
        dated March 29, 1996, between the Company and Gerry D. Getman. (1)

10.6    Employment Agreement, dated as of March 29, 1996. between the Company
        and Paul E. Hannesson. (2)


                                       63
<PAGE>


10.7    1996 Stock Option Plan of the Company. (1)

10.8    Executive Bonus Plan of the Company. (1)

10.9    Nationwide Permit for PCB Disposal issued by the EPA to Commodore
        Remediation Technologies, Inc. (1)

10.10   Memorandum of Understanding, dated April 9, 1996, between Teledyne Brown
        Engineering (a Division of Teledyne Industries, Inc.) and Commodore
        Government Environmental Technologies, Inc. (1)

10.11   Memorandum of Understanding. dated March 28, 1996, between Sharp
        Associates, Inc. and the Company. (1)

10.12   Memorandum of Understanding, dated April 12, 1996, between Sverdrup
        Environmental, Inc. and the Company. (1)

10.13   Credit Facility Agreement and Promissory Note, dated April 5, 1996,
        between the Company and Chemical Bank, and Guaranty and General Loan and
        Collateral Agreement, each dated April 5, 1996, between Bentley J. Blum
        and Chemical Bank. (1)

10.14   Demand Promissory Note, dated December 31, 1995, in the principal amount
        of $8,925,426, issued by Commodore Labs to Environmental. (1)

10.15   Form of $4,000,000 Promissory Note issued by the Company to
        Environmental, in partial replacement of the $8,925,426 Demand
        Promissory Note, dated December 31, 1995, issued by Commodore Labs to
        Environmental. (1)

10.16   Bond Purchase Agreement, dated December 3, 1993, by and between
        Environmental and Credit Agricole Deux Sevres. (1)

10.17   License Agreement, dated as of March 29, 1996, by and between the
        Company and Environmental, relating to the use of SET in the CFC
        Business. (2)

10.18   Form of Technology and Technical Services Agreement entered into between
        the Company and CFC Technologies.(2)

10.19   Voting Agreement, dated June 28, 1996, among Environmental, Bentley J.
        Blum, the Company and National Securities Corporation. (4)

10.20   Agreement and Plan of Merger, dated September 27, 1996, by and between
        the Company, CXI-ASI Acquisition Corp. and Advanced Sciences, Inc. (5)

10.21   Agreement and Plan of Merger, dated September 27, 1996, by and between
        the Company CXI-ASE Acquisition Corp. and A.S. Environmental, Inc. (5)

10.22   Agreement of Transfer, dated as of December 1, 1996 by and between the
        Company and Advanced Sciences. (11)

10.23   Bill of Sale, dated as of December 1, 1996, by and between the Company
        and Commodore Advanced Sciences, Inc. (11)

10.24   Stock Purchase Agreement, dated as of December 2, 1996, between the
        Company and Environmental. (6)


                                       64
<PAGE>


10.25   Employment Agreement, dated as of October 31, 1996, between
        Environmental and Edwin L. Harper. (7)

10.26   Employment Agreement, dated as of October 1, 1996, between the Company
        and Thomas E. Noel. (5)

10.27   Form of Employment Agreement between Environmental and Paul E.
        Hannesson. (8)

10.28   8% convertible note for $4.0 million from the Company to Environmental.
        (9)

10.29   8% non-convertible note for $5,450,000 from the Company to
        Environmental. (10)

10.30   Teaming Agreement, dated March 18, 1997, by and between ICF Kaiser
        Engineers, Inc. and Advanced Sciences.

10.31   Memorandum of Understanding between Lockheed Martin Advanced
        Environmental Systems, Inc. and Advanced Sciences.

10.32   Services Agreement, dated as of September 1, 1997, by and among the
        Company, Environmental, Separation, Advanced Sciences and other
        affiliated companies named therein. (14)

10.33   Amended and Restated 1996 Stock Option Plan. (13)

16.1    Letter regarding change in certifying accountant. (12)

*22.1   Subsidiaries of the Company.

*27.1   Financial Data Schedule.

99.1    Debt Repayment Agreement, dated as of September 28, 1998, between the
        Company and Environmental. (15)

99.2    Registration Rights Agreement, dated as of September 28, 1998, between
        the Company and Environmental. (15)

----------------------
* Filed herewith.

(1)  Incorporated by reference and filed as Exhibit to Registrant's Registration
     Statement on Form S-1 filed with the Securities and Exchange Commission on
     May 2, 1996 (File No. 333-4396).

(2)  Incorporated by reference and filed as Exhibit to Registrant's Amendment
     No. 1 to Registration Statement on Form S-1 filed with the Securities and
     Exchange Commission on June 11, 1996 (File No. 333-4396).

(3)  Incorporated by reference and filed as Exhibit to Registrant's Amendment
     No. 2 to Registration Amendment No.2 to Registration Statement on Form S-1
     filed with the Securities and Exchange Commission on June 25, 1996 (File
     No. 333-4396).

(4)  Incorporated by reference and filed as Exhibit to Registrant's
     Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed
     with the Securities and Exchange Commission on July 1, 1996 (File No.
     333-4396).

(5)  Incorporated by reference and filed as Exhibit to Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     October 15, 1996 (File No. 1-11871).

(6)  Incorporated by reference and filed as Exhibit to Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     January 27, 1997 (File No. 1-11871).

(7)  Incorporated by reference and filed as Exhibit to Amendment No. 3 to
     Registration Statement on Form S-1 of Separation filed with the Securities
     and Exchange Commission on January 23, 1997 (File No. 333-11813).

(8)  Incorporated by reference and filed as Exhibit to Annual Report on Form
     10-K for the fiscal year ended December 31, 1996 of Environmental filed
     with the Securities and Exchange Commission on April 15, 1997 (File No.
     0-10054).


                                       65
<PAGE>


(9)  Incorporated by reference and filed as an Exhibit to Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     October 3, 1997 (File No. 1-11871).

(10) Incorporated by reference and filed as an Exhibit to Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     February 23, 1998 (File No. 1-11871).

(11) Incorporated by reference and filed as an Exhibit to Registrant's Annual
     Report on Form 10-K for the fiscal year ended December 31, 1996 filed with
     the Securities and Exchange Commission on April 15, 1997 (File No.
     1-11871).

(12) Incorporated by reference and filed as on Exhibit to Registrant's Current
     Report on Form 8-K filed with the Securities and Exchange Commission on
     December 24, 1996 (File No. 1-11871).

(13) Incorporated by reference and filed as an Exhibit to the Registrant's
     Registration Statement on Form S-8 filed with the Securities and Exchange
     Commission on December 5, 1997 (File No. 333-41643).

(14) Incorporated by reference and filed as an Exhibit to Registrant's Annual 
     Report on Form 10-K for the fiscal year ended December 31, 1997 filed with 
     the Securities and Exchange Commission on March, 31, 1998 (File 
     No. 1-11871).

(15) Incorporated by reference and filed as an Exhibit to Registrant's Current 
     Report on Form 8-K filed with the Securities and Exchange Commission on
     January 5, 1999 (File No. 1-11871).


                                       66
<PAGE>


Reports on Form 8-K:

    On December 1, 1998, the Company filed with the SEC the Company's Current
Report on Form 8-K, dated November 25, 1998, with respect to the reversal by the
GAO of its September 15, 1998 dismissal of the Company's protest, and the GAO's
reinstatement of the protest lodged by the Company's joint venture, Teledyne
Commodore LLC, owing to major errors in the evaluation process. Such event was
reported in Item 5 of the Form 8-K and no financial statements were included in
such report.


                                       67
<PAGE>


                                   SIGNATURES

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

Date:  April 14, 1999               COMMODORE APPLIED TECHNOLOGIES, INC.


                                    By: /s/ Paul E. Hannesson 
                                        ----------------------------------------
                                        Paul E. Hannesson, Chairman of the Board
                                        and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                    <C>                                 <C>

/s/ Paul E. Hannesson                  Chairman  of the Board and          April 14, 1999
----------------------                 Chief Executive Officer   
Paul E. Hannesson                      (principal executive officer)


/s/ James M. DeAngelis                 Vice President-Finance and          April 14, 1999
----------------------                 Treasurer (principal financial
James M. DeAngelis                     officer)

/s/ William E. Ingram                  Vice President and Controller       April 14, 1999
----------------------
William E. Ingram

/s/ Kenneth L. Adelman                 Director                            April 14, 1999
----------------------
Kenneth L. Adelman, Ph.D.

/s/ Bentley J. Blum                    Director                            April 14, 1999
----------------------
Bentley J. Blum

/s/ Herbert A. Cohen                   Director                            April 14, 1999
----------------------
Herbert A. Cohen

/s/ David L. Mitchell                  Director                            April 14, 1999
----------------------
David L. Mitchell

/s/ Edward L. Palmer                   Director                            April 14, 1999
----------------------
Edward L. Palmer

/s/ William R. Toller                  Director                            April 14, 1999
----------------------
William R. Toller
</TABLE>


                                       68
<PAGE>



<TABLE>
<CAPTION>

                         INDEX TO FINANCIAL STATEMENTS

                                                                            Page No.
                                                                            --------
Financial Statements.
---------------------
<S>                                                                         <C>
Commodore Applied Technologies, Inc.

        Report of Independent Accountants..................................   F-1

        Consolidated Balance Sheets as of December 31, 1998 and 1997.......   F-2

        Consolidated Statements of Operations and Comprehensive Loss
               for the years ended December 31, 1998,
               1997 and 1996 ..............................................   F-3

        Consolidated Statements of Stockholders' Equity for the years
               ended December 31, 1998, 1997 and 1996......................   F-4

        Consolidated Statements of Cash Flows for the years ended
               December 31, 1998, 1997 and 1996............................   F-5

        Notes to Consolidated Financial Statements.........................   F-6

Teledyne-Commodore, LLC                                                       

        Independent Auditors' Report ......................................   F-32

        Balance Sheet as of December 31, 1998 and 1997 (Unaudited).........   F-33

        Statement of Operations for the years ended December 31, 1998,
               1997 (Unaudited) and the period from August 6, 1996
               (Date of Inception) to December 31, 1996 (Unaudited)........   F-34

        Statement of Members' Capital (Deficit) for the years ended
               December 31, 1998, 1997 (Unaudited) and the period from
               August 6, 1996 (Date of Inception) to December 31, 1996
               (Unaudited) ................................................   F-35

        Statement of Cash Flows for the years ended December 31, 1998,
               1997 (Unaudited) and the period from August 6, 1996
               (Date of Inception) to December 31, 1996 (Unaudited) .......   F-36

        Notes to Teledyne-Commodore, LLC Financial Statements .............   F-38


        
</TABLE>

         Except for the unconsolidated financial statements of
Teledyne-Commodore, LLC included herein, all other financial statement schedules
for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related
instructions or are inapplicable, and, therefore, have been omitted.



