<PAGE>   1





                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

[ X ]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                       OR

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

                   FOR THE TRANSITION PERIOD FROM      TO    
                                                  ----    ----
                         COMMISSION FILE NUMBER 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.)

    6867 ELM STREET, SUITE 210, MCLEAN, VIRGINIA              22101
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

      REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 748-0200

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

                              TITLE OF EACH CLASS
                    COMMON STOCK, PAR VALUE $.001 PER SHARE
                          REDEEMABLE CLASS A WARRANTS

       SECURITIES REGISTERED TO PURSUANT SECTION 12(g) OF THE ACT: None

         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 the 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. [ X ]

         As of March 14, 1997, 21,650,000 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.

         Non-affiliates of the registrant owned shares of Common Stock as of
March 14, 1997 with an aggregate market value of approximately $43,225,000
(based upon the March 14, 1997 closing sales price of the Common Stock as
reported by the American Stock Exchange).

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

                      DOCUMENTS INCORPORATED BY REFERENCE

                                      None
<PAGE>   2

                      COMMODORE APPLIED TECHNOLOGIES, INC.

                           ANNUAL REPORT ON FORM 10-K
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                               TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                          PART I
                                                                                                               Page
                                                                                                               ----
<S>        <C>                                                                                                   <C>
Item 1.    Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1
          
Item 2.    Properties.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
          
Item 3.    Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
          
Item 4.    Submission of Matters to a Vote of Security Holders  . . . . . . . . . . . . . . . . . . . . . . . .  21
          
          
                                                   PART II
          
Item 5.    Market and Registrant's Common Equity and Related
           Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
          
Item 6.    Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
          
Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operation.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  24
          
Item 8.    Financial Statements and Supplementary Data  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  27
          
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  . . . . . . .  27
          
          
                                                   PART III
          
Item 10.   Directors and Executive Officers of the Registrant.  . . . . . . . . . . . . . . . . . . . . . . . .  28
          
Item 11.   Executive Compensation.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33
          
Item 12.   Security Ownership of Certain Beneficial Owners
            and Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37
          
Item 13.   Certain Relationships and Related Transactions.  . . . . . . . . . . . . . . . . . . . . . . . . . .  39
          
          
                                                   PART IV
          
Item 14.   Exhibits, Financial Statement Schedules and Reports on
            Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  42
</TABLE>





                                       i
<PAGE>   3
                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Commodore Applied Technologies, Inc. (the "Company"), through its four
principal subsidiaries, is primarily engaged in the development of a variety of
environmental technologies for the destruction of hazardous materials and the
separation and recovery of metals, organics and other chemical compounds.

         o       COMMODORE ADVANCED SCIENCES, INC. ("CAS"), a wholly owned
                 subsidiary of the Company, uses a patented non-thermal,
                 portable and scalable process known as SET(TM) for treating and
                 decontaminating soils and other materials and surfaces
                 containing PCBs, pesticides, dioxins and other toxic
                 contaminants to an extent sufficient to satisfy current federal
                 environmental guidelines.  Based on the results of laboratory
                 testing, SET(TM) also appears capable of neutralizing
                 substantially all known chemical weapons materials and warfare
                 agents.

         o       ADVANCED SCIENCES, INC. ("ADVANCED SCIENCES"), a wholly owned
                 subsidiary of CAS, provides a full range of environmental,
                 technical and remediation services, including identification,
                 investigation, remediation and management of hazardous and
                 mixed waste sites, to government agencies, including the U.S.
                 Department of Defense and Energy, and to private companies
                 located in the United States and abroad.

         o       COMMODORE SEPARATION TECHNOLOGIES, INC. ("SEPARATION"), an 87%
                 owned subsidiary of the Company, has developed a separation
                 technology and recovery system known as SLM(TM) for the purpose
                 of separating a variety of metals, chemical compounds, nuclear
                 by-products and other contaminants from liquid and gaseous
                 feedstreams.

         o       COMMODORE CFC TECHNOLOGIES, INC. ("REFRIGERANT"), a wholly
                 owned subsidiary of the Company, is applying certain
                 environmental technologies to the destruction, separation and
                 recycling of CFCs and other ozone-depleting substances.

         The Company believes that its chemical processes and technologies
offer a safe, efficient and cost-effective alternative to traditional methods
for the separation, destruction and disposal of toxic substances and other
compounds, which can be utilized in a wide variety of industrial, military and
other applications.  The Company is currently in the process of introducing
these processes and technologies on a commercial scale.  In July 1996, the
Company successfully completed an initial public offering of its equity
securities from which it received net proceeds of approximately $30.5 million.
In April 1997, Separation successfully completed an initial public offering of
its equity securities, from which it received net proceeds of approximately
$11.7 million.

         The Company was incorporated in the State of Delaware in March 1996.
The principal executive offices of the Company are located at 6867 Elm Street,
Suite 210, McLean, Virginia 22101, and its telephone number is (703) 748-0200.

RECENT DEVELOPMENTS

         ACQUISITION OF ADVANCED SCIENCES, INC.

         Effective October 1, 1996, the Company completed the acquisition of
all of the outstanding shares of capital stock of Advanced Sciences. Advanced
Sciences, together with its subsidiaries, provides a full range of
environmental and technical services, including identification, investigation,
remediation and management of hazardous and mixed waste sites, to government
agencies, including the U.S. Department of Defense and Energy,





                                       1
<PAGE>   4
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 Company Common Stock.

         ACQUISITION OF A.S. ENVIRONMENTAL, INC.

         Effective October 1, 1996, the Company also completed the acquisition
of all of the outstanding shares of capital stock of A.S. Environmental, Inc.,
a Delaware corporation ("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
Common Stock.

         TRANSFER OF CERTAIN OPERATING ASSETS TO CAS

         Effective as of December 1, 1996, the Company transferred certain of
its operating assets related to its SET(TM) technology to CAS, subject to
certain liabilities related to such assets, in exchange for 100 shares of
common stock, par value $.01 per share, of CAS, representing all of the issued
and outstanding shares of capital stock of CAS.  Pursuant to the Agreement of
Transfer, dated as of December 1, 1996, by and between the Company and CAS (the
"Agreement of Transfer"), CAS agreed to assume all of the net assets of the
Company relating to its SET(TM) 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 transferred assets included, without limitation,
(i) all of the licenses and permits of the Company; (ii) all of the business
and goodwill of the Company; (iii) all of the machinery, equipment, furniture,
fixtures, vehicles and other personal property and all of the materials and
supplies owned by the Company; (iv) all of the outstanding capital stock of
Commodore Laboratories, Inc., Commodore Remediation Technologies, Inc.,
Commodore Governmental Environmental Technologies, Inc., Commodore
Technologies, Inc., Advanced Sciences, ASE and Sandpiper Properties, Inc.; (v)
all intellectual property owned or held by the Company; (vi) all real property
or rights to use real property owned or held by the Company; (vii) all
contracts and contract rights held by the Company; and (viii) all books,
records and other data held by the Company.  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 located in McLean, Virginia. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Relationships and
Related Transactions."

         ACQUISITION OF COMMODORE SEPARATION TECHNOLOGIES, INC. AND
         COMMODORE CFC TECHNOLOGIES, INC.

         Effective as of December 2, 1996, the Company acquired (i) all of the
outstanding capital stock of Separation and (ii) all of the outstanding capital
stock of Refrigerant from Commodore Environmental Services, Inc.
("Environmental"), the owner of 69.3% of the outstanding Common Stock of the
Company, 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 Refrigerant to the Company, the Company paid
Environmental $3.0 million in cash and, subject to compliance with any
applicable stockholder approval or notice requirements, will issue 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 "Management's Discussion and Analysis of Financial Condition and 
Results of Operations--Liquidity and Capital Resources" and "Certain 
Relationships and Related Transactions."





                                       2
<PAGE>   5
BUSINESS OPERATIONS

         COMMODORE ADVANCED SCIENCES, INC.

         The Company, through CAS, has developed and intends to commercialize
its patented process known as SET(TM).  Based on the results of its extensive
testing, the Company believes that SET(TM) 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(TM) appears to be capable of
neutralizing substantially all known chemical weapons materials and warfare
agents and of concentrating certain radioactive wastes for more effective
disposal.  Tests of SET(TM) have been conducted since 1989 and have been
financed to date principally from borrowings and investments from the Company's
stockholders, including Environmental.  SET(TM) is based upon solvated electron
chemistry, in which solvents such as anhydrous liquid ammonia are mixed with
various base metals to produce a solvated electron solution.

         SET(TM)

         The SET(TM) technology 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(TM) can achieve
consistently high levels of contaminant destruction when working with PCBs,
dioxins and pesticides.  SET(TM) has treated soils containing up to 10,000
parts-per-million (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(TM) has been successfully applied to other
PCB-contaminated surfaces such as concrete.  The SET(TM) 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(TM), nor will there be any toxic
emissions into the air, water, soils or other surfaces.  By example, most
contaminated soils treated with SET(TM) 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(TM) process consists of tanks, pumps and
piping to handle anhydrous ammonia and other solvents in liquid and vapor
forms, and reactor vessels for holding contaminated materials and for the
introduction of solvating solutions.  The system can be transported to field
sites and configured in numerous sizes.

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

         EPA Nationwide Permit and Testing Results

         In order to treat PCBs within the United States on all non-Superfund
sites, the treating entity must obtain a permit from the United States
Environmental Protection Agency ("EPA").  Most EPA permits granted to date for
PCB destruction are solely for single-site incineration treatment centers.  In
August 1995, SET(TM) was demonstrated to the EPA in order to obtain a
Nationwide Permit for PCB Disposal (the "Nationwide Permit").  In March 1996,
the EPA issued the Nationwide Permit to the Company, which the Company then
transferred to CAS effective December 1, 1996.  See "Recent Developments" -
Transfer of Operating Assets of CAS."  The Nationwide Permit





                                       3
<PAGE>   6
allows CAS to use SET(TM) on-site to treat PCB-contaminated soil at any
location in the United States.  In addition to soil treatment, the Nationwide
Permit allows CAS to treat PCB-contaminated metallic surfaces.  The Nationwide
Permit only covers the destruction of PCBs in soils and on metallic surfaces.

         Based on currently published lists of EPA national operating permits,
the Company believes that CAS 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 CAS is
permitted to remediate PCB-contaminated soils and metallic surfaces.  The EPA's
Alternative Destruction Technology Program is designed to encourage remediation
technologies as an alternative to incineration.

         The Nationwide Permit became effective on March 15, 1996, expires on
March 15, 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 CAS, 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 CAS may seek to establish, and certain
restrictions on the disposal of by-products from the use of SET(TM).  The
Nationwide Permit further specifies that CAS must continue to comply with all
otherwise applicable federal, state and local laws regarding the handling and
disposition of hazardous substances.

         In more than 1,000 tests using SET(TM), various high levels of PCB
contamination were reduced to levels approaching non-detectable, with the
destruction process occurring in a matter of minutes.  The following table is a
summary of the results of those tests.


<TABLE>
<CAPTION>
                                           PCB LEVEL         
                          ------------------------------------------
SOIL TYPE/MATERIAL        BEFORE TREATMENT           AFTER TREATMENT
------------------        ----------------           ---------------
 <S>                         <C>                    <C>
                              High PCBs          
                              ---------          
 Clay                          290 ppm              less than one ppm
 Organic                       660 ppm              less than one ppm
 Sandy                       6,200 ppm              less than one ppm
 Oil                       250,000 ppm              less than one ppm
                                                 
                              Low PCBs           
                              --------           
 Clay                          29 ppm               less than one ppm
 Organic                       83 ppm               less than one ppm
 Sandy                        130 ppm               less than one ppm
</TABLE>

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

         In September 1995 and December 1995, Geomet, an independent surety
laboratory licensed by the U.S. government, conducted two series of laboratory
tests on SET's ability to neutralize chemical weapons materials and warfare
agents.  Such tests, conducted on a small scale, demonstrated destruction
efficiencies of more than 99.99999% on nerve agents and chemical mustards.
Such tests are not necessarily indicative of results that would





                                       4
<PAGE>   7
be obtained from testing on a larger scale.  CAS is continuing to test SET(TM)
on chemical weapons by-products, as well as on larger quantities of these
chemical weapons materials.

         Competitive and Operational Aspects of SET(TM)

         Substantially all existing systems in use for the destruction of PCBs
and other halogenated compounds involve incineration or other thermal
approaches, 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(TM) 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(TM) is more effective than incineration and other destruction methods for
toxic substances in that:

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

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

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

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

         o       SET(TM) 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(TM), 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(TM) is the only technology currently
available which possesses all of these features and is capable of treating a
wide variety of contaminants.

         Joint Ventures

         Teledyne Environmental Joint Venture.  On August 6, 1996, Commodore
Government Environmental Technologies, Inc.  ("Commodore Government"), a wholly
owned subsidiary of the Company, entered into a joint venture agreement with
Teledyne Environmental, Inc. ("Teledyne Environmental") as the exclusive means
by which each party (and their affiliates) will pursue the chemical weapons
destruction and demilitarization market on a worldwide basis.  Commodore
Government and Teledyne Environmental each own one-half of the venture.
Teledyne Environmental is a major provider of contract services to the
Department of Defense and to the Department of Energy.  The purpose of the
joint venture, known as "Teledyne-Commodore, LLC," a Delaware limited liability
company, encompasses all phases of chemical weapons demilitarization including
design, engineering, field work, chemical weapon, ordinance and residue (heel)
neutralization and demilitarization, disposal and reclamation through the use,
application and commercialization of the SET(TM) process.





                                       5
<PAGE>   8
         Each of Commodore Government and Teledyne Environmental owns 50% of
the equity, profit and losses of the joint venture company, and have each
budgeted initial capital contributions of approximately $2.0 million.  Under
the terms of the joint venture, Commodore Government's role concentrates on
engineering and site operations relating to the SET(TM) 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 addition, each of the parties will
jointly coordinate the engineering, construction, installation and
decommissioning of the SET(TM) process controls and monitoring instrumentation.

         CAS has licensed SET(TM) and corresponding know-how to the joint
venture.  In exchange, CAS received ownership of one-half of the joint venture
which will benefit from Teledyne's extensive experience in government
contracting, particularly with the United States Military and the Department of
Energy, its extensive experience in engineering and design, and its worldwide
contacts.  CAS also licensed the SET(TM) process and corresponding know-how to
Teledyne Brown Engineering, Inc. ("TBE"), a subsidiary of 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 with a
contract value of up to $250 million.  Under the terms of such license, CAS
receives a royalty equal to 8% of TBE's net sales revenues derived from the
Small Burials Contract.

         Proposed New Bedford Harbor Project.  The New Bedford, Massachusetts
harbor and waterfront area contains some of the highest concentration of PCBs
in the nation and in 1982, this 18,000-acre site was placed on the EPA's
Superfund national priorities list.  The contaminated sediments and sludges
from this site were to be disposed of by incineration.  However, public and
political opposition related to the risks associated with incineration has
caused the EPA to halt these plans.

         In March 1996, the Company and TriRex Consulting Company, an
environmental project management company ("TriRex"), submitted a proposal for a
competing feasibility study under which SET(TM) would represent the enabling
stand-alone technology for the destruction of PCBs at the site, with TriRex
providing monitoring services.  The Company and its possible working partner
have not, as yet, been awarded a follow-up contract with respect to the New
Bedford Harbor Project.

         Proposed Sverdrup Joint Venture.  The Company and Sverdrup Corporation
("Sverdrup") have entered into a non-binding memorandum of understanding to
establish one or more joint ventures or related arrangements to utilize SET(TM)
as the enabling technology for the decontamination of PCBs and other toxic
substances on a variety of Superfund sites.  The Company has conducted
extensive discussions with Sverdrup whereby SET(TM) would be marketed through
Sverdrup primarily to governmental agencies such as the EPA (for clean-up of
Superfund and other sites) and branches of the United States armed forces.  The
Company and Sverdrup have also jointly responded to a request for proposal
("RFP") from the Department of the Navy in respect of an alternative method of
decontaminating various naval installations in the United States.

         Sharp & Associates.  The Company has entered into a non-binding
memorandum of understanding with Sharp & Associates, Inc., a Columbus,
Ohio-based consulting and remediation company ("Sharp"), to explore the
applicability of SET(TM) to the remediation of dioxin-contaminated soils.  The
memorandum of understanding contemplates that the Company and Sharp will
jointly approach owners of dioxin-contaminated sites with proposals to
demonstrate the applicability of SET(TM) to the remediation of soils at such
sites.  The Company believes that a successful demonstration could result in
additional opportunities for the use of SET(TM).





                                       6
<PAGE>   9
         ADVANCED SCIENCES, INC.

         Advanced Sciences is a national environmental consulting firm that
provides specialized technical and project management products and services
primarily to government-sector clients, including the U.S. Department of Energy
("DOE") and Department of Defense ("DOD"), and also to private-sector domestic
and foreign industrial clients.  Advanced Sciences offers its clients almost 20
years' experience in all aspects of environmental regulation and compliance, as
well as access to leading technologies and innovative skills related to the
identification, investigation, remediation and management of hazardous, mixed
and radiological waste sites.  Advanced Sciences currently operates a network
of eight offices located in six states, with its principal executive offices
located in Albuquerque, New Mexico.

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

         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 clients 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.

         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 clients' 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.

