SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            _________________________

                                   FORM 10-KSB

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

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

                                       OR

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

                   For the fiscal year ended December 31, 2001

                         Commission file number 0-22291

                     Commodore Separation Technologies, Inc.
             (Exact Name of Registrant as Specified in Its Charter)

                  Delaware                                         11-3299195
                  (State or Other Jurisdiction of              (I.R.S. Employer
                  Incorporation or Organization)             Identification No.)

                  150 East 58th Street, Suite 3238
                  New York, New York                                     10155
                  (Address of Principal Executive Offices)            (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: Not Applicable

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

                               Title of Each Class
                               -------------------
                    Common Stock, par value $0.001 per share
  10% Senior Convertible Redeemable Preferred Stock, par value $0.001 per share
                    Redeemable Common Stock Purchase Warrants

         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 the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         Non-affiliates  of the  registrant  held  shares of Common  Stock as of
March 1, 2002 with an aggregate  market value of  approximately  $16,000  (based
upon the  average bid and asked  prices of the Common  Stock on March 1, 2002 as
quoted by the Nasdaq Small Cap Market).

         As of March 1, 2002, 11,732,640 shares of the registrant's Common Stock
were outstanding.

                       __________________________________

                       DOCUMENTS INCORPORATED BY REFERENCE
<PAGE>

                                     PART I
                                     ------

ITEM 1.       BUSINESS.
-------       ---------

GENERAL

         Commodore  Separation  Technologies,  Inc., a Delaware corporation (the
"Company"), has developed its separation technology and recovery system known as
SLiM(TM)  (supported  liquid  membrane).  Based on its  historical  research and
development  program,  the Company  believes  that SLiM can separate and recover
solubilized metals, radionuclides, biochemicals and other targeted elements from
aqueous and  possibly  gaseous  waste  streams in degrees of  concentration  and
purity  which  permit  both the reuse of such  elements  and the ability for the
waste  water or gas to be disposed of as  non-toxic  effluent  with little or no
further  treatment.  SLiM utilizes a process  whereby a contaminated  aqueous 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 SLiM'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 discharge.

         In December 1997 and February  1998,  the Company was awarded its first
two commercial contracts from Maryland  Environmental Service ("MES") to use its
SLiM  technology  in connection  with the removal of chromium in water  leaching
from waste sites at Baltimore  Harbor and  potentially  polluting the Chesapeake
Bay. The Company installed the SLiM based processing systems as per contract but
was unable to remove the chromium due to third party  technology  failures.  The
Company removed the SLiM based processing systems in June of 1999 at the request
of MES.  Prior to these  awards,  the Company had  performed a series of on-site
demonstrations   of  SLiM,  in  which  a  SLiM  unit,  in  a  single  feedstream
passthrough,  reduced the  contamination  level of  chromium  from more than 630
parts per million (ppm) to less than one ppm. The Company has  demonstrated  the
ability of the SLiM technology in the separation of various  radionuclides  from
aqueous mixed waste streams in third party laboratory experiments. The Company's
business  strategy is to pursue  these and other  opportunities  for SLiM and to
seek marketing  arrangements  with  established  engineering  and  environmental
services firms to use SLiM.

         To finance the significant growth expected by the Company,  the Company
raised a net amount equal to  approximately  $11,100,000  from an initial public
offering of its preferred stock, common stock and warrants in April and May 1997
(the "IPO"). As of March 1, 2002 approximately 85% of the Company's common stock
was owned by  Commodore  Environmental  Services,  LLC  ("LLC"),  a wholly owned
subsidiary of Commodore  Environmental  Services,  Inc., a Delaware  corporation
("Environmental").  Effective  as  of  September  28,  1998,  Commodore  Applied
Technologies,  Inc., a Delaware  Corporation  ("Applied"),  transferred  its 87%
interest  in the  Company  to  Environmental  as  part  of a debt  restructuring
agreement  consummated  between the two companies  following  the  completion of
fairness opinions.

         In April  2000,  the Company  was  notified  by Maryland  Environmental
Services  ("MES")  requesting the removal of the SliM equipment from the Port of
Baltimore  Dundalk Marine Terminal and Hawkins Point  facilities.  MES cited the
fact that the  Company had removed  Chromium VI as per the  requirements  in the
contract,  however there remained trace amounts of Chromium III in the leachate,
which resulted in the total chromium concentrations to exceed contract specified
amounts.  The  Company has made  several  attempts  to remove  trace  amounts of
Chromium III, including the use of alternative technologies,  however was unable
to satisfy MES requirements. It should be noted that the original samples tested
from the leachate  solution did not have Chromium III present and therefore this
problem was not foreseen.  As a result,  the Company has withdrawn its equipment
from the Port of Baltimore and  transferred  it, along with its inventory,  to a
storage facility in Albuquerque, New Mexico.