                                       69



<PAGE>

COMMODORE
APPLIED
TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997





<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
Commodore Applied Technologies, Inc. and Subsidiaries:


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Commodore Applied Technologies, Inc. and its subsidiaries (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and net cash outflows from operations 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 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty



PricewaterhouseCoopers LLP



Philadelphia, Pennsylvania
April 8, 1999



                                      F-1
<PAGE>



<TABLE>
<CAPTION>




COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------------------------

                                                                               1998       1997
                                     ASSETS
<S>                                                                            <C>        <C>
Current assets:
    Cash and cash equivalents (Note 2)                                         $  1,798   $ 13,151
    Accounts receivable, net (Notes 2 and 6)                                      3,142      3,064
    Notes and advances to related parties (Note 15)                                 130        866
    Inventory                                                                      --          360
    Restricted cash and certificates of deposit (Note 2)                           --          260
    Prepaid assets and other current receivables                                    271        403
                                                                               --------   --------
         Total current assets                                                     5,341     18,104
Other receivables                                                                  --           18
Investments and advances (Note 7)                                                  --          554
Property and equipment, net (Notes 2 and 8)                                       2,202      2,498
Other assets (Notes 2 and 5)
    Patents and completed technology, net of accumulated amortization of
      $296 and $238, respectively                                                   977      1,150
    Goodwill, net of accumulated amortization of $575 and $320, respectively      7,097      7,353
    Other                                                                          --           19
                                                                               --------   --------
                                                                                  8,074      8,522
                                                                               --------   --------
         Total Assets                                                          $ 15,617   $ 29,696
                                                                               ========   ========


                                 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable                                                           $    975   $  1,930
    Due to related parties                                                         --           55
    Current portion of long term debt                                                 5         27
    Line of credit (Note 10)                                                        361      1,199
    Other accrued liabilities (Note 9)                                            2,183      3,723
                                                                               --------   --------
         Total current liabilities                                                3,524      6,934
Long term debt                                                                     --           19
Notes payable to related parties (Notes 5 and 15)                                   185      3,568
                                                                               --------   --------
         Total Liabilities                                                        3,709     10,521
Minority interest in subsidiary (Note 5)                                           --        6,645
Commitments and contingencies (Note 16)
Redeemable Preferred Stock (Note 5)
    Series A Preferred Stock, par value $0.001 per share, 7% cumulative
    dividends, 80,000 shares authorized, 0 shares and 9,600 shares issued and
    outstanding at December 31, 1998 and 1997, respectively                        --          876
Stockholders' Equity:
    Convertible Preferred Stock, Series B, C and D, par value $.001 per
      share, 6% non-cumulative dividends, 65,000 shares authorized, 51,489
      shares issued and outstanding, at December 31, 1998 (Notes 5 and 13)         --         --
    Common Stock, par value $0.001 per share, 75,000,000
      shares authorized, 23,702,263 and 22,766,334 issued and outstanding,
      at December 31, 1998 and 1997, respectively                                    24         23
    Additional paid-in capital                                                   43,382     37,594
    Accumulated deficit                                                         (35,445)   (29,910)
    Accumulated other comprehensive income                                        3,947      3,947
                                                                               --------   --------
         Total Stockholders' Equity                                              11,908     11,654
                                                                               --------   --------
         Total Liabilities and Stockholders' Equity                            $ 15,617   $ 29,696
                                                                               ========   ========

      The accompanying notes are an integral part of the consolidated financial statements

</TABLE>

                                      F-2


<PAGE>

<TABLE>
<CAPTION>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
----------------------------------------------------------------------------------------------

                                                             1998       1997       1996
                                                           --------   --------   ---------
<S>                                                        <C>        <C>        <C>
Contract revenues (Note 2)                                 $ 17,470   $ 19,493   $  5,123
Costs and expenses:
    Cost of sales                                            15,421     16,325      4,136
    Research and development (Note 2)                         2,722      3,074      2,022
    General and administrative                                8,118     12,196      3,412
    Depreciation and amortization (Note 2)                    1,150      1,282        561
    Minority interest                                           300        (82)      --
                                                           --------   --------   --------
    Total costs and expenses                                 27,711     32,795     10,131
                                                           --------   --------   --------
Loss from operations                                        (10,241)   (13,302)    (5,008)

Gain on sale of affiliate (Note 5)                            4,664       --         --
Interest income                                                 337        745        477
Interest expense                                             (1,066)    (1,310)      (617)
Equity in losses of unconsolidated subsidiary                (2,383)    (1,827)      (495)
                                                           --------   --------   --------
Loss before income taxes and extraordinary item              (8,689)   (15,694)    (5,643)
Income tax benefit (Note 12)                                 (1,262)      --         --
                                                           --------   --------   --------
Net loss before extraordinary item                           (7,427)   (15,694)    (5,643)
Extraordinary item - gain on troubled debt restructuring,
    net of taxes of $1,262 (Note 5)                           1,892       --         --
                                                           --------   --------   --------
Net loss                                                     (5,535)   (15,694)    (5,643)
Other comprehensive income
    Gain on subsidiary's sale of common stock                  --        3,927       --
    Issuance of stock options                                  --         --           20
                                                           --------   --------   --------
Other comprehensive income                                     --        3,927         20
Income tax expense related to items of
    other comprehensive income                                 --         --         --
                                                           --------   --------   --------
Other comprehensive income, net of tax                         --        3,927         20
                                                           --------   --------   --------
Comprehensive loss                                         $ (5,535)  $(11,767)  $ (5,623)
                                                           ========   ========   ========
Net loss per share before extraordinary item - basic and
    diluted                                                $   (.32)  $   (.73)  $   (.31)
Extraordinary item per share - basic and diluted                .08       --         --
                                                           --------   --------   --------
Net loss per share - basic and diluted (Note 3)            $   (.24)  $   (.73)  $   (.31)
                                                           ========   ========   ========
Number of weighted average shares outstanding                23,194     21,844     18,100
                                                           ========   ========   ========

     The accompanying notes are an integral part of the consolidated financial statements

</TABLE>

                                      F-3

<PAGE>

<TABLE>
<CAPTION>


COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                       ACCUMULATED
                                                     PREFERRED STOCK      COMMON STOCK     ADDITIONAL    OTHER
                                                     ---------------    -----------------    PAID IN  COMPREHENSIVE    ACCUMULATED
                                                    SHARES    AMOUNT    SHARES     AMOUNT    CAPITAL     INCOME          DEFICIT
                                                    ------    ------    ------     ------    -------  -------------    -----------
<S>                                                  <C>      <C>        <C>       <C>     <C>        <C>              <C>
BALANCE, JANUARY 1, 1996                             19,372   $  19      147,012   $   2   $     10                    $  (8,573)
Conversion of note payable to principal
    shareholder to equity                                             14,852,988      14      2,986                          --
Redemption of predecessor's preferred stock         (19,372)    (19)        --        --        --                           --
Sale of Common Stock                                                   5,750,000       5     30,546                          --
Acquisition of remaining interests in Commodore
    Laboratories, Inc.                                                        --      --        706          --
Issuance of stock options                                                     --      --        --     $     20              --
Acquisition of Advanced Sciences, Inc.                                   900,000       1      2,249                          --
Acquisition of Commodore Separation
    Technologies Inc., Commodore CFC
    Technologies Inc., and CFC
    Technologies Inc., (Note 5)                                               --      --     (4,647)                         --
Issuance of warrants (Note 5)                                                 --      --      2,400                          --
Net loss                                                                      --      --        --                        (5,643)
                                                     ------   -----  -----------   -----    -------    --------         --------
BALANCE, DECEMBER 31, 1996                             --      --     21,650,000      22     34,250          20          (14,216)
Gain on subsidiary's sale of Common Stock                                     --      --        --        3,927              --
Warrants issued in connection with Redeemable
    Preferred Stock                                                           --      --         25                          --
Warrants issued in connection with convertible loan
    from parent                                                               --      --        660                          --
Beneficial conversion feature on convertible
    loan from parent                                                          --      --        750                          --
Beneficial conversion feature on Series A
    Preferred Stock                                                           --      --        216                          --
Sale of Common Stock, net of $1,198 liability
    for price reset                                                      700,000       1      1,143                          --
Preferred Stock dividends                                                     --      --       (240)                         --
Conversion of Series A Preferred Stock
    into Common Stock                                                    416,334      --        790                          --
Net loss                                                                      --      --         --                       (15,694)
                                                     ------   -----  -----------   -----   --------  -----------      -----------
BALANCE, DECEMBER 31, 1997                               --      --   22,766,334      23     37,594       3,947          (29,910)
Conversion of Series A Preferred Stock
    into Common Stock                                                    336,866      --        890
Issuance of Common Stock to satisfy
    price reset liability                                                599,063       1     1,197
Preferred stock dividends                                                     --      --       (14)
Warrant issued in connection with early paydown
    on intercompany note                                                      --      --       340
Warrant issued in connection with loan from parent                            --      --       527
Change in exercise price of warrant issued
    in connection with convertible loan from parent                           --      --       842
Change in exercise price of warrant issued
    in connection with debt restructuring                                     --      --         5
Issuance of Series B Convertible
    Preferred Stock (Note 5)                         20,909      --           --      --       813
Issuance of Series C Convertible
    Preferred Stock (Note 5)                         10,189      --           --      --       396
Issuance of Series D Convertible
    Preferred Stock (Note 5)                         20,391      --           --      --       792
Net loss                                               --        --           --      --        --                        (5,535)
                                                     ------   -----   ----------   -----   -------  -----------      -----------
Balance, December 31, 1998                           51,489   $  --   23,702,263   $  24   $43,382  $     3,947      $   (35,445)
                                                     ======   =====   ==========   =====   =======  ===========      ===========

     The accompanying notes are an integral part of the consolidated financial statements

</TABLE>

                                      F-4

<PAGE>
<TABLE>
<CAPTION>


COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                      YEAR ENDED DECEMBER 31,
                                                                                             --------------------------------------
                                                                                                1998          1997            1996
Cash flows from operating activities:
<S>                                                                                          <C>            <C>            <C>
    Net loss                                                                                 $ (5,535)      $(15,694)      $ (5,643)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation and amortization                                                           1,150          1,282            561
        Loss on disposition of property and equipment                                             601           --             --
        Equity in losses of unconsolidated subsidiary                                           2,340          1,827            495
        Write down of investment in unconsolidated subsidiary                                      43           --             --
        Provision for related party bad debt                                                     --              814           --
        Minority interest in subsidiary losses                                                    300            (82)          --
        Amortization of debt discount                                                             695            792           --
        Non-cash gain on sale of affiliate                                                     (4,664)          --             --
        Non-cash gain on early extinguishment of debt                                          (3,154)          --             --
        Other                                                                                      26            135           --
    Changes in assets and liabilities, net of sale of subsidiary (1998) and
      acquisitions (1996)
        Accounts receivable                                                                       (79)         4,085         (2,351)
        Inventory                                                                                (271)          (360)          --
        Prepaid assets                                                                            132            178           (190)
        Other accounts receivable                                                                  18             45            (63)
        Accounts payable and accrued liabilities                                                 (776)        (1,347)           153
        Other                                                                                      19            105           (121)
                                                                                             --------       --------       --------
            Net cash used in operating activities                                              (9,155)        (8,220)        (7,159)
                                                                                             --------       --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Equipment purchased or constructed                                                         (2,554)        (1,409)          (335)
    Patents acquired                                                                             (150)          (401)           (58)
    Purchase of Commodore Separation Technologies
      Inc., Commodore CFC Technologies, Inc. and
      CFC Technologies, Inc., net of cash acquired                                               --             --           (2,870)
    Advances to related parties                                                                   (96)          --           (1,527)
    Decrease (increase) in restricted cash                                                         50            410           (519)
    Cash held by subsidiary at the time of sale                                                  (715)          --             --
    Repayment of loans to affiliate, net of advances                                              752           (723)          (153)
    Contributions to affiliate                                                                 (2,377)        (1,000)        (1,000)
                                                                                             --------       --------       --------
            Net cash used in investing activities                                              (5,090)        (3,123)        (6,462)
                                                                                             --------       --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from sale of Common Stock                                                           --            2,341         30,551
    Proceeds from sale of Preferred Stock                                                        --            1,668           --
    Preferred stock dividends paid by subsidiary                                                 (300)          (438)          --
    Proceeds from subsidiary's sale of Common and Preferred Stock                                --           11,088           --
    Payments to principal shareholder                                                          (1,328)          --           (5,925)
    Borrowings from principal shareholder                                                       5,450          4,000           --
    (Repayments)/borrowings under the line of credit                                             (838)        (5,843)         1,361
    Payments on long term debt and capital leases                                                 (35)           (72)          (255)
    Repayment of related party accounts receivable and payable                                    (57)          (326)           (39)
                                                                                             --------       --------       --------
            Net cash provided by financing activities                                           2,892         12,418         25,693
                                                                                             --------       --------       --------