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

         Significant Contracts

         Advanced Sciences has contracts in place that extend beyond the year
2000 with remaining funded and unfunded ceilings of over $130,000,000.  Certain
of the contracts Advanced Sciences has been awarded within the last 18 months
include: (i) a $15,000,000, five-year environmental restoration/waste
management contract for Lockheed-Martin at its facilities in Oak Ridge,
Tennessee; (ii) a $52,000,000, five-year technical and management support
contract for the DOE facility located in Carlsbad, New Mexico; and (iii) a
$10,000,000, five-year





                                       7
<PAGE>   10
environmental remediation contract for Westinghouse Savannah River Corp.
Advanced Sciences' contract base is national in scope (from Washington, D.C. to
Richland, Washington), and encompasses a wide variety of services, clients and
industries.

         COMMODORE SEPARATION TECHNOLOGIES, INC.

         The Company, through Separation, has developed and intends to
commercialize a separation technology and recovery system, known as SLM(TM).
Based on the results of more than 100 laboratory and other tests to date, the
Company believes that SLM(TM) can separate and recover chromium, cadmium,
silver, mercury, platinum, lead, zinc, nickel, trichlorethylene,
polychlorinated biphenyls, methylene chloride, amino acids, antibiotics,
radionuclides, and other organic and inorganic targeted substances from liquid
or gaseous feedstreams. SLM(TM) utilizes a process whereby a contaminated
liquid or gaseous feedstream is introduced into a fibrous membrane unit or
module containing a proprietary chemical solution, the composition of which is
customized depending on the types and concentrations of compounds in the
feedstream. As the feedstream enters the membrane, the targeted substance
reacts with SLM's proprietary chemical solution and is extracted through the
membrane into a strip solution where it is then stored. The remaining
feedstream is either recycled or discharged free of the extractant(s). In some
instances, additional treatment may be required prior to disposal.

SLM(TM) is distinguishable from other existing forms of membrane filtration
technology in that it:

         o       requires low initial capital costs and low operating costs;

         o       has the capability of treating a wide variety of elements and
                 compounds in a wide variety of industrial settings at great
                 speed and with a high degree of effectiveness, in a wide range
                 of contaminant concentrations, volume requirements and other
                 variables;

         o       is environmentally safe, in most instances producing no
                 sludges or other harmful by-products which would require
                 additional post-treatment prior to disposal;

         o       can selectively extract target substances, while extracting
                 substantially fewer unwanted substances;

         o       can typically operate on-site and in less space than competing
                 technologies;

         o       can extract metals, organic chemicals and other elements and
                 compounds in degrees of concentration and purity which permit
                 their reuse; and

         o       has the capability, in a single process application, of
                 selectively extracting multiple elements or compounds from a
                 mixed process stream.

                 In August 1996, Separation completed an on-site demonstration
of SLM(TM) for the decontamination of chromium-contaminated groundwater at the
Port of Baltimore, Maryland. During this demonstration, a SLM(TM) unit, in a
single feedstream pass-through, reduced the contamination level of chromium
from over 630 parts per million (ppm) to less than one ppm. The results of this
test were verified by Artesian Laboratories, Inc., an independent testing
laboratory. Separation has since completed additional on-site demonstrations of
SLM(TM) at the Port of Baltimore with similar results. Due to the success of
such demonstrations, in February 1997 the State of Maryland informed Separation
that it will recommend including the SLM(TM) process as an eligible technology
in the bid specifications to remediate the groundwater at the Port of
Baltimore. Based on management studies and discussions with metals industry
executives, the Company believes that SLM(TM) represents a significant
technological advancement in the area of environmental remediation as the only
technology capable of on-site chromium removal and recovery that enables
effluent discharge without additional treatment.





                                       8
<PAGE>   11
                 In September 1996, Separation installed a commercial scale
prototype SLM(TM) unit at a Columbus, Ohio metal plating company. DLZ
Laboratories, Inc., an independent testing laboratory, verified that the
SLM(TM) unit processed the initial batch of process effluent stream and reduced
nickel and zinc contamination from 900 ppm to 2 ppm in one hour. Separation
continued to operate this SLM(TM) unit for three months to process nickel and
zinc effluent streams containing concentrations of 200 to 400 ppm, and the unit
has consistently reduced the contaminant levels to 1 to 5 ppm. The
decontaminated process effluent stream is being recycled into the plating line
rinse tanks, saving the plating company its normal consumption of make-up water
at a rate of five gallons per minute.

                 In January 1997, Separation entered into a license agreement
with Lockheed Martin Energy Research Corporation ("Lockheed Martin"), manager
of the Oak Ridge National Laboratory, a DOE national laboratory ("Oak Ridge").
Under the terms of the agreement, Separation received the exclusive worldwide
license, subject to a government use license, to use and develop the technology
related to the separation of the radionuclides technetium and rhenium from
mixed wastes containing radioactive materials. Based on tests conducted at Oak
Ridge since May 1994, the Company believes that this technology is capable of
selectively extracting and recovering technetium, rhenium and other radioactive
isotopes as a concentrated aqueous solution which can be reused in various
scientific applications or disposed of by government-approved techniques
including long-term storage. The Company believes that this technology can be
used to remediate nuclear waste tanks stored at the U.S. Department of Energy's
atomic energy plants in Rocky Flats, Colorado, Idaho Falls, Idaho, Paducah,
Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los Alamos, New
Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas and Hanford,
Washington, and intends to pursue such opportunities through Separation.
According to DOE sources, there are approximately 100 million gallons of mixed
radioactive and hazardous chemical waste stored at these plants.

                 The Company intends to pursue collaborative joint working and
marketing arrangements with, or acquisitions of or investments in, companies
that have a presence in target markets and those that focus on obtaining
environmental remediation projects, including clean-up of harbors, groundwater
and nuclear waste sites.  Advanced Sciences will help market SLM(TM) to the DOE
and DOD.  Separation has entered into memorandums of understanding for proposed
working arrangements with TBE and Sverdrup, and is bidding on certain projects.

         SLM(TM)

                 Although SLM(TM) uses the same basic principles as other
membrane separation technologies, the Company believes that SLM(TM) represents
a significant advance in membrane separation technology in the treatment of
solubilized feedstreams. SLM(TM) acts by separating and extracting the targeted
material(s) from the feedstream, rather than trapping the target material as
the entire feedstream passes through the filter mechanism. As a result, for the
first time, a single process is capable of treating a wide variety of elements
and compounds in a wide variety of industrial settings, and doing so at great
speed and with a high degree of effectiveness regardless of particle size,
volume requirements and other variables. The Company also believes that SLM(TM)
is the first membrane separation technology which is capable, in a single
process application, of selectively extracting multiple elements or compounds
from a mixed process stream. The SLM(TM) membrane modules can also be
configured in various sizes and numbers and for varying capacities, and operate
on the manufacturing site at ambient temperatures and pressures.

                 SLM(TM) involves injecting a contaminated liquid or gaseous
feedstream into the Separation-designed fibrous membrane unit or module. This
module is previously loaded with a series of proprietary chemicals whose
composition will vary depending on the types of compounds in the feedstream. As
the feedstream enters the membrane unit, the metal or other substance to be
extracted reacts with the proprietary chemical solution in the fibrous
membrane, and the metallic or other ions are extracted through the membrane
into a strip solution which is concentrated and gathered in a separate storage
container. The balance of the feedstream is either recycled or simply
discharged as normal effluent. In some instances, additional treatment may be
required prior to disposal, or





                                       9
<PAGE>   12
disposal may need to be made in a regulated manner. The Company believes that
SLM(TM) can be utilized for the separation and recovery of chromium, cadmium,
silver, mercury, platinum, lead, zinc, nickel, trichlorethylene,
polychlorinated biphenyls, methylene chloride, amino acids, antibiotics,
radionuclides, and other organic and inorganic substances.

                 The typical SLM(TM) module is cylindrical in shape and can be
situated on a surface or in an area the size of a desktop. The module casing is
typically constructed of plastic and contains the microporous fiber membrane
through which the target element or compound is separated from the contaminated
feedstream. At one end of the module, there is attached a set of pumps and
tubing that feeds the contaminated feedstock from its point of origin (such as
a metal plating tank or bath) into the module. Additional pumps and tubing are
attached to feed and recycle the strip solution which concentrates the
contaminant that is being deposited continuously by Separation's proprietary
chemicals resident in the membrane, and discharge tubing or piping is attached
at the other end of the module, to carry away the separated concentrated metal
solution or other compound, and the wastewater and other non-reusable
by-product.  Separation plans to produce a range of modules that will precisely
conform to the customer's requirements for volume and capacity, and thus
accommodate the available space in the customer's facility. Separation also
formulates the active chemical compound for the process in each customer
application, and performs the initial installation of the equipment at the
customer site. The customer will operate the equipment and, using computer data
links, Separation will monitor the equipment and process while in operation.

         Laboratory and Other Test Results

                 In more than 100 laboratory and other tests to date, SLM(TM)
has demonstrated the ability to successfully separate a variety of metals and
other substances from liquid and gaseous process streams. In each instance, the
process stream was reduced to levels approaching federal guidelines under the
Federal Clean Water Act for the disposal of the reacted process stream as
normal wastewater effluent, and the recovered materials were of sufficient
quantity and purity as to economically permit the reuse thereof in most
commercial applications. Test results included the following:
<TABLE>
<CAPTION>
                                                                                                            APPLICABLE
 MATERIAL                       BEFORE TREATMENT        AFTER TREATMENT                                 FEDERAL GUIDELINE
 --------                       ----------------        ---------------                                 -----------------
 <S>                            <C>                     <C>                                           <C>
 Metals:

      Zinc                      1,000 ppm               Less than 2 ppm (after 30 minutes)            Less than 2 ppm

      Nickel                    3,200 ppm               Less than 1.6 ppm (after 30 minutes)          Less than 2 ppm

      Chromium (hexavalent)     630 ppm                 0.03 ppm (field test)                         0.05 ppm

      Aluminum                  195 ppm                 100 ppm (after 15 minutes)                    30 ppm

      Silver                    177 ppm                 1 ppm                                         Less than 2 ppm

 Organics:

      Phenol                    10,000 ppm              Less than 10 ppm                              Less than 30 ppm

      Nitrophenol               10,000 ppm              Less than 10 ppm                              Less than 30 ppm

 Biochemicals:

      Phenylalanine             5,000 ppm               Less than 10 ppm                              Less than 30 ppm

 Radionuclides:

      Cesium                    10 ppm                  Less than 5 parts per billion (ppb)           Less than 10 ppb

      Rhenium                   5 ppm                   Less than 5 ppb                               Less than 10 ppb

 Anions:

      Nitrates                  62,000 ppm              Less than 100 ppm                             Less than 10 ppm
</TABLE>





                                       10
<PAGE>   13
                 All of these tests were performed on limited quantities of
process streams, and there can be no assurance that the same or similar results
would or could be obtained on a large-scale commercial basis or on any specific
project. Other than with respect to Separation's tests involving the separation
and recovery of zinc, nickel and chromium, no other tests conducted by
Separation have been independently verified.

         Commercialization and Marketing Strategy

                 During the initial commercialization phase, Separation expects
to lease its equipment to customers, with the lease payments being due and
payable after installation and successful start-up of the equipment. When
replacement modules are required, Separation expects to supply these modules at
a reasonable mark-up over their cost. As new patents are filed and issued,
Separation may, for certain applications, determine to make a direct sale of
the equipment with additional long-term royalty payment provisions. Separation
also expects to obtain revenues through servicing the SLM(TM) equipment,
including periodic replacement of the membrane component. In addition to
leasing and selling its equipment, Separation intends to charge its customers
based on a percentage of the customer's actual cost savings derived from
reduced disposal costs and recovered reusable materials. In applications in
which reusable materials are not recovered, Separation's ongoing charges may be
based on the volume of materials processed.  Although Separation plans to focus
its initial marketing efforts on domestic businesses, Separation will also be
prepared to pursue international opportunities, which may arise from successful
presentations to multinational corporations or from overseas referrals by
domestic entities.

                 In specific industries and for specific applications,
Separation intends to emphasize and exploit the following attributes of
SLM(TM).

         Metals Separation and Recovery. Separation's initial marketing efforts
will be in the industrial sector, in which the separation and recovery of
metal-bearing liquid solutions present a substantial market. Primary among the
potential customers in this area are metal plating and metal finishing
operations, which generate substantial volumes of mixed metals process streams
for which no previous technology was available to effect proper separation.

                 In September 1996, Separation installed a commercial scale
SLM(TM) unit on-line at Plating Technology Inc., a Columbus, Ohio metal plating
company ("PTI").  The unit operated in a batch and on a continuous mode for
three months, and, based on operating data results, successfully separated and
recovered nickel and zinc effluent streams with concentrations varying from 100
to 1,000 ppm. DLZ Laboratories, Inc., an independent testing laboratory,
verified that the SLM(TM) unit processed the initial batch of process effluent
stream and reduced nickel and zinc contamination from 900 ppm to 2 ppm in one
hour. Separation's own data indicate that, in ongoing use on effluent streams
containing nickel and zinc concentrations of 200 to 400 ppm, this SLM(TM) unit
has consistently reduced the level of contaminants to 1 to 5 ppm. The
decontaminated process effluent stream is being recycled into PTl's plating
line rinse tanks, saving PTI its normal consumption of make-up water at a rate
of five gallons per minute.

                 Based on management studies and discussions with metals
industry executives, the Company believes that the major competitive technology
in this area is precipitation, which generates a metallic sludge by-product
requiring further treatment prior to landfill disposal. By contrast, SLM(TM)
does not generate harmful metallic sludges, and instead enables nearly 100%
process water recycling, while also enabling recovery of valuable





                                       11
<PAGE>   14
raw materials. As costs of environmental compliance continue to mount, the
Company expects SLM(TM) to become a preferred alternative to existing metals
separation methods.

         Gas Separation. The SLM(TM) equipment and technology can also be
utilized to separate and recover valuable gases (such as nitrogen) from mixed
gaseous and liquid compounds. For example, nitrogen is used for a wide variety
of process applications, including oil recovery, food processing, metal heat
treatment, and pharmaceutical testing and development.

         Nitrogen is typically obtained by separating it from oxygen, using
processes such as cryogenic distillation, absorption, catalytic removal, and
permselective polymeric membrane separation. However, each of these processes
has drawbacks, which can include high energy usage, high pressure and
temperature requirements, and/or relatively low purity of the recovered gas.
The SLM(TM) process is predicted to overcome these drawbacks by yielding
relatively pure nitrogen in a low-energy, low capital cost process conducted at
ambient temperature and pressure. Separation has prepared a proposal for a
prototype unit for the production of high-purity nitrogen for use in food
processing, but has not otherwise developed a strategy or targeted a market for
commercialization of the gas separation application.

         Organics Separation and Recovery. As of August 1, 1996, based on
market data compiled by Separation, there were more than 10,000 organic
chemical industry companies operating in the United States. These companies
generate significant volumes of waste process streams, including mixed
organic/non-organic streams. SLM(TM) has been demonstrated to have significant
capabilities in the separation and recovery of a variety of contaminants,
including phenol and nitrophenol (a phenolic derivative), and the Company
believes that such capabilities, although untested, extend to other organic
chemicals such as volatile organic compounds, petrochemicals, other phenolic
derivatives, olefin alkanes and acid gases.

         Currently, the primary technology utilized in this area is activated
carbon treatment. Like the other slow biological treatment processes utilized
in this area, the by-products are often more toxic than the original compound.
Separation intends to demonstrate to chemical manufacturers that SLM(TM) is
effective in dealing with the wide variety of contaminants generated by these
businesses, and that use of SLM(TM) will substantially reduce the environmental
risks and costs associated with traditional separation methods.

         Biochemicals Separation and Recovery. SLM(TM) has also been
demonstrated to have significant capabilities in the separation and recovery of
biochemicals, including phenylalanine (an amino acid), and the Company believes
that such capabilities, although untested, extend to other biochemicals such as
proteins, other amino acids, antibiotics, glycerides, fatty acids, drug
delivery vehicles and other pharmaceuticals. Mixed wastes containing these
materials are generated in both research and development functions and in
manufacturing functions. These materials have substantial value, and Separation
intends to emphasize both the value of the recovered materials and the enhanced
and speedier environmental compliance attributes of SLM(TM).

         Currently, the primary competing technology in this area is
chromatography, which requires substantially greater time to treat significant
volumes of material, and is substantially less selective in the types of
materials that can be separated from the liquid feedstream.

         Environmental Remediation and Restoration. The Company believes that
SLM(TM) has significant potential for application to environmental remediation
and restoration. Separation is currently involved in pilot projects for the
decontamination of water in the Port of Baltimore. In the case of a project
such as the Port of Baltimore project, it is expected that the remediating
technology will be applied continuously over a period of many years, until the
subject contamination (in the case of Baltimore, chromium leaching from
underlying soil into the aquifer) has been demonstrated to have been abated for
a significant period of time.





                                       12
<PAGE>   15
         In contrast to other remediation technologies, the Company believes
that SLM(TM) has the attributes of low initial capital costs, low operating
costs and the ability to recover heavy metals, organic chemicals and varied
volatile organic compounds for reuse.

