<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-K/A


                               (AMENDMENT NO. 1)


                        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, 1999

                                       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:

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

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





                                       i
<PAGE>   2
         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
February 29, 2000 with an aggregate market value of approximately $29,174,364
(based upon the last sale price of the Common Stock on February 29, 2000 as
reported by the American Stock Exchange).

         As of February 29, 2000, 31,016,338 shares of the registrant's Common
Stock were outstanding.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None





                                       ii
<PAGE>   3



                      COMMODORE APPLIED TECHNOLOGIES, INC.

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                TABLE OF CONTENTS


<TABLE>
<S>               <C>                                                                                           <C>
PART 1............................................................................................................5
         ITEM 1.  BUSINESS........................................................................................5
                  General.........................................................................................5
                  Soil Decontamination--Commodore Solution Technologies, Inc......................................7
                  Environmental Management - Commodore Advanced Sciences, Inc....................................13
                  Markets and Customers..........................................................................15
                  Raw Materials..................................................................................16
                  Backlog........................................................................................16
                  Research and Development.......................................................................16
                  Intellectual Property..........................................................................17
                  Competition....................................................................................17
                  Environmental Regulation.......................................................................18
                  Employees......................................................................................20
         ITEM 2.  PROPERTIES.....................................................................................20
         ITEM 3.  LEGAL PROCEEDINGS..............................................................................21
         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
                  Forward Looking Statements.....................................................................34
         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................35
         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................35
         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE............................................................35
</TABLE>





                                       iii
<PAGE>   4

<TABLE>
<S>                <C>                                                                                          <C>
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..................................................................................43
                  Employment Agreements..........................................................................44
                  Compensation Committee Interlocks and Insider Participation....................................46
                  Report of the Compensation Committee on executive Compensation.................................46
         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................50
                  Security Ownership of Certain Beneficial Owners................................................50
                  Security Ownership of Management...............................................................51
         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................53
                  Organization and Capitalization of the Company.................................................53
                  Services Agreement.............................................................................54
                  Sale of Company Common Stock by Environmental..................................................55
                  February 1998 Intercompany Note................................................................56
                  September 1997 Intercompany Convertible Note...................................................57
                  Sale of Series D Preferred Stock by Environmental..............................................57
                  License of SET Technology......................................................................58
                  Future Transactions............................................................................58
PART IV..........................................................................................................59
         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................59
SIGNATURES.......................................................................................................60
</TABLE>






                                       iv
<PAGE>   5




                                     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, radioactivity, chemical warfare agents, explosives 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, explosives and concentrating certain radioactive wastes for more
effective disposal. In January 1999, Commodore entered into an agreement with
Dames & Moore group pursuant to which the Company's SET technology will be used
in connection with the remediation of mixed waste, principally at Department of
Energy sites, and also selected international locations. In December 1999,
Advanced Sciences entered into a memorandum of understanding with Envirocare of
Utah, to utilize the SET technology for treatment of mixed waste at their Clive,
Utah treatment and disposal facility. 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. This permit is under revision to increase the scope of materials
to be processed as well as the machinery to perform the process. Based on
currently published lists of EPA national operating permits, the Company
believes that it possesses the only non-thermal PCB destruction 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




                                       5
<PAGE>   6

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, 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.

         Demand for the Company's environmental technology and services is
anticipated to arise principally from two sources:

o              the need for alternative environmental treatment and disposal
               methods for toxic substances, (such as the SET technology), which
               involve limited safety risks with respect to air pollution and
               transportation of hazardous materials and do not 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 business strategy is to expand its environmental services
business and commercialize its SET technology. The Company plans to execute this
strategy by:

o         strengthening its relationships with its present industrial and
          government-sector customers, particularly the Department of Energy and
          Department of Defense, by continuing to provide high-quality
          environmental management and consulting services;

o         focusing its marketing efforts with respect to the SET technology on
          selected niche markets within certain strategic environmental market
          segments, such as government mixed waste remediation and chemical
          weapons demilitarization, where the Company believes SET offers the
          greatest value and meets pressing customer needs; and

o         establishing additional collaborative joint working and marketing
          arrangements with established engineering and environmental service
          organizations to pursue commercial opportunities in public and private
          sector.

         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>   7



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,
explosives and concentrating certain radioactive wastes for more effective
disposal.

         The SET process was further commercialized during the calendar year
1999. The testing that was enacted occurred in several process systems of
varying capacities with varying contaminated soil, oil, and material matrices.
The Company performed several treatability studies for third party customers
during this time period as well as continued internal testing and process
development. In the case of third party treatability studies, customer location
processing and new patent data set construction, all tests and processing
results were verified by independent laboratories agreed upon by the Company
and/or the respective client. In the case of internal Company process
development testing, we verify results with Company owned analytical equipment
in addition to periodic independent testing.

         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 treatment 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
treatment vessel where they are mixed with a solvent and charged with a base
metal (e.g. sodium). The chemical reaction produces metal salts such as calcium
chloride, calcium hydroxide and non-halogenated inert organics. The ammonia
within the treatment vessel 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:




                                       7
<PAGE>   8


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

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.
This permit revision covers the destruction of PCBs in soils, waste oils,
organic materials, water, and on metallic surfaces. Additionally, the Company is
in the process of obtaining a permit revision for its commercial SET processing
system; the S-10. The S-10 system is capable of processing up to 10 tons of
contaminated material daily. These revisions to the company's existing permit
are expected to issue in June 2000.





                                       8
<PAGE>   9

         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-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.



<TABLE>
<CAPTION>
MATERIAL            CONTAMINANT               PRE-TREATMENT         POST-TREATMENT            DESTRUCTION EFFICIENCY
--------            -----------               -------------         --------------            ----------------------
<S>                 <C>                       <C>                   <C>                       <C>
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%
</TABLE>


         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.



                                       9
<PAGE>   10



         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. 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 secured additional funding for
the Company's technology to be demonstrated. The Company was notified in 1999
that additional funding was secured by the US Congress to test its technology
under its ACWA contract. Testing will commence in fiscal year 2000. The
international efforts to utilize the LLC's SET process are ongoing in Russia,
Japan 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.




                                       10
<PAGE>   11

         Government Technologies and Teledyne Environmental each owns 50% of the
equity, profit and losses of the LLC and have made capital contributions of
approximately $4.58 million as of December 31, 1999. The Company contributed an
additional $176,500 in February 2000. From inception of the LLC to February 29,
2000 the Company has made capital contributions of approximately $4.8 million.
Additional capital contributions may be required from time to time in amounts
approved by the LLC's board of managers. 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.

         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, 1999.

         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 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



                                       11
<PAGE>   12

hazardous waste (including PCB's). The Company processed approximately 4000 lbs.
of mixed waste for one of WCS' clients in 1999. All processing results were
successful.

         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. It is
anticipated that the contract will be performed in the second quarter of 2000.

         URS[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.

         ENVIROCARE OF UTAH, INC. (ENVIROCARE) MEMORANDUM OF UNDERSTANDING
(MOU): Commodore Solution Technologies, Inc. (Solution) signed an MOU with
Envirocare in September 1999. Envirocare operates a broad-based waste treatment,
storage and disposal facility in Utah. This agreement is intended to establish a
permanent SET process installation at a facility that is permitted and licensed
to treat and store mixed waste as well as certain hazardous waste. The Company
has performed a series of processing trials in January of 2000 to validate the
efficacy of the SET process. All trials were successful.

         TETRA TECH, INC.: The Company was awarded a contract by Tetra Tech EM
Inc. to treat PCB contaminated soil as part of a study on three sites; each with
several PCB contaminated locations, in Hawaii, including Pearl Harbor. This
contract followed the successful completion of an initial treatability study and
is the second step toward being included in a comparative study for the
remediation of in excess of 10,000 cubic yards of PCB contaminated soils. The
contract was performed successfully in the fourth quarter of 1999 at Pearl
Harbor.
                                       12
<PAGE>   13
           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 six offices located in four
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.

     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. Commodore Advanced Sciences has access to the
SET(TM) technology and all its derivatives. Additionally, Advanced Sciences has
access to the Supported Liquid Membrane (SLIM(TM)) technology held by Commodore
Separation Technologies. This technology has the ability to selectively extract
heavy metals and radioactive nuclides from liquids and gasses. The SLIM(TM)
technology is held in an 87% owned subsidiary of Commodore Environmental
Services (COES), which owns 49.9% of Commodore Applied. 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.

                                       13
<PAGE>   14

         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 85 full-time equivalent (FTE) 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 in 2000 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 June
2000, 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. Kaiser-Hill Co. was recently
(February 1, 2000) awarded a contract extension of 5 years and CAS is in the
process of negotiating an extension to its contract as well.

     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(1).

     GENERAL SERVICES ADMINISTRATION CONTRACT: In January 2000, the Company was
awarded a 5-year contract for environmental services by the GSA's Federal Supply
Service. This contract has an estimated value of $15 million. The environmental
advisory services contract includes providing expertise in the areas of
environmental planning services and documentation, environmental compliance
services, environmental/occupational training services, and waste management
services.


                                       14
<PAGE>   15


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, 1999, sales of approximately 5% of the Company's
environmental management services were to private sector customers and sales of
approximately 95% 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 1999, Advanced
Sciences' WIPP Contract and Rocky Flats Contract accounted for approximately 68%
and 20%, 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, performing mixed waste remediation at the Envirocare site in
Clive, Utah, 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


                                       15
<PAGE>   16

limited competition when compared to the general hazardous waste market. The SET
process brings a unique solution to the problem of remediating mixed waste.

         ENVIRONMENTAL MANAGEMENT

     Based on market data compiled by Advanced Sciences, the largest market for
environmental services today within the United States is the U.S. government.
Government wide spending levels exceed $10 billion per year. The DOD and DOE are
expected to account for approximately 66% of such expenditures and together
expect to spend in excess of $200 billion for environmental work. Advanced
Sciences has a long-term record for providing environmental services to the
United States government with the DOD and DOE being its primary customers.

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, 1999, total backlog for the Company was approximately
$50,000,000, as compared with approximately $80,000,000 as of December 31, 1998.
Approximately $25,000,000 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 $25,000,000 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 $1,145,000
and $2,722,000 for the years ended December 31, 1999 and 1998, respectively of
which approximately $0 and $1,390,000 respectively, were attributable to
Commodore Separation Technologies, Inc. ("Separation"). The Company transferred
its 87% interest in Separation to Commodore Environmental Services, Inc.
("Environmental") in 1998. See "Recent Sales of Unregistered Securities --
September 1998 Exchange of Debt per Series B, C, D Preferred Stock and
Separation Stock."

                                       16
<PAGE>   17


INTELLECTUAL PROPERTY

     The Company currently has thirty-(30) issued, U.S. and foreign patents.
Additionally, the Company has seventy-nine(79) patent applications currently on
file and pending in the U.S. and in foreign countries. The average life
expectancy for the currently issued patents is 14.66 years. As patents issue,
the US Patent and Trademark Office assigns the Company a twenty-(20) year
patent-life for each patent issued.

     The Company's patent portfolio provides the Company the necessary
"proprietary turf" in which it can market, distribute, and license the full
range of the SET(TM) technology and all of its derivatives. Additionally, the
Company's strength of its patent portfolio may operate as an effective "barrier
to entry" in several of the markets in which the Company is presently
conducting business.

     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 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 that 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. The Company primarily competes
in the hazardous waste treatment market in the U.S., a market valued at over
$3.6 billion for 1999. The top ten competitors in this market account for over
70% of the revenues for this market sector. The dominant companies in this
sector include URS, The IT Group, Inc., Tetra Tech, Inc. and CH2M Hill, Inc.
The Company's revenues for 1999 account for less than 1% of the dollar volume
of the hazardous waste market. 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.


                                       17
<PAGE>   18

     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 continue its
spending level for environmental services at approximately $10 to $11 billion
for 2000. 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 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., URS 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"), the Resource Conservation and Recovery Act (RCRA), 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.


                                       18
<PAGE>   19

     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.

     RCRA was enacted in 1976 with the primary objective to protect human health
and the environment, and to conserve valuable material and energy resources. The
most important aspect of RCRA is its establishment of "cradle-to-grave"
management and tracking of hazardous waste, from generator to transporter, to
treatment, storage, and disposal.

     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
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.



                                       19
<PAGE>   20
The Company was selected to participate in the Rapid Commercialization
Initiative program in 1996. A direct result of this temporary administrative
program was a SET(TM) process demonstration for the destruction of PCBs at the
Port Hueneme naval base in Port Hueneme, California in 1997. The Company's
SET(TM) technology successfully destroyed the PCBs in the test material
provided, results were verified by independent laboratories, and a closure
report was prepared by the various associated agencies involved with the RCI.
The RCI no longer is a functioning office having served its primary mission of
streamlining the demonstration and evaluation of various technologies into
government sectors. The Company believes that its recent contract in Hawaii,
the subject of a press release and disclosed in the business description
section of various, subsequent SEC filings, was partially the result of its
participation in the RCI program.

     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.

EMPLOYEES

     As of February 29, 2000, the Company (including all of its direct and
indirect subsidiaries) had a total of 105 full-time employees, of which
approximately 85 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 maintains offices 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 Company's lease for the New
York City space expired in December 1998. The Company was permitted to use the
New York City office space during 1999 on a rent free basis and as of March 29,
2000 the Company has not been charged rent for this space. The Company currently
does not have any lease for any use of this space. The Company is charged for
direct labor, office supplies and third party vendor services that the Company
generates in its activities in the New York City offices.

     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 pays $6,800 per
month under the lease for the Houston space, which expires in June 2000. The
leased offices were sublet in for part of 1999. 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. This
facility is scheduled to be closed in the first quarter of 2000. All

                                       20
<PAGE>   21

laboratory research and development functions were transferred to Albuquerque,
New Mexico in February 2000.

     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.