(Decrease) increase in cash and cash equivalents                                              (11,353)         1,075         12,072
Cash and cash equivalents, beginning of period                                                 13,151         12,076              4
                                                                                             --------       --------       --------

Cash and cash equivalents, end of period                                                     $  1,798       $ 13,151       $ 12,076
                                                                                             ========       ========       ========

Supplemental disclosure of cash flow information 
    Cash paid during the year for:
        Interest                                                                             $    289       $    446       $  1,442
                                                                                             --------       --------       --------

        Taxes                                                                                $   --         $   --         $   --
                                                                                             --------       --------       --------

          See Note 11 for non-cash investing and financing activities
     The accompanying notes are an integral part of the consolidated financial statements
</TABLE>

                                      F-5
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------
1. BACKGROUND

      Commodore Applied Technologies, Inc. and subsidiaries ("Applied"), is
      engaged in the destruction and neutralization of hazardous waste from
      other materials. Applied owns technologies related to the separation and
      destruction of polychlorinated biphenyls (PCBs) and chlorofluorocarbons
      (CFCs).

      Applied is currently working on the commercialization of these
      technologies through development efforts, licensing arrangements and joint
      ventures. Through Commodore Advanced Sciences, Inc. ("CASI"), formerly
      Advance Sciences, Inc., a subsidiary acquired on October 1, 1996, Applied
      has contracts with various government agencies and private companies in
      the United States and abroad. As some government contracts are funded in
      one year increments, there is a possibility for cutbacks as these
      contracts constitute a major portion of CASI's revenues, and such a
      reduction would materially affect the operations. However, management
      believes the subsidiary's existing client relationships will allow Applied
      to obtain new contracts in the future.

      Until September 1998, Applied was also engaged in the separation of
      hazardous waste through its 87% owned subsidiary, Commodore Separation
      Technologies, Inc. ("Separation"). Effective September 28, 1998, Applied
      sold its investments in Separation to Commodore Environmental Services,
      Inc. ("Commodore") (See Note 5).

  2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      LIQUIDITY

      The accompanying financial statements have been prepared under the
      assumption that Applied will continue as a going concern. Such assumption
      contemplates the realization of assets and the satisfaction of liabilities
      in the normal course of business. As shown in the financial statements for
      the years ended December 31, 1998, 1997 and 1996, Applied incurred losses
      exclusive of their gains on the sale of an affiliate and extraordinary
      item of $13,353, $15,694 and $5,643, respectively. Applied has also
      experienced net cash outflows from operating activities of $9,155, $8,220
      and $7,159 for the years ended December 31, 1998, 1997 and 1996,
      respectively. Presently, Applied does not have sufficient cash resources
      to meet its requirements in 1999. The financial statements do not include
      any adjustments that might be necessary should Applied be unable to
      continue as a going concern. Applied's continuation as a going concern is
      dependent upon its ability to generate sufficient cash flow to meet its
      obligations on a timely basis, to obtain additional financing as may be
      required, and ultimately to attain profitability. Potential sources of
      cash include new contracts, external debt, the sale of new shares of
      company stock or alternative methods such as mergers or sale transactions.
      No assurances can be given, however, that Applied will be able to obtain
      any of these potential sources of cash.

      PRINCIPLES OF CONSOLIDATION

      The consolidated financial statements include the accounts of Applied and
      its majority-owned subsidiaries. All significant intercompany balances and
      transactions have been eliminated. The investment in Teledyne-Commodore,
      LLC, a 50% owned joint venture with Teledyne Environmental, Inc., has been
      accounted for under the equity method of accounting as Applied does not
      have a

                                      F-6
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------


      controlling interest in the venture. Effective September 28, 1998, Applied
      sold its investment in Separation to Commodore (see Note 5).

      USE OF ESTIMATES

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

      REVENUE RECOGNITION

      Substantially all of Applied's revenues are generated by its subsidiary,
      CASI. Revenues consist of engineering and scientific services performed
      for the U.S. Government and prime contractors that serve the U.S.
      Government under a variety of contracts, most of which provide for
      reimbursement of cost plus fixed fees. Revenue under cost-reimbursement
      contracts is recorded using the percentage of completion method as costs
      are incurred and include estimated fees in the proportion that costs
      incurred to date bear to total estimated costs.

      Anticipated losses on contracts are provided for by a charge to income
      during the period such losses are first identified. Changes in job
      performance, job conditions, estimated profitability (including losses
      arising from contract penalty provisions) and final contract settlements
      may result in revisions to costs and income and are recognized in the
      period in which the revisions are determined.

      Direct and indirect contract costs are subject to audit by the Defense
      Contract Audit Agency ("DCAA"). Management does not expect these audits to
      materially affect the financial statements and have established
      appropriate allowances to cover potential audit disallowances. Contract
      revenues have been recorded in amounts which are expected to be realized
      upon final settlement. The DCAA has audited CASI's contracts through
      September 30, 1995. An allowance for doubtful accounts and potential
      disallowances has been established based upon the portion of billed and
      unbilled receivables that management believes may be uncollectible.

      Applied had revenues from one significant contract representing 62% and
      65% of total contract revenues for the years ended December 31, 1998 and
      1997, respectively. This contract is scheduled to end on September 30,
      2000.

      CASH AND CASH EQUIVALENTS

      Applied considers cash and highly liquid debt instruments with original
      maturities of three months or less at the date of purchase to be cash
      equivalents. Applied's investments in cash equivalents are diversified
      among securities with high credit ratings in accordance with Applied's
      investment policy.

      RESTRICTED CASH AND CERTIFICATES OF DEPOSIT

      Restricted cash at December 31, 1997 consisted of $260 held in interest
      bearing deposit accounts as collateral for the line of credit, collateral
      for a performance bond and as deposits on certain leased property.

                                      F-7
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      CONCENTRATION OF CREDIT RISK

      Applied maintains its cash in bank deposit accounts which, at times, may
      exceed federally insured limits. Applied has not experienced any losses in
      such accounts. With respect to trade receivables, Applied generally does
      not require collateral as the majority of Applied's services are performed
      for the U.S. Government and prime contractors that serve the U.S.
      Government. Applied believes it is not exposed to any significant credit
      risk on cash, cash equivalents and trade receivables.

      RISK AND UNCERTAINTY

      Applied's operations involving the separation and destruction of PCBs
      requires a permit from the EPA. Currently, Applied has a valid nationwide
      permit related to the treatment of PCBs in certain substances. Applied
      expects to obtain a permit for treatment of additional substances in June
      1999. The current permit expires in March 2001. If this permit is not
      renewed, Applied will not be permitted to service any contracts which
      utilize Applied's separation and destruction technology related to the
      treatment of PCB's. Presently, there is no information to suggest that the
      EPA will not renew the Applied's permit or grant them the requested
      revision.

      IMPAIRMENT OF LONG-LIVED ASSETS

      Applied reviews its long-lived assets for impairment whenever events or
      changes in circumstances indicate that the carrying amount of the assets
      may not be recoverable through undiscounted future cash flows. If it is
      determined that an impairment loss has occurred based on expected cash
      flows, such loss is recognized in the statement of operations.

      PROPERTY AND EQUIPMENT

      Property and equipment are recorded at cost. Improvements which
      substantially increase the useful lives of assets are capitalized.
      Maintenance and repairs are expensed as incurred. Upon retirement or
      disposal, the related cost and accumulated depreciation are removed from
      the respective accounts and any gain or loss is recorded in the Statement
      of Operations. Provisions for depreciation are computed on the
      straight-line method based on the estimated useful lives of the assets
      which range from 2-10 years.

      OTHER ASSETS

      Goodwill represents the fair value of securities issued plus the fair
      value of net liabilities assumed in connection with the acquisition of
      CASI (see Note 5). Goodwill is being amortized on a straight line basis
      over its estimated 30 year life. Completed technology represents certain
      technology and related patents acquired in connection with the purchase of
      third-party interests in Commodore Laboratories, Inc. ("Labs") (see Note
      5). Completed technology and patents are being amortized on a straight
      line basis over their estimated 7 and 17 year lives, respectively. Applied
      annually evaluates the existence of impairment on the basis of whether the
      goodwill, patents and completed technology are fully recoverable from the
      projected undiscounted net cash flows of the assets to which they relate.

      INCOME TAXES

      Income taxes are determined in accordance with Statement of Financial
      Accounting Standards ("SFAS") 109, which requires recognition of deferred
      income tax liabilities and assets for the

                                      F-8
<PAGE>
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      expected future tax consequences of events that have been included in the
      financial statements or tax returns. Under this method, deferred income
      tax liabilities and assets are determined based on the difference between
      financial statement and tax bases of assets and liabilities using enacted
      tax rates in effect for the year in which the differences are expected to
      reverse. SFAS 109 also provides for the recognition of deferred tax assets
      if it is more likely than not that the assets will be realized in future
      years.

      RESEARCH AND DEVELOPMENT

      Research and development expenditures are charged to operations as
      incurred.

      FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value of financial instruments is determined by reference to
      various market data and other valuation techniques as appropriate.
      Accounts receivable, notes receivable, cash equivalents, long term debt
      and the line of credit are financial instruments that are subject to
      possible material market variations from the recorded book value. The fair
      value of these financial instruments approximate the recorded book value
      as of December 31, 1998 and 1997.

      RECLASSIFICATIONS

      Certain prior year amounts have been reclassified to conform with the
      current year presentation.

      STOCK-BASED COMPENSATION

      Compensation costs attributable to stock option and similar plans are
      recognized based on any difference between the quoted market price of the
      stock on the date of the grant over the amount the employee is required to
      pay to acquire the stock (in the intrinsic value method under Accounting
      Principles Board Opinion 25). SFAS 123, "Accounting for Stock-Based
      Compensation," requires companies electing to continue to use the
      intrinsic value method to make pro forma disclosures of net income and
      earnings per share as if the fair value based method of accounting had
      been applied. Applied has adopted the disclosure only provisions of SFAS
      123.

      COMPREHENSIVE INCOME

      Effective January 1, 1998 Applied adopted the provisions of SFAS 130,
      "Reporting Comprehensive Income." SFAS 130 establishes standards for
      reporting and display of comprehensive income and its components in the
      financial statements. The 1997 and 1996 financial statements have been
      restated to reflect the application of SFAS 130.

      SEGMENT INFORMATION

      In 1998, Applied adopted SFAS 131, "Disclosures about Segments of an
      Enterprise and Related Information." SFAS 131 provides that the internal
      organization that is used by management for making operating decisions and
      assessing performance is the source of Applied's reportable segments. SFAS
      131 also requires disclosure about products and services, geographic areas
      and major customers. The adoption of SFAS 131 did not affect the results
      of operations or financial position of Applied (see Note 4).