         In August 1996, Separation completed an on-site demonstration of
SLM(TM) for the decontamination of water in the Port of Baltimore. During seven
hours of operation, a single SLM(TM) unit, in a single pass-through of
feedstream, processed 90 gallons of water containing more than 630 ppm of
hexavalent chromium and reduced the concentration level to 0.7 ppm, slightly
above the federal guidelines for unregulated discharge of total chromium. The
results of this test were verified by Artesian Laboratories, Inc., an
independent testing laboratory. Separation returned to Baltimore in February
1997 at the invitation of the Port and Maryland Environmental Service.  During
this demonstration, over 2000 gallons of the same feedstream used in the first
demonstration was processed.  Hexavalent chromium was reduced to 0.03 ppm, well
below the federal guidelines for unregulated discharge. Due to the success of
these demonstrations, the State of Maryland informed Separation in February
1997 that it will recommend including the SLM(TM) process as an eligible
technology in the bid specifications to remediate the groundwater at the Port
of Baltimore. The Company believes that compliance with the federal guideline
can be achieved either by refinement of chemical formulation or process
procedure, by dilution of the processed water with a small amount of
uncontaminated water, or by passing the processed water through a larger or
supplemental SLM(TM) unit. The Company believes that the same process is
capable of achieving comparable results in the same time period on
substantially greater volumes of contaminated water, either by increasing the
flow of feedstream into the membrane, by configuring and utilizing a larger
module, or by installing and operating additional modules. As indicated above,
this demonstration was performed on limited quantities of process streams, and
there can be no assurance that the same or similar results would or could be
obtained on a larger scale.

         To speed its entry in this market, Separation intends to enter into
collaborative joint working and marketing arrangements with established
engineering and environmental service organizations which are expected to
provide technical and professional expertise, market presence and credibility.
Although Separation has entered into memorandums of understanding with several
such companies, Separation has not to date entered into any definitive
agreements or received any firm contract awards.

         Radionuclide/Mixed Waste Separation. In the United States, there are
numerous sites operated or maintained by the DOE and/or the DOD at which there
are present "mixed wastes" containing radionuclides intermingled with other
hazardous wastes. These sites are also contaminated with other compounds
associated with nuclear weapons, testing and energy. SLM(TM) has been
demonstrated to have significant capabilities in the separation of
radionuclides such as cesium, technetium and rhenium, and the Company believes
that such capabilities, although untested, extend to most of the other
compounds found at such sites. The United States government estimates that
potential government expenditures in this market could be between $234 billion
and $389 billion over the course of the next 75 years.

         This element of the market is a significant subcategory of the general
environmental remediation that can be undertaken with SLM(TM). In addition to
low initial capital costs and low operational costs, SLM(TM) has the advantage
of cost-effectively separating both dissolved mixed waste and radionuclides,
and allowing separate handling and disposal of both hazardous waste types.
Separation anticipates pursuing this market area in collaboration with ASI and
other established engineering and environmental service organizations, who can
provide technical and professional expertise, market presence and credibility.
Neither Separation nor any of its collaborative partners have been awarded any
contracts to use SLM(TM), and there can be no assurance as to whether or when
any such contracts may be obtained.

         In January 1997, Separation entered into a license agreement with
Lockheed Martin, manager of Oak Ridge (the "Lockheed License Agreement"). Under
the terms of the Lockheed License Agreement, Separation received the exclusive
worldwide license, subject to a government use license, to use and develop the
technology related to





                                       13
<PAGE>   16
the separation of the radionuclides technetium and rhenium from mixed wastes
containing radioactive materials.  Separation also received under the Lockheed
License Agreement the right to exploit the technology for other commercial
applications. Pursuant to the Lockheed License Agreement, Separation made an
initial cash payment of $50,000 upon the execution of the agreement and is
obligated to pay, commencing in the third year of the Lockheed License
Agreement, a royalty to Lockheed Martin of 2% of net sales (less allowances for
returns, discounts, commissions, freight, and excise or other taxes) up to
total net sales of $4,000,000 and 1% of net sales thereafter. In addition,
Separation has agreed to guarantee Lockheed Martin, during the term of the
Lockheed License Agreement, an annual minimum royalty, of $15,000 commencing in
the third year of the Lockheed License Agreement. The Lockheed License
Agreement, which may be terminated at any time solely by Separation, has a term
which will last until the end of the life of all patents or patentable claims
described in or ultimately arising out of the provisional patent recently filed
jointly by Separation and three colleagues of Srinivas Kilambi, Ph.D.,
Separation's Vice President-Technology, who worked with him at Oak Ridge,
covering their inventions related to radionuclides. Based on tests conducted at
Oak Ridge since May 1994, the Company believes that this technology is capable
of selectively extracting and recovering technetium, rhenium and other
radioactive isotopes as a concentrated aqueous solution which can be reused in
various scientific applications or disposed of by government approved
techniques including long-term storage. The Company believes that this
technology can be used to remediate nuclear waste tanks stored at the DOE's
atomic energy plants in Rocky Flats, Colorado, Idaho Falls, Idaho, Paducah,
Kentucky, Weldon Springs, Missouri, Frenchman Flat, Nevada, Los Alamos, New
Mexico, Aiken, South Carolina, Oak Ridge, Tennessee, Pantex, Texas and Hanford,
Washington, and intends to pursue such opportunities through Separation.
According to DOE sources, there are approximately 100 million gallons of mixed
radioactive and hazardous chemical waste stored at these plants.

         COMMODORE CFC TECHNOLOGIES, INC.

         Through Refrigerant, the Company has developed and patented a process
which, in test applications of limited quantities of CFCs has been able to
separate mixtures of refrigerants so that they can be returned to productive
use at purity levels meeting industry standards.  An example of the benefit of
this process involves automobile air conditioners.  EPA econometrics models
predict that, by the end of 1996, there will be over 120,000,000 cars in the
United States alone that will still rely on dichlorodifluoromethane, also known
as freon ("R-12"), as the refrigerant in their systems.  Based on test results
to date, it appears that Refrigerant's process can provide the required stocks
of R-12 economically through its patented separation process.

         Refrigerant Technology

         Refrigerant's CFC separation and destruction technologies may be a
solution to a rapidly growing worldwide problem for which an economic and
effective alternative is not otherwise known to be available.  The Refrigerant
process employs fundamental chemical principles in novel combinations to deal
with two aspects of the CFC problem:

         1.      The technology has separated mixtures of CFCs that have become
                 cross-contaminated during use, thereby returning acceptable
                 purity, high-valued CFCs to economic and productive use, and

         2.      The technology has also destroyed low-value CFCs, and mixtures
                 thereof, that do not merit recycling.  This is done using
                 SET(TM), which is believed to have considerable cost advantage
                 over alternative destruction processes.

         To date, the separation and destruction technologies have proven
effective in test applications of significant quantities of CFCs.  The Company
has begun to place the technologies into commercial-scale use and application.





                                       14
<PAGE>   17
         Joint Ventures

         Refrigerant received an exclusive, worldwide license from the Company
for the SET(TM) technology for use relating to destruction of refrigerants.
See "Intercompany License" below.  Refrigerant also owns a selective
refrigerant destruction technology based on its aqueous process for which
patents are pending.  In addition to these technologies, Refrigerant, through
its wholly-owned subsidiary, Commodore Refrigerant Technologies, Inc. ("CORT"),
has acquired an interest in a refrigerant separation technology owned by
Climate Supply (Atlantic) Inc. ("Climate Supply"), a Canadian corporation
located near Halifax, Nova Scotia.  Climate Supply owns patented equipment and
a patented process which separates refrigerants by the "fractional
distillation" method.  The fractional distillation technology separates gases,
including refrigerants, through temperature and pressure differentials.  On
September 1, 1996, CORT entered into a joint venture with Climate Supply.  The
joint venture, which is known as CORTCLIMATE, LLC ("CORTCLIMATE"), is owned
one-half by CORT and one-half by Climate Supply, and is organized as a Delaware
limited liability company.

         CORT has licensed to the joint venture the SET(TM) process for
refrigerant destruction and the aqueous technology for selective refrigerant
destruction.  Climate Supply has licensed its fractional distillation
technology for separating refrigerants to the joint venture.  The purpose of
the joint venture is to pursue, with certain limited territorial exceptions,
worldwide refrigerant destruction, selective destruction and separation based
on the SET(TM) process, the aqueous technology and Climate Supply's fractional
distillation technology.

         On September 17, 1996, CORTCLIMATE entered into a series of agreements
with Refrigerant Products Limited of Manchester, England ("RPL"), pursuant to
which CORTCLIMATE sold fractional distillation refrigerant separation equipment
to RPL on a restricted basis and licensed the fractional distillation
technology to RPL throughout the United Kingdom in exchange for a royalty
equivalent to 50% of the net profits.  The equipment recently was shipped to
England where it is expected to undergo brief operational trials before
entering full-scale commercial operations.

         On August 1, 1996, CORTCLIMATE entered into a License and Processing
Agreement with North East Separation Technologies, LLC ("North East") pursuant
to which CORTCLIMATE licensed fractional distillation refrigerant separation
equipment.  In return, North East agreed to process mixed refrigerant supplied
to it by CORTCLIMATE and obtained by itself for a specified fee.  CORTCLIMATE
expects to profit from the difference between the fees it receives for
processing mixed refrigerant and the fee it pays North East for processing it,
as well as from the fee it will receive from refrigerants obtained directly and
processed by North East.

         CORTCLIMATE is currently negotiating with a number of other companies
throughout the United States and throughout the world to establish refrigerant
processing centers where used refrigerant can be destroyed, selectively
destroyed or separated based on the SET(TM), aqueous and fractional
distillation separation technologies.  Refrigerant believes that international
business arrangements are likely to resemble the RPL business arrangement and
that U.S.  business arrangements are likely to resemble the North East business
arrangement.

         On February 6, 1997, CORTCLIMATE entered into a series of agreements
with Solvents Australia (Pty.) Limited ("Solvents Australia") pursuant to which
CORTCLIMATE sold fractional distillation refrigeration separation equipment to
Solvents Australia on a restricted basis and licensed the fractional
distillation technology to Solvents Australia for the use throughout Australia
in exchange for a royalty ranging from 4-1/2% to 9% of net sales of products
and processes attributable to the use of the fractional distillation technology
in a refrigerant separation business owned and operated by Solvents Australia,
plus a 50% interest in the net profits earned by the Solvents Australia
refrigerant separation business.  The business arrangement is in full-scale
commercial operation.





                                       15
<PAGE>   18
INTELLECTUAL PROPERTY

         COMMODORE ADVANCED SCIENCES, INC.

         CAS has seven United States patents which issued between 1987 and
1996, and which relate to SET(TM), electrochemistry of halogenated organic
compounds, separation and destruction of CFCs and decontamination of soils
containing mercury and radioactive metals.  CAS also has one Canadian patent
relating to its SET(TM) technology and is in the process of prosecuting one
patent in Japan on such technology.  CAS has filed five additional United
States patent applications relating to separation and destruction of CFCs and
removal of heavy metals from soil.  In November 1995, the Company filed a
provisional patent application relating to the destruction of chemical warfare
agents.  CAS is pursuing foreign patent protection where it deems appropriate.

         COMMODORE SEPARATION TECHNOLOGIES, INC.

         Separation has filed one United States utility patent application and
two United States provisional patent applications covering the principal
features of its SLM(TM) technology. One provisional patent application covers
the joint inventions of Dr. Kilambi and Lockheed Martin, and a corresponding
utility patent application containing the specific patent claims is expected to
be filed in the near future. Separation may also pursue foreign patent
protection where it deems appropriate.

         COMMODORE CFC TECHNOLOGIES, INC.

         Refrigerant has one patent and one patent filing as of the date of
this Annual Report, and Refrigerant is licensed to utilize SET(TM) for CFC
applications.

INTERCOMPANY LICENSE

         CAS has granted to the Company and its subsidiaries (other than CAS
and its subsidiaries) the exclusive world-wide right (with the right to
sublicense) to make, use, sell and exploit, for itself or jointly with other
third parties, in all domestic and international markets and for all
applications, all of the inventions and technology under all patents,
discoveries, technology and other intellectual property now or hereafter owned
or otherwise possessed by CAS in connection with SET(TM); provided that such
license expressly limits the licensees' rights to the licensed patents and
technology to the destruction of CFCs and other ozone-depleting substances.  It
is contemplated that subsidiaries of CAS will render services in the future to
the Company in respect of Refrigerant's business.

COMPETITION

         COMMODORE ADVANCED SCIENCES, INC.

         CAS anticipates that the initial market for commercial private sector
applications of SET(TM) 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, including Molten Metal Technology,
Inc., have substantially greater financial and other resources than CAS.
Although CAS believes that it possesses the only Nationwide Permit for
destroying PCBs, any one or more of CAS's competitors or other enterprises not
presently known may develop technologies which are superior to the technologies
utilized by CAS.  To the extent that CAS's competitors are able to offer
comparable services at lower prices or of higher quality, or more
cost-effective remediation alternatives, CAS's ability to compete effectively
could be adversely affected.





                                       16
<PAGE>   19
          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 CAS.  In addition, many prospective users of SET(TM) 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.

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

         ADVANCED SCIENCES, INC.

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

         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., Dames & Moore and Woodward-Clyde.  Primary factors affecting Advanced
Sciences' competitiveness in this market are (i) its ability to continue to
attract and retain qualified technical and professional staff with quality
project performance records and (ii) its ability 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 DOE, DOD and private sector
industrial clients.  Advanced Sciences' believes its competitive position with
the DOE and DOD is enhanced by the physical proximity of its plants to DOE and
DOD sites, its skilled professional staff, prior project experience with the
DOE and DOD, numerous existing multi-year contracts with the DOE and DOD,
integrated services, and high quality performance.






                                       17
<PAGE>   20
         COMMODORE SEPARATION TECHNOLOGIES, INC.

         The most common alternative methods for metals separation from
solubilized process streams presently include ion exchange, reverse osmosis,
precipitation, ultrafiltration and chromatography. The Company believes that
most of these methods have certain drawbacks, including lack of selectivity in
the separation process, inability to handle certain metals in the process
streams, and the creation of sludges and other harmful by-products which
require further post-treatment prior to disposal. For example, reverse osmosis
and ultrafiltration are incapable of separating chrome and chromium materials
from wastewater streams, and precipitation results in the production of sludge
which requires dewatering, drying and disposal in a landfill. Certain of these
other technologies also entail long process times, and are relatively
expensive.

         By contrast, SLM(TM) is capable of handling a broad range of compounds
in a faster and relatively inexpensive manner. Furthermore, the by-products of
the SLM(TM) process consist primarily of wastewater, which can be discharged as
normal wastewater effluent, and to a substantially lesser extent and in only
rare circumstances, materials requiring landfill disposal.

         Separation technologies are currently utilized by a wide variety of
domestic and international companies, including several large companies having
substantially greater financial and other resources than the Company. Although
the Company believes that SLM(TM) has substantial advantages over all other
known separation technologies, any one or more of the Company's competitors, or
other enterprises not presently known, may develop technologies which are
superior to SLM(TM). To the extent the Company's competitors are able to offer
comparable services at lower prices or of higher quality, or more
cost-effective alternatives, the Company's ability to compete effectively could
be materially adversely affected. The Company believes that its ability to
compete in both the commercial and governmental sectors is dependent upon
SLM(TM) being a superior, more cost-effective method to achieve separation
and/or recovery of a variety of materials in varying amounts and
configurations. In the event that the Company is unable to demonstrate that
SLM(TM) is a technical and cost-effective alternative to other separation
technologies on a commercial scale, the Company may not be able to successfully
compete.

         COMMODORE CFC TECHNOLOGIES, INC.

         The Company believes that the market for CFC separation, selective
destruction, and full destruction will continue to be fragmented due to
existing technologies in the marketplace and inconsistent supplies of products
to be separated and destroyed.  In the case of full destruction, incineration
is the main competition.  In several countries, incineration is not permitted,
which gives the SET(TM) technology an operating advantage.  In the area of CFC
separation, the Company believes that Refrigerant holds one of the most
efficient and portable technologies in the world for the effective separation
of CFCs and Halons.  Although several companies have entered into this market
in the past 12 months with other forms of non-portable technology, the Company
and its joint venture partners believe the mobility and ease of use of
Refrigerant's technologies make them more attractive then the alternatives in
the marketplace.

RESEARCH AND DEVELOPMENT

         Research and development activities are ongoing and utilize internal
technical staff as well as independent consultants retained by the Company and
its subsidiaries.  All such activities are company-sponsored.  Research and
development expenditures for the Company and its subsidiaries were $2,364,000
and $1,815,000 for each of the years ended December 31, 1996 and 1995,
respectively.





                                       18
<PAGE>   21
ENVIRONMENTAL MATTERS

         SET(TM)

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

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

         CERCLA and subsequent amendments under SARA (often referred to
collectively as Superfund) impose strict, retroactive liability upon persons
who generated, transported or arranged for the transportation of hazardous
substances or owned or operated the vessels or facilities at which such
substances were disposed.  CERCLA provides for the investigation and
remediation of hazardous substance sites and mandates that any hazardous
substances remaining on-site must meet certain regulatory requirements, with a
preference for innovative technology.  These program regulations may create an
incentive to utilize environmental-friendly technologies such as SET(TM), 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(TM) 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.  CAS's
plans to own and operate SET(TM) at on-site installations expose CAS 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 CAS for final disposition of residues from SET(TM) are targeted for
investigation and clean-up under CERCLA, CAS 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, CAS has designed the SET(TM)
technology to minimize the potential for release of hazardous substances into
the environment.  In addition, CAS 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.  CAS 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(TM) systems in the event that there is any
discharge of non-recovered gases into





                                       19
<PAGE>   22
the environment.  Such additional air emission controls can be costly and
require an air permit to construct and operate.

         On April 3, 1996, the Company was selected by the White House as one
of nine companies to participate in the Rapid Commercialization Initiative
("RCI"), which is a component of the Clinton Administration's efforts to
streamline the commercialization process for new environmental technologies,
and to build cooperative interactions between business and government to bring
environmental technologies to market more rapidly and efficiently.  Under the
RCI, the Company intends to form "working partnerships" with the EPA and other
governmental agencies for the purpose of developing and implementing policies
and strategies for the commercialization of SET(TM).  Although there is no
funding through the RCI, it is expected that the EPA and other governmental
agencies will provide permitting and siting assistance under the program to
facilitate and expedite the issuance of permits for site specific
demonstrations of SET(TM), as well as assistance to certify and publish the
on-site test results of such demonstrations.