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

     On December 22, 1999, the Company conducted its 1999 Annual Meeting of
Stockholders (the "Annual Meeting"). As of the record date of November 26, 1999,
there were 30,960,796 shares of Company Common Stock eligible to vote. Of these
shares 28,852,217, (93.2%) were represented either in person or by proxy at the
Annual Meeting. The following matters were submitted to a vote at the Annual
Meeting with the following results:

(a)  Election of Directors: Each of the following nominees for election to the
     Board of Directors of the Company were elected by an affirmative vote of a
     minimum of 28,308,967 shares, or 91.4% of all eligible shares: Kenneth L.
     Adelman, PhD., Bentley J. Blum, Herbert A. Cohen, Paul E. Hannesson, David
     L. Mitchell, Edward L. Palmer, and William R. Toller. A maximum of 635,750
     shares were "withheld" with respect to each of the foregoing nominees; no
     shares "abstained"; and no shares were represented as "broker non-votes".

(b)  Charter Amendment: By an affirmative vote of 28,049,000 shares, 90.6% of
     all eligible shares, the stockholders of the company ratified an amendment
     to the Company's Certificate of Incorporation increasing the authorized
     number of shares of common stock from 75,000,000 to 100,000,000. 858,935
     shares were voted "against" approval of this proposal; 36,782 shares
     "abstained"; and no shares were represented as "broker non-votes".

(c)  Ratification of Independent Auditors: By an affirmative vote of 28,453,440
     shares, 91.9% of all eligible shares, the stockholders of the Company
     ratified the appointment of Tanner + Co. as the Company's independent
     auditors for the fiscal year ending December 31, 1999. 465,120 shares were
     voted "against" approval of this proposal; 26,157 shares "abstained"; and
     no shares were represented as "broker non-votes".



                                       21
<PAGE>   22

                                     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 February 29, 2000, there were 137 holders of record of
Common Stock and 43 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.

<TABLE>
<CAPTION>
                                                                 COMMON STOCK                WARRANTS
                                                              -----------------         -----------------
                                                              HIGH          LOW         HIGH         LOW
                                                              -----       -----         -----       -----
<S>                                                           <C>          <C>          <C>          <C>
FISCAL 1999
      First Quarter....................................       0.44         0.38         0.16         0.03
      Second Quarter...................................       0.38         0.19         0.02         0.02
      Third Quarter....................................       1.50         0.25         0.63         0.02
      Fourth Quarter...................................       1.44         0.63         0.38         0.02
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
</TABLE>

     Commodore Applied, through its joint venture Teledyne Commodore, LLC has
participated in the Assembled Chemical Weapons Alternative (ACWA) technology
program  since 1997 with a derivative of the SET(TM) technology. The SET(TM)
technology was short-listed in 1997 with 5 other technologies. Throughout 1997
and into 1998 Teledyne - Commodore, LLC demonstrated the efficacy of the
SET(TM) technology to the ACWA assessment board. The ACWA program forwarded $1.8
million to the joint venture in anticipation of the further testing of
the SET(TM) technology. When the ACWA program did not select the Commodore
SET(TM) technology (July 1998) for further demonstration, the Company's stock
reacted strongly in a negative manner.

     In the last quarter of 1999 the same ACWA assessment panel announced in a
written report that it would test the technologies that it did not test in
1998. The ACWA assessment panel notified Teledyne/Commodore in February 2000,
that the Company's SET(TM) technology would be tested further in the ACWA
demonstration program. The ACWA awarded a $7.9 million contract to the
joint venture for this purpose in March 2000. On August 27, 1999 the "Defense
Cleanup", a publication which covers contracting and general news concerning
the Department of Defense (DOD), stated that the DOD had agreed to spend an
additional $40 million to test the three remaining technologies in the ACWA
program. The Company's technology, represented through the Teledyne/Commodore
LLC, was one of the remaining three awaiting this additional funding for test
completion.


     Thirty days prior to this August 27, 1999 announcement, the Company's
Common Stock was selling at $0.5625 per share. After this article was published,
the Company's Common Stock traded at $1.00. This article did not award the
testing funds to the company but was a strong indication that the funds were to
be received. By early 2000 the Company's stock moved as high as $2.50 per share
on February 25th, 2000, the day the Company issued a press release announcing
the official funding of the Company's technology in the ACWA program.


     Although the Company released other press releases during this time period
on other aspects of its business, it believes this ACWA program funding was the
primary reason for the Company's common stock price appreciation.

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 Commons Stock were issued in
1998, the total value of which is approximately $14,000. All series A preferred
stock was converted prior to 1999. See "Recent Sales of Unregistered Securities
-- August 1997 Private Placement of Series A Preferred Stock."

     The holders of the Company's Series E Convertible Preferred Stock, par
value ($0.001) per share (the "Series E Preferred Stock"), are entitled to a
variable rate dividend beginning at 12% and averaging 8.15% over the term of the
securities. As of December 31, 1999, the Company had paid $62,533 in dividends
on these shares. The Company has the option to pay these dividends in common
stock for all periods after April 30, 2000. See "Recent Sales of Unregistered
Securities -- November 1999 Private Placement of Series E Preferred Stock."

                                       22
<PAGE>   23

     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.

RECENT SALES OF UNREGISTERED SECURITIES

     NOVEMBER 1999 PRIVATE PLACEMENT OF SERIES E PREFERRED STOCK

     On November 4, 1999 the Company completed a $2,500,000 private placement
financing with The Shaar Fund Ltd. The Company issued to The Shaar Fund 335,000
shares of a new Series E convertible preferred stock, convertible into its
common stock, any time after April 30, 2000, at a conversion price equal to the
arithmetic mean of the closing prices of the Company's common stock as reported
on the American Stock Exchange for the ten trading days immediately preceding
the date of conversion, as long as the Company's common stock continues to trade
on the American Stock Exchange. In May 2003, the Series E convertible preferred
stock will automatically convert into the Company's common stock at a conversion
price calculated in accordance with the above conversion formula plus any
accrued and unpaid dividends. The Series E convertible preferred stock has a
variable rate dividend averaging 8.15% over the term of the securities. The
Company reserved the right to redeem all of the Series E convertible preferred
stock on or before April 30, 2000 by payment of $2,800,000 plus any accrued and
unpaid dividends. Depending upon the market price of the Company's common stock
at the time of conversion, the issuance of the common stock upon conversion of
the Series E convertible preferred stock may be subject to shareholder approval.
In addition, the Company issued to The Shaar Fund a warrant to purchase up to
312,500 shares of its common stock (subject to adjustment) at a purchase price
of $1.1963 per share. The warrant expires on November 4, 2004. The Company also
issued to Avalon Research Group Inc., as finder in this transaction, a five-year
warrant to purchase up to 250,000 shares of common stock (subject to adjustment)
at a purchase price of $1.1963 per share. The Company also paid Avalon a fee of
$250,000.


     The recipient of securities in this transaction represented its intention
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 this transaction. The Company made available to The Shaar Fund Ltd. written
information about the Company advised such recipient of the limitations on
resale of such securities. In addition, The Shaar Fund Ltd. was 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
transaction and to obtain additional relevant information about the Company.
Given the facts above, the Company believed this transaction to be exempt from
the registration requirements of the Securities Act in reliance on Section 4(2)
thereof as a transaction not involving any public offering.


     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 owned approximately 35% of the
outstanding shares of Common Stock of the Company at that date. Currently
Environmental owns approximately 49% 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



                                       23
<PAGE>   24

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.


     The recipient of securities in this transaction represented its intention
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 this transaction. The Company made available to Environmental written
information about the Company in accordance with Rule 502 of the Securities Act
and advised Environmental of the limitations on resale of such securities. In
addition, Environmental was 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 transaction and to obtain additional
relevant information about the Company. Given the facts above, the Company
believed this transaction to be exempt from the registration requirements of
the Securities Act in reliance on Section 4(2) thereof as a transaction not
involving any public offering.


     On November 24, 1999, Environmental converted all its series B, C, and D
preferred stock into 7,258,533 shares of the Company's common stock.

     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."


     The recipient of securities in this transaction represented its intention
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 this transaction. The Company made available to Environmental written
information about the Company in accordance with Rule 502 of the Securities Act
and advised Environmental of the limitations on resale of such securities. In
addition, Environmental was 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 transaction and to obtain additional
relevant information about the Company. Given the facts above, the Company
believed this transaction to be exempt from the registration requirements of
the Securities Act in reliance on Section 4(2) thereof as a transaction not
involving any public offering.


     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

                                       24
<PAGE>   25
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."


         The recipients of securities in this 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 advise 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 transaction and to obtain additional relevant information about the Company.
Given the facts above, the Company believed this transaction to be exempt from
the registration requirements of the Securities Act in reliance on Section 4(2)
thereof as a transaction not involving any public offering.


         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




                                       25
<PAGE>   26

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."


         The recipients of securities in this 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 transaction and to obtain additional relevant information about the Company.
Given the facts above, the Company believed this transaction to be exempt from
the registration requirements of the Securities Act in reliance on Section 4(2)
thereof as a transaction not involving any public offering.


         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 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 recipient of securities in this transaction represented its
intention 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 warrant issued in this transaction. The
Company made available to Environmental written information about the Company in
accordance with Rule 502 of the Securities Act and advised Environmental of the
limitations on resale of such securities. In addition, Environmental was 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
transaction and to obtain additional relevant information about the Company.
Given the facts above, the Company believed this transaction to be exempt from
the registration requirements of the Securities Act in reliance on Section 4(2)
thereof as a transaction not involving any public offering.





                                       26
<PAGE>   27


ITEM 6.  SELECTED FINANCIAL DATA.

         The following table presents selected financial data of the Company, as
of December 31, 1999, and for the years ended December 31, 1995, 1996, 1997,
1998 and 1999. 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.

                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                              --------------------------------------------------------------------
                                                1995           1996           1997           1998           1999
                                              --------       --------       --------       --------       --------
<S>                                           <C>            <C>            <C>            <C>            <C>

Revenue:
    Contract revenue ......................   $     --       $  5,123       $ 19,493       $ 17,470       $ 18,147
Cost of sales:
    Cost of sales .........................         --          4,136         16,325         15,421         16,127
    Research and development ..............      1,815          2,022          3,074          2,722          1,145
    General and administrative ............      1,773          3,412         12,196          8,118          4,037
    Depreciation and amortization .........         --            561          1,282          1,150            696
    Minority interests ....................         --             --            (82)           300             --
                                              --------       --------       --------       --------       --------

Loss from operations ......................     (3,588)        (5,008)       (13,302)       (10,241)        (3,858)

    Gain on sale of affiliate .............         --             --             --          4,664             --
    Interest income .......................          6            477            745            337             39
    Interest expense ......................       (274)          (617)        (1,310)        (1,066)          (166)
    Equity in net losses of subsidiary ....         --           (495)        (1,827)        (2,383)            --
                                              --------       --------       --------       --------       --------
Loss before income taxes and
extraordinary item ........................     (3,856)        (5,643)       (15,694)        (8,689)        (3,985)
                                                                                                            (3,856)
    Income taxes, benefit .................         --             --             --          1,262             --
Net loss -before extraordinary item .......     (3,856)        (5,643)       (15,694)        (7,427)        (3,985)
    Extraordinary item Gain on troubled
    debt restructuring ....................         --             --             --          1,892             --
                                              --------       --------       --------       --------       --------
Net loss ..................................   $ (3,856)      $ (5,643)      $(15,694)      $ (5,535)      $ (3,985)
                                              ========       ========       ========       ========       ========

Net loss per share -- basic and diluted ...   $  (0.26)      $  (0.31)      $  (0.73)      $  (0.32)      $  (0.16)
    Extraordinary item per share ..........         --             --             --           0.08             --
                                              --------       --------       --------       --------       --------
Net loss per share -- basic and diluted ...   $  (0.26)      $  (0.31)      $  (0.73)      $  (0.24)      $  (0.16)
                                              ========       ========       ========       ========       ========
Weighted average number of shares .........     15,000         18,100         21,844         23,194         24,819
                                              ========       ========       ========       ========       ========
</TABLE>



CONSOLIDATED BALANCE SHEET DATA:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                ------------------------------------------------------------------------
                                  1995             1996            1997            1998            1999
                                -------          -------         -------         -------         -------
<S>                             <C>              <C>             <C>             <C>             <C>

Cash and cash equivalents ...   $     4          $12,076         $13,151         $ 1,777         $ 1,797
Total assets ................     1,091           33,456          29,696          15,617          16,047
Long term debt ..............        --               29              19              --             716
Total liabilities ...........     9,633           13,380          10,521           3,709           6,096
Minority interests ..........        --               --           6,645              --              --
Stockholders' equity ........    (8,542)          20,076          11,654          11,908           9,951
</TABLE>




                                       27
<PAGE>   28




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

OVERVIEW

         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). Until
September 1998, Applied was 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 which has caused significant variations in results for the periods
presented.

         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 Advanced
Sciences, Inc., a subsidiary acquired on October 1, 1996, Applied has contracts
with various government agencies and private companies in the United States. 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.

RESULTS OF OPERATIONS

         YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

         Revenues were $18,147,000 for the year ended December 31, 1999, as
compared to $17,470,000 for the year ended December 31, 1998. Such revenues were
primarily from the Company's ASI subsidiary, 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-reimbursement contracts is recorded under the percentage of
completion method as costs incurred and include estimated fees in the proportion
that costs to date bear to total estimated costs. The Company has two major
customers, each of which represents more than 10% of annual total revenue. The
combined revenue for these two customers was $15,979,000 or 88% of total 1999
revenue. Costs of sales were $16,127,000 for the year ended December 31, 1999,
as compared to $15,421,000 for the year ended December 31, 1998. Variations
arise from the changes in subcontract activities in relations to total revenue.

         For the year ended December 31, 1999, the Company incurred research and
development costs of $1,145,000, as compared to $2,722,000 for the year ended
December 31, 1998. In 1999, research and development costs were reduced in
accordance with the Company's cost saving program initiated in late 1998.
Research and development costs include salaries, wages, and 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. 1998 numbers included research and
development costs of $501,000 for Separation.

         General and administrative expenses for the year ended December 31,
1999 were $4,037,000, as compared to $8,118,000 for the year ended December 31,
1998. The savings in 1999 are a result of restructuring steps taken during the
last half of 1998. Also, Separation had $1,896,000 in general and administrative
costs in 1998.



                                       28
<PAGE>   29

         Interest expense for the year ended December 31, 1999 was $166,000 as
compared to $1,066,000 for the year ended December 31, 1998. Interest changes in
1999 result from favorable rate and terms on a line of credit put in place in
April 1998 and the elimination of non-cash interest expense that totaled
$777,000 in 1998.