      NEW ACCOUNTING STANDARDS

      In June 1998, the Financial Accounting Standard Board issued SFAS 133,
      "Accounting for Derivative Instruments and Hedging Activities," which is
      effective for fiscal years beginning after June 15, 1999. SFAS 133 is not
      expected to have a material effect on the financial position or results of
      operations of Applied.

                                      F-9
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

3. EARNINGS PER SHARE

      All earnings per share amounts reflect the implementation of SFAS 128
      "Earnings per Share". Basic earnings per share are computed by dividing
      net income available to common shareholders by the weighted average number
      of shares outstanding during the period. Diluted earnings per share are
      computed using the weighted average number of shares determined for the
      basic computations plus the number of shares of that would be issued
      assuming all contingently issuable shares having a dilutive effect on
      earnings per share were outstanding for the period. Loss per share has
      been computed based on the number of shares outstanding as though
      capitalization, through the contribution of a $3,000 note payable to the
      principal stockholder had been exchanged for 15,000,000 shares of
      Applied's on January 1, 1995.

<TABLE>
<CAPTION>

                                                                                           Year Ended December 31,
                                                                                   ----------------------------------------

                                                                                 1998                 1997               1996
                                                                                  (Dollars in thousands, except per share data)
                                                                             -------------------------------------------------------

<S>                                                                          <C>                  <C>                  <C>
Net loss before extraordinary item                                           $     (7,427)        $    (15,694)        $     (5,643)
Preferred stock dividends                                                             (14)                (240)                --
Dividends on Series A Preferred Stock (not declared)                                 --                    (26)                --
                                                                             ------------         ------------         ------------

Net loss applicable to common shareholders before
   extraordinary item                                                              (7,441)             (15,960)              (5,643)
Extraordinary item - gain on troubled debt restructuring                            1,892                 --                   --
                                                                             ------------         ------------         ------------

Net loss available to common shareholders                                    $     (5,549)        $    (15,960)        $     (5,643)
                                                                             ============         ============         ============

Weighted average common shares outstanding (basic)                             23,194,000           21,844,000           18,100,000

Series A Convertible Preferred Stock (Note 13)                                       --                    (*)                 --
Series B Convertible Preferred Stock (Note 13)                                        (*)                 --                   --
Series C Convertible Preferred Stock (Note 13)                                        (*)                 --                   --
Series D Convertible Preferred Stock (Note 13)                                        (*)                 --                   --
Employee Stock Options (Note 14)                                                      (*)                  (*)                  (*)
Warrants issued in connection with various transactions
   (Note 14)                                                                          (*)                  (*)                  (*)
                                                                             ------------         ------------         ------------

Weighted average common shares outstanding (diluted)                           23,194,000           21,844,000           18,100,000
                                                                             ------------         ------------         ------------

Net loss per share before extraordinary item - basic and
   diluted                                                                   $       (.32)        $      (0.73)        $      (0.31)
Extraordinary item per share - basic and diluted                                      .08                 --                   --
                                                                             ------------         ------------         ------------

Net loss per share - basic and diluted                                       $       (.24)        $      (0.73)        $      (0.31)
                                                                             ============         ============         ============

</TABLE>

(*)   Due to Applied's loss from continuing operations in 1998, 1997 and 1996,
      the incremental shares issuable in connection with these instruments are
      anti-dilutive and accordingly not considered in the calculation.

                                      F-10

<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

4. SEGMENT INFORMATION

      Using the guidelines set forth in SFAS No. 131, "Disclosures About
      Segments of an Enterprise and Related Information," Applied has identified
      three reportable segments in which it operates based on the services it
      provides. The reportable segments are as follows: Commodore Advanced
      Sciences ("CASI"), which primarily provides various engineering, legal,
      sampling and public relations services to Government agencies on a cost
      plus basis; Solution, which is developing and constructing equipment to
      treat mixed and hazardous waste through a patented process using sodium
      and anhydrous ammonia; and through September 28, 1998, Separation, which
      provides water and contaminant separation by use of a patented process.
      Common overhead costs are allocated between segments based on a record of
      time spent by executives. Applied evaluates segment performance based on
      the segment's net income (loss). The accounting policies of the segments
      are the same as those described in the summary of significant accounting
      policies. Applied's foreign and export sales and assets located outside of
      the United States are not significant. Segment information was not kept,
      nor is it available for 1996. Summarized financial information concerning
      Applied's reportable segments is shown in the following table. Effective
      September 28, 1998, Applied sold its investment in Separation to
      Commodore, and accordingly, the summarized information for Separation is
      only included through the date of sale.


                                      F-11
<PAGE>

<TABLE>
<CAPTION>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

1998
----                                                                                   Separation
                                                                                        (Through                          Corporate
                                                                                       September 28,                       Overhead
                                                          Total            CASI            1998)          Solution         & Other

<S>                                                    <C>              <C>              <C>              <C>              <C>
Revenue                                                $ 17,470         $ 17,346         $     18         $   --           $    106

Costs and expenses:
   Cost of sales                                         15,421           14,986             --                375               60
   Research and development                               2,722             --              1,169            1,320              233
   General and administrative                             8,118            1,835            1,896              440            3,947
   Depreciation and amortization                          1,150              103              287              422              338
   Minority interest                                        300             --                300             --               --
                                                       --------         --------         --------         --------         --------

       Total costs and expenses                          27,711           16,924            3,652            2,557            4,578
                                                       --------         --------         --------         --------         --------

Income (loss) from operations                           (10,241)             422           (3,634)          (2,557)          (4,472)

   Gain on sale of affiliate                              4,664                                                               4,664
   Interest income                                          337                1               94                               242
   Interest expense                                      (1,066)            (125)                                              (941)
   Equity in losses of
     unconsolidated subsidiary                           (2,383)            --               --               --             (2,383)
   Income tax benefit                                    (1,262)            --               --               --              1,262
                                                       --------         --------         --------         --------         --------

Income (loss) before
   extraordinary item                                    (7,427)             298           (3,540)          (2,557)          (1,628)

Extraordinary item - gain on
   troubled debt restructuring                            1,892             --               --               --              1,892
                                                       --------         --------         --------         --------         --------

Net (loss) income                                      $ (5,535)        $    298         $ (3,540)        $ (2,557)        $    264
                                                       ========         ========         ========         ========         ========

Total assets                                           $ 15,617         $  3,506         $   --           $  1,932         $ 10,179
                                                       ========         ========         ========         ========         ========

Expenditures for long-lived assets                     $  2,704         $    135         $    762         $  1,669         $    138
                                                       ========         ========         ========         ========         ========
</TABLE>

                                      F-12
<PAGE>
<TABLE>
<CAPTION>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

1997
----                                                                                                                       Corporate
                                                                                                                            Overhead
                                                             Total            CASI        Separation       Solution          & Other

<S>                                                        <C>             <C>             <C>             <C>             <C>
Revenue                                                    $ 19,493        $ 19,468        $   --          $   --          $     25

Costs and expenses:
   Cost of sales                                             16,325          15,763            --               358             154
   Research and development                                   3,074            --             1,440           1,189             495
   General and administrative                                12,196           3,019           3,697           1,766           3,714
   Depreciation and amortization                              1,282             103             233             567             379
   Minority interest                                            (82)           --              --              --               (82)
                                                           --------        --------        --------        --------        --------

       Total costs and expenses                              32,795          18,885           5,370           3,880           4,660
                                                           --------        --------        --------        --------        --------

Income (Loss) from operations                               (13,302)            583          (5,370)         (3,880)         (4,635)

   Interest income                                              745            --               294              32             419
   Interest expense                                          (1,310)           (437)             (8)           --              (865)
   Equity in losses of
     unconsolidated subsidiary                               (1,827)           --              --              --            (1,827)
   Income taxes                                                --              --              --              --              --
                                                           --------        --------        --------        --------        --------

Net income (loss)                                          $(15,694)       $    146        $ (5,084)       $ (3,848)       $ (6,908)
                                                           ========        ========        ========        ========        ========

Total assets                                               $ 29,696        $  3,916        $  6,396        $    984        $ 18,400
                                                           ========        ========        ========        ========        ========

Expenditures for long-lived assets                         $  1,810        $     (0)       $  1,226        $    427        $    157
                                                           ========        ========        ========        ========        ========

</TABLE>


                                      F-13
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------
   5.   SIGNIFICANT TRANSACTIONS

      1998
      ----

      INTERCOMPANY NOTE

      In February, 1998, Commodore provided a $5,450 uncollaterized loan to
      Applied, evidenced by Applied's 8% non-convertible note (the "1998
      Intercompany Note"). Pursuant to the terms of the 1998 Intercompany Note,
      interest on the unpaid principal balance was payable at the rate of 8% per
      annum semiannually in cash. The unpaid principal amount of the 1998
      Intercompany Note was due and payable, together with accrued and unpaid
      interest, on December 31, 1999, or earlier under certain circumstances.

      In connection with the loan, Applied amended a five-year warrant to
      purchase 7,500,000 shares of Applied Common Stock issued to Commodore on
      December 2, 1996 to, among other things, reduce the exercise price of the
      warrant from $15.00 per share to $10.00 per share. In addition, Applied
      issued to Commodore an additional five-year warrant to purchase 1,500,000
      shares of Applied at an exercise price of $10.00 per share. The new
      warrant and the modification of the existing warrant issued in connection
      with this transaction were valued at $1,369 in the aggregate and recorded
      as additional paid-in capital. Through the date of the extinguishment of
      this note, the discount associated with this allocation was being
      recognized using the effective interest rate method over the term of the
      loan. Amortization of the discount for 1998 was $542.

      As of September 28, 1998, the balance and carrying values of the 1997
      (described in succeeding paragraphs) and 1998 Intercompany Notes were as
      follows:


                                    1997 NOTE    1998 NOTE      TOTAL
                                     
      Principal balance               $2,000       $4,622       $6,622
      Accrued interest                    40           94          134
                                      ------       ------       ------
      Total face value                 2,040        4,716        6,756
 
      Unamortized discount              (269)        (827)      (1,096)
                                      ------       ------       ------
      Carrying value                  $1,771       $3,889       $5,660
                                      ======       ======       ======


      On September 28, 1998, Applied repaid all amounts owed to Commodore by
      exchanging i) its 87% interest in the Common Stock of Separation, ii)
      20,909 shares of newly created Series B Convertible Preferred Stock, iii)
      10,189 shares of newly created Series C Convertible Preferred Stock, iv)
      20,391 shares of newly created Series D Convertible Preferred Stock, v) a
      $357 receivable from Separation and vi) a modification of the new warrants
      granted in connection with the 1998 Intercompany Notes reducing the
      exercise price to $1.50. The value of the consideration given was less
      than the carrying amount of the Intercompany Notes. Accordingly, a $3,154
      gain on troubled debt restructuring was recognized as follows:

                                      F-14
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      Carrying value of Intercompany Notes                              $5,660

      Value of 87% interest in and receivable from Separation    500
      Value of Series B Convertible Preferred Stock              813
      Value of Series C Convertible Preferred Stock              396
      Value of Series D Convertible Preferred Stock              792
      Value of modification of warrant                             5

      Value of consideration given                                       2,506
                                                                       --------

      Gain on troubled debt restructuring                               $3,154
                                                                       --------

      The value of the 87% interest in and receivables from Separation,
      Preferred Stock and modification of the warrant were determined by
      independent appraisal.

      The gain on troubled debt restructuring, net of applicable taxes, has been
      recorded as an extraordinary item on the accompanying statement of
      operations.