         Effective March 18, 1996, the EPA lifted a ban dating to 1980 on the
import of waste materials containing certain high concentrations of PCBs.  The
new regulations are expected to make disposal capacity in the United States
available to waste generators in Mexico and Canada, where PCB waste disposal
capacity is less available.  The EPA has estimated that these regulations may
create an additional market for United States-based PCB disposers of between
$50.0 million and $100.0 million per year for the next five years.

         CAS possesses a Nationwide Permit issued by the EPA under the
Alternative Destruction Technology Program that allows CAS to use SET(TM)
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 CAS 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, CAS 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 CAS and its operations.  See "-- EPA
Nationwide Permit and Testing Results."

         SLM(TM)

         Separation's operations, as well as the use of specialized technical
equipment by its customers, are subject to numerous federal, state and local
regulations relating to the storage, handling and transportation of certain
regulated materials. Although Separation's role is generally limited to the
leasing of its specialized technical equipment for use by its customers, there
is always the risk of the mishandling of such materials or technological or
equipment failures, which could result in significant claims against
Separation. Any such claims against Separation could materially adversely
affect the Company's business, financial condition and results of operations.

         Separation maintains environmental liability insurance with limits of
$1.0 million per occurrence and $1.0 million in the aggregate. Separation may
be required to obtain environmental liability insurance in greater amounts in
the future as SLM(TM) is commercialized. There can be no assurance that such
insurance will provide coverage against all claims, and claims may be made
against Separation (even if covered by Separation's insurance policy) for
amounts substantially in excess of applicable policy limits. Any such event
could have a material adverse effect on Separation's business, financial
condition and results of operations.

EMPLOYEES

         The Company (including all of its direct and indirect subsidiaries)
had a total of 140 employees as of March 14, 1997.  None of such employees are
covered by collective bargaining agreements, and the Company's relations with
its employees are believed to be satisfactory.






                                       20
<PAGE>   23
ITEM 2.  PROPERTIES

         The Company leases approximately 7,000 square feet in Columbus, Ohio
from an unaffiliated third party under a month to month lease, which the
Company uses as its laboratory and offices. The Company also leases
approximately 10,000 square feet of space in Marengo, Ohio (approximately 30
miles north of Columbus, Ohio) from an affiliated third party under a lease
expiring in August 1997, which the Company uses as its equipment and SET(TM)
demonstration and testing facilities. In the event that the Company does not
extend or renew such leases, the Company believes that there are comparable
facilities available at lease rates comparable to those currently paid by the
Company.

         The Company's principal executive offices are located in approximately
2,000 square feet of office space in McLean, Virginia under a lease expiring in
May 2002. The Company pays $2,500 per month, on a month-to-month basis, under
such lease.

         The Company has leased approximately 11,000 square feet of space, and
plans to lease approximately 10,000 square feet of additional space, in
Houston, Texas, for testing, additional research and development, equipment
demonstration and assembly, and executive and administrative offices. Upon
occupation of these facilities, the Company will terminate its existing leases 
in Columbus and Marengo, Ohio.

         The Company has leased a new facility of approximately 20,000 square
feet near Atlanta, Georgia, which will provide administration offices, research
and testing laboratories and a SLM(TM) manufacturing plant.

ITEM 3.  LEGAL PROCEEDINGS

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


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

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.





                                       21
<PAGE>   24
                                    PART II

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

         The Company's Common Stock and Class A Warrants were traded and quoted
on the American Stock Exchange beginning June 29, 1996. The following tables
set forth, for the periods indicated, and the high and low closing sales prices
of Common Stock and Class A Warrants through December 31, 1996 as reported by
the American Stock Exchange.

<TABLE>
<CAPTION>
                                                       Common Stock                Class A Warrants
                                                       ------------                ----------------

                     1996                          High            Low             High         Low
                                                   ----            ---             ----         ---
 <S>                                              <C>             <C>             <C>          <C>
 Quarter ended December 31, 1996                   7 1/8          4 3/4            2 1/4       1 5/16

 Quarter ended September 30, 1996                 11 5/8          5 9/16           5           1 3/4

 Quarter ended June 30, 1996                       5 3/4          5 1/4            2           1 1/2
</TABLE>


         The Company had approximately 37 owners of record as of December 31,
1996.

         Since its inception, the Company has not paid any cash dividends on
its Common Stock. The Company intends to retain earnings to finance the
operation and expansion of the Company's business and, accordingly, does not
plan for the reasonably foreseeable future to pay cash dividends to holders of
the Common Stock. Any decisions as to the future payment of dividends will
depend on the earnings and financial position of the Company and such other
factors as the Company's Board of Directors deems relevant.





                                       22
<PAGE>   25
ITEM 6.  SELECTED FINANCIAL DATA.

         The selected financial data included in the following table as of
December 31, 1996, for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 are derived from the Consolidated Financial Statements appearing elsewhere
herein. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" and the Consolidated Financial Statements and notes thereto
appearing elsewhere herein.


CONSOLIDATED STATEMENT OF OPERATIONS(2):
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                  --------------------------------------------------------------------------------
                                     1992               1993              1994             1995             1996
                                     ----               ----              ----             ----             ----
                                  Commodore Laboratories, Inc.
                                     (Predecessor Company)
                                  ----------------------------
 <S>                                  <C>               <C>             <C>              <C>               <C>
 Revenues  . . . . . . . .             $ 145            $ 154           $     0          $      0          $  5,123
                                       -----            -----           -------          --------          --------

 Net loss  . . . . . . . .            $  (66)           $(473)          $(4,717)          $(3,856)         $ (5,643)
                                      ======            =====           =======           =======          ======== 

 Net loss per share(1) . .                --            $(.03)          $  (.31)          $  (.26)         $   (.31)
                                      ======            =====           =======           =======          ======== 

 Cash dividends paid . . .                 0                0                 0                 0                 0
</TABLE>


CONSOLIDATED BALANCE SHEET DATA(2):
(Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                              -----------------------------------------------------------------------------
                                  1992             1993              1994           1995            1996
                                  ----             ----              ----           ----            ----
                              Commodore Laboratories, Inc.
                                  (Predecessor Company)
                              -----------------------------
 <S>                              <C>              <C>              <C>             <C>              <C>
 Working capital
 (deficit) . . . . . . .          $(351)           $1,139           $(5,450)        $(9,200)         $8,991

 Total assets  . . . . .             95               330               856           1,091          33,456

 Total liabilities . . .            480             1,189             5,542           9,633          13,380

 Stockholders' equity
 (deficit) . . . . . . .           (385)             (859)           (4,686)         (8,542)         20,076
</TABLE>
______________________
(1)  Net loss is calculated on the basis of 18,100,000 shares of Common Stock
     being outstanding for 1996, and 15,000,000 shares of Common Stock being
     outstanding for each of 1995, 1994, 1993 and 1992.
(2)  The selected financial data at and for the years ended December 31, 1993
     and 1992 are those of Commodore Laboratories, Inc. (formerly, A.L.
     Sandpiper Corporation), which is the predecessor of the Company, and the
     selected financial data for subsequent periods reflect the cost of the
     acquisition of Commodore Labs pushed down from Environmental.





                                       23
<PAGE>   26
                 MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

                 The Company, since Environmental's acquisition of Commodore
Laboratories, Inc. ("Commodore Labs") in December 1993, has not generated
material revenues, except from the acquisition of Advanced Sciences in the
fourth quarter of 1996, or any profits.  Prior to the acquisition of Advanced
Sciences, the Company was considered to be a development stage company. 

RESULTS OF OPERATIONS

    YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

                 Revenues were $5,123,000 for the year ended December 31, 1996,
compared to $0 for the year ended December 31, 1995.  Such revenues for 1996
were primarily due to the Company's acquisition of Advanced Sciences, effective
October 1, 1996, and consisted of engineering and scientific services performed
for the United States government under a variety of contracts, most of which
provide for reimbursement of cost plus fixed fees.  Revenue under
cost-reimbursement contracts is recorded under 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.  Cost of sales increased
to $4,136,000 from $0 for the same periods.  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, 1996, the Company incurred
research and development costs of $2,364,000, as compared to $1,815,000 for the
year ended December 31, 1995.  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 of construction of an asset having an economic useful life are
capitalized, and then depreciated over the estimated useful life of the asset.
Research and development increased for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 primarily due to the continued use
of independent consultants in the development of SET(TM).  Also, the Company
hired additional technical and operational personnel to develop the SET(TM)
process.

                 General and administrative expenses for the year ended
December 31, 1996 were $3,412,000, as compared to $1,773,000 for the year ended
December 31, 1995.  The increase was primarily due to hiring executives and 
staff to support the increased activities of the Company caused by its change to
"public" status and its efforts to commercialize its technology. Approximately
$1,038,000 of the increase relates to expenses incurred at the newly acquired
Advanced Sciences subsidiary.

                 Annual interest income was $477,000 for the year ended
December 31, 1996, as compared to $6,000 for the year ended December 31, 1995.
This increase resulted from the investment of the proceeds of the Company's
initial public offering during the last six months of 1996.

                 Interest expense for the year ended December 31, 1996 was
$617,000, as compared to $274,000 for the year ended December 31, 1995.
Interest charges result from indebtedness to Environmental for advances made to
the Company and from indebtedness to a bank by a wholly owned subsidiary.
Interest expense increased due to the increased outstanding balance due to
Environmental throughout the year ended December 31, 1996 as compared to year
ended December 31, 1995, and the addition of debt of its wholly owned
subsidiary during the last three months of 1996.

                 Equity in losses of unconsolidated subsidiary for the year
ended December 31, 1996 was $495,000, as compared to $0 for the year ended
December 31, 1995.  The Company's Teledyne-Commodore, LLC joint venture
commenced reporting results of operations in October 1996.





                                       24
<PAGE>   27
     YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,1994

                 During the year ended December 31, 1995, the Company incurred
research and development costs of $1,815,000, as compared to research and
development costs of $380,000 for the year ended December 31, 1994. Research
and development costs increased in 1995 as compared to 1994 primarily due to
the hiring of additional personnel and a significant increase in testing of the
SET(TM) process. In the year ended December 31, 1994, the Company devoted a
significant portion of its financial resources towards the construction of a
pilot-scale commercial SET(TM) processing system. Approximately $620,000 was
incurred on this project which included the costs of materials, design and
construction, all of which was capitalized as research equipment.

                 General and administrative expenses for the year ended
December 31, 1995 were $1,773,000, as compared to $1,369,000 for the year ended
December 31, 1994. In 1995, general and administrative expenses increased by
$404,000, due primarily to increase in salaries, insurance expense, travel and
related activities and bad debt expenses were allocated from Environmental, as
among its subsidiaries, based on utilization of resources.

                 In the year ended December 31,1995, the Company incurred
approximately $274,000 of interest expense, which related to intercompany
interest charges from Environmental for advances made to the Company, as
compared to $551,000 of interest expense in the year ended December 31, 1994,
which related to intercompany interest charges. In 1994, the Company incurred a
financing fee of $384,000 in connection with bank financing obtained by
Environmental to be utilized by the Company, which did not recur in 1995.
Without taking into account the financing fee of $384,000, interest expense
increased by $107,000 from 1994 to 1995 due to the increase in advances from
Environmental throughout 1995.

                 In the year ended December 31, 1994, the Company charged to
expense $2,424,000 of in-process technology which had been acquired.

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.  On June 28, 1996, the Company successfully completed an
initial public offering of its Common Stock and warrants from which it received
net proceeds of approximately $30,551,000.  In connection with the initial
public offering, the Company incurred transaction costs of approximately
$649,000.  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.  

                 In July 1996, the Company utilized a portion of the net
proceeds from its initial public offering 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 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.

                 At December 31, 1996, the Company had a $7,042,000 outstanding
balance on a $9,250,000 revolving line of credit due September 30, 1997.  This
increase in debt was attributable to the line of credit assumed in the
Company's acquisition of Advanced Sciences, effective October 1, 1996.  See
"Business--Recent Developments--Acquisition of Advanced Sciences, Inc."  The
Company anticipates refinancing the revolving line of credit in the third
quarter of 1997.  In addition, the Company plans to pursue various options to
finance its anticipated capital expenditures for 1997 and 1998.

                 For the year ended December 31, 1996, the Company incurred a
net loss of $5,643,000.  At December 31, 1996, the Company had working capital
of $8,991,000.





                                       25
<PAGE>   28
                 Effective as of December 1, 1996, the Company transferred
certain of its operating assets related to its SET(TM) technology to CAS,
subject to certain liabilities related to such assets, in exchange for 100
shares of common stock, par value $.01 per share, of CAS, representing all of
the issued and outstanding shares of capital stock of CAS.  CAS agreed to
assume all of the net assets of the Company relating to its SET(TM) 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 located in
McLean, Virginia. See "Business--Recent Developments--Transfer of Certain
Operating Assets to CAS" and "Certain Relationships and Related Transactions."

                 Effective as of December 2, 1996, the Company acquired (i) all
of the outstanding capital stock of Separation and (ii) all of the outstanding
capital stock of Refrigerant from Environmental, the owner of 69.3% of the
outstanding Common Stock of the Company, 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 Refrigerant
to the Company, the Company paid Environmental $3.0 million in cash and, subject
to compliance with any applicable stockholder approval or notice requirements,
will issue 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 "Business--Recent Developments--Acquisition 
of Commodore Separation Technologies, Inc. and Commodore CFC Technologies, 
Inc." and "Certain Relationships and Related Transactions."

                 In April 1997, Separation successfully completed an initial
public offering of its equity securities, from which it received net proceeds
of approximately $11.7 million.  Such funds will be used primarily to finance
Separation's operations through 1997.

NET OPERATING LOSSES

                 The Company has net operating loss carry forwards of
approximately $14,718,000 which expire in the years 2000 through 2011. The
amount of net operating loss carry forward that can be used in any one year
will be limited by the applicable tax laws which are in effect at the time such
carry forward can be utilized. A valuation allowance of $7,781,000 has been
established to offset any benefit from the net operating loss carry forwards it
cannot be determined when to if the Company will be able to utilize the net
operating losses.





                                       26
<PAGE>   29
ITEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 The following consolidated financial statements of the Company
and subsidiaries are included as ITEM 8 and can be found beginning on page F-1
herein:

                 Report of Independent Public Accountants.

                 Consolidated Balance Sheet as of December 31, 1995 and 1996.

                 Consolidated Statements of Operations for the years ended
                 December 31, 1994, 1995 and 1996.

                 Consolidated Statements of Stockholders' Equity for the years
                 ended December 31, 1994, 1995  and 1996.

                 Consolidated Statements of Cash Flows for the years ended
                 December 31, 1994, 1995 and 1996.

                 Notes to Consolidated Financial Statements.

                 All financial statement schedules for which provision is made
in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable,
and, therefore, have been omitted.


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

                 The Company and its former auditors, Tanner + Co. ("Tanner")
mutually agreed on December 11, 1996 to terminate their relationship. During
the Company's last two fiscal years, Tanner's reports on the Company's financial
statements neither contained any adverse opinions nor were qualified or modified
as to any uncertainty, except that Tanner's auditors reports on the Company's
consolidated financial statements for the years ended December 31, 1995 and 1994
contained additional paragraphs relating to the Company continuing as a going
concern, due to significant losses and a deficit in working capital.

                 During the last two fiscal years, there were no disagreements
with Tanner 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 Tanner, would have caused it to make reference
to the subject matter of the disagreements in connection with its report.

                 The Company has retained Price Waterhouse LLP as its auditors
as of December 19, 1996.


                                       27
<PAGE>   30
                                    PART III

ITEM 10.         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

                 The names and ages of the executive officers, key employees
and directors of the Company, and their positions with the Company, are as
follows:

<TABLE>
<CAPTION>
 NAME                                   AGE     POSITION
 ----                                   ---     --------
 <S>                                    <C>     <C>
 Paul E. Hannesson                      55      Chairman of the Board and Chief Executive Officer

 Edwin L. Harper, Ph.D.                 55      Co-Vice Chairman, President and Chief Operating Officer

 Tom J. Fatjo, Jr.                      56      Co-Vice Chairman

 Thomas E. Noel                         58      President and Chief Operating Officer, Commodore Advanced
                                                Sciences, Inc., and Director of the Company

 Kenneth J. Houle                       57      President and Chief Operating Officer, Commodore Separation
                                                Technologies, Inc.

 Albert E. Abel                         53      Vice President

 Neil L. Drobny, P.E., Ph.D.            56      Vice President

 Carl O. Magnell, P.E.                  55      Vice President

 Rayburn Hanzlik                        58      Vice President, General Counsel, Chief Administrative Officer
                                                and Secretary

 William E. Ingram                      51      Vice President, Finance

 Kenneth L. Adelman, Ph.D.              49      Director

 Bentley J. Blum                        55      Director

 Herbert A. Cohen                       62      Director

 C. Thomas McMillen                     44      Director

 David L. Mitchell                      75      Director

 Ed L. Romero                           62      Director
</TABLE>

        PAUL E. HANNESSON has been  a director of the Company since March 1996,
served as its Chief Executive Officer from March to October 1996 and was
reappointed Chief Executive Officer on November 18, 1996, has served as its
Chairman of the Board since November 1996 and served as its President from March
to September 1996. Mr. Hannesson has been a director of Environmental since
February 1993, was appointed its Chairman of the Board and Chief Executive
Officer in November 1996, and served as its President until July 1996. Mr.
Hannesson also currently serves as a director of Separation, CAS and
Refrigerant. 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 currently serves as Chairman of the Board of
Lanxide Corporation, where he also serves on its Compensation Committee. Mr.
Hannesson is the brother-in-law of Bentley J. Blum, a director of the Company
and Environmental.