         Equity in losses of unconsolidated subsidiary for the year ended
December 31, 1999 was $0, as compared to $2,383,000 for the year ended December
31, 1998. The Company's Teledyne-Commodore, LLC joint venture commenced
operations in October 1996. The Company recorded its liability for all capital
contributions at December 31, 1998. The Company's 1999 obligation to fund the
LLC ($176,500) has been included in research and development costs.

      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 Company has three major customers, each of which represents more than
10% of annual revenue. The combined revenue for these three customers was
$16,706,000 or 96% of total 1998 revenue. 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.

         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 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.




                                       29
<PAGE>   30

         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.

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>   31

         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, 1999 and 1998, ASI had a $948,000 and $361,000
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 ASI and is
guaranteed by Applied. This line of credit contains certain financial covenants
and restrictions including minimum ratios that ASI must satisfy. CASI was in
compliance with the covenants at December 31, 1999 and 1998.

         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 of $6,300,000 subordinated indebtedness owned 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




                                       31
<PAGE>   32

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.

         On August 20, 1999, CASI received $1,000,000 as a "new advance" under a
First Amendment to its existing revolving line of credit. This advance is
evidenced by a Secured Promissory Note (the "1999 Term Note"). The term note is
repayable in monthly installments in the principal amount of $16,667 plus
interest accrued and unpaid interest. The first payment was paid August 1, 1999.
Interest will be at prime plus 1 1/2%. Security for the note includes virtually
all property and equipment owned by CASI and CAT. This 1999 term note is shown
as long term debt in the consolidated balance sheet.

         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
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




                                       32
<PAGE>   33

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.

         For the year ended December 31, 1999, the Company incurred a net loss
of $3,985,000. As compared to a net loss of $5,535,000 for the year ended
December 31, 1998.

         The contract with one customer, representing $12,287,000, or 68% of
1999 revenue is scheduled to end on September 30, 2000. The Company expects to
be successful with its efforts to rebid this work, but at a significantly
reduced level. The Company uses many subcontractors to service this account,
and it is anticipated that much of this subcontract work will be reduced or
eliminated with the anticipated work reduction. The negative impact on profits
from this work reduction should be offset by increases in other areas of the
Company's business.

         As shown in the financial statements for the years ended December 31,
1999, 1998 and 1997, the Company incurred losses exclusive of their gain on the
sale of affiliate and extraordinary item of $3,985,000, $13,353,000, and
$15,694,000, respectively. The Company has also experienced net cash outflows
from operating activities of $2,888,000, $9,155,000, and $8,220,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. At December 31,
1999, 1998 and 1997 the Company had working capital of $842,000, $1,817,000, and
$11,170,000, respectively, and stockholders' equity of $6,968,000, $11,908,000,
and $11,654,000, respectively. The Company's decrease in working capital and
stockholders' equity from December 31, 1997 to December 31, 1999 is principally
due to the net loss for the period.

         In November 1999, Applied completed $2.5 million in financing through
private placement. The company issued 335,000 shares of a new Series E
convertible preferred stock, convertible into the Company's common stock at the
market price, after April 30, 2000 and up through April 30, 2003 at which time
it automatically converts to the Company's common stock. The series E
convertible preferred stock has a variable rate dividend averaging 8.15% over
the term of the securities. The Company reserved the right to redeem all of the
Series E preferred stock on or before April 30, 2000 by payment of $2,800,000
plus any accrued dividends.

NET OPERATING LOSS CARRYFORWARDS

         The Company has net operating loss carryforwards of approximately
$36,000,000, 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

         Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computers to adequately recognize 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished during the years leading up to
2000 was effective to prevent any problems. As of March 29, 2000, the Company
has not experienced any such computer difficulty; however, computer experts have
warned that there may still be residual consequences of the change in centuries
and any such difficulties may, depending upon their pervasiveness and severity,
have a material adverse effect on the Company's business, financial condition
and results of operations. Any of the following could have a material adverse
effect on the Company's business, financial condition and results of operations:

     o    a failure to fully identify all year 2000 dependencies in the
          Company's systems;

     o    a failure to fully identify all year 2000 dependencies in the
          systems of third parties with whom the Company does business;

     o    a failure of any third party with whom the Company does
          business to adequately address their year 2000 issues;

     o    the failure of any contingency plans developed to protect the
          Company's business and operations from year 2000-related
          interruptions; and

     o    delays in the implementation of new systems resulting from year 2000
          problems.



                                       33
<PAGE>   34

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




                                       34
<PAGE>   35

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.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


         The consolidated financial statements of the Company are included on
pages F-1 through F-45 of this Annual Report and are incorporated herein by
reference.


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

         The Registrant terminated its former auditors, PricewaterhouseCoopers,
LLP ("PwC"), on August 17, 1999.

         During the Registrant's past two fiscal years, PwC's report on the
Registrant's financial statements neither contained any adverse opinions or
disclaimers of opinions nor were qualified or modified as to uncertainty, audit
scope or accounting principles, except that PwC's auditors report on the
Registrant's consolidated financial statements for the year ended December 31,
1998, contained an explanatory paragraph relating to the Registrant continuing
as a going concern due to the Registrant's recurring losses from operations and
net cash outflows from operations.

         The decision to terminate its relationship with PwC was approved by the
Board of Directors of the Registrant.

         In connection with its audits for the past two fiscal years and through
August 17, 1999, there were no disagreements with PwC on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
PwC, would have caused it to make reference to the subject matter of the
disagreements in connection with its reports.

         Pursuant to action approved by the Registrant's Board of Directors, the
Registrant retained Tanner + Co. ("Tanner") as is auditors as of August 17,
1999.

         During the Company's fiscal year ended December 31, 1999, there were no
disagreements between the Company and its independent accountants, Tanner + Co.,
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 Tanner + Co., would have caused Tanner + Co. to make
reference to the subject matter of the disagreements in connection with its
report.




                                       35
<PAGE>   36

                                    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 February 29, 2000, are as
follows:

<TABLE>
<CAPTION>
NAME                    AGE     POSITION
----                    ---     --------
<S>                     <C>     <C>

Paul E. Hannesson       59      Chairman of the Board, President and Chief Executive
                                Officer

Peter E. Harrod, P.E.   50      President of Commodore Advanced Sciences

William E. Ingram       54      Vice President and Controller

James M. DeAngelis      39      Chief Financial Officer

Kenneth L. Adelman      51      Director

Bentley J. Blum         58      Director

Herbert A. Cohen        66      Director

David L. Mitchell       78      Director

William R. Toller       68      Director

Edward L. Palmer        82      Director
</TABLE>



         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 member of the National Society of Professional Engineers and the
American Society of Civil




                                       36
<PAGE>   37
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.

     JAMES M. DEANGELIS was appointed Vice President-Finance and Treasurer of
the Company in July 1998 and was promoted to Chief Financial Officer in December
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.

     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.

     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


                                       37
<PAGE>   38


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; 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. (August 1996-Present). 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.


                                       38
<PAGE>   39


     EDWARD L. PALMER joined the board in August 1998. Mr. Palmer currently
serves as President of the Mill Neck Consulting Group, founded in 1983. Mr.
Palmer retired September 1982 as Chairman of the Executive Committee and
Director of CitiCorp and Citibank, N.A. after 23 years of service. Prior to
joining Citibank, Mr. Palmer served as Vice President at the New York Trust,
serving in several executive positions since 1940. Mr. Palmer is 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.

     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 February 29, 2000, are as follows:

<TABLE>
<CAPTION>
NAME                       AGE   POSITION
----                       ---   --------
<S>                        <C>   <C>
Vincent Valeri             64    Senior Vice President and Chief Engineer

Gerry D. Getman, Ph.D.     52    Vice President and Director of Research and Development

O. Mack Jones              58    Vice President-Field Operations
</TABLE>


     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 October 1994 to May 1996 he served as Vice President
and Chief Engineer for Environmental. 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 1996 to March 1996, he was a private
consultant for Environmental and from April 1996 to May 1996 he served as Vice
President and Director of Research 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.

     O. MACK JONES has served as Vice President of Field Operations of the
Company since April 1998 managing its field treatability studies and commercial
projects. Mr. Jones served as a consultant to the Company from June 1996 to
April 1998, assisting in the commercialization of the solvated electron
technology. Prior to this he served as a consultant to Environmental from
September 1994 to May 1996, assisting in the development of the solvated
electron technology. From 1991 to May 1996, Mr. Jones served as the founder and
principal executive officer of an environmental consulting company, Florida
Vector Services, which provided both consulting and hands-on remediation
services primarily in TSCA-related areas. From 1986 to 1991, Mr. Jones was Vice
President-Operations with Quadrex Environmental Company, managing the company's
field remediation businesses. 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.


                                       39
<PAGE>   40

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, 1999, 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 $375 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, 1999, and upon a
review of Forms 5 and amendments thereto furnished to the Company with respect
to the year ended December 31, 1999, 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


                                       40
<PAGE>   41



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, 1999, except for the following: (i)
William E. Ingram, the Vice President and Controller of the Company, who
inadvertently failed to file a Form 5 with regard to a transaction that
occurred in December 1999 and who inadvertently failed to file a Form 3 upon
becoming an officer of the Company in October 1996; (ii) James E. DeAngelis,
the Chief Financial Officer of the Company, who inadvertently failed to file a
Form 5 with regard to a transaction that occurred in December 1999 and who
inadvertently failed to file a Form 3 upon becoming an officer of the Company in
July 1998; and (iii) Paul E. Hannesson, the Chairman of the Board, President
and Chief Executive Officer of the Company, who inadvertently failed to file a
Form 5 with regard to a transaction that occurred in July 1999.


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 1999, 1998, and 1997 to all persons serving as
the Company's Chief Executive Officer during 1999, 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.

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                               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                  1999     331,416(1)        -0-      12,000(3)       -0-      2,400,000          -0-    33,638(4)
Chief Executive Officer            1998     250,256(1)        -0-       7,700(3)       -0-        577,500          -0-       -0-
                                   1997     250,526(1)     63,356(2)   15,205(3)       -0-            -0-          -0-       -0-

Kenneth L. Adelman, Ph.D           1999         -0-           -0-     238,756(8)       -0-            -0-          -0-       -0-
Former Executive Vice              1998     179,854(5)        -0-         -0-          -0-         70,000(7)       -0-       -0-
President                          1997      83,444(5)     54,937(6)      -0-          -0-        150,000          -0-       -0-

William E. Ingram(9)               1999     150,426(10)       -0-         -0-          -0-        100,000          -0-       -0-
Vice President & Controller        1998      82,500(10)       -0-         -0-          -0-        150,000          -0-       -0-
                                   1997      82,500(10)    16,500(11)     -0-          -0-        150,000          -0-       -0-

Peter E Harrod(12)                 1999     170,501(13)       -0-         -0-          -0-        200,000          -0-       -0-
President Advanced Sciences        1998     170,653(13)       -0-         -0-          -0-        255,000          -0-       -0-
                                   1997     150,807(13)    45,000(14)     -0-          -0-        125,000          -0-       -0-

James M. DeAngelis(15)             1999     147,614(16)       -0-         -0-          -0-        200,000          -0-    12,225(17)
Senior Vice President & Chief      1998      72,500(16)       -0-         -0-          -0-        181,250          -0-       -0-
Financial Officer                  1997         -0-           -0-         -0-          -0-            -0-          -0-       -0-

</TABLE>


                                       41
<PAGE>   42


(1)  Represents the amount of Mr. Hannesson's base salary allocated to the
     Company (100% in 1999). 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.
     The Company has recorded a liability for $344,000 representing amounts owed
     to Mr. Hannesson under his employment contract, but deferred per agreement.
     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 moving allowances paid to Mr. Hannesson in 1999.

(5)  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.

(6)  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.

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

(8)  Represents amounts paid to Mr. Adelman in 1999 in satisfaction of his
     employment agreement.

(9)  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.

(10) Represents the amount of Mr. Ingram's base salary allocated to the Company.
     Mr. Ingram's total base salary for 1999, 1998 and 1997 was $150,000.
     Certain portions of such base salary in 1998 and 1997 were also allocated
     to Environmental and Separation.

(11) Represents the amount of Mr. Ingram's annual incentive bonuses allocated to
     the Company. Mr. Ingram's total annual incentive bonus for 1997, 1998 and
     1999 was $30,000, $0 and $0 respectively. Certain portions of his 1997
     annual incentive bonus was allocated to Environmental and Separation.

(12) 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.

(13) 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.

(14) 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 1997, 1998 and 1999 was $45,000, $0, and $0 respectively.

(15) Mr. DeAngelis served as Vice President and Treasurer of the Company since
     July 1998.

(16) Represents the amount of Mr. DeAngelis' base salary allocated to the
     Company. Mr. DeAngelis' total base salary for 1999 and 1998 was $145,000.

(17) Represents moving allowances paid to Mr. DeAngelis in 1999.


                                       42
<PAGE>   43


STOCK OPTIONS

     The following table sets forth certain information concerning options
granted during the year ended December 31, 1999 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, 1999.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                            INDIVIDUAL GRANTS
                          --------------------------------------------------
                                                                                  POTENTIAL REALIZABLE
                                                                                    VALUE AT ASSUMED
                          NUMBER OF      PERCENT OF                                  ANNUAL RATES OF
                          SECURITIES    TOTAL OPTIONS   EXERCISE              STOCK PRICE APPRECIATION FOR
                          UNDERLYING      GRANTED TO    OF BASE                       OPTION TERM(6)
                            OPTIONS      EMPLOYEES IN    PRICE    EXPIRATION  ----------------------------
          NAME            GRANTED (#)   FISCAL YEAR(5)   ($/SH)      DATE        5% ($)           10% ($)
------------------------  -----------   --------------  --------  ----------  ----------------------------
<S>                      <C>            <C>             <C>       <C>         <C>                <C>
Paul E. Hannesson....... 2,400,000(1)       74%          0.500     07/13/03     1,050,423        1,387,464
Peter E. Harrod.........   200,000(2)        6%          0.688     12/14/08       113,715          244,388
James M. DeAngelis......   200,000(3)        6%          0.688     12/14/08       113,715          244,388
William E. Ingram.......   100,000(4)        3%          0.688     12/14/08        56,858          122,194
</TABLE>

(1)  Options to purchase 2,400,000 shares of Common Stock were granted to Mr.
     Hannesson in July 1999 pursuant to the 1998 Plan and are exercisable in
     four (4) 500,000 share increments when the Company's stock price reaches
     $2, $3, $4 and $5 per share. The remaining 400,000 shares are exercisable
     upon the successful power fund financing in the amount of approximately $90
     million or other criteria as determined by the Board of Directors.