      As of the date of the transaction, the carrying value of Applied's 87%
      interest in the Common Stock of Separation and Applied's $357 receivable
      from Separation was $(4,164). Accordingly, a $4,664 gain (representing the
      difference between the book value and the fair value of Applied's
      investment in Separation) on the sale of affiliate was also recorded in
      connection with the transaction.

      1997 AND 1996
      -------------

      REDEEMABLE PREFERRED STOCK (SERIES A PREFERRED STOCK)

      In August 1997, Applied sold 18,000 shares of its Series A Preferred Stock
      for an aggregate purchase price of $1,800. The Series A Preferred Stock
      had a liquidation preference of $100 per share plus accumulated and unpaid
      dividends (the "Liquidation Preference") and paid a 7% annual cumulative
      dividend. The Series A Preferred Stock was convertible by investors into
      that number of shares of Common Stock equal to the Liquidation Preference
      divided by the Conversion Price. The Conversion Price was defined as the
      amount equal to the lesser of (i) $4.64, representing 100% of the average
      of the closing sale prices of the Common Stock for the five consecutive
      trading days preceding the issuance date of the Series A Preferred Stock,
      or (ii) 88% of the average of the closing sale prices of the Common Stock
      for the five consecutive trading days immediately prior to the date of
      conversion (beneficial conversion feature). The Conversion Price was
      subject to certain floors based upon the trading price of Applied Common
      Stock.

      The Series A Preferred Stock was subject to mandatory redemption at the
      Liquidation Preference upon certain events, including (i) the average
      share price for any sixty consecutive days was less than $2.00, (ii)
      Applied's Common Stock was not listed on any exchange or over-the-counter
      market for fifteen consecutive trading days, or (iii) Applied was required
      to obtain stockholder approval under exchange regulations in order to
      issue shares of Common Stock and failed to obtain such approval within
      ninety calendar days.

                                      F-15
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      After cash transaction costs of $132, Applied received net proceeds of
      $1,668 from the sale of the Series A Preferred Stock. Of this total, $25
      was allocated to paid-in capital related to warrants issued to the
      placement agent in connection with the transaction and $216 was allocated
      to paid-in capital related to the beneficial conversion feature. The
      remaining $1,427 was recorded as mandatorily redeemable preferred stock.
      The $216 beneficial conversion feature was charged to income available to
      common shareholders over the earliest possible conversion period of five
      months.

      In December 1997, stockholders owning 8,400 shares of the Series A
      Preferred Stock elected to convert their shares to Common Stock based upon
      conversion prices ranging from $2.00 to $2.29 per share. At the time of
      conversion, Applied recorded $24 of preferred dividends related to the
      accumulated and unpaid dividends on shares converted. The conversions
      resulted in the issuance of 416,000 new shares of Common Stock valued at
      $790, the carrying value of the underlying Preferred Stock at the time of
      conversion.

      The $876 December 31, 1997 carrying value was not accreted to the $986
      liquidation value because of the uncertainty associated with the
      redemption features.

      In 1998, the remaining 9,600 shares of Series A Preferred Stock were
      converted into 337,000 shares of Common Stock based upon conversion prices
      ranging from $2.48 to $3.69 per share. At the time of conversion, Applied
      recorded $14 of preferred dividends related to the accumulated and unpaid
      dividends on shares converted.

      INTERCOMPANY CONVERTIBLE NOTE

      In September 1997, Commodore provided a $4,000, 8% convertible
      uncollateralized loan to Applied (the "1997 Intercompany Note"). Interest
      on the 1997 Intercompany Note was payable quarterly and the unpaid
      principal amount was payable on August 31, 2002. As previously discussed,
      this Note was extinguished in September 1998. Commodore had the right to
      convert the loan into shares of Common Stock at a conversion price of
      $3.89 per share, a 16% discount from the market price at the date of
      closing (beneficial conversion feature), subject to adjustment based on a
      number of factors. In connection with the 1997 Intercompany Note, Applied
      issued Commodore a five-year warrant to purchase 1,000,000 shares of
      Common Stock at an exercise price of $5.03 per share, 109% of the market
      price on the date of closing.

      Applied recorded the $750 value of the beneficial conversion feature as
      additional paid-in capital, offset by an immediate recognition of the $750
      as interest expense. The warrants issued in connection with this
      transaction were valued at $660 in the aggregate and recorded as
      additional paid-in capital. Through the date of extinguishment, the
      original issue discount associated with this allocation was recognized
      using the effective interest rate method over the term of the loan.
      Amortization of this discount for 1998 and 1997 totaled $19 and $42,
      respectively.

                                      F-16
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      PRIVATE PLACEMENT OF COMMON STOCK

      In October 1997, Applied sold 700,000 shares of Common Stock (of which
      600,000 shares were sold at $3.68 per share and 100,000 shares were sold
      at $3.93 per share) for an aggregate purchase price of approximately
      $2,600. Transaction costs on this sale totaled $256. Additionally,
      affiliates of the placement agent received warrants to purchase an
      aggregate of 60,000 shares of Common Stock at $3.675 per share.

      The sales agreement related to these shares specified certain twelve-month
      price reset provisions in the event that new Common shares were sold or
      issued in connection with the exercise of warrants at a per share price
      less than the original sales price. At the end of the twelve-month period,
      the price reset features expired. At the option of the Company, the
      liability under the price reset feature could be satisfied by issuing new
      Common Stock (at a price equal to the reset price) up to an aggregate of
      5% of the total Common Stock of the Company (including the original shares
      and the shares issued in connection with the price reset); any excess
      price reset liabilities were required to be paid in cash.

      At December 31, 1997, the aggregate price reset liability was $1,198. This
      amount was recorded as an adjustment to the original purchase price and
      accrued as a liability. In 1998, Applied issued 599,063 additional shares
      of Common Stock in fulfillment of this liability.

      COMMODORE SEPARATION TECHNOLOGIES, INC.

      On December 2, 1996 Applied purchased Separation, Commodore CFC
      Technologies, Inc. ("CCFC") and CFC Technologies, Inc. ("CFC") from
      Commodore for $5,400, consisting of $3,000 in cash and warrants to
      purchase 7,500,000 shares of Applied's Common Stock at an exercise price
      of $15.00 per share and with termination date of December 2, 2003. These
      warrants were amended in February 1998 (see 1998 Intercompany Note). The
      acquisition was accounted for as a transaction between entities under
      common control. Applied recorded its investment in Separation, CFC and
      CCFC as $753, equal to Commodore's historical basis in these subsidiaries.
      The difference between this amount and the $5,400 paid to Commodore was
      recorded as a direct reduction in the paid-in capital of Applied.

      In April 1997, Separation completed an initial public offering of its
      Common and Preferred equity securities from which it received net proceeds
      of approximately $6,109 and $4,978, respectively. This offering reduced
      Applied's equity ownership in Separation from 100 percent to 87 percent.
      Applied's $3,927 gain on this transaction was recorded as a direct
      increase in Applied's paid-in capital because Separation is a development
      stage company.

      Minority interests in Separation at December 31, 1997 consisted of the
      Separation Preferred Stock and warrants to purchase Separation Common
      Stock, both of which were sold in Separation's initial public offering. By
      December 31, 1997, all other minority interests in Separation's Common
      Equity had been reduced to zero, resulting in 100% of the losses of
      Separation being absorbed by Applied. For the period January 1, 1998 to
      September 28, 1998 and the year ended December 31, 1997, Separation paid
      dividends to its Preferred shareholders of $300 and $438, respectively.


                                      F-17
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      ACQUISITIONS AND REORGANIZATIONS

      On March 29, 1996, Commodore, Applied's sole shareholder at that date, in
      exchange for the issuance of 15,000,000 shares of Applied Common Stock,
      capitalized Applied, as follows: (1) contributed 90.05 percent of the
      outstanding common stock of Commodore Laboratories, Inc. ("Labs") and 100
      percent of the outstanding capital stocks of Commodore Technologies
      ("Technologies"), Commodore Government Environmental ("Government"),
      Commodore Remediation Technologies ("Remediation"), and Sandpiper
      Properties ("Sandpiper"), (2) assigned all rights, titles, and interests
      in its contracts, assets, and properties related to AGENT 313 to Applied,
      and (3) contributed $3,000 of a promissory note to Applied for the purpose
      of funding the development of AGENT 313. This exchange (along with the
      July 1996 transaction described in the second succeeding paragraph) were
      recorded by Applied at Commodore's historical book value.

      In June of 1996, Applied made a public offering of 5,750,000 shares of its
      $.001 par value common stock for $6.00 per share. Along with each share
      was one detachable warrant valued at $.10, which entitles its owner to
      purchase one share of Applied stock at the price of $8.40 per share for
      the period from June 28, 1997 until June 28, 2001. These warrants are
      redeemable by Applied for $.01 per share if the average trading price of
      Applied stock for any 20 day period is greater than or equal to $18.00 per
      share. Net proceeds from the offering were $30,551.

      In July 1996, Commodore acquired the remaining 9.95% of Labs and
      contributed its investment to Applied. The excess of Commodore's purchase
      price of $3,000 over the $2,294 fair value of the net assets acquired has
      been recorded as completed technology and is being amortized over 7 years.

      On October 1, 1996, Applied acquired all of the outstanding voting common
      stock of Commodore Advanced Sciences, Inc. ("CASI") formerly Advanced
      Sciences, Inc. and A.S. Environmental, Inc. ("ASE"). This transaction also
      included the purchase of ASI's foreign subsidiaries, Advanced Sciences
      Integrada, S.A., ("ASI Argentina") and Advanced Sciences Integrated
      Mexico, S.A., ("ASI Mexico"). The acquisition was recorded using the
      purchase method of accounting. Accordingly, the results of operations of
      CASI have been included in those of Applied for the period subsequent to
      the date of acquisition.

      In consideration for the CASI and ASE stock, Applied issued 900,000 shares
      of common stock to CASI and ASE shareholders, with a fair value of $2,250.
      The fair value of the underlying net liabilities of CASI totaled $5,423,
      resulting in $7,673 of goodwill associated with the acquisition.


                                      F-18
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

6. RECEIVABLES

      The components of Applied's trade receivable are as follows as of December
      31, 1998 and 1997:

<TABLE>
<CAPTION>

                                                                          1998       1997
Contract receivables:
<S>                                                                     <C>        <C>
    Amounts billed                                                      $ 3,132    $ 3,285
    Retainages                                                              142        168
    Unrecovered costs and estimated profits
      subject to future negotiation - not billed                            (14)       (52)
                                                                        -------    -------

                                                                          3,260      3,401
    Less: Allowance for doubtful accounts and potential disallowances       118        416
                                                                        -------    -------

    Contract receivable - net                                             3,142      2,985
    Other receivables, net of allowances of $45 in 1997                    --           79
                                                                        -------    -------

       Total receivables - net                                          $ 3,142    $ 3,064
                                                                        =======    =======
</TABLE>


      The balances billed but not paid by customers pursuant to retainage
      provisions are due upon completion and acceptance of the contracts.

      Unbilled receivables include current and prior year costs and fees
      billable upon specified events (including settlement of prior years'
      government audits). All such amounts have been classified as current
      assets although certain amounts may not be collected within one year
      depending on when the conditions are satisfied.

      Substantially all of trade receivables are pledged to collateralize its
      line of credit (see Note 10).