        EDWIN L. HARPER, PH.D. has been the President and Chief Operating
Officer of both the Company and Environmental since November 18, 1996, and has
also served as the Company's Co-Vice Chairman since that date.





                                       28
<PAGE>   31
Dr. Harper also currently serves as the Chairman of the Board and Chief
Executive Officer of Separation, CAS and Refrigerant. Dr. Harper had been the
President and Chief Executive Officer of the Association of American Railroads,
a trade association for the major railroads in North America, since January
1992. Prior to such appointment, Dr. Harper was the Co-Chief Executive Officer
of Campbell Soup Company from November 1989 through January 1990, and its
Executive Vice President and Chief Financial Officer from 1986 to 1991. Dr.
Harper has held several other senior executive officer positions in the past,
with Dallas Corporation (1983 to 1986), Emerson Electric Company (1978 to 1981)
and CertainTeed Corporation (1975 to 1978), and served in the White House as
Assistant to the President, Deputy Director of the Office of Management and
Budget and Chairman of the President's Council on Integrity and Efficiency in
Government from 1981 to 1983. Dr. Harper holds a Ph.D. degree from the
University of Virginia, Dr. Harper has agreed to devote a majority of his
business and professional time to the Company.

        TOM J. FATJO, JR. has been Co-Vice Chairman of the Company since
November 1996. Mr. Fatjo also currently serves as Chairman of TransAmerican
Waste Industries, Inc., a Houston based solid waste management company which he
founded in 1991.  Mr. Fatjo is also the developer of The Houstonian, a 22-acre
fitness and preventative medicine complex and luxury condominium.  Mr. Fatjo
has served on the boards of several other public companies including Western
Waste, Inc., Rolm Corporation, Consolidated Fibers, Inc., Health Resources
Corporation of American, Criteron Capital Corporation, Advanced Sciences, Inc.
and American Title, Inc., among others.  He holds a B.A. from Rice University.
He has also co-authored a book, With No Fear of Failure (1981), a treatise on
his personal business philosophy.

        THOMAS E. NOEL was appointed President and Chief Operating Officer of
CAS effective December 1, 1996.  Mr. Noel was elected a director of the Company
in October 1996 and served as the Company's President and Chief Executive
Officer from October to November 17, 1996. Mr. Noel has held numerous executive
positions in hazardous, non-hazardous and low-level nuclear waste industries.
He previously served as President of TransAmerican Waste Industries, Inc., a
non-hazardous waste disposal company, and two years as President of Ecova
Corporation, an Amoco subsidiary in the environmental services business. From
1984 to 1992, he was at Chemical Waste Management, Inc., where he served as
Senior Vice President of operations, managing that company's core business with
more than 6,000 employees and $1.5 billion in annual revenues. He also
previously served as President of Pakhoed, USA and DSI Terminals, Inc. After
graduating from the United States Military Academy at West Point, New York, he
served 14 years in the Army, including two years as an aide to General
Creighton Abrams, Commander of all U.S. Forces in Vietnam and Army Chief of
Staff. Mr. Noel was presidential appointee as Assistant Secretary of the
Department of Energy, responsible for the U.S. Strategic Petroleum Reserve, a
$20 billion federal program created following the Arab oil boycott in the early
1970's.

        KENNETH J. HOULE was appointed President and Chief Operating Officer of
Separation effective January 27, 1997. Mr. Houle previously served as the
President of the Hall Chemical Company, a manufacturer of inorganic metal
catalysts and compounds, from April 1995 to September 1996. Prior to such time,
Mr. Houle had served as Vice President and Business Director of the Personal
Care Business Unit of International Specialty Products, Inc., a producer of
specialty chemicals , from April 1992 to March 1995, and the President and Chief
Executive Officer of Ruetgers - Nease Chemical Company, a manufacturer of
organic chemical intermediates and surfactants, from February 1990 to January
1991. Mr. Houle was an independent consultant in the chemical industry form
October 1996 to January 1997. Mr. Houle is a graduate of Siena College, with a
Bachelors degree in Chemistry, and the Accounting and Financial Management
Program at Columbia University. Mr. Houle also participated in the Masters
degree program in Organic Chemistry at Iowa State University. He is a board
member of the Chemist's Club (New York, New York) and a member of the American
Chemical Society, American Institute of Chemical Engineers and Societe de Chemie
Industrielle (American section). Mr. Houle is also a trustee and Board member of
the Ohio Center of Science and Industry.

        ALBERT E. ABEL founded Commodore Labs (formerly A.L. Sandpiper
Corporation), an environmental technology company, in 1980 and was a Vice
President and one of its principal stockholders until its sale to





                                       29
<PAGE>   32
Environmental in 1993. Mr. Abel has been the President of Commodore Labs since
December 1993, and has been a Vice President of the Company since March 1996.

        CARL O. MAGNELL, P.E. has served as a Vice President of Environmental
from September 1995 to June 1996 when he became a Vice President of the
Company. From 1992 to 1995, Mr. Magnell served as Director of Research for
Civil Engineering Research Foundation (an industry-sponsored engineering
research group), and from 1964 to 1992, Mr. Magnell served in various
engineering capacities with the U.S. Army Corps of Engineers. Mr. Magnell holds
a B.S. degree form the United States Military Academy, and an M.S. in Civil
Engineering and Political Science from the Massachusetts Institute of
Technology.

        NEIL L. DROBNY, P.E., PH.D. has served as a Vice President of the
Company since June 1996.  Dr. Drobny served as Vice President of Environmental
from June 1995 to June 1996.  From October 1994 to May 1995, Dr. Drobny served
as a private consultant for Environmental.  From 1981 to October 1994, Dr.
Drobny served as President and a principal stockholder of ERM-Midwest, Inc., an
environmental consulting firm that is now part of ERM, Inc., an international
environmental consulting group.  He also founded and served as President of
ERM/EnviroClean-Midwest, Inc., an affiliated remediation company, from 1989 to
October 1993.  From 1966 to 1981, Dr. Drobny held numerous positions ranging
from Project Engineer to Director of Business Development of Battelle Memorial
Institute, an international contract research organization.  Dr. Drobny
received his Ph.D. in Civil Engineering from Ohio State University in 1971.

        RAYBURN HANZLIK joined the Company in January 1997 as Vice President,
General Counsel, Chief Administrative Officer and Secretary.  He also serves as
Vice President, General Counsel and Secretary of Environmental, CAS, Separation
and Refrigerant.  During the previous five years, he founded and was chairman
of Lanxide Sports International, Inc. and Stealth Propulsion International,
Ltd., two San Diego-based technology companies in the sporting goods and
boating industries.  Mr. Hanzlik has held other senior executive positions in
business and government, including partner and director of Heidrick &
Struggles, Inc. from 1985 through 1990; Administrator of the Department of
Energy's Economic Regulatory Administration from 1981 through 1985; and, White
House staff from 1970 through 1975.  He has also been a member of several law
firms in Washington, D.C. and Los Angeles, California.  Mr. Hanzlik holds J.D.
and M.A. degrees from the University of Virginia.

        WILLIAM E. INGRAM joined the Company as its Vice President and
Controller in October 1996 and was appointed Vice President, Finance in March
1997. Prior to that he was Chief Financial Officer of HydroChem Industrial
Services, Inc., a privately owned, $160 million company providing high pressure
water and chemical cleaning services primarily to the petrochemical industry.
He was Vice President and Region Controller for Chemical Waste Management, Inc.
(CWM) for eleven years. CWM, a subsidiary of WMX Technologies, provides
hazardous waste treatment and disposal services to a wide range of government
and industrial customers. He also spent two years with the solid waste
operations of WMX Technologies. Mr.  Ingram is a CPA. He has an MBA from the
University of Florida and a B.S. in Accounting from Florida Southern college.

        KENNETH L. ADELMAN, PH.D. joined the Company's Board of Directors in
July 1996. 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 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.





                                       30
<PAGE>   33
        BENTLEY J. BLUM served as the Chairman of the Board of the Company and
Commodore Labs until November 1996, and has served as a director of the Company
since that date. Mr. Blum served as the Chairman of the Board of Environmental
from 1984 to November 1996, and has served as a director of Environmental since
that date. Mr. Blum also currently serves as a director of Separation, CAS and
Refrigerant. For more than 15 years, Mr. Blum has been actively engaged in real
estate acquisitions and currently is the sole stockholder and director of a
number of corporations which hold real estate interests, oil drilling interests
and other corporate interests. Mr. Blum is Director of Lanxide Corporation, a
research and development company developing metal and ceramic materials; 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 the
controlling stockholder of Environmental. Mr. Blum is the brother-in-law of Paul
E. Hannesson, the Chairman of the Board and Chief Executive Officer of the
Company.

        HERBERT A. COHEN joined the Board of Directors of the Company in July
1996.  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 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.

        C. THOMAS MCMILLEN joined the Board of Directors of the Company in July
1996. Mr. McMillen was elected to three consecutive terms (1987-1993) in the
U.S. House of Representatives from the Fourth Congressional District of
Maryland, serving on both the Energy and Commerce Committee and the Science,
Space and Technology Committee. Currently, Mr.  McMillen serves as Chairman and
Chief Executive Officer of the Complete Wellness Centers, Inc., a privately
held physician practice management company. Previously, he served as Chief
Administrative Officer of Clinicorp, Inc., a publicly traded physician practice
management company. He is also a member of the Board of Directors of Chemring
Group, PLC and Integrated Communication Network, Inc. Mr. McMillen was also the
first selection by Buffalo in the 1974 National Basketball Association draft,
subsequently playing for eleven years in the NBA. Mr. McMillen received a B.S.
degree from the University of Maryland, where he was elected Phi Beta Kappa and
was an All-American basketball player.  He received a M.A. degree in politics
and philosophy from Oxford University in 1978.

        DAVID L. MITCHELL joined the Board of Directors of the Company in July
1996. For the past thirteen 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
diversities. Prior to forming Mitchell & Associates in 1982, Mr. Mitchell was a
Managing Director of Shearson/American Express. 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.

        ED L. ROMERO has retained his position as Advanced Sciences' Chairman
and Chief Executive Officer since joining the Company's Board of Directors in
October 1996.  Mr. Romero, who founded Advanced Sciences in 1983, is a
prominent member of many veteran groups and Hispanic business organizations.
He is president of the Hispanic Culture Foundation and also a member of the
board of the Democratic National Committee's Finance Committee.

        The Company's Board of Directors has an Audit Committee, a
Compensation/Stock Option Committee and a Finance Committee. The
responsibilities of the Audit Committee (which consists of Messrs. Adelman and





                                       31
<PAGE>   34
McMillen) 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, and
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. The
Compensation/Stock Option Committee (which consists of Messrs. Cohen, Adelman,
Fatjo and Harper) has responsibility for establishing and reviewing employee
compensation, 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.  The Finance Committee
consists of Messrs. Blum, Hannesson, Harper and Mitchell.

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

        The Company's officer's are elected annually by, and serve at the
pleasure of, the Board of Directors, subject to the terms of any employment
agreements.

COMPLIANCE WITH SECTION 16(a)

        Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors and officers, and persons who
own more than ten percent of the Company's Common Stock, par value $.001 per
share (the "Common Stock"), to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the American Stock
Exchange. Based on the Company's review of the copies of such reports received
by the Company and on written representations received by the Company, the
Company believes that no director, officer or holder of more than ten percent
of the Common Stock failed to file on a timely basis the reports required by
Section 16(a) of the Exchange Act during fiscal 1996.





                                       32
<PAGE>   35
ITEM 11.         EXECUTIVE 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 1996, 1995, and 1994 to the person serving as
the Company's current Chief Executive Officer and to each of the Company's most
highly compensated executive officers other than the Chief Executive Offer
whose total salary and bonus compensation exceeded $100,000 during any such
year (the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                                            ANNUAL COMPENSATION
                                   -------------------------------------------------------------------------
                                                                              Other
 Name                                                                         Annual            All Other
 Principal Position                Year        Salary($)    Bonus($)     Compensation($)     Compensation($)
 ------------------                ----        ---------    --------     ---------------     ---------------
 <S>                               <C>          <C>          <C>            <C>                 <C>
 Paul E. Hannesson                 1996         265,836      50,000            -0-                 -0-
 Chief Executive Officer           1995         186,476        -0-          96,000(1)              -0-
                                   1994         186,476        -0-          24,000(1)              -0-

 Albert E. Abel                    1996         140,583        -0-             -0-                 -0-
 Vice President                    1995         114,577      12,500            -0-                 -0-
                                   1994         104,666      12,500            -0-                 -0-

 Carl O. Magnell                   1996         117,500      20,000            -0-                 -0-
 Vice President                    1995          37,500        -0-             -0-              40,000(2)
                                   1994           -0-          -0-             -0-                 -0-

 Neil L. Drobny                    1996         180,000       20,000           -0-                 -0-
 Vice President                    1995          75,000        -0-             -0-              81,955(3)
                                   1994           -0-          -0-             -0-                 -0-

 Vincent Valeri                    1996         151,666      20,000            -0-                 -0-
 Formerly, Senior Vice             1995         140,000      20,000            -0-                 -0-
 President and Chief               1994          11,666        -0-             -0-                 -0-
 Engineer (4)
                 
-----------------
</TABLE>

(1)              Represents amounts paid to Mr. Hannesson as an allowance for
                 living expenses in the New York Metropolitan area.

(2)              Represents consulting fees paid to Mr. Magnell prior to his
                 full-time employment.

(3)              Represents consulting fees paid to Dr. Drobny prior to his
                 full-time employment.

(4)              Mr. Valeri served as Senior Vice President and Chief Engineer
                 of the Company until December 1996, at which time he became 
                 an executive officer of CAS.





                                       33
<PAGE>   36
STOCK OPTIONS

         The following table sets forth certain information concerning options
granted in fiscal 1996 to the Named Executive Officers under the Company's 1996
Stock Option Plan (the "1996 Plan"). The Company has no outstanding stock
appreciation rights and granted no stock appreciation rights during fiscal
1996.

                       OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                                          
                                                                                                          
                                                                                                            
                                                                               Potential Realized Value at  
                                                                                         Assumed            
                                      % of Total                               Annual Rates of Stock Price  
                                        Options                                      Appreciation           
                                      Granted to     Exercise                       for Option Term         
                                       Employees     or Base                   -----------------------------
                         Options       in Fiscal      Price      Expiration        5%             10%       
         Name          Granted (#)      Year(2)       ($/sh)        Date           ($)            ($)
------------------------------------------------------------------------------------------------------------
 <S>                     <C>                <C>        <C>       <C>            <C>             <C>
 Paul E. Hannesson       400,000(1)         29.1%      6.00      12/31/2000     $120,000         $240,000

 Albert E. Abel          125,000(1)          9.1%      6.00      12/31/2000      $37,500          $75,000

 Carl O. Magnell          35,000             2.6%      6.00      12/31/2000      $10,500          $21,000

 Neil L. Drobny          175,000(1)         12.8%      6.00      12/21/2000      $52,500         $105,000

 Vincent Valeri          125,000(1)          9.1%      6.00      12/31/2000      $37,500          $75,000
</TABLE>

(1)      These options were granted on March 29, 1996 pursuant to the 1996
         Plan, and are exercisable at the rate of 20% of the number of options
         granted in each of calendar 1996 through 2000, inclusive, beginning on
         March 31, 1996 and, unless exercised, expire on December 31, 2000
         (subject to prior termination in accordance with the applicable stock
         option agreements). Upon announcement of a Change in Control (pursuant
         to and as defined in the 1996 Plan), all options granted under the
         1996 Plan will become immediately exercisable. Upon consummation of a
         Change in Control, all unexercised options will terminate.

(2)      Percentages based on 1,372,375 stock options granted to employees in
         fiscal year 1996.

         The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the 1996
Plan at December 31, 1996 by the Named Executive Officers.

  AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FY-END OPTION VALUES


<TABLE>
<CAPTION>
                                                           Number of Securities                                    
                                                                Underlying                Value of Unexercised     
                                                            Unexercised Options           In-the-Money Options     
                            Shares                             at FY-End (#)                at FY-End ($)(1)       
                         Acquired on     Value Realized        -------------                ----------------       
 Name                    Exercise (#)        ($)(2)       Exercisable/Unexercisable       Exercisable/Unexercisable
-------------------------------------------------------------------------------------------------------------------
 <S>                        <C>              <C>             <C>        <C>                 <C>         <C>  
 Paul E. Hannesson          -0-              -0-             80,000     320,000             -0-         -0-  
                                                                                                             
 Albert E. Abel             -0-              -0-             25,000     100,000             -0-         -0-  
                                                                                                             
 Carl O. Magnell            -0-              -0-             35,000        -0-              -0-         -0-  
                                                                                                             
 Neil L. Drobny             -0-              -0-             35,000     140,000             -0-         -0-  
                                                                                                             
 Vincent Valeri             -0-              -0-             25,000     100,000             -0-         -0-  
</TABLE>

(1)      Represents the difference between the last sale price of the Common
         Stock on December 31, 1996, and the exercise price of the option
         multiplied by the applicable number of options.