(2)  Options to purchase 200,000 shares of Common Stock were granted to Mr.
     Harrod in December 1999 pursuant to the 1998 Plan and are fully vested.

(3)  Options to purchase 200,000 shares of Common Stock were granted to Mr.
     DeAngelis in December 1999 pursuant to the 1998 Plan and are fully vested.

(4)  Options to purchase 100,000 shares of Common Stock were granted to Mr.
     Ingram in December 1999 pursuant to the 1998 Plan and are fully vested.

(5)  Percentages based on 3,259,323 stock options granted (the 1998 Plan) during
     the year ended December 31, 1999.

(6)  The closing price for the Company's Common Stock on December 31, 1999 was
     $0.81. The closing price is used for all the subsequent stock appreciation
     calculations.


                                       43
<PAGE>   44


     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, 1999 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
                                                                       SECURITIES UNDERLYING      VALUE OF UNEXERCISED
                                                                        UNEXERCISED OPTIONS       IN-THE-MONEY OPTIONS
                                      SHARES           VALUE           AT FISCAL YEAR-END(#)      AT FISCAL YEAR-END($)
                                    ACQUIRED ON       REALIZED             EXERCISABLE/               EXERCISABLE/
             NAME                   EXERCISE (#)       ($)(1)             UNEXERCISABLE             UNEXERCISABLE(2)
------------------------------      ------------      --------         ---------------------      --------------------
<S>                                 <C>               <C>              <C>                       <C>
Paul E. Hannesson ............           -0-             -0-           577,500 / 2,400,000       $215,119 / $744,000

Kenneth L. Adelman, Ph.D .....           -0-             -0-              70,000 / -0-              $26,075 / $0

William E. Ingram ............           -0-             -0-            190,000 / 60,000          $45,725 / $22,350

James M. DeAngelis ...........           -0-             -0-              381,250 / -0-             $91,916 / $0

Peter E. Harrod ..............           -0-             -0-            353,000 / 102,000         $81,393 / $37,995
</TABLE>


(1)  Represents the difference between the last reported sale price of the
     Common Stock on December 31, 1999 ($0.81), and the exercise price of the
     option ($0.4375 to $0.688) multiplied by the applicable number of options
     exercised.

(2)  Represents the difference between the exercise price and the closing price
     on December 31, 1999, multiplied by the applicable number of securities.

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. 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,
but not less than $25,000 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


                                       44
<PAGE>   45


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 expired on December 31, 1999 and provided for an annual
base salary of $477,950 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).
Also, 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). At December
31, 1999, the Board has approved recognition of a deferred compensation
liability to Mr. Hannesson of $343,000. This represents, among other things,
monies due Mr. Hannesson for deferred payroll, approved relocation costs and
guaranteed minimum bonuses.

     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. Mr. Fullwood resigned as an employee of the Company
effective July 10, 1998, thus voiding the employment contract.

     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 received severance pay and benefits which terminated
June 30, 1999.

     James M. DeAngelis, the Company's Vice President and Chief Financial
Officer, 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 expired on December 31, 1999. It provided
for an annual base salary of $145,000.

     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 expired on December 31, 1999. It provided for an annual
base salary of $150,000.


                                       45
<PAGE>   46


     The Company has decided to no longer use employment contracts in the normal
course of business.

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, 1999 were Herbert A. Cohen (Chairman), David L. Mitchell, and William R.
Toller. At December 31, 1999, 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,
1999. Mr. Mitchell served as a consultant to the 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, 1999, 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, 1999, addressing the
Company's compensation policies for 1999 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.


                                       46
<PAGE>   47
     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.

     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 1999
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 1999, 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, 1999. 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.


                                       47
<PAGE>   48


     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
1999, 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 1998 goals and his individual contributions to the Company
and its affiliates. The Compensation Committee concluded that he had achieved
his 1998 goals and had provided a leadership role in achieving the Company's and
its affiliates' strategic priorities for 1998. 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 judgment
based on the above factors, and no specific formula was applied to determine the
weight of each factor.

     Mr. Hannesson's base salary increased from $434,500 for 1998 to $477,950
for 1999, representing an increase of approximately 10%. On October 5, 1998, Mr.
Hannesson agreed to defer a portion of his base salary (31%), reducing his base
salary to $330,000. 1998 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 his 1998 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. The Company
paid all of Mr. Hannesson's compensation in 1999.

     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 1999 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 1999, Mr.
Hannesson was awarded an incentive bonus of $0. However, per Mr. Hannesson's
employment contract, he was guaranteed a minimum bonus of $25,000 per year. The
Company has included $50,000 in a deferred compensation liability representing
minimum bonuses for 1998 and 1999.

     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.


                                       48
<PAGE>   49


         A total of 3,259,323 and 3,576,412 stock options were granted pursuant
to the 1998 Plan in 1999 and 1998, respectively. 2,400,000 and 577,500 of which
were granted to Mr. Hannesson respectively, and 500,000 and 656,250 of which
were granted (in the aggregate) to other individuals named in the Summary
Compensation Table. The 1998 number does not include 324,959 stock options
granted to Directors under the 1996 Plan, which were rescinded on the issuance
of the 1998 Plan. The number of stock options granted in 1999 and 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 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.


                                      49

<PAGE>   50







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 February 29,
2000, 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
          -------------------                    ---------------------                -------------------------
<S>                                              <C>                                   <C>
Commodore Environmental
Services, Inc........................                15,456,677(3)                              49.9%
Bentley J. Blum......................                15,526,677(4)                              50.0%
Paul E. Hannesson....................                 2,121,578(5)                               6.7%

</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 February 29, 2000, 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) 3,077,500 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.
         Hannesson disclaims any beneficial interest in the shares of
         Environmental Common Stock




                                    50


<PAGE>   51




         owned by or for the benefit of his spouse and children. It also does
         not include 2,400,000 shares of common stock underlying stock options
         granted to Mr. Hannesson by the Company which are not currently
         exercisable.

SECURITY OWNERSHIP OF MANAGEMENT

         The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of the Record Date by (i) 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, (ii) each Director, (iii)
each individual listed in the Summary Compensation Table herein, and (iv) 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>

                                                                                         PERCENTAGE OF OUTSTANDING
              NAME AND ADDRESS OF                         NUMBER OF SHARES                 SHARES OF COMMON STOCK
              BENEFICIAL OWNER(1)                      BENEFICIALLY OWNED(2)                 BENEFICIALLY OWNED
              -------------------                      ---------------------             -------------------------
<S>                                                       <C>                                       <C>
Commodore Environmental Services, Inc.......              15,456,677(3)                             49.9%
Bentley J. Blum.............................              15,526,677(4)                             50.0%
Paul E. Hannesson...........................               2,121,578(5)                              6.7%
James M. DeAngelis..........................                 524,011(6)                              1.7%
Peter E. Harrod.............................                 353,000(7)                              1.1%
William E. Ingram...........................                 190,000(8)                              *
Kenneth L. Adelman, PhD.....................                  70,000(9)                              *
Herbert A. Cohen............................                  71,000(10)                             *
David L. Mitchell...........................                  70,000(11)                             *
Edward L. Palmer............................                  70,000(12)                             *
William R. Toller...........................                  70,000(13)                             *
All executive officers and Directors as a
group (10 persons)..........................              19,066,266                                61.6%
</TABLE>

 *       Percentage ownership is less than 1%

(1)      Unless otherwise noted, the address of each beneficial owner is 150
         East 58th Street, Suite 3400, New York, New York 10155.

(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 14,410,540 shares of
         Common Stock at exercise prices ranging from $1.28 per share. See
         "Certain Relationships and Related Transactions."

(4)      Consists of: (i) 70,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Blum by the Company's 1998
         Stock Option Plan (the "1998 Plan"); and (ii) Mr. Blum's indirect
         beneficial ownership of Common Stock based upon his beneficial
         ownership of 28,479,737 shares of Environmental common stock; and
         (iii) 4,500,000 shares of Environmental underlying currently
         exercisable options at $0.10 per share; and (iv) his spouse's
         ownership of 2,000,000 shares of common stock of Environmental,
         representing together 52.0% of the outstanding shares of Environmental
         common stock at the Record Date.



                                      51


<PAGE>   52


         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. The
         Board of Directors of Environmental has the power to direct the vote
         and to direct the disposition of the 15,456,677 shares of Common Stock
         of the Issuer owned directly by Environmental. Environmental's Board
         of Directors is currently composed of two directors, one of which is
         Mr. Blum. By virtue of Mr. Blum's beneficial ownership of
         approximately 52% of the outstanding shares of Environmental common
         stock and his position on the Board of Directors of Environmental, Mr.
         Blum is deemed to be the indirect beneficial owner of the shares of
         the Issuer's Common Stock owned directly by Environmental and shares
         voting and disposition power with the other member of Environmental's
         Board of Directors.

(5)      Consists of: (i) 577,500 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Hannesson by the Company
         under the Company's 1998 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, (c) 500,000 shares of Environmental
         common stock issued to the Hannesson Family Trust, and (d) additional
         stock options to purchase 525,705 shares of Environmental common stock
         at $0.10 per share, representing collectively 10% of the outstanding
         shares of Environmental common stock at the Record Date. 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. It also does not include 2,400,000 shares of Common
         Stock underlying stock options granted to Mr. Hannesson by the Company
         that are not currently exercisable.

(6)      Consists of (i) 381,250 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. DeAngelis by the Company
         under the Company's 1998 Plan; and (ii) Mr. DeAngelis' indirect
         beneficial ownership of Common Stock based upon his ownership of
         580,000 shares of Environmental.

(7)      Consists of 353,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Harrod by the Company under
         the Company's 1998 Plan.

(8)      Consists of 190,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Ingram by the Company under
         the Company's 1998 Plan.

(9)      Consists of 70,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Adelman by the Company under
         the Company's 1998 Plan.

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

(11)     Consists of 70,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Mitchell by the Company under
         the Company's 1998 Plan.

(12)     Consists of 70,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Palmer by the Company under
         the Company's 1998 Plan.

(13)     Consists of 70,000 shares of Common Stock underlying currently
         exercisable stock options granted to Mr. Toller by the Company under
         the Company's 1998 Plan.


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


                                      52


<PAGE>   53





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



                                      53




<PAGE>   54





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 of all of the 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



                                      54



<PAGE>   55



(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.

         There was no sharing of services in 1999, although, insurance costs
were allocated between the Companies where it was beneficial to insure the
family of Companies under one policy.

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 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


                                      55


<PAGE>   56




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 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 has been effective for 75 consecutive days and is effective on the
date of such repayment. 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. 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."





                                      56




<PAGE>   57







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).

          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 have been 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



                                      57



<PAGE>   58





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.

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.





                                      58



<PAGE>   59



                                    PART IV

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

         The following documents are filed as part of this Annual Report:

<TABLE>
<CAPTION>
                                                                                                            Page No.
                                                                                                            --------
Financial Statements.

         <S>                                                                                                 <C>
         Independent Auditors' Report.............................................................             F-1
         Report of Independent Accountants........................................................             F-1A
         Consolidated Balance Sheets as of December 31, 1999 and 1998.............................             F-2
         Consolidated  Statements  of  Operations  and  Comprehensive  Loss for the years ended
                  December 31, 1999, 1998 and 1997................................................             F-4
         Consolidated Statements of Stockholders' Equity for the years
                  ended December 31, 1999, 1998 and 1997..........................................             F-5
         Consolidated Statements of Cash Flows for the years ended
                  December 31, 1999, 1998 and 1997................................................             F-8
         Notes to Consolidated Financial Statements...............................................             F-10

</TABLE>



         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.

                                       59
<PAGE>   60


                                   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:  March 29, 2000             COMMODORE APPLIED TECHNOLOGIES, INC.

                                  By: /s/ JAMES M. DEANGELIS
                                      ------------------------------------------
                                          James. M. DeAngelis, Senior Vice
                                          President and Chief Financial 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 Chief           March 29, 2000
------------------------------------------     Executive Officer (principal executive
Paul E. Hannesson                              officer)


/s/ James M. DeAngelis                         Senior Vice President                     March 29, 2000
------------------------------------------     Chief Financial Officer (principal
James M. DeAngelis                             financial officer)

/s/ William E. Ingram                          Vice President and Controller             March 29, 2000
----------------------------------
William E. Ingram

/s/ Kenneth L. Adelman                         Director                                  March 29, 2000
------------------------------------------
Kenneth L. Adelman, Ph.D.

/s/ Bentley J. Blum                            Director                                  March 29, 2000
------------------------------------------
Bentley J. Blum

/s/ Herbert A. Cohen                           Director                                  March 29, 2000
------------------------------------------
Herbert A. Cohen

/s/ David L. Mitchell                          Director                                  March 29, 2000
------------------------------------------
David L. Mitchell

/s/ Edward L. Palmer                           Director                                  March 29, 2000
----------------------------------
Edward L. Palmer

/s/ William R. Toller                          Director                                  March 29, 2000
------------------------------------------
William R. Toller
</TABLE>


                                       60
<PAGE>   61




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)

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)

4.19          Warrant to purchase shares of Common Stock of Commodore Applied
              Technologies, Inc. issued to The Shaar Fund Ltd. (16)

4.20          Certificate of Designation of Series E Preferred Stock. (16)

4.21          Warrant to purchase shares of Common Stock of Commodore Applied
              Technologies, Inc. issued to Avalon Research Group, Inc. (16)

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)


                                       61
<PAGE>   62

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)

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)


                                       62
<PAGE>   63

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)

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)

10.34         Securities Purchase Agreement, dated November 4, 1999, between
              Commodore Applied Technologies, Inc. and The Shaar Fund Ltd. (16)

10.35         Registration Rights Agreement, dated November 4, 1999, between
              Commodore Applied Technologies, Inc. and the Shaar Fund Ltd. (16)

10.36         Finder's Agreement, dated August 17, 1999, between Commodore
              Applied Technologies, Inc. and Avalon Research Group, Inc. (16)

16.1          Letter regarding change in certifying accountant. (12)

16.2          Letter regarding change in certifying accountant. (17)

*21.1         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).