7. OTHER INVESTMENTS

      On August 6, 1996, Applied and Teledyne Environmental, Inc. formed a joint
      venture named Teledyne-Commodore, LLC ("the LLC") and signed a licensing
      agreement for one of Applied's patented remediation technologies. The LLC
      was funded by a capital contribution of $1,000 in cash from each of
      Teledyne and Applied on October 1, 1996. Further capital contributions are
      required only when the Board of Members determines additional
      contributions are necessary or advisable. In February 1997 and pursuant to
      the agreement, Applied contributed an additional $1,000 to the LLC. In
      1998, Applied contributed an additional $2,581 to the LLC. This investment
      is accounted for under the equity method.


                                      F-19
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      Summarized information of the LLC's net assets and results of operations
      was as follows at December 31, 1998 and 1997:

                                                       1998      1997

Current assets                                       $  2,049   $ 1,701
Non-current assets                                      1,549     1,312
Current liabilities                                     3,873     1,771
Revenues                                                1,788       510
Expenses                                                6,467     4,163

Investment in LLC:
    Opening balance                                  $    554   $   658
    Capital contribution                                2,581     1,000
    Advances to LLC, net of repayments                   (752)      723
    Loss reserve                                          (43)       --
    Equity in net loss                                 (2,340)   (1,827)
                                                     ---------  --------

    Net amount                                       $     --   $   554
                                                     ---------  --------

      Due to uncertainties over the success of various claims made by the LLC
      against various government agencies, Applied recorded a reserve of $43 in
      the fourth quarter of 1998 to reduce its investment to $0 at December 31,
      1998. Applied will not approve or fund further LLC capital calls without
      adequate assurance that these monies will be recoverable and unless
      Applied has adequate resources to pay the capital call.

                                      F-20
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

8. PROPERTY AND EQUIPMENT

      Property and equipment consist of the following:
<TABLE>
<CAPTION>

                                                              AVERAGE        DECEMBER 31,
                                                             USEFUL LIFE    1998      1997

<S>                                                           <C>       <C>       <C>
       Machinery and equipment                                   10        $1,119    $2,438
       Furniture and fixtures                                     5            61       277
       Computer equipment                                         4           359       503
       Leasehold improvements                                     5            44       258
       Equipment construction in progress                                   1,208         -
                                                                          -------   -------

                                                                            2,791     3,476

       Less: accumulated depreciation and amortization                        589       978
                                                                           -------   -------

           Total property and equipment                                     $2,202    $2,498
                                                                           =======   =======
</TABLE>

9. OTHER ACCRUED LIABILITIES

      Other accrued liabilities consist of the following:

                                                              1998      1997

Price reset feature of Common Stock                          $  --    $1,198
Compensation and employee benefits                             718    1,711
Severance payments                                              486       --
Loss reserve                                                    405      283
Other                                                           574      531
                                                             ------   ------

                                                             $2,183   $3,723
                                                             ======   ======

10. LINE OF CREDIT

      At December 31, 1998 and 1997, CASI had a $361 and $1,199 outstanding
      balance, respectively, on various revolving lines of credit. In August
      1998 CASI refinanced their line of credit. The line of credit is not to
      exceed 75% of eligible receivables or $2,000 and is due August 4, 2000
      with interest payable monthly at prime plus 1.5 percent (9.25 percent as
      of December 31, 1998). The credit line is collateralized by the assets of
      CASI and is guaranteed by Applied. The line of credit contains certain
      financial covenants and restrictions including minimum ratios that CASI
      must satisfy.


                                      F-21
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

11. NON-CASH INVESTING AND FINANCING ACTIVITIES

      1998
      ----

      In February 1998, Commodore provided a $5,450 loan to Applied. In
      connection with the loan, Applied issued new and amended warrants valued
      at $1,369 in the aggregate and recorded as additional paid-in capital
      (Note 5).

      In February 1998, Applied transferred a receivable from an affiliate with
      a carrying value of $830 to Commodore for debt reduction. In connection
      with the transaction, Applied issued a warrant to Commodore with a fair
      value of $340 which was recorded as additional paid-in capital (Note 5).

      In September 1998, Applied repaid Intercompany Notes with a carrying value
      of $5,660 through the exchange of 87% interest in the Common Stock of
      Separation and receivable from Separation with a value of $500, issuance
      of Preferred Stock with a value of $2,001 and modification of a warrant
      with a value of $5 (Note 5).

      In October 1998, Applied satisfied a price reset liability with an
      aggregate balance of $1,198, recorded as an accrued liability at December
      31, 1997, through the issuance of additional shares of Common Stock 
      (Note 5).

      In 1998, 9,600 shares of Series A Preferred Stock with an aggregate value
      of $876 were converted into Common Stock (Note 5).

      1997
      ----

      In August 1997, Applied sold 18,000 shares of Series A Preferred Stock for
      net proceeds of $1,668. Of this total, $242 was allocated to additional
      paid-in capital related to the fair value of warrants issued and the
      beneficial conversion feature. The remaining $1,427 was recorded as
      mandatorialy redeemable preferred stock. As of December 31, 1997, 8,400
      shares of Series A Preferred Stock with an aggregate value of $550 were
      converted into Common Stock (Note 5).

      In September 1997, Commodore provided a $4,000 loan to Applied. In
      connection with the loan, Applied issued a new warrant valued at $660 in
      the aggregate which was recorded as additional paid-in capital. In
      addition, Applied recorded $750 in connection with a beneficial conversion
      feature of the

                                      F-22
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      loan as additional paid-in capital, offset by an immediate recognition of
      the $750 as interest expense (Note 5).

      In October 1997, Applied sold 700,000 shares of Common Stock that included
      a price reset feature. The aggregate price reset liability of $1,198 was
      recorded as an adjustment to the original purchase price and an accrued
      liability (Note 5).

12. INCOME TAXES

      Applied provides for deferred income taxes on temporary differences which
      represent tax effects of transactions reported for tax purposes in periods
      different than for book purposes.

      The provision (benefit) for income taxes for the years ended December 31,
      1998, 1997 and 1996 are as follows:


                                                 1998      1997       1996

      Current tax benefit                    $(4,244)   $(6,136)   $(1,372)
      Deferred tax expense                     2,982      6,136      1,372
                                             -------    -------    -------

      Provision (benefit) for income taxes
         before extraordinary item            (1,262)      --         --

      Tax from extraordinary item              1,262       --         --
                                             -------    -------    -------

      Provision (Benefit) for income taxes   $  --      $  --      $  --
                                             =======    =======    =======

                                      F-23
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      The provision for income taxes for the year ended December 31 results in
      an effective tax rate which differs from federal income tax rates as
      follows:

                                                      1998      1997       1996

Expected tax benefit at federal statutory rate     $(1,882)   $(5,336)  $(1,919)
State income tax benefit, net of federal
   income tax benefit                                 (332)      (942)     (339)
Loss on sale of subsidiary                          (2,866)      --        --  
Loss of NOLs in connection with sale of affiliate    3,689       --        --  
Change in valuation allowance                          476      5,694     2,213
Interest accretion                                     796         86      --  
Beneficial conversion                                 --          300      --  
Other                                                  119        198        45
                                                   -------    -------   -------

Income tax benefit                                 $  --      $  --     $  --
                                                   =======    =======   =======

      The components of the net deferred income tax as of December 31, are as
      follows:

                                               1998        1997         1996
Components of current deferred taxes, net:
    Reserve for uncollectible receivables
      and potential disallowances            $    480    $    492    $    925
    Net operating loss carryforward            12,254      11,700       5,573
    In process technology                         903         969         969
                                             --------    --------    --------

                                               13,637      13,161       7,467
Valuation allowance                           (13,637)    (13,161)     (7,467)
                                             --------    --------    --------

Net deferred taxes                           $   --      $   --      $   --
                                             ========    ========    ========

      Applied conducts a periodic examination of its valuation allowance.
      Factors considered in the evaluation include recent and expected future
      earnings and Applied's liquidity and equity positions. As of December 1998
      and 1997, Applied has established a valuation allowance for the entire
      amount of net deferred tax assets.

      Applied has net operating loss ("NOL") carryforwards at December 31, 1998
      of approximately $31,000 which expire in years 2000 through 2018. The NOL
      carryforwards are limited to use against future taxable income due to
      changes in ownership and control.


                                      F-24
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

13. STOCKHOLDERS' EQUITY

      In 1997, Applied amended its Certificate of Incorporation authorizing up
      to 10,000,000 shares of Preferred Stock, $.001 par value and increasing
      authorized shares of Common Stock from 50,000,000 to 75,000,000.

      CONVERTIBLE PREFERRED STOCK

      Effective September 28, 1998, Applied authorized and issued three new
      series of Preferred Stock. Series B, C and D Preferred Stock were
      authorized up to 25,000, 15,000 and 25,000 shares, respectively, all at
      $.001 par value.

      Each of the Series B, C and D Preferred Stock is convertible into common
      shares of Applied; each has a par value of $.001 and a stated value of
      $100 per share; each carries a dividend rate of $6.00 per share per annum
      from the date of issuance, payable quarterly commencing December 31, 1998,
      when, and if declared by the Board of Directors; and each has
      non-cumulative dividends. Applied did not declare any dividend payment as
      of December 31, 1998.

      The Series B, C and D Convertible Preferred Stock is convertible into
      Common Stock at any time prior to redemption at a conversion rate of 142.9
      shares of Common Stock for each share of Series B and D Convertible
      Preferred Stock and 133.3 shares of Common Stock for each share of Series
      C Convertible Preferred Stock (and effective conversion price of $.70 and
      $.75 per share of Common Stock, respectively). The conversion price is
      subject to adjustment under certain circumstances, including Applied
      taking action to change the number of Common Shares outstanding, such as
      declaring a stock dividend.

      The holders of Convertible Preferred Stock have the right, voting as a
      class, to approve or disapprove of the issuance of any class or series of
      stock ranking senior to or on a parity with the Convertible Preferred
      Stock with respect to declaration and payment of dividends or the
      distribution of assets on liquidation, dissolution or winding-up. Upon
      liquidation, dissolution or winding up of Applied, holders of Convertible
      Preferred Stock are entitled to receive liquidation distributions
      equivalent to $100.00 per share before any distribution to holders of the
      Common Stock or any capital stock ranking junior to the Convertible
      Preferred Stock.

14. STOCK OPTIONS AND STOCK WARRANTS

      Applied has adopted the intrinsic value method of accounting for stock
      options and warrants under APB 25 with footnote disclosures of the pro
      forma effects as if the FAS 123 fair value method had been adopted.


                                      F-25
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      Had compensation expense for Applied's employee stock options been
      determined based on the fair value at the grant date for awards in 1998
      and 1997 consistent with the provisions of FAS 123, Applied's net loss per
      share would have been increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                         YEAR ENDED
                                                                        DECEMBER 31,
                                                             ----------------------------------

                                                               1998         1997        1996

<S>                                                          <C>         <C>         <C>
      Net Loss - as reported                                   $(5,535)    $(15,694)   $(5,643)
      Net Loss - pro forma                                     $(7,931)    $(17,742)   $(6,239)
      Loss per share - as reported                              $(0.24)     $ (0.73)    $(0.31)
      Loss per share - Pro forma                                $(0.34)     $ (0.82)    $(0.34)

</TABLE>


      FAS 123 requires stock options to be valued using an approach such as the
      Black-Scholes option pricing model. The Black-Scholes model calculates the
      fair value of the grant based upon the following assumptions about the
      underlying stock: The expected dividend yield of the stock is zero, the
      assumed volatility is 60 percent, the expected risk-free rate of return is
      4.6 - 6.5 percent, calculated as the rate offered on U.S. Government
      securities with the same term as the expected life of the options, and the
      expected term is the maximum possible term under the option.