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





                                       34
<PAGE>   37
EMPLOYMENT AGREEMENTS

     Paul E. Hannesson, the Company's Chairman of the Board 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, Dr. Harper agreed to devote his business and professional time and
efforts to the business of Environmental as its Chairman of the Board and Chief
Executive Officer, and to serve in senior executive positions with one or more
of Environmental's subsidiaries, including the Company.  The employment
agreement provides that Mr. Hannesson shall receive, among other things, a fixed
base salary at an annual rate of $395,000 for services rendered to Environmental
and its subsidiaries, including the Company.  Pursuant to the employment
agreement, Mr. Hannesson received options to purchase an aggregate of 950,000
shares of Environmental common stock, which options vested on the date of his
employment agreement, and also received 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, and
is also eligible to receive options to purchase common stock of each publicly-
traded subsidiary of Environmental in the amount of 1.0% of such subsidiary's 
total outstanding shares of common stock on the date of grant.  The Company has 
paid Mr. Hannesson's salary under the employment agreement since October 1996, 
and will continue to pay his salary in the future.

         Edwin L. Harper, Ph.D., the Company's Co-Vice Chairman, President and
Chief Operating Officer, entered into an employment agreement with
Environmental in October 1996 for a term expiring on December 31, 1999.
Pursuant to such employment agreement, Dr. Harper agreed to devote his business
and professional time and efforts to the business of Environmental as its
President and Chief Operating Officer, and to serve in senior executive
positions with one or more of Environmental's subsidiaries, including the
Company.  The employment agreement provides that Dr. Harper shall receive,
among other things, a fixed base salary at an annual rate of $375,000 for
services rendered to Environmental and its subsidiaries, including the Company.
Pursuant to the employment agreement, Dr. Harper will also receive options to
purchase an aggregate of 2,000,000 shares of Environmental common stock,
exercisable in installments over a period of five years commencing on the date
of his employment agreement, and is also eligible to receive options to
purchase common stock of each publicly-traded subsidiary of Environmental in
the amount of .75% of such subsidiary's total outstanding shares of common
stock on the date of grant.  The Company has paid Dr. Harper's salary under the
employment agreement since October 1996, and will continue to pay his salary in
the future.

         Effective June 1996, the Company assumed and amended an employment
agreement entered into between Environmental and Carl O. Magnell, effective
September 1995 and expiring September 1997. Under such agreement, as amended,
Mr. Magnell received an annual base salary of $150,000 through June 1996 and
will receive $180,000 through September 1997. The Company has an option to
extend Mr. Magnell's agreement through September 1998 at an annual salary of
$180,000.  Pursuant to the employment agreement, Mr. Magnell also received
options to purchase an aggregate of 35,000 shares of Common Stock, which
options are currently exercisable.

         Effective June 1996, the Company assumed and modified an employment
agreement entered into between Environmental and Albert E. Abel, effective
August 1993 and expiring August 1997, pursuant to which he received an annual
salary of $121,000 through August 1996, and will receive $133,100 through
August 1997, and $146,410 through August 1998. Pursuant to the modification of
Mr. Abel's employment agreement, which became effective in June, 1996.  The
employment agreement was extended so as to terminate in June, 2001, with a base
salary of $140,000 for the first twelve months of such modified agreement,
subject to minimum annual increases of not less than 5% each year thereafter
based upon changes in an applicable cost of living index. Pursuant to the
employment agreement, Mr. Abel will also receive options to purchase an
aggregate of 125,000 shares of Common Stock, exercisable in installments over a
period of five years commencing on the date of his employment agreement.

         Each of Messrs. Hannesson, Harper, Magnell and Abel are entitled to
participate in the Company's Executive Bonus Program.

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





                                       35
<PAGE>   38
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The members of the Compensation/Stock Option Committee were Herbert A.
Cohen, Kenneth L. Adelman, Ph.D., Tom J.  Fatjo, Jr. and Edwin L. Harper, Ph.D.
during the fiscal year ended December 31, 1996.  Dr. Harper was also appointed
the President and Chief Operating Officer of the Company and Environmental on
November 18, 1996, and was appointed the Chairman of the Board and Chief
Executive Officer of Separation effective January 1, 1997.  No other member of
the Compensation/Stock Option Committee has any interlocking relationship with
any other corporation that requires disclosure under this heading.

REPORT OF THE COMPENSATION/STOCK OPTION COMMITTEE ON EXECUTIVE COMPENSATION

         The Compensation/Stock Option Committee (the "Committee") of the Board
of Directors of the Company was established in November 1996 and did not hold
any meetings during the fiscal year ended December 31, 1996.  The duties and
responsibilities of the Committee include the following:

         (a)     approval of annual salaries and other benefits provided for
executive officers of the Company;

         (b)     approval of the adoption of compensation plans in which the
executive officers of the Company may be participants and awarding of benefits
under such plans;

         (c)     administration and interpretation of the Company's 1996 Stock
Option Plan, and determination of 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

         (d)     undertaking studies and making recommendations with respect to
the Company's compensation structure and policies and the development of
management personnel.

         The Committee's policies with respect to executive compensation are
intended to achieve the following goals.  First, they are intended to create
base compensation levels sufficient to attract and retain talented and
dedicated executive officers.  Second, the compensation policies are intended
to provide a direct link between performance during the year (both the
performance of the Company as a whole and the performance of the individual
officer) as a part of the officer's compensation.  Third, the compensation
policies are intended to provide executive officers with the opportunity to
acquire an entity stake in the Company through the grant of options pursuant to
the Company's 1996 Stock Option Plan.

         During the fiscal year ended December 31, 1996, the full Board of
Directors approved bonuses and granted options to certain of its executive
officers and certain employees.  In each case, the Board of Directors' decision
was based upon the principles and procedures outlined above.

                                             COMPENSATION/STOCK OPTION COMMITTEE
                                                                Herbert A. Cohen
                                                       Kenneth L. Adelman, Ph.D.
                                                               Tom J. Fatjo, Jr.
                                                          Edwin L. Harper, Ph.D.





                                       36
<PAGE>   39
                 SECURITY OWNERSHIP OF CERTAIN
ITEM 12.         BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of March 14,
1997 with respect to (i) the beneficial ownership of the Common Stock of the
Company by each beneficial owner of more than 5% of the outstanding shares of
Common Stock of the Company, each director, each executive officer and all
executive officers and directors of the Company as a group, and (ii) the number
of shares of Common Stock owned by each such person and group. Unless otherwise
indicated, the owners have sole voting and investment power with respect to
their respective shares.

<TABLE>
<CAPTION>
                                              Number of Shares of Common     Percentage of Outstanding
                                              Stock Beneficially                    Common Stock
 Number and Address of Beneficial Owner(1)    Owned(2)                            Beneficially Owned   
 -----------------------------------------    --------------------            -------------------------
 <S>                                          <C>                                       <C>
 Commodore Environmental
          Services, Inc. . . . . . . . . .    15,000,000                                69.3%

 Bentley J. Blum . . . . . . . . . . . . .    15,000,000(3)                             69.3%

 Paul E. Hannesson . . . . . . . . . . . .    1,745,275(4)                              8.0%

 Tom J. Fatjo, Jr. . . . . . . . . . . . .    289,800(5)                                1.3%

 Edwin L. Harper . . . . . . . . . . . . .    84,090(6)                                   *

 Albert E. Abel  . . . . . . . . . . . . .    696,554(7)                                3.2%

 Ed L. Romero  . . . . . . . . . . . . . .    450,000                                   2.1%

 Carl O. Magnell . . . . . . . . . . . . .    96,989(8)                                   *

 Kenneth L. Adelman  . . . . . . . . . . .    22,500(9)                                   *

 Herbert A. Cohen  . . . . . . . . . . . .    22,500(9)                                   *

 David L. Mitchell . . . . . . . . . . . .    22,500(9)                                   *

 C. Thomas McMillen  . . . . . . . . . . .    22,500(9)                                   *

 Neil L. Drobny  . . . . . . . . . . . . .    98,767(10)                                  *

 Thomas E. Noel  . . . . . . . . . . . . .    50,000(11)                                  *

 All executive officers
   and directors as
   a group (14 persons)  . . . . . . . . .    15,739,800                                72.7%
</TABLE>
________________________________
Percentage ownership is less than 1%.

(1)  The addresses of each of Commodore Environmental Services, Inc., Bentley
     J. Blum, Paul E. Hannesson, Kenneth L.  Adelman, Herbert A. Cohen and
     David L. Mitchell is 150 East 58th Street, Suite 3400, New York, New York
     10155. The addresses of Messrs. Abel and Magnell is 1487 Delashmut Avenue,
     Columbus, Ohio 43212. The addresses of each of Messrs. Tom J. Fatjo, Jr.,
     Edwin L. Harper, Ed L. Romero, C. Thomas





                                       37
<PAGE>   40
     McMillen and Thomas E. Noel is 6867 Elm Street, Suite 210, McLean,
     Virginia 22101. Bentley J. Blum and Paul E.  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 Securities Exchange Act of 1934, as
     amended, 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)  Represents all of the shares of Common Stock held by Environmental, based
     upon Mr. Blum's beneficial ownership of 28,224,050 shares and his spouse's
     ownership of 2,000,000 shares of common stock of Environmental,
     representing together 52.2% of the outstanding shares of Environmental
     common stock. As of December 31, 1996, there were 57,924,368 outstanding
     shares of Environmental common stock. Does not include 440,000 shares of
     Environmental common stock owned by Simone Blum, the mother of Mr. Blum,
     and 395,000 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.

(4)  Consists of (i) 80,000 shares of Common Stock underlying stock options,
     representing 20% of the 400,000 stock options granted to Mr. Hannesson
     under the Plan, which are currently exercisable, (ii) an aggregate of
     2,650,000 shares of Environmental common stock owned by Suzanne Hannesson,
     the spouse of Mr. Hannesson, (iii) 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
     (iv) currently exercisable options to purchase 500,000 and 950,000 shares
     of Environmental common stock at $.53 per share and $1.12 per share,
     respectively, representing collectively 11.4% 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, and additional stock options to
     purchase 2,500,000 shares of Environmental common stock at $1.12 per
     share, which vest and become exercisable ratably on November 18 of each of
     1997 through 2001. Mr. Hannesson disclaims any beneficial interest in the
     shares of Environmental common stock owned by or for the benefit of his
     spouse and children.

(5)  Consists of (i) 41,400 shares of Common Stock directly owned by Mr. Fatjo
     and (ii) 248,000 shares of Common Stock owned by First Financial Alliance
     Partnership, Inc., in which trusts controlled by Mr. Fatjo own 20% of the
     capital stock.  Does not include 124,200 shares of Common Stock owned by
     Tom J. Fatjo III, the son of Mr. Fatjo.  Mr. Fatjo disclaims any beneficial
     interest in the shares of Common Stock owned by or for the benefit of his
     son.

(6)  Consists of (i) 32,475 shares of Common Stock underlying stock options,
     representing 20% of the 162,375 stock options granted to Mr. Harper under
     the Plan, which are currently exercisable and (ii) currently exercisable
     options to purchase 200,000 shares of Environmental common stock at $1.12
     per share.

(7)  Consist of (i) Mr. Abel's indirect beneficial interest in the shares of
     Common Stock, based upon his ownership of 1,000,000 shares of
     Environmental common stock, currently exercisable options to purchase an
     additional 1,000,000 shares of Environmental common stock, and a warrant
     to purchase 667,964 shares of Environmental common stock at $.05 per
     share, and (ii) 25,000 shares of Common Stock, representing 20% of the
     125,000 stock options granted to Mr. Abel under the Plan, which are
     currently exercisable.

(8)  Consists of (i) Mr. Magnell's indirect beneficial interest in the shares
     of Common Stock, based upon his ownership of 90,000 shares of
     Environmental common stock, and currently exercisable options to purchase
     150,000 shares of Environmental common stock at $.50 per share, and (ii)
     35,000 shares of Common Stock, representing stock options granted to Mr.
     Magnell under the Plan, which are currently exercisable.

(9)  Consists of 33-1/3% of the 67,500 stock options granted to each of Messrs.
     Adelman, Cohen, Mitchell and McMillen under the Plan, which are
     immediately exercisable. See "Executive Compensation - Stock Options."





                                       38
<PAGE>   41
(10) Consists of (i) Dr. Drobny's indirect beneficial interest in the shares of
     Common Stock, based upon his beneficial ownership of 7,266 shares of
     Environmental common stock and options to purchase 240,000 shares of
     Environmental common stock at $.50 per share, and (ii) 35,000 shares of
     Common Stock underlying stock options, representing 20% of the 175,000
     stock options granted to Dr. Drobny under the under the Plan, which are
     currently exercisable.

(11) Consists of 50,000 shares of Common Stock underlying stock options,
     representing 20% of the 250,000 stock options granted to Mr. Noel under
     the Plan, which are currently exercisable.


ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

         Since its acquisition of the capital stock of Commodore Labs (formerly
A.L. Sandpiper Corporation) in 1993, Environmental has advanced an aggregate of
$8,925,426 to the Company, which has been used to finance the development of
SET(TM), 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 predecessors, and, at December
31,1995, by the Environmental Funding Note. Kraft Capital Corporation
("Kraft"), a corporation wholly owned by Bentley J. Blum, the principal
stockholder of Environmental and a director of the Company and of
Environmental, provided approximately $656,000 of such financing to
Environmental. Environmental has provided additional advances to the Company of
$978,896 for the three months ended March 31, 1996, which were repaid by the
Company subsequent to its obtaining a line of credit provided by a commercial
bank in April 1996.

         In March 1996, the Company was formed as a wholly-owned subsidiary of
Environmental. Prior to its June 1996 initial public offering, 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(TM) and the exploitation of the SET(TM) technology
and processes in all commercial and governmental applications; (ii) all of the
outstanding shares of the capital stock of each of Commodore Labs, 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 Labs, which is currently
held by Albert E. Abel but acquired by Environmental (and thereafter
contributed by Environmental to the Company) upon completion of its June 1996
initial public offering); 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 June 1996 initial
public offering to repay the line of credit, and Mr.  Blum's guarantee was
released at such time.

         In June 1996, Environmental acquired from Albert E. Abel, the
Company's Vice President, the remaining 9.95% of the outstanding shares of
common stock of Commodore Labs which was not owned by the Company, and
Environmental contributed such shares to the Company, for no additional
consideration. To acquire the remaining shares of Commodore Labs, 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.





                                       39
<PAGE>   42
Simultaneously, the Company settled all outstanding obligations for accrued
compensation payable to Mr. Abel and for amount receivable by the Company from
Mr. Abel, and that the net payment to Mr. Abel arising therefrom approximated
$120,000. The Company paid such amount to Mr. Abel from the proceeds of its
June 1996 initial public offering.

         Effective as of December 1, 1996, the Company transferred certain of
its operating assets related to its SET(TM) technology to CAS, subject to
certain liabilities related to such assets, in exchange for 100 shares of
common stock, par value $.01 per share, of CAS, representing all of the issued
and outstanding shares of capital stock of CAS.  CAS agreed to assume all of
the net assets of the Company relating to its SET(TM) 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 located in McLean, Virginia. See
"Business--Recent Developments--Transfer of Certain Operating Assets to CAS"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

         Effective as of December 2, 1996, as part of a corporate restructuring
to consolidate all of its current environmental technology businesses within
the Company, Environmental transferred to the Company 100% of the capital stock
of Separation and 100% of the capital stock of Refrigerant.  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, subject to any applicable stockholder
approval and notification requirements, shall issue 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. 
See "Business--Recent Developments--Acquisition of Commodore Separation 
Technologies, Inc. and Commodore CFC Technologies, Inc." and "Management's 
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

         At December 31, 1996, the Company and its subsidiaries had advanced an
aggregate of $1,500,000 to Lanxide Performance Materials, Inc. ("LPM"), a
wholly owned subsidiary of Lanxide Corporation, a Delaware corporation
("Lanxide") which specializes in the manufacture of ceramic bonding and
refractory materials. Lanxide is related to Applied by significant common
beneficial ownership. The promissory notes become due on February 28, 1998.
Interest receivable on the note totaled $18,000 as of December 31, 1966. The
notes are collateralized by the assets of LPM and guaranteed by Lanxide on
behalf of its subsidiary.

LICENSES OF SET(TM) TECHNOLOGY

         As a result of its acquisitions of the capital stock of Commodore
Labs, the Company acquired all patents, discoveries, technology and other
intellectual property  in connection with the SET(TM) process system which it
later transferred to CAS effective December 1, 1996. Environmental licenses
from CAS 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 the CAS, the SET(TM)  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.

         The Company and its stockholders, other than Environmental, will not
receive any direct or indirect benefit from any revenues delivered from the CFC
Business, and any losses or other contingent liabilities incurred by CFC
Technologies and other entities operating businesses related to the CFC
Business may have a material adverse effect on Environmental, which, in turn,
may adversely affect the Company.

TECHNOLOGY SERIES

         The Company has entered into five-year technology and technical
support agreement with Environmental and CFC Technologies. Pursuant to such
agreement, the Company will provide certain research and development,





                                       40
<PAGE>   43
equipment engineering and technical support to enable Environmental and CFC
Technologies to exploit the CFC Business.  Under such agreement, the Company
will provide Environmental and CFC the services of certain Company personnel
and equipment. The Company will charge CFC Technologies and Environmental a fee
equal to the sum of (a) the actual costs of all materials and equipment
utilized in connection with such services; and (b) an hourly rate allocable to
the services rendered by all Company personnel which shall be equal to 120% of
the average hourly rate of compensation then payable by the Company to such
persons (based on a 35-hour work week). Under the terms of the technology and
technical services agreement, in no event will the employees of the Company be
required to expend in access of 25% of their business and professional time in
any 90-day period to rendering services to Environmental or CFC Technologies,
without the majority approval or consent of Kenneth L. Adelman, Herbert A.
Cohen and David L. Mitchell, or such other members of the Board of Directors of
the Company not otherwise affiliated with or employed by Environmental, the
Company or any of their respective subsidiaries.