                                       63
<PAGE>   64

(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).

(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 an 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).

(16) Incorporated by reference and filed as an Exhibit to Registrant's
     Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 filed
     with the Securities and Exchange Commission on February 10, 2000 (File No.
     333-95445).

(17) 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
     August 23, 1999 (File No. 1-11871).

Reports on Form 8-K:
-------------------

     On November 16, 1999, the Company filed with the SEC the Company's current
report on Form 8-K, dated October 31, 1999, with respect to its announcement
that the agreement and Plan of Merger, dated October 1, 1999, between Global
Energy Investors, Inc., and certain other parties thereto expired by its terms
on October 31, 1999. Such event was reported in Item 5 of the Form 8-K and no
financial statements were included in such report.

                                       64
<PAGE>   65


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES

                                          CONSOLIDATED FINANCIAL STATEMENT INDEX

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



<TABLE>
<CAPTION>


                                                                                         PAGE

<S>                                                                                     <C>
Commodore Applied Technologies Inc.

     Independent Auditors' Report                                                        F-1

     Report of Independent Accountants                                                   F-1A

     Consolidated Balance Sheet as of December 31, 1999 and 1998                         F-2

     Consolidated Statements of Operations for the years ended
       December 31, 1999, 1998 and 1997                                                  F-4

     Consolidated Statements of Stockholders' Equity for
       the years ended December 31, 1999, 1998 and 1997                                  F-5

     Consolidated Statements of Cash Flows for the years
       ended December 31, 1999, 1998 and 1997                                            F-8

     Notes to Consolidated Financial Statements                                          F-10
</TABLE>


                                      F-i
<PAGE>   66



                                                    INDEPENDENT AUDITOR'S REPORT



TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES

We have audited the consolidated balance sheet of COMMODORE APPLIED
TECHNOLOGIES, INC. AND SUBSIDIARIES as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of COMMODORE APPLIED
TECHNOLOGIES, INC. AND SUBSIDIARIES as of December 31, 1999, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.


                                                  Tanner + Co.


Salt Lake City, Utah
February 18, 2000, except Note 18 which is
  dated March 17, 2000


                                                                             F-1

<PAGE>   67


                       REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated balance sheet as of December 31, 1998 and the
related consolidated statements of operations and comprehensive loss, of
stockholders' equity and of cash flows for each of the two years in the period
ended December 31, 1998 present fairly, in all material respects, the financial
position, results of operations and cash flows of Commodore Applied
Technologies, Inc. and its subsidiaries at December 31, 1998 and for each of the
two 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. We have not
audited the consolidated financial statements of Commodore Applied Technologies,
Inc. for any period subsequent to December 31, 1998.

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-1A
<PAGE>   68


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

<TABLE>
<CAPTION>

                                                                    1999         1998
                                                                 ----------   ----------
              ASSETS
<S>                                                              <C>          <C>
Current assets:
     Cash and cash equivalents (Note 2)                          $    1,797   $    1,777
     Accounts receivable, net (Notes 2, 6 and 10)                     3,552        3,142
     Notes and advances to related parties (Note 15)                    265          130
     Restricted cash and certificates of deposit (Note 2)                21           21
     Prepaid assets and other current receivables                       366          271
                                                                 ----------   ----------

                  Total current assets                                6,001        5,341

Investments and advances (Note 7)                                        --           --
Property and equipment, net (Notes 2, 8 and 10)                       2,244        2,202
Other assets (Notes 2 and 5):
     Patents and completed technology, net of accumulated
       amortization of $425 and $296, respectively                      961          977
     Goodwill, net of accumulated amortization of $831
       and $575, respectively                                         6,841        7,097
                                                                 ----------   ----------


                  Total assets                                   $   16,047   $   15,617
                                                                 ----------   ----------

</TABLE>




--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.                                                                  F-2




<PAGE>   69

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                                      CONSOLIDATED BALANCE SHEET

                                                      DECEMBER 31, 1999 AND 1998
                        (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                       1999          1998
                                                                                   ----------    ----------
              LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                                <C>           <C>

Current liabilities:
     Accounts payable                                                              $    1,792    $      975
     Current portion of long-term debt (Note 10)                                          200             5
     Line of credit (Note 10)                                                             948           361
     Other accrued liabilities (Note 9)                                                 2,255         2,183
                                                                                   ----------    ----------

                  Total current liabilities                                             5,195         3,524
                                                                                   ----------    ----------

Long-term debt (Note 10)                                                                  716            --
Notes payable to related parties (Note 15)                                                185           185
                                                                                   ----------    ----------

                  Total liabilities                                                     6,096         3,709

Minority interest in subsidiary (Note 5)                                                   --            --
Commitments and contingencies (Note 16)                                                    --            --
Stockholders' Equity:
     Convertible Preferred Stock, Series B, C and D, par value $.001 per share,
       6% non-cumulative dividends, 65,000 shares authorized, 0 and 51,489 share
       issued and outstanding, at December 31, 1999 and 1998,
       respectively (Notes 5 and 13)                                                       --            --
     Convertible Preferred Stock, Series E,  par value $0.001
       per share, aggregate liquidation value of $4,355,000, 12% cumulative
       dividends, 335,000 shares authorized, 335,000 shares and 0 shares issued
       and outstanding at December 31, 1999 and 1998,
       respectively (Notes 5 and 13)                                                       --            --
     Common Stock, par value $0.001 per share, 100,000,000
       shares authorized, 30,962,938 and 23,702,263 issued
       and outstanding, at December 31, 1999 and 1998,
       respectively                                                                        31            24
Additional paid-in capital                                                             49,350        47,329
Accumulated deficit                                                                   (39,430)      (35,445)
                                                                                   ----------    ----------

                  Total stockholders' equity                                            9,951        11,908
                                                                                   ----------    ----------


                  Total liabilities and stockholders' equity                       $   16,047    $   15,617
                                                                                   ==========    ==========
</TABLE>



--------------------------------------------------------------------------------
                                                                             F-3

<PAGE>   70

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF OPERATIONS

                                    YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                        (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                          1999        1998        1997
                                                       --------    --------    --------

<S>                                                    <C>         <C>         <C>
Contract revenue (Note 2)                              $ 18,147    $ 17,470    $ 19,493
Costs and expenses:
     Cost of sales                                       16,127      15,421      16,325
     Research and development (Note 2)                    1,145       2,722       3,074
     General and administrative                           4,037       8,118      12,196
     Depreciation and amortization (Note 2)                 696       1,150       1,282
     Minority interest                                       --         300         (82)
                                                       --------    --------    --------

                  Total costs and expenses               22,005      27,711      32,795
                                                       --------    --------    --------

Loss from operations                                     (3,858)    (10,241)    (13,302)

Gain on sale of affiliate (Note 5)                           --       4,664          --
Interest income                                              39         337         745
Interest expense                                           (166)     (1,066)     (1,310)
Equity in losses of unconsolidated subsidiary                --      (2,383)     (1,827)
                                                       --------    --------    --------

Loss before income taxes and extraordinary item          (3,985)     (8,689)    (15,694)
Income tax benefit (Note 12)                                 --       1,262          --
                                                       --------    --------    --------

Net loss before extraordinary item                       (3,985)     (7,427)    (15,694)
Extraordinary item - gain on troubled debt
  restructuring, net of taxes $1,262 (Note 5)                --       1,892          --
                                                       --------    --------    --------

Net loss                                               $ (3,985)   $ (5,535)   $(15,694)
                                                       ========    ========    ========

Net loss per share before extraordinary item -
  basic and diluted                                    $   (.16)   $   (.32)   $   (.73)

Extraordinary item per share - basic and diluted             --         .08          --
                                                       --------    --------    --------

Net loss per share - basic and diluted (Note 3)        $   (.16)   $   (.24)   $   (.73)
                                                       ========    ========    ========
Number of weighted average shares outstanding            24,819      23,194      21,844
                                                       ========    ========    ========
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.                                                                  F-4



<PAGE>   71





                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                   YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                        (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)

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

<TABLE>
<CAPTION>


                                                          PREFERRED STOCK           COMMON STOCK         ADDITIONAL
                                                      -----------------------   ----------------------     PAID-IN      ACCUMULATED
                                                        SHARES       AMOUNT       SHARES       AMOUNT      CAPITAL        DEFICIT
                                                      ----------   ----------   ----------   ----------   ----------    ----------
<S>                                                   <C>          <C>          <C>          <C>          <C>           <C>
Balance, January 1, 1997                                      --   $       --   21,650,000   $       22   $   34,270    $  (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 $1,189 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)
                                                      ----------   ----------   ----------   ----------   ----------    ----------
</TABLE>


--------------------------------------------------------------------------------
                                                                             F-5

<PAGE>   72


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                                                       CONTINUED

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

<TABLE>
<CAPTION>




                                                               PREFERRED STOCK           COMMON STOCK       ADDITIONAL
                                                            ----------------------  ----------------------    PAID-IN    ACCUMULATED
                                                              SHARES      AMOUNT      SHARES      AMOUNT      CAPITAL      DEFICIT
                                                            ----------  ----------  ----------  ----------  ----------   ----------

<S>                                                         <C>         <C>         <C>          <C>        <C>          <C>
Balance, December 31, 1997                                          --          --  22,766,334          23      41,541      (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
   (Notes 5 and 13)                                             20,909          --          --          --         813           --

Issuance of Series C Convertible Preferred Stock
  (Notes 5 and 13)                                              10,189          --          --          --         396           --

Issuance of Series D Convertible Preferred Stock
  (Notes 5 and 13)                                              20,391          --          --          --         792           --

Net loss                                                            --          --          --          --          --       (5,535)
                                                            ----------  ----------  ----------  ----------  ----------   ----------

</TABLE>

--------------------------------------------------------------------------------
                                                                            F-6

<PAGE>   73


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                                                       CONTINUED

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

<TABLE>
<CAPTION>


                                                          PREFERRED STOCK            COMMON STOCK        ADDITIONAL
                                                     ------------------------   -----------------------    PAID-IN      ACCUMULATED
                                                       SHARES        AMOUNT       SHARES       AMOUNT      CAPITAL        DEFICIT
                                                     ----------    ----------   ----------   ----------   ----------    ----------

<S>                                                  <C>          <C>          <C>          <C>          <C>           <C>
Balance December 31, 1998                                51,489            --   23,702,263           24       47,329       (35,445)

Conversion of series B, C, and D preferred stock
  into common stock (Notes 5 and 13)                    (51,489)           --    7,258,533            7           (7)           --

Issuance of Series E Convertible Preferred Stock
  at redemption value (Notes 5 and 13)                  335,000            --           --           --        2,030            --

Warrants issued in connection with Series E
  Convertible Preferred Stock                                --            --           --           --           60            --

Preferred stock dividends                                    --            --           --           --          (63)           --

Exercise of stock options                                    --            --        2,142           --            1            --

Net loss                                                     --            --           --           --           --        (3,985)
                                                     ----------    ----------   ----------   ----------   ----------    ----------

Balance, December 31, 1999                              335,000    $       --   30,962,938   $       31   $   49,350    $  (39,430)
                                                     ==========    ==========   ==========   ==========   ==========    ==========
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.                                                                  F-7


<PAGE>   74


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF CASH FLOWS

                                   YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
                        (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>


                                                                           1999        1998        1997
                                                                         --------    --------    --------

<S>                                                                      <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                            $ (3,985)   $ (5,535)   $(15,694)
     Adjustments to reconcile net loss to net cash
       used in operating activities:
         Depreciation and amortization                                        696       1,150       1,282
         Loss on disposition of property and equipment                         --         601          --
         Equity in losses of unconsolidated subsidiary                         --       2,340       1,827
         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
       and acquisitions:
         Accounts receivable                                                 (410)        (79)      4,085
         Inventory                                                             --        (271)       (360)
         Restricted cash                                                       --         (21)         --
         Prepaid assets                                                       (95)        132         178
         Other accounts receivable                                             --          18          45
         Accounts payable and accrued liabilities                             889        (776)     (1,347)
         Other                                                                 --          19         105
                                                                         --------    --------    --------

                  Net cash used in
                  operating activities                                     (2,905)     (9,176)     (8,220)
                                                                         --------    --------    --------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Equipment purchased or constructed                                      (353)     (2,554)     (1,409)
     Patents acquired                                                        (113)       (150)       (401)
     Purchase of Commodore Separation Technologies, Inc.,
       Commodore CFC Technologies, Inc., and CFC
       Technologies, Inc., net of cash acquired                                --          --          --
     Advances to related parties                                             (135)        (96)         --
     Increase in restricted cash                                               --          50         410
     Cash held by subsidiary at the time of sale                               --        (715)         --
     Repayment of loans to affiliate, net of advances                          --         752        (723)
     Contributions to affiliate                                                --      (2,377)     (1,000)
                                                                         --------    --------    --------

                  Net cash used in
                  investing activities                                       (601)     (5,090)     (3,123)
                                                                         --------    --------    --------
</TABLE>


--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.                                                                  F-8

<PAGE>   75


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENT OF CASH FLOWS
                                                                       CONTINUED

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



<TABLE>
<CAPTION>

CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                            <C>           <C>           <C>
     Proceeds from sale of Common Stock                                 1            --         2,341
     Proceeds from sale of Preferred Stock                          2,090            --         1,668
     Preferred stock dividends paid by subsidiary                      --          (300)         (438)
     Preferred stock dividends                                        (63)
     Proceeds from subsidiary's sale of Common
       and Preferred Stock                                             --            --        11,088
     Payments to principal shareholder                                 --        (1,328)           --
     Borrowings from principal shareholder                             --         5,450         4,000
     (Repayments)/borrowings under the line of credit                 587          (838)       (5,843)
     Borrowings on long term debt                                   1,000            --            --
     Payments on long term debt and capital leases                    (89)          (35)          (72)
     Repayment of related party accounts receivable
       and payable                                                     --           (57)         (326)
                                                               ----------    ----------    ----------

                  Net cash provided by
                  financing activities                              3,526         2,892        12,418
                                                               ----------    ----------    ----------

(Decrease) increase in cash and cash equivalents                       20       (11,374)        1,075

Cash and cash equivalents, beginning of year                        1,777        13,151        12,076
                                                               ----------    ----------    ----------

Cash and cash equivalents, end of year                         $    1,797    $    1,777    $   13,151
                                                               ==========    ==========    ==========



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     Cash paid during the year for:

              Interest                                         $      166    $      289    $      446
                                                               ==========    ==========    ==========

              Taxes                                            $       --    $       --    $       --
                                                               ==========    ==========    ==========
</TABLE>




--------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.                                                                  F-9

<PAGE>   76


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                      DECEMBER 31, 1999 AND 1998
                                  (IN THOUSANDS EXCEPT SHARE 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
                         Advanced 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).