      STOCK OPTIONS

      In December 1998, Applied adopted its 1998 Stock Option Plan pursuant to
      which officers, directors, key employees and/or consultants of Applied can
      receive non-qualified stock options to purchase up to an aggregate
      5,000,000 shares of Applied's Common Stock. Exercise prices applicable to
      stock options issued under this Plan represent no less than 100% of the
      fair value of the underlying common stock as of the date of grant.

      Applied amended stock options to purchase 1,826,234 shares granted under
      the 1996 Stock Option Plan to extend the term to 10 years and to change
      the exercise price to $.44, 100% of the fair market value of Applied's on
      the date of the amendment.

      In March 1996, Applied adopted its 1996 Stock Option Plan pursuant to
      which officers, directors, key employees and/or consultants of Applied can
      receive incentive stock options and non-qualified stock options to
      purchase up to an aggregate of 2,000,000 shares of Applied's (of which no
      more than 1,500,000 shares may be issued pursuant to non-qualified stock
      options). Substantially all stock options granted in 1996 were done so
      under the 1996 Plan. Exercise prices applicable to stock options issued
      under the Plan represent no less than 100% of the fair value of the
      underlying as of the date granted. Stock options granted under the plan
      vest over a 3 - 5 year period.


                                      F-26
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      A summary of the status of options granted under the Plan as of December
      31, 1998 and 1997 and changes during the periods then ended is presented
      below:

<TABLE>
<CAPTION>

                                                1998                      1997
                                       -----------------------    ----------------------
                                                      Weighted                  Weighted
                                                      Average                   Average
                                                      Exercise                  Exercise
                                         Shares        Price       Shares        Price

<S>                                      <C>            <C>       <C>            <C>
Options outstanding - beginning of year  2,912,375      $6.06     1,994,875      $ 6.22
Granted                                  3,901,371       0.59     1,570,000        6.29
Exercised                                       --         --            --          --
Forfeited                                       --         --      (242,500)       6.19
Rescinded                               (2,658,734)      5.83      (410,000)       8.03
                                       ------------               ----------

Options outstanding - end of year        4,155,012       1.08     2,912,375        6.06
                                       ------------               ----------

Options exercisable - end of year        2,272,785                1,144,875
                                       ------------               ----------
Weighted average fair value of options
   granted during the period                            $0.42                    $ 4.61


<CAPTION>
                                                1996
                                       -----------------------
                                                       WEIGHTED
                                                       AVERAGE
                                                       EXERCISE
                                         SHARES        PRICE

<S>                                                      <C>
Options outstanding - beginning of year        --        $ --
Granted                                 1,994,875        6.22
Exercised                                      --          --
Forfeited                                      --          --
Rescinded                                      --          --
                                       -----------

Options outstanding - end of year       1,994,875        6.22
                                       -----------

Options exercisable - end of year         629,875
                                       -----------
Weighted average fair value of options
   granted during the period                            $1.70

</TABLE>

                                      F-27

<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      The following table summarizes information about employee stock options
      outstanding at December 31, 1998:

<TABLE>
<CAPTION>

                            OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
                   ---------------------------------------      ----------------------
                                   WEIGHTED
                                    AVERAGE        WEIGHTED                   WEIGHTED
   RANGE OF                        REMAINING       AVERAGE                    AVERAGE
 EXERCISABLE         NUMBER       CONTRACTUAL     EXERCISE        NUMBER      EXERCISE
    PRICES          OUTSTANDING      LIFE          PRICE        EXERCISABLE    PRICE

<S>                   <C>          <C>             <C>              <C>        <C>
$4.75 - $6.69         457,375      5.41 years      $ 5.77           364,875    $ 5.55
$2.00 - $2.31         121,225      9.29 years        2.18            91,225      2.24
$0.44 - $0.44       3,576,412      9.96 years        0.44         1,816,685      0.44
                   -----------                     -------      ------------   -------

                    4,155,012      9.45 years      $ 1.10         2,272,785    $ 1.49
                   -----------                                  ------------
</TABLE>


      STOCK WARRANTS

      Outstanding warrants (vested and not vested) at December 31, 1998 are as
      follows:

<TABLE>
<CAPTION>

                                                NUMBER OF     CURRENT
     GRANTED       GRANTED        GRANTED       WARRANTS      EXERCISE     EXPIRATION
      1996           1997          1998           1998         PRICE          DATE

    <S>            <C>           <C>             <C>          <C>       <C>
       500,000             -                       500,000      $7.20    August 2001
     5,750,000             -                     5,750,000       8.40    June 2001
       500,000             -                       500,000      13.86    August 2001
     7,500,000             -                     7,500,000      10.00    December 2003
             -        19,407                        19,407       5.80    August 2002
             -        60,000                        60,000       3.68    September 2002
             -     1,000,000                     1,000,000       5.03    August 2002
             -        60,000                        60,000       5.00    November 2000
                                    514,000        514,000       4.50    March, 2003
                                  1,500,000      1,500,000       1.50    February, 2004
   ------------   -----------   ------------   ------------

    14,250,000     1,139,407      2,014,000     17,403,407
   ------------   -----------   ------------   ------------

</TABLE>

      There were no warrants exercised in 1998, 1997 or 1996. As of December 31,
      1998 and 1997, 17,403,407 and 15,389,407 warrants were exercisable,
      respectively.

 15.  RELATED PARTY TRANSACTIONS

      During 1996, Applied advanced an aggregate amount of $1.5 million to
      Lanxide Performance Materials, Inc. ("LPM"), a wholly-owned subsidiary of
      Lanxide Corp. Lanxide is related to Commodore by substantial common
      ownership. The promissory notes became due on February 28, 1998. At
      December 31, 1997 a $814 reserve against this receivable existed, reducing
      the net


                                      F-28
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      receivable to its estimated fair value. In March 1998, Applied realized
      this receivable by exchanging it for amounts due under the Intercompany
      Convertible Note (see Note 5). In connection with the exchange, Applied
      issued a warrant to Commodore to purchase 514,000 shares of Common Stock
      at exercise price of $4.50 expiring August 2001. The $340 fair value of
      the warrant was recorded as additional paid-in capital.

      CASI had a lease agreement with its Chairman under which CASI utilizes
      certain real estate for business purposes. Rent of approximately $11 and
      $6 was paid for the years ended December 31, 1997 and 1996, respectively.
      No rent was paid in 1998.

      During the year ended December 31, 1997, Applied was charged a management
      fee by Commodore of $640. This management fee was based on allocated wages
      and salaries, rent, insurance and other administrative expenses relating
      to its executive offices in New York. The management fees ended in August,
      1997. Subsequent to August 1997, Applied entered into a cost sharing
      agreement with Commodore whereby all common costs were accumulated and
      allocated based on various factors, including executive time reports.
      Costs were allocated on this basis between Applied, Commodore and a
      company owned by a director of Applied.

16. COMMITMENTS AND CONTINGENCIES

      OPERATING LEASES

      Applied and its subsidiaries are committed under non cancelable operating
      leases for office space and other equipment. Future obligations under the
      leases net of projected subleases of $64 are as follows:


                    1999                                        $253
                    2000                                         157
                    2001                                          86
                                                               -----
                                                                $496
                                                               =====


      Rent expense approximated $502, $767 and $313 in 1998, 1997 and 1996,
      respectively.

      EMPLOYMENT AGREEMENTS
      Applied and its subsidiaries have employment agreements with 4 executives
      and key personnel. Aggregate minimum payments under the employment
      agreements for 1999 total $798. All employment agreements terminate by the
      end of 1999.

      Applied has a five-year Executive Bonus Plan (the "Bonus Plan") under
      which a number of executives and employees of Applied are entitled to
      formula bonuses. Applied paid $622 of 1997 executive bonuses in January
      1998. No bonuses are accrued at December 31, 1998.


                                      F-29
<PAGE>

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

      LITIGATION

      Applied has matters of litigation arising in the ordinary course of
      business which in the opinion of management will not have a material
      adverse effect on its financial condition or results of operations.

17. SUBSEQUENT EVENT

      In March 1999, Applied entered into a Letter of Intent with Global Energy
      Investors, LLC ("Global"). Under the terms of the Letter of Intent,
      Applied will acquire a 50% interest in Global for $5.0 million worth of
      Applied Convertible Preferred Stock and $2.5 million in cash. The
      Convertible Preferred Stock will have a conversion price of $.50 per
      share, will be non-dividend bearing and Global will be obligated to
      convert the Preferred Stock into Applied's Common Stock upon the earlier
      of March 31, 2001 or when Applied's Common Stock trades above $.50 per
      share for twenty days. Applied will also be obligated to acquire the
      remaining 50% interest of Global from the Global shareholders for 12.5
      million shares of Applied's Common Stock at such time that Applied's
      Common Stock trades for at least $2.00 per share for twenty days.
      Applied's acquisition of Global is conditional upon the signing of
      definitive agreements, due diligence and the raising of $10 million in new
      working capital for Applied and Global.


                                      F-30



<PAGE>



                                                         TELEDYNE-COMMODORE, LLC
                                                   INDEX TO FINANCIAL STATEMENTS


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






                                                                            PAGE
                                                                       
Independent Auditors' Report                                                F-32
                                                                       
Balance Sheet                                                               F-33
                                                                       
Statement of Operations                                                     F-34
                                                                       
Statement of Members' Capital (deficit)                                     F-35
                                                                       
Statement of Cash Flows                                                     F-36
                                                                       
Notes to Financial Statements                                               F-38
                                                                     

                                      F-31

<PAGE>







                                                    INDEPENDENT AUDITORS' REPORT


TO THE MEMBERS OF
TELEDYNE-COMMODORE, LLC


We have audited the accompanying balance sheet of TELEDYNE-COMMODORE, LLC as of
December 31, 1998, and the related statements of operations, members' capital
(deficit), 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.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TELEDYNE-COMMODORE, LLC as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2, the Company
recognized a net loss for 1998, and has a deficit in working capital and
members' capital as of December 31, 1998. These conditions result in substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


Tanner + Co.