FUTURE TRANSACTIONS

         In connection with the Company's initial public offering in June 1996,
the Company's Board of Directors has adopted a policy whereby any future
transactions between the Company and any of its subsidiaries, affiliates,
officers, directors, principal stockholders and any affiliates of the foregoing
will be on terms no less favorable to the Company than could reasonably be
obtained in "arms length" transactions with independent third parties, and that
any such transactions also be approved by a majority of the Company's
disinterested outside directors, including one of the designees of National
Securities Corporation so long as they are serving on the Company's Board of
Directors.





                                       41
<PAGE>   44
                                    PART IV

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

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


<TABLE>
<CAPTION>
                                                                                            Page No.
                                                                                            --------
 <S>                                                                                        <C>
 Financial Statements.
 -------------------- 
          Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . .    F-1

          Consolidated Balance Sheet as of December 31, 1995 and 1996  . . . . . . . . .    F-2

          Consolidated Statements of Operations for the years ended                         F-3
                  December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . .

          Consolidated Statements of Stockholders' Equity for the years                     F-4
                  ended December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . .

          Consolidated Statements of Cash Flows for the years ended                         F-5
                  December 31, 1994, 1995 and 1996 . . . . . . . . . . . . . . . . . . .

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

 Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    None
</TABLE>

 Exhibits.

<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)

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





                                       42
<PAGE>   45
<TABLE>
<CAPTION>
EXHIBIT NO.   DESCRIPTION
-----------   -----------
<S>           <C>
 10.2         Employment Agreement, dated August 31, 1995, between Commodore and Carl O.
              Magnell, and conditional assignment thereof by Commodore to the Company, dated
              March 29, 1996. (1)

 10.3         Form of Employment Agreement, dated July 28, 1993, between Commodore
              Laboratories, Inc. ("Commodore Labs") 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 Commodore and Vincent
              Valeri, and conditional assignment thereof by Commodore 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)
</TABLE>



                                      43
<PAGE>   46

<TABLE>
<CAPTION>
 EXHIBIT NO.   DESCRIPTION
 -----------   -----------
<S>            <C>
 10.17         License Agreement, dated as of March 29, 1996, by and between the Company and
               Environmental, relating to the use of AGENT 313 in the CFC Business. (2)

 10.18         Form of Technology and Technical Services,Agreement to be entered into between
               the Company and CFC Technology, Inc. (2)

 10.19         Voting Agreement, dated June 28, 1996, among Commodore Environmental Services,
               Inc., 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 Commodore Advanced Sciences, Inc.

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

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

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

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

 *22.1         Subsidiaries of the Company.

 *27.1         Financial Data Schedule.
</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).

(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.
         333-11815).

(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).






                                       44
<PAGE>   47
Reports on Form 8-K:

     On October 15, 1996, the Company filed with the Commission a Current
Report on Form 8-K with respect to its acquisition of Advanced Sciences, Inc.
and A.S. Environmental, Inc.

     On December 11, 1996, the Company filed with the Commission a Current
Report on Form 8-K with respect to the mutual agreement of the Company and
Tanner & Co to terminate their relationship.

     On January 22, 1997, the Company filed with the Commission a Current
Report on Form 8-K with respect to its acquisition of all of the capital stock
of Commodore Separation technologies, Inc. and Commodore CFC Technologies, Inc.
from Commodore Environmental Services, Inc.

     On March 27, 1997, the Company filed with the Commission Amendment No. 1
on Form 8-K/A to the Company's Current Report on Form 8-K with respect to its
acquisition of all of the capital stock of Commodore Separation Technologies,
Inc. and Commodore CFC Technologies, Inc. from Commodore Environmental
Services, Inc.





                                       45
<PAGE>   48
                                   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 in the City of
Houston, State of Texas, on April 15, 1997.



                                  COMMODORE APPLIED TECHNOLOGIES, INC.


                                  By: /s/ WILLIAM E. INGRAM
                                      -----------------------------------------
                                      William E. Ingram, Vice President, 
                                      Finance


     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/ EDWIN L. HARPER                President and Chief                         April 15, 1997
 --------------------------------   Operating Officer (Principal                              
 Edwin L. Harper                    Executive Officer)          
                                                                

 /s/ WILLIAM E. INGRAM              Vice President, Finance                     April 15, 1997
 --------------------------------   (Principal Financial Officer)                             
 William E. Ingram                                               

 /s/ PAUL E. HANNESSON              Chairman of the Board                       April 15, 1997
 --------------------------------                                                             
 Paul E. Hannesson

 /s/ EDWIN L. HARPER                Co-Vice Chairman of the Board               April 15, 1997
 --------------------------------                                                             
 Edwin L. Harper

 /s/ TOM J. FATJO, JR.              Co-Vice Chairman of the Board               April 15, 1997
 --------------------------------                                                             
 Tom J. Fatjo, Jr.

 /s/ THOMAS E. NOEL                 Director                                    April 15, 1997
 --------------------------------                                                             
 Thomas E. Noel

 /s/ KENNETH L. ADELMAN             Director                                    April 15, 1997
 --------------------------------                                                             
 Kenneth L. Adelman

 /s/ BENTLEY J. BLUM                Director                                    April 15, 1997
 -------------------------------                                                              
 Bentley J. Blum

 /s/ HERBERT A. COHEN               Director                                    April 15, 1997
 --------------------------------                                                             
 Herbert A. Cohen

 /s/ C. THOMAS McMILLEN             Director                                    April 15, 1997
 --------------------------------                                                             
 C. Thomas McMillen

 /s/ DAVID L. MITCHELL              Director                                    April 15, 1997
 --------------------------------                                                             
 David L. Mitchell

 /s/ ED L. ROMERO                   Director                                    April 15, 1997
 --------------------------------                                                             
 Ed L. Romero
</TABLE>





                                       46
<PAGE>   49
COMMODORE
APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995





<PAGE>   50





                      REPORT OF INDEPENDENT ACCOUNTANTS


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


In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Commodore Applied Technologies, Inc. and its subsidiaries at December 31, 1996,
and the results of their operations and their cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the
opinion expressed above.



Price Waterhouse LLP




Philadelphia, Pennsylvania
April 11, 1997





                                      F-1
<PAGE>   51
                        [TANNER + COMPANY LETTERHEAD]




                          INDEPENDENT AUDITORS' REPORT





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


         We have audited the accompanying consolidated balance sheet of
Commodore Applied Technologies, Inc., and subsidiaries as of December 31, 1995,
and the related consolidated statements of operations, stockholders' deficit,
and cash flows for each of the two years 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 audits.

         We conducted our audits 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 audits provide 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, 1995,
and the results of their operations and their cash flows for each of the two
years then ended, in conformity with generally accepted accounting principles.



                                        TANNER + CO.





Salt Lake City, Utah
January 19, 1996




                                      F-1A
<PAGE>   52


COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------

<TABLE>
<CAPTION>
                                                                                    1996      1995
                                    ASSETS
<S>                                                                               <C>        <C>    
Current assets:
    Cash (Note 2)                                                                 $  4,617   $     4
    Temporary investments (Note 2)                                                   7,459        --
    Accounts receivable, net (Notes 2, 4 and 7)                                      7,149        --
    Notes and advances to related parties                                            1,680        --
    Restricted cash and certificates of deposit (Note 2)                               670        --
    Prepaid assets and other current receivables                                       581        --
                                                                                  --------   -------
    Total current assets                                                            22,156         4
Other receivables                                                                       63        --
Other investments (Note 5)                                                             505        --
Property and equipment, net (Notes 2 and 6)                                          2,044       900
Other assets (Notes 2 and 3)
    Patents and completed technology, net of accumulated amortization of
      $140 and $19, respectively                                                     1,004       184
    Goodwill, net of accumulated amortization of $113                                7,560        --
    Other                                                                              124         3
                                                                                  --------   -------
                                                                                     8,688       187
                                                                                  --------   -------
    Total Assets                                                                  $ 33,456   $ 1,091
                                                                                  ========   =======
                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                              $  3,804   $   209
    Notes payable to principal stockholder                                              --     8,925
    Payables to related parties                                                        252        --
    Current portion of long term debt                                                   89        --
    Line of credit (Note 7)                                                          7,042        --
    Other accrued liabilities                                                        1,978        70
                                                                                  --------   -------
       Total current liabilities                                                    13,165     9,204
Long term debt                                                                          29        --
Payable to related parties (Note 10)                                                   186       429
                                                                                  --------   -------
       Total liabilities                                                            13,380     9,633
Commitments and contingencies (Note 11)                                                 --        --
Stockholders' equity:
    Preferred stock (Commodore Laboratories, Inc.), par value $1 per share,
     10% non-cumulative 600,000 shares authorized, 19,372 issued and outstanding        --        19
    Common stock (Commodore Laboratories, Inc.),
     par value $.01 per share, 1,000,000 authorized shares, 147,012 shares
     issued and outstanding                                                             --         2
    Common stock, par value $0.001 per share, 50,000,000 shares authorized,
     21,650,000 issued and outstanding                                                  22        --
    Additional paid-in capital                                                      34,270        10
    Accumulated deficit                                                            (14,216)   (8,573)
                                                                                  --------   -------
       Total stockholders' equity                                                   20,076    (8,542)
                                                                                  --------   -------
    Total Liabilities And Stockholders' Equity                                    $ 33,456   $ 1,091
                                                                                  ========   =======
</TABLE>


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

                                      F-2


<PAGE>   53


COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
---------------------------------------------

<TABLE>
<CAPTION>
                                                 1996      1995      1994

<S>                                            <C>        <C>       <C>    
Contract revenues (Note 2)                     $  5,123   $    --   $    --
Costs and expenses:
    Cost of sales                                 4,136        --        --
    Research and development (Note 2)             2,364     1,815       380
    General and administrative                    3,412     1,773     1,369
    Amortization (Note 2)                           219        --        --
    In-process technology acquired                   --        --     2,424
                                               --------   -------   -------
       Total costs and expenses                  10,131     3,588     4,173
                                               --------   -------   -------
Loss before interest, taxes and equity in
    losses of unconsolidated subsidiary          (5,008)   (3,588)   (4,173)

    Interest income (Note 10)                       477         6         7
    Interest expense                               (617)     (274)     (551)
    Income tax expense (Note 8)                      --        --        --
                                               --------   -------   -------
    Net loss before affiliate losses             (5,148)   (3,856)   (4,717)
Equity in losses of unconsolidated subsidiary      (495)       --        --
                                               --------   -------   -------
    Net loss                                   $ (5,643)  $(3,856)  $(4,717)
                                               ========   =======   =======
    Net loss per share (Note 2)                $   (.31)  $  (.26)  $  (.31)
                                               ========   =======   =======

</TABLE>


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

                                      F-3


<PAGE>   54

COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
----------------------

<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, 1994                    19,372      $ 19         147,012     $ 2     $     10      $     --
   Net loss                                     --        --              --      --           --        (4,717)
                                           -------      ----      ----------     ---     --------      --------
BALANCE, DECEMBER 31, 1994                  19,372        19         147,012       2           10        (4,717)
   Net loss                                     --        --              --      --           --        (3,856)
                                           -------      ----      ----------     ---     --------      --------
BALANCE, DECEMBER 31, 1995                  19,372        19         147,012       2           10        (8,573)
Conversion of note payable to
    principal shareholder to equity             --        --      14,852,988      14        2,986            --
Redemption of predecessor's
   preferred stock                         (19,372)      (19)             --      --           --            --
Sale of common stock                            --        --       5,750,000       5       30,546            --
Acquisition of remaining interests
   in Commodore Laboratories, Inc.              --        --              --      --          706            --
Issuance of stock options                       --        --              --      --           20            --
Acquisition of Advanced Sciences, Inc.          --        --         900,000       1        2,249            --
Acquisition of Commodore Separation
   Technologies Inc., Commodore CFC
   Technologies, Inc. and CFC
   Technologies, Inc. (See Note 3)              --        --              --      --       (4,647)           --
Issuance of Common Stock Warrants
(See Note 3)                                    --        --              --      --        2,400            --
Net loss                                        --        --              --      --           --        (5,643)
                                           -------      ----      ----------     ---     --------      --------
BALANCE, DECEMBER 31, 1996                      --      $ --      21,650,000     $22     $ 34,270      $(14,216)
                                           =======      ====      ==========     ===     ========      ========

</TABLE>


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

                                      F-4


<PAGE>   55


COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
----------------------

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                 ----------------------------------
                                                                   1996         1995         1994
                                                                 --------      -------      -------
<S>                                                              <C>           <C>          <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net loss                                                    $ (5,643)     $(3,856)     $(4,717)
     Adjustments to reconcile net loss to net
      cash used in operating activities:
         Depreciation and amortization                                561           41           28
         Undistributed losses of unconsolidated subsidiary            495           --           --
         Provision for related party bad debts                         --           98           --
         Write off of in-process technology                            --           --        2,424
     Changes in assets and liabilities, net of acquisitions:
         Accounts receivable                                       (2,351)          --           --
         Prepaid assets                                              (190)          --           --
         Other accounts receivable                                    (63)          (7)          (7)
         Accounts payable and accrued liabilities                     153          (74)         247
         Other accruals                                              (121)          --           --
                                                                 --------      -------      -------
              Net cash used in operating activities                (7,159)      (3,798)      (2,025)
                                                                 --------      -------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Equipment purchased or constructed                              (335)        (227)        (705)
     Patents acquired                                                 (58)        (137)         (41)
     Purchase of Commodore Separation Technologies
         Inc., Commodore CFC Technologies, Inc. and
         CFC Technologies, Inc., net of cash acquired              (2,870)          --           --
     Temporary investments purchased                               (7,459)          --           --
     Advances to related parties                                   (1,680)          --           --
     Increase in restricted cash                                     (519)          --           --
     Other investments                                             (1,000)          --           --
                                                                 --------      -------      -------
     Net cash used in investing activities                        (13,921)        (364)        (746)
                                                                 --------      -------      -------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Sale of stock                                                 30,551           --           --
     Payments to principal shareholder                             (5,925)          --           --
     Borrowings from principal shareholder                             --        4,166        2,720
     Borrowings under the line of credit                            1,361           --           --
     Payments on long term debt and capital leases                   (255)          --            1
     Repayment of related party notes payable                         (39)          --           --
                                                                 --------      -------      -------
         Net cash provided by financing activities                 25,693        4,166        2,721
Increase (decrease) in cash                                         4,613            4          (50)
Cash, beginning of period                                               4           --           50
                                                                 --------      -------      -------
Cash, end of period                                              $  4,617      $     4      $     0
                                                                 ========      =======      =======

</TABLE>


Supplemental disclosure of cash flow information

Operations reflect actual amounts paid for interest and income taxes as follows:

<TABLE>
<CAPTION>

                                               1996         1995         1994
<S>                                          <C>           <C>          <C>
         Interest paid                       $  1,442      $    --      $    --
                                             ========      =======      =======
         Taxes paid                          $     --      $    --      $    --
                                             ========      =======      =======
</TABLE>


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

                                      F-5


<PAGE>   56

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


1.   BACKGROUND

     Commodore Applied Technologies, Inc. and subsidiaries ("Applied"), a
     majority-owned subsidiary of Commodore Environmental Services, Inc.
     ("Commodore"), is engaged in the destruction and neutralization of
     hazardous waste and the separation 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 various acquisitions, licensing agreements and joint
     ventures. Through Advanced Sciences, Inc. ("ASI"), 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 the subsidiaries
     revenues, 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.
     Prior to the acquisition of ASI, Applied was considered to be a
     developmental stage company.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     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 as Applied does not have a
     controlling interest in the venture.

     SEGMENT REPORTING

     Applied currently has one principal business line in environmental
     technologies. Applied and its subsidiaries operate primarily in the United
     States but it has two international subsidiaries in Mexico and Argentina.

     CASH AND CASH EQUIVALENTS

     Applied considers cash and highly liquid debt instruments with original
     maturities of three months or less to be cash equivalents. At December 31,
     1996 cash and cash equivalents included cash of $995 and highly liquid
     investments of $3,622.

     RESTRICTED CASH AND CERTIFICATES OF DEPOSIT

     Restricted cash at December 31, 1996 consisted of $670 held in an interest
     bearing deposit account as collateral on the line of credit.

     DEBT AND EQUITY INVESTMENTS

     Applied adopted Statement of Financial Accounting Standards No. 115,
     "Accounting for Certain Investments in Debt and Equity Securities" in
     1996. Prior to 1996, no material debt or equity securities were held.

     Management determines the appropriate classification of its investments at
     the time of purchase and re-evaluates such determinations at each balance
     sheet date. Applied currently invests in only short term investments of
     less than six months which it classifies as available for sale. Applied's
     investments in debt and equity securities are diversified among securities
     with high credit ratings in accordance with the company's investment
     policy.



                                      F-6
<PAGE>   57


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


     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.
     Convertible bonds, notes receivable and temporary investments are
     financial instruments that are subject to possible material market
     variations from the recorded book value. There are no material differences
     between the fair value of these financial instruments and the recorded
     book value as of December 31, 1996.

     REALIZATION ALLOWANCE

     Receivables are accounted for net of allowances for estimated
     uncollectable amounts

     RESEARCH AND DEVELOPMENT

     Research and development expenditures are charged to operations as
     incurred except for those costs relating to design or construction of
     assets having alternate future uses which are then capitalized and
     depreciated over their estimated useful lives.

     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. Provisions for
     depreciation are computed on the straight-line method based on the
     estimated useful lives of the assets. Management anticipates that research
     equipment constructed by Applied and its subsidiaries during 1996 will be
     placed in service in 1997.