--------------------------------------------------------------------------------
                                                                            F-10

<PAGE>   77


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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



2.   SUMMARY OF          LIQUIDITY
     SIGNIFICANT
     ACCOUNTING          The accompanying consolidated financial statements have
     POLICIES            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 consolidated financial
                         statements for the years ended December 31, 1999, 1998
                         and 1997, Applied incurred losses exclusive of their
                         gains on the sale of an affiliate and extraordinary
                         item of $3,985, $13,353 and $15,694, respectively.
                         Applied has also experienced net cash outflows from
                         operating activities of $2,905, $9,155 and $8,220 for
                         the years ended December 31, 1999, 1998 and 1997,
                         respectively. With the financing described in Note 18,
                         The consolidated 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.

                         As described in Note 18, in March 2000 Applied
                         completed a $2.0 million dollar financing through a
                         private placement. Net proceeds to the Company were
                         $1.77 million. With this additional cash, it appears
                         Applied will be able to meet its obligations on a
                         timely basis and continue as a going concern.

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


--------------------------------------------------------------------------------
                                                                            F-11

<PAGE>   78


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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



2.   SUMMARY OF          USE OF ESTIMATES
     SIGNIFICANT
     ACCOUNTING          The preparation of consolidated financial statements in
     POLICIES            conformity with generally accepted accounting
     CONTINUED           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.

--------------------------------------------------------------------------------
                                                                            F-12

<PAGE>   79


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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


2.   SUMMARY OF          CASH AND CASH EQUIVALENTS
     SIGNIFICANT
     ACCOUNTING          Applied considers cash and highly liquid debt
     POLICIES            instruments with original maturities of three months or
     CONTINUED           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 consists of $21 held in interest
                         bearing deposit accounts as security for closure costs
                         on potential permitted facilities.


                         CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

                         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.

                         The contract with Customer A is scheduled to end on
                         September 30, 2000. Sales to major customers which
                         exceeded 10 percent of net sales are as follows:

<TABLE>
<CAPTION>

                                                       YEARS ENDED DECEMBER 31,
                                                ------------------------------------
                                                    1999         1998         1997
                                                ----------   ----------   ----------

<S>                                             <C>          <C>          <C>
                         Customer A             $   12,287   $   10,673   $   12,729
                         Customer B             $    3,692   $    4,061   $    3,058
                         Customer C             $    1,006   $    1,972   $    2,168
</TABLE>



                         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.
                         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.

--------------------------------------------------------------------------------
                                                                            F-13

<PAGE>   80


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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



2.   SUMMARY OF          IMPAIRMENT OF LONG-LIVED ASSETS
     SIGNIFICANT
     ACCOUNTING          Applied reviews its long-lived assets for impairment
     POLICIES            whenever events or changes in circumstances indicate
     CONTINUED           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.

--------------------------------------------------------------------------------
                                                                            F-14

<PAGE>   81


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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



2.   SUMMARY OF          INCOME TAXES
     SIGNIFICANT
     ACCOUNTING          Income taxes are determined in accordance with
     POLICIES            Statement of Financial Accounting Standards ("SFAS")
     CONTINUED           109, which requires recognition of deferred income tax
                         liabilities and assets for the 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, 1999 and 1998.

                         RECLASSIFICATIONS

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

--------------------------------------------------------------------------------
                                                                            F-15

<PAGE>   82


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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



2.   SUMMARY OF          STOCK-BASED COMPENSATION
     SIGNIFICANT
     ACCOUNTING          Compensation costs attributable to stock option and
     POLICIES            similar plans are recognized based on any difference
     CONTINUED           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.

                         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-16

<PAGE>   83


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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


3.   EARNINGS PER        All earnings per share amounts reflect the
     SHARE               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 that would
                         be issued assuming all contingently issuable shares
                         having a dilutive effect on earnings per share were
                         outstanding for the period.

<TABLE>
<CAPTION>

                                                        YEAR ENDED DECEMBER 31,
                                                --------------------------------------
                                                    1999          1998          1997
                                                ----------    ----------    ----------

<S>                                             <C>           <C>           <C>
Net loss before extraordinary item              $   (3,985)   $   (7,427)   $  (15,694)
Preferred stock dividends                              (63)          (14)         (240)
Dividends on Series A Preferred Stock
  (not declared)                                        --            --           (26)
                                                ----------    ----------    ----------

Net loss applicable to common
  shareholders before extraordinary item            (4,048)       (7,441)      (15,960)

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

Net loss available to common
  shareholders                                  $   (4,048)   $   (5,549)   $  (15,960)
                                                ==========    ==========    ==========
</TABLE>



--------------------------------------------------------------------------------
                                                                            F-17

<PAGE>   84


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

<TABLE>


<S>                                                                <C>               <C>               <C>
3.   EARNINGS            Weighted average common shares
     PER SHARE             outstanding (basic)                         24,819,000        23,194,000        21,844,000
     CONTINUED           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)                                           --               (*)                --
                         Series E 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)                       24,819,000        23,194,000        21,844,000
                                                                   ==============    ==============    ==============

                         Net loss per share before extraordinary
                           item - basic and diluted                $         (.16)   $         (.32)   $         (.73)

                         Extraordinary item per share -
                           basic and diluted                                   --               .08                --
                                                                   --------------    --------------    --------------

                         Net loss per share - basic and diluted    $         (.16)   $         (.24)   $         (.73)
                                                                   ==============    ==============    ==============
</TABLE>


                         (*) Due to Applied's loss from continuing operations in
                         1999, 1998 and 1997, the incremental shares issuable in
                         connection with these instruments are anti-dilutive and
                         accordingly not considered in the calculation.

--------------------------------------------------------------------------------
                                                                            F-18

<PAGE>   85


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

4.   SEGMENT             Using the guidelines set forth in SFAS No. 131,
     INFORMATION         "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. 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-19

<PAGE>   86


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

<TABLE>
<CAPTION>


     1999                                                                     CORPORATE
                                                                              OVERHEAD
                                      TOTAL         CASI       SOLUTION       & OTHER
                                   ----------    ----------    ----------    ----------

<S>                                <C>           <C>           <C>           <C>
Revenue                            $   18,147    $   17,973    $      174    $       --

Costs and expenses:
   Cost of sales                       16,127        15,865           262            --
   Research and development             1,145            --         1,145            --
   General and administrative           4,037         1,428           175         2,434
   Depreciation and
     amortization                         696            64           247           385
   Minority interest                       --            --            --            --
                                   ----------    ----------    ----------    ----------

     Total costs and expenses          22,005        17,357         1,829         2,819
                                   ----------    ----------    ----------    ----------

Income (loss) from operations          (3,858)          616        (1,655)       (2,819)

Interest income                            39            --            --            39
Interest expense                         (166)         (103)          (63)           --
Equity in losses of
  unconsolidated subsidiary                --            --            --            --
Income taxes                               --            --            --            --
                                   ----------    ----------    ----------    ----------

Net income (loss)                  $   (3,985)   $      513    $   (1,718)   $   (2,780)
                                   ==========    ==========    ==========    ==========

Total assets                       $   16,047    $    4,108    $    2,035    $   11,713
                                   ==========    ==========    ==========    ==========

Expenditures for long-lived
  assets                           $      353    $       12    $      337    $        4
                                   ==========    ==========    ==========    ==========
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-20

<PAGE>   87


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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


<TABLE>
<CAPTION>

     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             8,188           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-21

<PAGE>   88


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

<TABLE>
<CAPTION>

     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    $         --    $      1,226    $        427    $        157
                                   ============    ============    ============    ============    ============
</TABLE>



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

                                                                            F-22

<PAGE>   89


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         1999
     TRANSACTIONS
                         SERIES E CONVERTIBLE PREFERRED STOCK

                         In November 1999, Applied completed $2.5 million in
                         financing through a private placement. The Company
                         issued 335,000 shares of a new Series E Convertible
                         Preferred Stock, convertible into the Company's common
                         stock at the market price, after April 30, 2000 and up
                         through April 30, 2003 at which time it automatically
                         converts to the Company's common stock. The Series E
                         Convertible Preferred Stock has a variable rate
                         dividend averaging 8.15% over the term of the
                         securities. The Company reserved the right to redeem
                         all of the Series E preferred stock on or before April
                         30, 2000 by payment of $2,800 plus any accrued
                         dividends.

                         The Series E Convertible Preferred Stock has a
                         liquidation preference of $10 per share. In addition,
                         the Company issued warrants to purchase 572,500 shares
                         of common stock at a purchase price equal to 110% of
                         the market price on the date of closing ($1.20). These
                         warrants expire on November 4, 2004.

                         The entry to record this transaction is as follows:

<TABLE>

<S>                                                          <C>
                         Cash                                $    2,500
                         Commission and buyer's legal cost         (410)
                         Value assigned to warrants                 (60)
                                                             ----------

                                                             $    2,030
                                                             ==========
</TABLE>

                         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.

--------------------------------------------------------------------------------
                                                                            F-23

<PAGE>   90


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         INTERCOMPANY NOTE - CONTINUED
     TRANSACTIONS
     CONTINUED           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:

<TABLE>
                                                         1997        1998
                                                         NOTE        NOTE         TOTAL
                                                       -------      -------      -------
<S>                                                    <C>          <C>          <C>
                              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
                                                       =======      =======      =======
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-24

<PAGE>   91


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         On September 28, 1998, Applied repaid all amounts owed
     TRANSACTIONS        to Commodore by exchanging i) its 87% interest in the
     CONTINUED           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:

<TABLE>
<S>                                                                             <C>
                              Carrying value of Intercompany Notes              $ 5,660
                                                                                -------
                              Value of 87% interest in a 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 warrant                           5
                                                                                -------
                              Value of consideration given                       (2,506)
                                                                                -------

                              Gain on troubled debt restructuring               $ 3,154
                                                                                =======
</TABLE>


                         Commodore has had various ownership percentages in
                         Applied over the past three years. At December 31, 1996
                         Commodore owned 69.3% of Applied; however, at September
                         28, 1998 Commodore owned only 34.6% of the outstanding
                         common stock of Applied.


                         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.


--------------------------------------------------------------------------------
                                                                            F-25

<PAGE>   92


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         1997
     TRANSACTIONS
     CONTINUED           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.

                         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 recorded as 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.


--------------------------------------------------------------------------------
                                                                            F-26

<PAGE>   93

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         REDEEMABLE PREFERRED STOCK (SERIES A PREFERRED STOCK) -
     TRANSACTIONS        CONTINUED
     CONTINUED
                         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.


--------------------------------------------------------------------------------
                                                                            F-27

<PAGE>   94

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         Applied recorded the $750 value of the beneficial
     TRANSACTIONS        conversion feature as additional paid-in capital,
     CONTINUED           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.


                         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.


--------------------------------------------------------------------------------
                                                                            F-28

<PAGE>   95

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   SIGNIFICANT         COMMODORE SEPARATION TECHNOLOGIES, INC.
     TRANSACTIONS
     CONTINUED           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 additional paid-in capital.

                         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-29

<PAGE>   96

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

6.   RECEIVABLES         The components of Applied's trade receivables are as
                         follows as of December 31, 1999 and 1998:


<TABLE>
<CAPTION>
                                                                             1999        1998
                                                                           -------     -------
<S>                                                                        <C>         <C>
                          Contract receivables:
                            Amounts billed                                 $ 3,637     $ 3,132
                            Retainages                                          25         142
                            Unrecovered costs and estimated
                               profits subject to future negotiation -
                               not billed                                        8         (14)
                                                                           -------     -------

                                                                             3,670       3,260

                          Less:  Allowance for doubtful accounts
                            and potential disallowances                        118         118
                                                                           -------     -------

                                        Total receivables - net            $ 3,552     $ 3,142
                                                                           =======     =======
</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).


--------------------------------------------------------------------------------
                                                                            F-30

<PAGE>   97


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

7.   OTHER               On August 6, 1996, Applied and Teledyne Environmental,
     INVESTMENTS         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. Applied
                         recognized a liability for $176 at December 31, 1999 to
                         properly record a capital contribution made in January
                         2000. This investment is accounted for under the equity
                         method.

                         Summarized information of the LLC's net assets and
                         results of operations was as follows at December 31,
                         1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                         1999         1998         1997
                                                                       -------      -------      -------
<S>                                                                    <C>          <C>          <C>
                           Current assets                              $ 1,988      $ 2,049      $ 1,701
                           Non-current assets                              903        1,549        1,312
                           Current liabilities                           2,679        3,873        1,771
                           Revenues                                         35        1,788          510
                           Expenses                                      1,108        6,467        4,163

                           Investment in LLC:
                                Opening balance                        $    --      $   554      $   658
                                Capital contribution                       176        2,581        1,000
                                Advances to LLC, net of repayments          --         (752)         723
                                Loss reserve                              (176)         (43)          --
                                Equity in net loss                          --       (2,340)      (1,827)
                                                                       -------      -------      -------

                                             Net amount                $    --      $    --      $   554
                                                                       =======      =======      =======
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-31

<PAGE>   98

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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



7.   OTHER               Due to uncertainties over the success of various claims
     INVESTMENTS         made by the LLC against various government agencies,
     CONTINUED           Applied recorded a reserve of $43 in the fourth quarter
                         of 1998 to reduce its investment to $0 at December 31,
                         1998. Applied committed to invest $176 in 1999 to cover
                         expenses by the LLC. Due to the uncertainty of
                         recovering this investment, Applied fully reserved for
                         this investment in 1999. Applied did not record its
                         equity in the losses of the LLC in 1999 as the LLC
                         agreement states that members of the LLC can only be
                         asked to fund approved capital calls and Applied has no
                         obligation to fund these 1999 losses.