Salt Lake City, Utah
March 31, 1999

                                                                            F-32

<PAGE>


                                                         TELEDYNE-COMMODORE, LLC
                                                                   BALANCE SHEET

                                                                    DECEMBER 31,
--------------------------------------------------------------------------------

                                                                      1997
                                                     1998          (UNAUDITED)
                                                --------------------------------
              ASSETS 

Current assets:
     Cash                                       $       63,252   $       405,620
     Capital contributions receivable                  408,000         1,000,000
     Accounts receivable                             1,578,150           295,591
                                                --------------------------------

             Total current assets                    2,049,402         1,701,211

Plant and equipment, net                             1,515,867         1,312,045
Other assets                                            33,101                 -
                                                --------------------------------

                                                $    3,598,370   $     3,013,256
                                                ================================

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

              LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)

Current liabilities:
   Accounts payable                            $    1,709,012   $       422,503
   Related party payables                           2,163,504         1,348,079
                                               --------------------------------

             Total current liabilities              3,872,516         1,770,582
                                               -------------------------------

Contingency                                                 -                 -

Members' Capital (deficit):
  Commodore                                          (137,073)          621,337
  Teledyne                                           (137,073)          621,337
                                               --------------------------------

             Total members' capital (deficit)        (274,146)        1,242,674
                                               --------------------------------

                                               $    3,598,370   $     3,013,256
                                               --------------------------------




--------------------------------------------------------------------------------
See accompanying notes to financial statements.                             F-33

<PAGE>


                                                         TELEDYNE-COMMODORE, LLC
                                                         STATEMENT OF OPERATIONS


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

<TABLE>
<CAPTION>
                                                                        PERIOD FROM  
                                                                         AUGUST 6,   
                                                                       1996 (DATE OF 
                                       YEARS ENDED DECEMBER 31,        INCEPTION) TO 
                                   -------------------------------      DECEMBER 31, 
                                                         1997               1996
                                         1998         (UNAUDITED)       (UNAUDITED)
                                   -------------------------------------------------
<S>                                <C>              <C>              <C>           
Revenue:                           $    1,788,150   $      510,306   $            -
                                   -------------------------------------------------

Expenses:
   Cost of revenues                     3,317,651          572,719                -
   General and administrative           1,780,413        1,741,459           360,611
   Research and development             1,399,302        2,033,093           644,888
                                   -------------------------------------------------

              Total expenses            6,497,366        4,347,271         1,005,499
                                   -------------------------------------------------

Loss from operations                   (4,709,216)      (3,836,965)       (1,005,499)

Interest income                            29,596           69,439            15,699
                                   -------------------------------------------------

Net loss                           $   (4,679,620)  $   (3,767,526)  $      (989,800)
                                   =================================================

</TABLE>



--------------------------------------------------------------------------------
See accompanying notes to financial statements.                             F-34


<PAGE>


                                                         TELEDYNE-COMMODORE, LLC
                                         STATEMENT OF MEMBERS' CAPITAL (DEFICIT)


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

<TABLE>
<CAPTION>
                                                     TELEDYNE         COMMODORE         TOTAL
                                                 ------------------------------------------------
<S>                                              <C>              <C>              <C>            
Balance at August 6, 1996 (unaudited)            $           -    $           -    $           - 

     Capital contributions                            1,000,000        1,000,000        2,000,000
     Net loss                                          (494,900)        (494,900)        (989,800)
                                                 ------------------------------------------------

Balance at December 31, 1996 (unaudited)                505,100          505,100        1,010,200

     Capital contributions                            2,000,000        2,000,000        4,000,000
     Net loss                                        (1,883,763)      (1,883,763)      (3,767,526)
                                                 ------------------------------------------------

Balance at December 31, 1997 (unaudited)                621,337          621,337        1,242,674

     Capital contributions                            1,581,400        1,581,400        3,162,800
     Net loss                                        (2,339,810)      (2,339,810)      (4,679,620)
                                                 ------------------------------------------------

Balance at December 31, 1998                     $     (137,073)   $    (137,073)  $     (274,146)
                                                 ================================================

</TABLE>







--------------------------------------------------------------------------------
See accompanying notes to financial statements.                             F-35


<PAGE>


                                                         TELEDYNE-COMMODORE, LLC
                                                         STATEMENT OF CASH FLOWS


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

<TABLE>
<CAPTION>

                                                                                   PERIOD FROM   
                                                                                     AUGUST 6,   
                                                                                   1996 (DATE OF 
                                                     YEARS ENDED DECEMBER 31,      INCEPTION) TO 
                                                 -------------------------------   DECEMBER 31,  
                                                                       1997            1996
                                                       1998         (UNAUDITED)     (UNAUDITED)
                                                 ------------------------------------------------
<S>                                              <C>              <C>              <C>           
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                      $   (4,679,620)  $   (3,767,526)  $     (989,800)
   Adjustments to reconcile net loss to          
     net cash used in operating activities:      
       Depreciation                                     491,688            6,525            2,202
       (Increase) decrease in interest           
         receivable                                          -             5,286           (5,286)
       Increase in accounts receivable               (1,282,559)        (295,591)              -
       Increase in other assets                         (33,101)              -                -
       Increase in accounts and related party    
         payables                                     2,101,934        1,351,097          419,485
                                                 ------------------------------------------------

                  Net cash used in
                  operating activities               (3,401,658)      (2,700,209)        (573,399)
                                                 ------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES-
     purchase of plant and equipment                   (695,510)      (1,309,760)         (11,012)
                                                 ------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES-
     capital contributions from members               3,754,800        3,000,000        2,000,000
                                                 ------------------------------------------------

Net increase (decrease) in cash                        (342,368)      (1,009,969)       1,415,589

Cash, beginning of period                               405,620        1,415,589               -
                                                 ------------------------------------------------

Cash, end of period                              $       63,252   $      405,620   $    1,415,589
                                                 ================================================
</TABLE>





--------------------------------------------------------------------------------
See accompanying notes to financial statements.                             F-36
                                               

<PAGE>


                                                         TELEDYNE-COMMODORE, LLC
                                                         STATEMENT OF CASH FLOWS
                                                                       CONTINUED


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




SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

The Company recorded member contributions receivable of $408,000 as of December
31, 1998 which were received in 1999. The Company recorded member contribution
receivables of $1,000,000 as of December 31, 1997, which was received in 1998.


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                                                                 
                                                                 PERIOD FROM  
                                                                   AUGUST 6,   
                                                                1996 (DATE OF 
                                 YEARS ENDED DECEMBER 31,       INCEPTION) TO 
                             -------------------------------     DECEMBER 31,  
                                                    1997            1996
                                   1998          (UNAUDITED)     (UNAUDITED)
                             ------------------------------------------------

         Interest paid       $           -    $-          -    $           - 
                             ------------------------------------------------




--------------------------------------------------------------------------------
See accompanying notes to financial statements.                             F-37

<PAGE>


                                                         TELEDYNE-COMMODORE, LLC
                                                   NOTES TO FINANCIAL STATEMENTS

                                                               DECEMBER 31, 1998
--------------------------------------------------------------------------------

1.   ORGANIZATION
     AND
     SUMMARY OF
     SIGNIFICANT
     ACCOUNTING
     POLICIES

ORGANIZATION
Teledyne-Commodore, LLC (the Company) is a Delaware limited liability company
(LLC) formed as a 50/50 joint venture between Teledyne Environmental, Inc.
(Teledyne) and Commodore Government Environmental Technologies, Inc.
(Commodore). The Company was formed for the purpose of developing marketing,
selling, and providing services using Solvated Electron Technology (SET). This
technology is used in the disposal, elimination, neutralization, separation,
remediation and decontamination of weapons and materials produced in the process
of weapons materials fabrication. SET is a patented process which provides for
the mixing of ammonia and other chemicals to neutralize toxic agents and
explosives.

The term of the Company commenced on August 6, 1996 and shall continue until
December 31, 2046, unless dissolved before such date in accordance with the
provisions of the Limited Liability Company Agreement (the "Agreement").


CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.


As of December 31, 1998 the entire account receivable balance of $1,578,150 is
due from one agency of the federal government. This receivable was paid in full
during February 1999.


The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes is not exposed to any significant credit
risk or cash and cash equivalents.


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<PAGE>


                                        TELEDYNE-COMMODORE, LLC AND SUBSIDIARIES
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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1.   ORGANIZATION
     AND
     SUMMARY OF
     SIGNIFICANT
     ACCOUNTING
     POLICIES
     CONTINUED

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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


CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents.



CAPITAL CONTRIBUTION RECEIVABLE

The Company records a receivable for capital contributions to be received from
the Members at the date the contributions are determined and agreed to by the
Board of Managers.


PLANT AND EQUIPMENT

Plant and equipment are recorded at cost, less accumulated depreciation.
Depreciation is determined using the straight-line and accelerated methods over
the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sales of plant and equipment are reflected in operations.


RESEARCH AND DEVELOPMENT

Research and development expenses consist of expenditures incurred during the
course of planned research and investigation aimed at discovery of new knowledge
which will be useful in developing processes or products and implementation of
such through design, testing of product alternatives or construction of
prototypes. The Company expenses all research and development costs as they are
incurred.


REVENUE
 
The Company records revenue upon completion of the service being performed.


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<PAGE>


                                        TELEDYNE-COMMODORE, LLC AND SUBSIDIARIES
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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1.   ORGANIZATION
     AND
     SUMMARY OF
     SIGNIFICANT
     ACCOUNTING
     POLICIES
     CONTINUED

ALLOCATION OF PROFITS OR LOSSES
The Company's Agreement generally provides that net profits and net losses shall
be allocated 50% to Teledyne's and 50% to Commodore's capital accounts.

INCOME TAXES
The Company is a Delaware limited liability company. As such, there is no
provision for income taxes. The members of the LLC are to include their
respective share of Company profits or losses in their respective returns.

UNAUDITED INFORMATION
In the opinion of management, the accompanying unaudited financial statements
for the year ended December 31, 1997 and the period ended December 31, 1996
contain all adjustments (consisting only of normal recurring items) necessary to
present fairly the financial position as of December 31, 1997 and the results of
operations and cash flows of the Company for the periods then ended.



2.   GOING
     CONCERN

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During the year ended December 31,
1998, the Company incurred a net loss of $4,679,620. Additionally the Company
has a working capital deficit of $1,823,114 and a deficit in members' capital of
$274,146. These factors among others indicate that the Company may be unable to
continue as a going concern for a reasonable period of time.

The Company's continuation as a going concern is dependent on its ability to
generate sufficient income and cash flow to meet its obligations on a timely
basis, to obtain additional contributions from members as may be required, and
ultimately to attain profitability. The Company is active in the development and
marketing of new products, and the obtaining of both commercial and governmental
contracts. There is no assurance that the Company will be successful.



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                                                                            F-40

<PAGE>


                                        TELEDYNE-COMMODORE, LLC AND SUBSIDIARIES
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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3.   PLANT AND
     EQUIPMENT

Plant and equipment consists of the following as of December 31, 1998:


                          Plant                           $       1,982,591
                          Equipment                                  33,692
                                                          -----------------

                                                                  2,016,283

                          Less accumulated depreciation            (500,416)
                                                          -----------------

                                                          $       1,515,867
                                                          =================



4.   SIGNIFICANT
     CUSTOMER

All of the Company's revenues of $1,788,150 for 1998 resulted from sales to and
services provided for one agency of the United States Government.


5.   RELATED PARTY
     TRANSACTIONS

The Company has service operations agreements with Teledyne and Commodore that
provide for reimbursement of costs incurred on behalf of the LLC. Total expenses
accrued to Teledyne and Commodore are as follows for 1998:


                          Teledyne                       $        3,279,000
                          Commodore                                 440,000
                                                         ------------------

                                       Total             $        3,719,000
                                                         ==================

Teledyne employs virtually all of the personnel serving the Company. The related
labor, overhead, and general and administrative expenses incurred by Teledyne
are billed to the Company on a monthly basis. Overhead expenses and general
administrative expenses are allocated based on labor and total costs excluding
labor, respectively. Rates applied in computing overhead and general and
administrative expenses are audited by the Defense Contract Audit Agency of the
United States Government.


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<PAGE>


                                        TELEDYNE-COMMODORE, LLC AND SUBSIDIARIES
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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5.   RELATED PARTY
     TRANSACTIONS
     CONTINUED

As of December 31, 1998 accounts payable reflect payables to the Members as
follows:


                          Teledyne                       $        2,023,758
                          Commodore                                 139,746
                                                         ------------------

                                       Total             $        2,163,504
                                                         ==================



6.   RECENT
     ACCOUNTING
     PRONOUNCE
     -MENTS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 1999. The Company believes that the
adoption of SFAS 133 will not have any material effect on the financial
statements of the Company.

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                                                                            F-42