     OTHER ASSETS

     Goodwill represents the fair value of securities issued plus the fair
     value of net liabilities assumed in connection with the acquisition of ASI
     (see Note 3). 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 ("Labs") (see Note 3).
     Completed technology and patents are being amortized on a straight line
     basis over their estimated 7 and 17 year lives, respectively. The Company
     annually evaluates the existence of impairment on the basis of whether the
     goodwill and the patents and completed technology are fully recoverable
     from the projected undiscounted net cash flows of the assets to which they
     relate.


     REVENUE RECOGNITION

     Substantially all of the company's revenues are from Advanced Sciences,
     Inc. ("ASI"), and 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 under 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 those
     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. Allowances for anticipated
     losses totaled $2,306 at December 31, 1996.



                                      F-7



<PAGE>   58


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


     Contract costs, both direct and indirect are subject to audit by the
     Defense Contract Audit Agency ("DCAA"). Management believes appropriate
     allowances have been established 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 ASI's contracts
     through September 30, 1993. 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.

     LOSS PER SHARE

     Loss per share is computed based on the weighted average number of shares
     outstanding at the end of the period. Shares used to determine loss per
     share exclude common stock equivalents as they are antidilutive.
     Accordingly, loss per share is based on the weighted average shares
     outstanding of 18,100,000 and 15,000,000 and 15,000,000 for the years
     ended December 31, 1996, 1995 and 1994 respectively.

     CONCENTRATION OF CREDIT RISK

     Applied 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. Applied believes it is not exposed to any
     significant credit risk on cash and cash equivalents.

     INCOME TAXES

     Applied provides for deferred income taxes on estimated future tax effects
     of temporary differences between financial statement carrying amounts and
     the tax bases of existing assets and liabilities.

     USE OF ESTIMATES

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

     RECLASSIFICATIONS

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

     NEW ACCOUNTING PRONOUNCEMENTS

     In 1996, Applied adopted the Financial Accounting Standards No. 121,
     "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of"
     which requires the recognition of an impairment loss for long-lived assets
     held for use when the estimate of undiscounted future cash flows expected
     to be generated by the individual asset is less than its carrying amount.
     Management estimates that none of Applied's long-lived assets are impaired
     under this definition at December 31, 1996. Although management uses the
     best information available on which to base its assumptions, future
     impairments could occur based upon future changes in economic conditions.

     In October 1995, the Financial Accounting Standards Board issued Statement
     of Financial Accounting Standards No. 123, "Accounting for Stock-Based
     Compensation" ("FAS 123") which established financial accounting and
     reporting standards for stock-based compensation. The new standard defines
     a fair value method of accounting for employee stock options or similar
     equity instruments. FAS 123 allows the Company the choice between adopting
     the fair value method or continuing to use the intrinsic value method
     under Accounting Principles Board (APB) Opinion No. 25 with footnote
     disclosures of the pro forma effects if the fair value method had been
     adopted. Applied has adopted the disclosure approach (see Note 9).


                                      F-8

<PAGE>   59


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


3.   ACQUISITIONS AND REORGANIZATIONS

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

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

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

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

     In consideration for the ASI and ASE stock, Applied issued 900,000 shares
     of common stock to ASI and ASE shareholders, with a fair value of $2,250.
     Assets and liabilities acquired are as follows:

<TABLE>
<S>                                                              <C>    
Cash                                                             $   199
Accounts receivable                                                4,783
Prepaid expenses                                                     286
Restricted cash                                                      151
Property and equipment                                               377
Trade payables                                                    (3,234)
Accrued expenses                                                  (1,931)
Line of credit                                                    (5,681)
Notes payable                                                       (200)
Capital leases and other long-term obligations                      (173)
                                                                 -------
Net liabilities in excess of assets purchased                     (5,423)
Issuance of common stock                                          (2,250)
                                                                 -------
Goodwill                                                         $(7,673)
                                                                 =======
</TABLE>


                                      F-9


<PAGE>   60


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


     The unaudited pro forma combined results of operations of Applied for the
     years ended December 31, 1996 and 1995, as if the acquisition had occurred
     on January 1, 1995, are as follows:

<TABLE>
<CAPTION>
                              1996          1995
                            --------      --------
<S>                         <C>           <C>     
     Revenue                $ 26,649      $ 33,337
     Net loss                (10,044)       (6,162)
     Net loss per share     $  (0.53)     $  (0.39)
</TABLE>


     Due to the fact that ASI's year end prior to the acquisition date was as
     of September 30, the foregoing unaudited pro forma results of operations
     consists of the combination of Applied's annual results as of December 31,
     1996 and 1995 and ASI annual results for the period ended September 30,
     1996 and 1995.

     On December 2, 1996 Applied purchased Commodore Separation Technologies
     Inc. ("Separation"), Commodore CFC Technologies, Inc. ("CCFC") and CFC
     Technologies, Inc. ("CFC") from Commodore for $5,400, consisting of $3,000
     in cash and (subject to compliance with any applicable stockholder
     approval or notice requirements) 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. The acquisition has been accounted
     for as a transaction between entities under common control. Applied has
     recorded its investment in Separation, CFC and CCFC as $753, which is equal
     to Commodore's historical basis in these subsidiaries. The difference
     between this amount and the $5,400 paid to Commodore has been recorded as a
     direct reduction in the paid-in capital of Applied.

4.   RECEIVABLES

     The components of the company's trade receivable are as follows as at
     December 31, 1996:

<TABLE>

<S>                                                                                 <C>    
              Contract receivables:
                 Amounts billed                                                     $ 9,066
                 Retainages                                                             128
                 Unrecovered costs and estimated profits
                  subject to future negotiation - not billed                             71
                                                                                    -------
                                                                                      9,265
              Less: Allowance for doubtful accounts and potential disallowances      (2,306)
                                                                                    -------
              Contract receivables - net                                              6,959
              Other receivables, net of allowance of $306                               190
                                                                                    -------
                 Total receivables - net                                            $ 7,149
                                                                                    =======
</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 secure its line of
     credit (see Note 7).



                                      F-10
<PAGE>   61
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------


5.   OTHER INVESTMENTS

     On August 6, 1996, the Company and Teledyne Environmental, Inc. formed a
     joint venture named Teledyne-Commodore, LLC ("the LLC") and signed a
     licensing agreement for one of Applied's patented remediation
     technologies. The LLC was funded by a $1,000 capital contribution from
     each Teledyne and the Company on October 1, 1996. This investment is
     accounted for under the equity method. Summarized information of the LLC
     results of operations is as follows at December 31, 1996:

<TABLE>
<S>                                                <C>    
              Revenues                             $    16
              Expenses                               1,006
                                                   -------
              Net Loss                                (990)
                                                   -------
              Applied equity in net loss (50%)     $  (495)
                                                   =======

              Investment in LLC:
                Gross value                        $ 1,000
                Equity in net loss                    (495)
                                                   -------
                Net amount                         $   505
                                                   =======
</TABLE>


6.   PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                           AVERAGE           DECEMBER 31,
                                                                         USEFUL LIFE     1996          1995
                                                                         -----------    --------     --------
<S>                                                                           <C>       <C>          <C>     
         Machinery and equipment                                              10        $  1,987     $    865
         Furniture and fixtures                                                5             427          120
         Other                                                                 5              38           --
                                                                                        --------     --------
                                                                                           2,452          985


         Less: accumulated depreciation and amortization                                     408           85
                                                                                        --------     --------

         Total property and equipment                                                   $  2,044     $    900
                                                                                        ========     ========
</TABLE>

7.   LINE OF CREDIT

     At December 31, 1996, ASI has a $7,042 outstanding balance on a $9,250
     revolving line of credit due September 30, 1997 with interest payable
     monthly at prime plus 1 percent (9.25 percent as of December 31, 1996).
     The credit line is secured by $670 of restricted cash, a $2,000 guarantee
     from Applied and the receivables of ASI. The line of credit contains
     certain financial covenants and restrictions including minimum ratios that
     ASI must satisfy. ASI was not in compliance with the covenants at December
     31, 1996. On January 17, 1997, ASI entered into a revised line of credit
     agreement and received a waiver and forbearance of amounts due related to
     their previous covenant violations.


                                     F-11
<PAGE>   62
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------


8.   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 difference between the income tax
     benefit at statutory rates for 1996, 1995 and 1994 and the amount
     presented in the financial statements is due to the change in the tax
     valuation allowance which offsets the income tax benefit of the operating
     loss. Because Applied is in a net operating loss carryforward position,
     there is no income tax provision for the year ended 1996 and 1995. The
     components of the net deferred income tax as of December 31, are as
     follows:

<TABLE>
<CAPTION>
                                                     1996          1995        1994
<S>                                                 <C>          <C>          <C>    

     Components of current deferred taxes, net:
        Reserve for uncollectible receivables
          and potential disallowances               $   925      $    --      $    --
        Net operating loss carryforward               5,887        2,788        1,246
        In process technology                           969          969          969
                                                    -------      -------      -------
                                                      7,781        3,757        2,215

     Less: Valuation allowance                       (7,781)      (3,757)      (2,215)
                                                    -------      -------      -------

              Total                                 $    --      $    --      $    --
                                                    =======      =======      =======
</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 1996
     and 1995, 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, 1996
     of approximately $14,718 which expire in years 2000 through 2011. Of the
     total amount of NOL carryforwards, approximately $2,600 are limited to use
     against future taxable income of ASI in accordance with certain separate
     return limitations. If a substantial change in Applied's ownership should
     occur, there would be an annual limitation of the amount of NOL
     carryforwards which could be utilized.

     ASI is currently undergoing an audit by the Internal Revenue Service for
     fiscal years 1994 and 1995. The effect for taxable income or loss cannot
     be quantified as the audit is still in process. However, management does
     not believe that the results will have a material impact on these
     financial statements.

9.   STOCK OPTIONS AND STOCK WARRANTS

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

                                     F-12

<PAGE>   63

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


     Had compensation expense for Applied's employee stock options been
     determined based on the fair value at the grant date for awards in 1996
     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>
                                                                 DECEMBER 31
                                                          ------------------------ 
                                                              1996          1995
<S>                                                       <C>            <C>       
                         Net Loss - as reported           $  (5,643)     $  (3,856)
                         Net Loss - pro forma             $  (6,239)     $  (3,856)
                         Loss per share - as reported     $    (.31)     $    (.26)
                         Loss per share - pro forma       $    (.34)     $    (.26)
</TABLE>


     FAS 123 requires stock options to be valued using an approach such as the
     Black-Scholes option pricing model. The Black-Scholes model calculates the
     fair value of the grant based upon certain assumptions about the
     underlying stock. The expected dividend yield of the stock is zero, the
     expected life of the options is 4 years, the expected volatility is 60.77
     percent, and the expected risk-free rate of return is 6.04 percent,
     calculated as the rate offered on U.S. Government securities with the same
     term as the expected life of the options. The weighted average remaining
     contractual life of all options outstanding at December 31, 1996 is 4.62
     years. The weighted average fair value of options granted during 1996 is
     $3.37. No options were granted in 1995.

     Compensation expense under APB 25 of $20 has been recognized for stock
     options issued to non-employees for services rendered in 1996.

     STOCK OPTIONS

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

     The following table presents stock options outstanding (vested and non
     vested) at December 31, 1996:

<TABLE>
<CAPTION>
                        GRANTED             EXERCISE            EXPIRATION
                         1996                 PRICE                DATE
                         ----                 -----                ----
                      <S>                    <C>              <C> 
                        162,375              $  4.75          November 2000
                      1,152,500                 6.00          December 2000
                         10,000                 5.50          August 2002
                        250,000                 6.63          October 2002
                        150,000                 5.63          October 2002
                        135,000                 6.00          November 2002
                        135,000                10.00          November 2002
                    -----------
                      1,994,875
                    ===========
</TABLE>

                                     F-13

<PAGE>   64


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


     There were no stock options outstanding at December 31, 1995, nor were any
     options exercised in 1996. At December 31, 1986, stock options for the
     purchase of approximately 600,000 shares of common stock were currently
     exercisable at a weighted average exercise price of approximately $6 per
     share.

     STOCK WARRANTS

     Outstanding warrants (vested and not vested) at December 31, 1996 are as
     follows:

<TABLE>
<CAPTION>
                           NUMBER OF
           GRANTED         WARRANTS          EXERCISE        EXPIRATION
            1996             1996              PRICE           DATE
        -----------        ---------       -----------        -------
         <S>               <C>              <C>              <C> 
            500,000           500,000          $7.20         August 2001
          5,750,000         5,750,000           8.40         August 2001
            500,000           500,000          13.86         August 2001
          7,500,000         7,500,000          15.00         December 2003
        -----------       -----------
         14,250,000        14,250,000
        ===========       =========== 
</TABLE>

     There were no stock warrants outstanding at December 31, 1995, nor were
     any warrants exercised in 1996. As of December 31, 1996, no stock warrants
     were exercisable

10.  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 note becomes due on February 28, 1998. Interest
     receivable on the note totaled $11 as of December 31, 1996. The notes are
     collateralized by the assets of LPM and guaranteed by Lanxide Corp. on
     behalf of its subsidiary.

     ASI has a lease agreement with its Chairman under which ASI utilizes
     certain real estate for business purposes. Rent paid approximated $6 for
     the year ended December 31, 1996.

11.  COMMITMENTS AND CONTINGENCIES

     OPERATING LEASES

     Applied and its subsidiaries are committed under non cancelable operating
     leases for office space and other equipment. Future obligations under the
     leases for the next five years are as follows:

<TABLE>
                      <S>                                       <C>    
                      1997                                      $   772
                      1998                                          427
                      1999                                          358
                      2000                                          221
                      2001                                          227
                                                                -------
                                                                $ 2,005
                                                                =======
</TABLE>

     Rent expense and lease payments approximated $318, $127, and $98 in 1996,
     1995 and 1994, respectively. ASI's lease commitments are offset by
     subleases of $310 and $78 in 1996 and 1997, respectively, which are not
     included in the obligations above.

                                      F-14

<PAGE>   65
COMMODORE APPLIED TECHNOLOGIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------


     CAPITAL LEASE OBLIGATIONS

     ASI has capital lease obligations of $118, net of imputed interest at
     rates ranging from 8 percent to 12 percent, of which $89 is due in 1997
     and is recorded as a current liability and the remaining $29 is due
     through 1999.

     EMPLOYMENT AGREEMENTS

     Applied and its subsidiaries have employment agreements with 14 executives
     and key personnel. Aggregate minimum payments under the employment
     agreements for the following five years are as follows:

<TABLE>

                      <S>                                       <C>    
                      1997                                      $ 2,562
                      1998                                        1,842
                      1999                                        1,722
                      2000                                          170
                      2001                                           89
                                                                -------

                      Total                                     $ 6,385
                                                                =======
</TABLE>

     Applied has a five-year Executive Bonus Plan (the "Bonus Plan") under
     which a number of executives and employees of the company are entitled to
     formula bonuses. Since inception of the Bonus Plan, bonus criteria have
     not been met.

     SELF INSURANCE

     During fiscal years 1996 and 1995, the company operated a health benefit
     plan for certain employees under which it is partially self-insured. The
     maximum liability is limited to $65 per individual per year. Claims in
     excess of the company's maximum liability are insured by a health
     insurance carrier.

     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 the financial condition or results of operation.

12.  SUBSEQUENT EVENTS

     In April 1997, Separation successfully completed an initial public offering
     of 1,500,000 shares of its $0.001 par value common stock for $5.00 per
     share, 600,000 shares of its $0.001, 10 percent senior convertible
     redeemable preferred stock for $10.00 per share and 2,100,000 warrants for
     the purchase of common and preferred stock of $.10 per warrant. Net
     proceeds from the Separation offering totaled approximately $11,668,000.
     Subsequent to Separation's initial public offering, Applied owns 87% of the
     common stock ownership of Separation.

     On January 5, 1997, Lockheed Martin Energy Research Corporation ("LMER")
     and Separation signed a license agreement of proprietary rights, processes
     and products owned and manufactured by the two companies for the purpose
     of engaging in commercial activities with LMER customers and the
     Department of Energy. Separation paid $50 to LMER in consideration of the
     agreement. Royalties will be paid to LMER in the amount of 2 percent of
     the first $4,000 of Separation's net annual sales and 1 percent
     thereafter. Separation has a minimum royalty liability of $15 per year.

     In February 1997 and pursuant to the agreement, Applied advanced an
     additional $1,000 payment to the Teledyne - Commodore joint venture (see
     Note 5).

     On March 17, 1997, Separation secured a bank line of credit for $1,500
     expiring on April 17, 1997. Applied has guaranteed the line of credit by
     pledging cash collateral equal to the line of credit.



                                     F-15
<PAGE>   66
                               INDEX TO EXHIBITS
<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)

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

 10.2         Employment Agreement, dated August 31, 1995, between Commodore and Carl O.
              March 29, 1996. (1)

 10.3         Form of Employment Agreement, dated July 28, 1993, between Commodore
              Laboratories, Inc. ("Commodore Labs") 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 Commodore and Vincent
              Valeri, and conditional assignment thereof by Commodore 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 AGENT 313 in the CFC Business. (2)

 10.18         Form of Technology and Technical Services,Agreement to be entered into between
               the Company and CFC Technology, Inc. (2)

 10.19         Voting Agreement, dated June 28, 1996, among Commodore Environmental Services,
               Inc., 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 Commodore Advanced Sciences, Inc.

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

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

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

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

 *22.1         Subsidiaries of the Company.

 *27.1         Financial Data Schedule.
</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).

(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.
         333-11815).

(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).