8.   PROPERTY AND        Property and equipment consist of the following:
     EQUIPMENT

<TABLE>
<CAPTION>
                                                                    AVERAGE        DECEMBER 31
                                                                  USEFUL LIFE    1999        1998
                                                                  -----------   ------      ------
<S>                                                               <C>           <C>         <C>
                            Machinery and equipment                   10        $1,010      $1,119
                            Furniture and fixtures                     5            64          61
                            Computer equipment                         4           476         359
                            Leasehold improvements                     5            44          44
                            Equipment construction in progress                   1,550       1,208
                                                                                ------      ------

                                                                                 3,144       2,791

                            Less:  accumulated depreciation
                              and amortization                                     900         589
                                                                                ------      ------

                                 Total property and equipment                   $2,244      $2,202
                                                                                ======      ======
</TABLE>

                         Substantially all property and equipment is pledged to
                         collateralize its line-of-credit term loan (see Note
                         10).


--------------------------------------------------------------------------------
                                                                            F-32

<PAGE>   99

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

9.   OTHER               Other accrued liabilities consist of the following:
     ACCRUED
     LIABILITIES

<TABLE>
<CAPTION>
                                                                   1999       1998
                                                                  ------     ------
<S>                                                               <C>        <C>
                           Compensation and employee benefits     $  668     $  718
                           Severance Payments                        171        486
                           Loss reserve                              357        405
                           Accrued compensation                      325         --
                           Other                                     734        574
                                                                  ------     ------

                                                                  $2,255     $2,183
                                                                  ======     ======
</TABLE>

10.  LINE OF             At December 31, 1999 and 1998, CASI had a $948 and $361
     CREDIT AND          outstanding balance, respectively, on various revolving
     TERM LOAN           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 (10.0 percent as of December 31, 1999). 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-33

<PAGE>   100

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

10.  LINE OF             This line of credit was amended July 15, 1999 to
     CREDIT AND          include a promissory note of $1,000,000 secured by
     TERM LOAN           substantially all the property and equipment of the
     CONTINUED           Company. This increased the total facility to a maximum
                         of $3,000,000, including $2,000,000 revolving credit
                         loans and the $1,000,000 1999 term loan. The term loan
                         is payable at $16,667 per month plus interest. The term
                         loan has the following scheduled maturities:


<TABLE>
<CAPTION>
                              YEAR                        AMOUNT
                              ----                        ------
<S>                           <C>                         <C>
                              2000                        $ 200
                              2001                          200
                              2002                          200
                              2003                          200
                              2004                          116
                                                          -----

                                                            916
Less current portion of long-term debt                     (200)
                                                          -----

                                                          $ 716
                                                          =====
</TABLE>


11.  NON-CASH            1999
     INVESTING
     AND                 In 1999, 51,489 shares of Series B, C and D Preferred
     FINANCING           Stock held by Commodore with an aggregate value of
     ACTIVITIES          $2,001 were converted into common stock (Note 5).

                         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).


--------------------------------------------------------------------------------
                                                                            F-34

<PAGE>   101

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

11.  NON-CASH            1998 - CONTINUED
     INVESTING
     AND                 In September 1998, Applied repaid Intercompany Notes
     FINANCING           with a carrying value of $5,660 through the exchange of
     ACTIVITIES          87% interest in the Common Stock of Separation and
     CONTINUED           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 mandatorily 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 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).


--------------------------------------------------------------------------------
                                                                            F-35

<PAGE>   102


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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


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, 1999, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                      1999         1998         1997
                                                                    -------      -------      -------
<S>                                                                 <C>          <C>          <C>
                           Current tax benefit                      $(1,594)     $(4,244)     $(6,136)
                           Deferred tax expense                       1,594        2,982        6,136
                                                                    -------      -------      -------

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

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

                           Provision (benefit) for income taxes     $    --      $    --      $    --
                                                                    =======      =======      =======
</TABLE>

                         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:

<TABLE>
<CAPTION>
                                                                  1999         1998         1997
                                                                -------      -------      -------
<S>                                                             <C>          <C>          <C>
                           Expected tax benefit at federal
                             statutory rate                     $(1,355)     $(1,882)     $(5,336)
                           State income tax benefit, net of
                             federal income tax benefit            (239)        (332)        (942)
                           Loss on sale of subsidiary                --       (2,866)          --
                           Loss of NOLs in connection with
                             sale of affiliate                       --        3,689           --
                           Change in valuation allowance          1,594          476        5,694
                           Interest accretion                        --          796           86
                           Beneficial conversion                     --           --          300
                           Other                                     --          119          198
                                                                -------      -------      -------

                                    Income tax benefit          $    --      $    --      $    --
                                                                =======      =======      =======
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-36

<PAGE>   103


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

12.  INCOME TAXES        The components of the net deferred tax as of December
     CONTINUED           31, are as follows:

<TABLE>
<CAPTION>

                                                                            1999         1998          1997
                                                                          -------      --------      --------
<S>                                                                       <C>          <C>           <C>
                           Components of current deferred taxes, net:
                                Reserve for uncollectable
                                  receivables and potential
                                  disallowances                           $    --      $    480      $    492
                                Net operating loss carryforward            14,394        12,254        11,700
                                In process technology                         837           903           969
                                                                          -------       -------      --------

                                                                           15,231        13,637        13,161

                           Valuation allowance                            (15,231)      (13,637)      (13,161)
                                                                          -------       -------      --------

                                    Net deferred taxes                    $    --      $     --      $     --
                                                                          =======      ========      ========
</TABLE>

                         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 1999, 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, 1999 of approximately $36,000 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.

13.  STOCKHOLDERS'       In 1997, Applied amended its Certificate of
     EQUITY              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. The certificate of Incorporation was again
                         amended in 1999, increasing authorized shares of common
                         stock from 75,000,000 to 100,000,000.

--------------------------------------------------------------------------------
                                                                            F-37

<PAGE>   104

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

13.  STOCKHOLDERS'       CONVERTIBLE PREFERRED STOCK
     EQUITY
     CONTINUED           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 (an 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.

                         In November 1999, all of the Series B, C and D
                         Preferred Stock was converted into 7,258,533 shares of
                         common stock.

                         Effective November 4, 1999, Applied issued 335,000
                         shares of Series E convertible preferred stock with a
                         stated value of $10 per share. This stock carries a
                         divided rate of 12% per annum through April 30, 2000
                         and thereafter 5% per annum. In addition there is a
                         special dividend at the rate of 7.5% per annum which
                         will accrue commencing on May 1, 2000, payable on May
                         1, 2001. The special dividend will not be paid on any
                         Series E preferred share that is converted to common
                         stock on or before April 30, 2001.


--------------------------------------------------------------------------------
                                                                            F-38

<PAGE>   105

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

13.  STOCKHOLDERS'       CONVERTIBLE PREFERRED STOCK - CONTINUED
     EQUITY
     CONTINUED           The Series E convertible preferred stock is convertible
                         into common stock at any time following April 30, 2000
                         at a conversion price equal to the arithmetic mean of
                         the closing prices of our common stock as reported in
                         the American Stock Exchange for the ten trading days
                         immediately preceding the date of conversion.

                         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 Series
                         E Convertible Preferred Stock are entitled to receive
                         liquidation distributions equivalent to $10.00 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       Applied has adopted the intrinsic value method of
     AND STOCK           accounting for stock options and warrants under APB 25
     WARRANTS            with footnote disclosures of the pro forma effects as
                         if the FAS 123 fair value method had been adopted.

                         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>
                                                               1999         1998       1997
                                                             -------     -------     --------
<S>                                                          <C>         <C>         <C>
                            Net loss - as reported           $(3,985)    $(5,535)    $(15,694)
                            Net loss - pro forma             $(6,335)    $(7,931)    $(17,742)
                            Loss per share - as reported     $ (0.16)    $  (.24)       (0.73)
                            Loss per share - pro forma       $ (0.26)    $  (.34)       (0.82)
</TABLE>

--------------------------------------------------------------------------------
                                                                            F-39

<PAGE>   106


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

14.  STOCK OPTIONS       FAS 123 requires stock options to be valued using an
     AND STOCK           approach such as the Black-Scholes option pricing
     WARRANTS            model. The Black-Scholes model calculates the fair
     CONTINUED           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. Stock options granted under the plan may vest
                         immediately or for any period up to five years.

                         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.


--------------------------------------------------------------------------------
                                                                            F-40

<PAGE>   107

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

14.  STOCK OPTIONS       A summary of the status of options granted under the
     AND STOCK           Plan as of December 31, 1999 and 1998 and changes
     WARRANTS            during the periods then ended is presented below:
     CONTINUED

<TABLE>
<CAPTION>
                                                              1999                  1998                   1997
                                                      --------------------  ---------------------   --------------------
                                                                  WEIGHTED               WEIGHTED               WEIGHTED
                                                                   AVERAGE                AVERAGE                AVERAGE
                                                                  EXERCISE               EXERCISE               EXERCISE
                                                        SHARES     PRICE      SHARES      PRICE      SHARES      PRICE
                                                      ---------   --------  ----------   --------   ---------   --------
<S>                                                   <C>         <C>       <C>          <C>        <C>         <C>
                           Options outstanding -
                             beginning of year        4,155,012   $  1.08    2,912,375    $ 6.06    1,994,875    $ 6.22
                           Granted                    3,259,323      0.56    3,901,371      0.59    1,570,000      6.29
                           Exercised                     (2,142)     0.44           --        --           --        --
                           Forfeited                   (242,396)     4.86           --        --     (242,500)     6.19
                           Rescinded                         --             (2,658,734)     5.83     (410,000)     8.03
                                                      ---------             ----------              ---------

                           Options outstanding -
                             end of year              7,169,797      0.61    4,155,012      1.08    2,912,375      6.06
                                                      =========             ==========              =========
</TABLE>

                         The following table summarizes information about
                         employee stock options outstanding at December 31,
                         1999:

<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>
                           $ 0.25 - $0.44      3,520,474        9 years      $ 0.44    2,320,117      $ 0.44
                           $ 0.50 - $0.50      2,400,000      3.58 years     $ 0.50           --      $ 0.50
                           $ 0.63 - $1.44        891,948        9 years      $ 0.72      818,390      $ 0.69
                           $ 2.00 - $6.00        357,375      6.92 years     $ 4.92      337,375      $ 5.03
                                               ---------                               ---------
                                               7,169,797                     $ 0.61    3,475,882      $ 0.94
                                               =========                               =========
</TABLE>


--------------------------------------------------------------------------------
                                                                            F-41

<PAGE>   108


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

14.  STOCK OPTIONS       STOCK WARRANTS
     AND STOCK
     WARRANTS            Outstanding warrants (vested and not vested) at
     CONTINUED           December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                               GRANTED                              NUMBER OF   CURRENT
                               1997 AND      GRANTED     GRANTED     WARRANTS   EXERCISE    EXPIRATION
                                PRIOR         1998        1999         1999      PRICE         DATE
                              ----------    ---------   ---------   ----------  --------  --------------
<S>                                         <C>         <C>         <C>         <C>       <C>
                                 500,000           --          --      500,000  $ 7.20    August 2001
                               5,750,000           --   2,547,959    8,297,959    5.82    June 2001
                                 500,000           --          --      500,000   13.86    August 2001
                               7,500,000           --   3,405,444   10,905,444    6.88    December 2003
                                  19,407           --          --       19,407    5.80    August 2002
                                  60,000           --          --       60,000    3.68    September 2002
                               1,000,000           --     356,092    1,356,092    3.71    August 2002
                                  60,000           --          --       60,000    5.00    November 2000
                                      --      514,000     148,267      662,267    3.49    March 2003
                                      --    1,500,000     266,861    1,766,861    1.27    February 2004
                                      --           --     312,500      312,500    1.20    November 2004
                                      --           --     250,000      250,000    1.20    November 2004
                              ----------    ---------   ---------   ----------

                              15,389,407    2,014,000   7,287,123   24,690,530
                              ==========    =========   =========   ==========
</TABLE>


                         There were no warrants exercised in 1999, 1998 or 1997.
                         As of December 31, 1999 and 1998, 23,861,169 and
                         17,403,407, respectively, warrants were exercisable.


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 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.


--------------------------------------------------------------------------------
                                                                            F-42

<PAGE>   109

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

15.  RELATED PARTY       CASI had a lease agreement with its Chairman under
     TRANSACTIONS        which CASI utilizes certain real estate for business
     CONTINUED           purposes. Rent of approximately $11 was paid for the
                         year ended December 31, 1997. No rent was paid in 1998
                         or 1999.

                         The Company has receivables from entities under common
                         control of $265 and $130 at December 31, 1999 and 1998,
                         respectively. The Company also has payables to related
                         parties of $165 at December 31, 1999 and 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         OPERATING LEASES
     AND
     CONTINGENCIES       Applied and its subsidiaries are committed under non
                         cancelable operating leases for office space and other
                         equipment. Future obligations under the leases are as
                         follows:

<TABLE>
<S>                                                                   <C>
                             2000                                     $      244
                             2001                                            149
                             2002                                              5
                                                                      ----------
                                                                      $      398
                                                                      ==========
</TABLE>

                         Rent expense approximated $332, $502 and $767 in 1999,
                         1998 and 1997, respectively.


--------------------------------------------------------------------------------
                                                                            F-43

<PAGE>   110


                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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

16.  COMMITMENTS         EXECUTIVE BONUS PLAN
     AND
     CONTINGENCIES       Applied has a five-year Executive Bonus Plan (the
     CONTINUED           "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, 1999 and
                         1998.

                         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.

                         U.S. DEPARTMENT OF LABOR PENALTIES

                         CASI has been notified by the U.S. Department of Labor
                         that it is being assessed penalties totaling $100,000
                         for failing to file reports of an independent qualified
                         public accountant for its 401(k) salary deferral trust
                         and Plan Annual Reports for 1996 and 1997. These
                         reports have since been filed. The delay was the result
                         of numerous problems with the Plan's former record
                         keeper. The Company hopes to settle these penalties for
                         less than the assessed amounts and/or recover the
                         amounts from the previous record keeper.

17.  401(K)              The Company has adopted a 401(K) savings plan for all
     SAVINGS PLAN        employees who qualify as to age and service. The
                         Company made annual contributions to the plan of
                         approximately $91, $108 and $37 during the years
                         ended December 31, 1999, 1998 and 1997, respectively.


--------------------------------------------------------------------------------
                                                                            F-44

<PAGE>   111

                                            COMMODORE APPLIED TECHNOLOGIES, INC.
                                                                AND SUBSIDIARIES
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                       CONTINUED

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


18.  SUBSEQUENT          In March 2000, Applied completed $2.0 million in
     EVENT               financing through private placement. The Company issued
                         266,700 shares of a new Series F Convertible Preferred
                         Stock, Convertible into the Company's common stock at
                         any time on or after September 30, 2000. On Conversion
                         the investor will receive for each converted preferred
                         share the greater number of Company common shares as
                         determined by (1) the face per share ($10) plus accrued
                         dividend divided by the average of the closing prices
                         over a ten consecutive trading day period ending on the
                         Trading day immediately preceding the Conversion date,
                         or (2) $7.50 (the cash invested for each preferred
                         share) divided by $1.93875.

                         The Series F convertible preferred stock has a
                         liquidation preference of $10, per share. In addition,
                         the Company issued warrants to purchase 363,475 shares
                         of common stock at $1.93875 per share. These warrants
                         expire on March 16, 2005.

                         The Series F convertible preferred stock has an annual
                         dividend rate of 12% through September 30, 2000 and 5%
                         thereafter, paid quarterly. Transaction costs totaled
                         $230 resulting in net proceeds to the Company of $1.77
                         million.

--------------------------------------------------------------------------------
                                                                            F-45

<PAGE>   112















                            TELEDYNE-COMMODORE, LLC

                            FINANCIAL STATEMENTS












                                                                            F-46

<PAGE>   113




                                                         TELEDYNE-COMMODORE, LLC
                                                   INDEX TO FINANCIAL STATEMENTS


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






                                                                  PAGE

Independent Auditors' Report                                      F-48

Balance Sheet                                                     F-49

Statement of Operations                                           F-50

Statement of Members' Capital (deficit)                           F-51

Statement of Cash Flows                                           F-52

Notes to Financial Statements                                     F-54


                                                                            F-47

<PAGE>   114




                                                    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 except for
Notes 1, 3, 4, and 5 which are dated
April 26, 2000

                                                                            F-48

<PAGE>   115



                                                         TELEDYNE-COMMODORE, LLC
                                                                   BALANCE SHEET
<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,
----------------------------------------------------------------------------------------------------

                                                                           1999             1998
                                                                        (UNAUDITED)       (AUDITED)
                                                                       -----------------------------
                     ASSETS

<S>                                                                    <C>
Current assets:
     Cash                                                              $     21,403      $     63,252
     Capital contributions receivable                                       353,000           408,000
     Accounts receivable                                                  1,866,252         1,578,150
                                                                       ------------------------------

                  Total current assets                                    2,240,655         2,049,402

Plant and equipment, net                                                    871,788         1,515,867
Other assets                                                                 30,969            33,101
                                                                       ------------------------------

                                                                       $  3,143,412      $  3,598,370
                                                                       ==============================

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

          LIABILITIES AND MEMBERS' CAPITAL (DEFICIT)

Current liabilities:
     Accounts payable                                                  $    166,021      $  1,709,012
     Related party payables                                               2,413,089         2,163,504
                                                                       ------------------------------

                  Total current liabilities                               2,579,110         3,872,516
                                                                       ------------------------------

Contingency                                                                       -                 -

Members' Capital (deficit):
     Commodore                                                              282,151          (137,073)
     Teledyne                                                               282,151          (137,073)
                                                                       ------------------------------

                  Total members' capital (deficit)                          564,302          (274,146)
                                                                       ------------------------------

                                                                       $  3,143,412      $  3,598,370
                                                                       ==============================
</TABLE>






--------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                            F-49

<PAGE>   116



                                                         TELEDYNE-COMMODORE, LLC
                                                         STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------

                                                            1999              1998               1997
                                                         (UNAUDITED)        (AUDITED)         (UNAUDITED)
                                                        --------------------------------------------------

<S>                                                    <C>                 <C>                <C>
Revenue:                                                $     35,067       $  1,788,150       $    510,306
                                                        --------------------------------------------------

Expenses:
     Cost of revenues                                         21,807          3,317,651            572,719
     General and administrative                            1,169,280          1,780,413          1,741,459
     Research and development                                 10,505          1,399,302          2,033,093
                                                        --------------------------------------------------

              Total expenses                               1,201,592          6,497,366          4,347,271
                                                        --------------------------------------------------

Loss from operations                                      (1,166,525)        (4,709,216)        (3,836,965)

Other income:
     Interest income                                          23,938             29,596             69,439
     Recovery of bad debt                                  1,628,035                  -                  -
                                                        --------------------------------------------------

                                                           1,651,973             29,596             69,439
                                                        --------------------------------------------------

Net income (loss)                                       $    485,448       $ (4,679,620)      $ (3,767,526)
                                                        ==================================================
</TABLE>





--------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                            F-50

<PAGE>   117

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

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

<TABLE>
<CAPTION>
                                                            TELEDYNE          COMMODORE          TOTAL
                                                          ------------------------------------------------

<S>                                                       <C>               <C>               <C>
Balance at January 1, 1997 (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 (audited)                         (137,073)        (137,073)         (274,146)

     Capital contributions                                      176,500          176,500           353,000
     Net income                                                 242,724          242,724           485,448
                                                          ------------------------------------------------

Balance at December 31, 1999 (unaudited)                  $     282,151     $    282,151      $    564,302
                                                          ================================================
</TABLE>









--------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                            F-51

<PAGE>   118

                                                         TELEDYNE-COMMODORE, LLC
                                                         STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------

                                                                   1999         1998          1997
                                                                (UNAUDITED)   (AUDITED)     (UNAUDITED)
                                                              ------------------------------------------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                        $    485,448   $ (4,679,620   $ (3,767,526)
     Adjustments to reconcile net income
       (loss) to net cash used in operating
       activities:
         Depreciation                                              672,388        491,688          6,525
         Decrease in interest receivable                                 -              -          5,286
         Increase in accounts receivable                          (288,102)    (1,282,559)      (295,591)
         Decrease (increase) in other
           assets                                                    2,132        (33,101)             -
         (Decrease) increase in accounts and
           related party payables                               (1,293,406)     2,101,934      1,351,097
                                                              ------------------------------------------

                  Net cash used in
                  operating activities                            (421,540)    (3,401,658)    (2,700,209)
                                                              ------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES-
     purchase of plant and equipment                               (28,309)      (695,510)    (1,309,760)
                                                              ------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES-
     capital contributions from members                            408,000      3,754,800      3,000,000
                                                              ------------------------------------------

Net decrease in cash                                               (41,849)      (342,368)    (1,009,969)

Cash, beginning of year                                             63,252        405,620      1,415,589
                                                              ------------------------------------------

Cash, end of year                                             $     21,403      $  63,252     $  405,620
                                                              ==========================================
</TABLE>








--------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                            F-52

<PAGE>   119

                                                         TELEDYNE-COMMODORE, LLC
                                                         STATEMENT OF CASH FLOWS
                                                                       CONTINUED

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


SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

As of December 31, 1999, 1998 and 1997 the Company recorded member contributions
receivable of $353,000 (unaudited), $408,000 (audited) and $1,000,000
(unaudited), respectively for contributions which were received in 2000, 1999
and 1998.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:



<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                          --------------------------------------------
                                                             1999           1998              1997
                                                          (UNAUDITED)     (AUDITED)       (UNAUDITED)
                                                          --------------------------------------------
<S>                                                       <C>            <C>              <C>
         Interest paid                                    $         -    $         -      $          -
                                                          ============================================
</TABLE>









--------------------------------------------------------------------------------
See accompanying notes to financial statements.
                                                                            F-53

<PAGE>   120

                                                         TELEDYNE-COMMODORE, LLC
                                                   NOTES TO FINANCIAL STATEMENTS

                                                               DECEMBER 31, 1999
--------------------------------------------------------------------------------


1.   ORGANIZATION     ORGANIZATION
     AND              Teledyne-Commodore, LLC (the Company) is a Delaware
     SUMMARY OF       limited liability company (LLC) formed as a 50/50 joint
     SIGNIFICANT      venture between Teledyne Environmental, Inc. (Teledyne)
     ACCOUNTING       and Commodore Government Environmental Technologies, Inc.
     POLICIES         (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, 1999 and 1998 the entire account
                      receivable balance of $1,866,252 (unaudited) and
                      $1,578,150 (audited), respectively, is due from one agency
                      of the federal government.

                      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.


--------------------------------------------------------------------------------
                                                                            F-54

<PAGE>   121

                                                         TELEDYNE-COMMODORE, LLC
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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

1.   ORGANIZATION     CASH AND CASH EQUIVALENTS
     AND
     SUMMARY OF       For purposes of the statement of cash flows, the Company
     SIGNIFICANT      considers all highly liquid investments with original
     ACCOUNTING       maturities of three months or less to be cash equivalents.
     POLICIES
     CONTINUED        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.


                      REVENUE

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


                      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.


                      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.


--------------------------------------------------------------------------------
                                                                            F-55

<PAGE>   122

                                                         TELEDYNE-COMMODORE, LLC
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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

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

                      UNAUDITED INFORMATION

                      The accompanying unaudited financial statements as of
                      December 31, 1999 and for the years ended December 31,
                      1999 and 1997 contain all adjustments (consisting only of
                      normal recurring items) necessary to present fairly the
                      financial position as of December 31, 1999 and the results
                      of operations and cash flows of the Company for the years
                      ended December 31, 1999 and 1997.


2.   GOING            The accompanying financial statements have been prepared
     CONCERN          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.



--------------------------------------------------------------------------------
                                                                            F-56

<PAGE>   123

                                                         TELEDYNE-COMMODORE, LLC
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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

3.   PLANT AND        Plant and equipment consists of the following as of
     EQUIPMENT        December 31, 1998:

<TABLE>
<CAPTION>
                                                       1999            1998
                                                    (UNAUDITED)       (AUDITED)
                                                    -----------------------------

                      <S>                           <C>              <C>
                      Plant                         $  2,010,900     $  1,982,591
                      Equipment                           33,692           33,692
                                                    -----------------------------

                                                       2,044,592        2,016,283

                      Less accumulated depreciation    1,172,304         (500,416)
                                                    -----------------------------

                                                    $    871,788     $  1,515,867
                                                    =============================
</TABLE>



4.   SIGNIFICANT      All of the Company's revenues of $35,067 (unaudited) and
     CUSTOMER         $1,788,150 (audited) for and 1999 and 1998 resulted from
                      sales to and services provided for one agency of the
                      United States Government.


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


<TABLE>
<CAPTION>
                                                       1999              1998
                                                    (UNAUDITED)       (AUDITED)
                                                    ----------------------------

                      <S>                           <C>              <C>
                      Teledyne                      $    566,000     $  3,279,000
                      Commodore                            3,000          440,000
                                                    -----------------------------

                           Total                    $    569,000     $  3,719,000
                                                    =============================
</TABLE>


                      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.

--------------------------------------------------------------------------------
                                                                            F-57

<PAGE>   124

                                                         TELEDYNE-COMMODORE, LLC
                                                   NOTES TO FINANCIAL STATEMENTS
                                                                       CONTINUED

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

5.   RELATED PARTY    Accounts payable reflect payables to the Members as
     TRANSACTIONS     follows at December 31:
     CONTINUED

<TABLE>
<CAPTION>
                                                       1999              1998
                                                    (UNAUDITED)       (AUDITED)
                                                    ----------------------------

                      <S>                           <C>              <C>
                      Teledyne                      $  2,270,835     $  2,023,758
                      Commodore                          142,254          139,746
                                                    -----------------------------

                           Total                    $  2,413,089     $  2,163,504
                                                    =============================
</TABLE>



6.   RECENT           In June 1998, the FASB issued SFAS No. 133, "Accounting
     ACCOUNTING       for Derivative Instruments and Hedging Activities." This
     PRONOUNCEMENTS   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-58
<PAGE>   125



                                 EXHIBIT INDEX
<TABLE>
<CAPTION>

EXHIBIT NO.   DESCRIPTION
-----------   -----------
<S>           <C>
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)

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)

4.19          Warrant to purchase shares of Common Stock of Commodore Applied
              Technologies, Inc. issued to The Shaar Fund Ltd. (16)

4.20          Certificate of Designation of Series E Preferred Stock. (16)

4.21          Warrant to purchase shares of Common Stock of Commodore Applied
              Technologies, Inc. issued to Avalon Research Group, Inc. (16)

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)
</TABLE>
<PAGE>   126


<TABLE>

<S>           <C>
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)

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)
</TABLE>

<PAGE>   127

<TABLE>

<S>           <C>
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)

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)

10.34         Securities Purchase Agreement, dated November 4, 1999, between
              Commodore Applied Technologies, Inc. and The Shaar Fund Ltd. (16)

10.35         Registration Rights Agreement, dated November 4, 1999, between
              Commodore Applied Technologies, Inc. and the Shaar Fund Ltd. (16)

10.36         Finder's Agreement, dated August 17, 1999, between Commodore
              Applied Technologies, Inc. and Avalon Research Group, Inc. (16)

16.1          Letter regarding change in certifying accountant. (12)

16.2          Letter regarding change in certifying accountant. (17)

*21.1         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)
</TABLE>

* 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).
<PAGE>   128

(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).

(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 an 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).

(16) Incorporated by reference and filed as an Exhibit to Registrant's
     Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 filed
     with the Securities and Exchange Commission on February 10, 2000 (File No.
     333-95445).

(17) 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
     August 23, 1999 (File No. 1-11871).