         In June 2000, the Company closed its Kennesaw,  Georgia facility.  As a
result,  the Company  transferred  approximately  $227,000 of lab  equipment and
furniture   and   fixtures   to   Commodore    Environmental    Services,   Inc.
"Environmental",  the owner of 87% of the issued and outstanding common stock of
the  Company,  in  exchange  for  $227,000  of  intercompany  indebtedness.  The
remainder of equipment and inventory was  transferred  to a storage  facility in
Albuquerque, New Mexico. As a result of the closure, all of the employees in the
Georgia facility have found other employment or have been released.

         As a result of the  closure,  the  Company  has  recorded a reserve for
inventory  obsolescence of $519,000,  an impairment reserve on long-lived assets
of $428,000,  a write off of leasehold  improvements  of $85,000 and a write off


                                       1
<PAGE>

intangibles  of $175,000 in the year ended  December 31, 2000. The Company plans
to continue to search for  applications  for its technology.  The Company had no
ongoing operations as of December 31, 2000.

         The  Company  was  incorporated  in  Delaware  in  November  1995.  The
Company's principal executive offices are located at 150 East 58th Street, Suite
3238,  New York,  New York 10155,  and its  telephone  number at that address is
(212) 308-5800.

THE SLiM TECHNOLOGY

         Although  SLiM  uses  the  same  basic  principles  as  other  membrane
separation technologies, the Company believes that SLiM represents a significant
advance in  membrane  separation  technology  in the  treatment  of  solubilized
feedstreams.  SLiM acts by separating and extracting the targeted materials 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 variety of elements and compounds in a
variety  of  industrial  settings,  and doing so at great  speed and with a high
degree of effectiveness regardless of particle size and volume requirements. The
Company also  believes  that SLiM 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 SLiM membrane
modules  can also be  configured  in various  sizes and  numbers and for varying
capacities, and operate at ambient temperatures and pressures.

         SLiM  involves  passing a  contaminated  aqueous or gaseous  feedstream
through  a  porous,  hollow  fiber  membrane  unit or  module.  This  module  is
previously  loaded with  chemicals  whose  composition  varies  depending on the
targeted  substance in the feedstream.  As the feedstream enters the module, the
metal or other substance to be extracted  reacts with the  proprietary  chemical
combination in the module,  and the metallic or other ions are extracted through
the  membrane  into a strip  solution  that 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  discharge,  or  discharge  may need to be made in a
regulated  manner.  The  Company  believes  that  SLiM can be  utilized  in many
instances for the separation and recovery of solubilized metals (e.g., chromium,
cobalt, copper, zinc, strontium,  calcium,  nickel,  cadmium,  silver,  mercury,
platinum  and lead) and,  with  refinement,  radionuclides,  gas,  organics  and
biochemicals.

         The typical SLiM module is cylindrical  in shape.  The module casing is
typically  constructed  of plastic and  contains  the fibers  through  which the
targeted  element or compound is  separated  from the  contaminated  feedstream.
Pumps and pipes feed the  contaminated  feedstock from its point of origin (such
as a metal  plating  tank or bath) into the module.  Additional  pumps and pipes
recycle the strip  solution  that  concentrates  the  contaminant  that is being
deposited  continuously by the Company's  proprietary  chemicals resident in the
membrane.  The Company  formulates the chemical  mixture for the process in each
customer application,  and performs the initial installation of the equipment at
the customer site.  The customer will either operate the equipment  itself using
computer data links to the Company, which will monitor the equipment and process
while in operation,  or the Company will enter into service  contracts  with the
customer to operate the equipment at the customer's site.

         Operational Characteristics

         The  most  common  alternative   methods  for  metals  separation  from
solubilized  process streams  presently  include ion exchange,  reverse osmosis,
precipitation,  ultrafiltration,  nanofiltration 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  that
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
that requires  dewatering,  drying and disposal in a landfill.  Certain of these
other technologies also entail long process times and are relatively  expensive.
The Company  believes  that SLiM may be a  cost-effective  alternative  to other
existing forms of membrane filtration technology in that it:


o        requires lower initial capital costs and lower operating costs;

o        has the  capability  of treating a variety of elements and compounds in
         laboratory and selected industrial settings at greater speed and with a
         higher degree of effectiveness;

                                       2
<PAGE>

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

o        has the capability of selectively removing more than one element from a
         mixed process stream by incorporating SLiM systems in series.


         Test Results

         In more  than  100  laboratory  and  field  tests  to  date,  SLiM  has
demonstrated the ability to successfully  separate a variety of metals and other
substances from aqueous and possibly gaseous process streams.  In each instance,
the process stream was reduced to levels meeting  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:
     Chromium (hexavalent)     400 ppm                       0.05 ppm (field test)               Less than 0.05 ppm

     Zinc                      2,700 ppm                     Less than 2 ppm (after 30 minutes)  Less than 2 ppm

     Cobalt                    500 ppm                       Less than 1.1 ppm                   Less than 1.5 ppm

     Copper                    150 - 4,500 ppm               Less than 0.15 ppm                  Less than 1.0 ppm

     Calcium                   85 ppm                        Less than 0.15 ppm                  ------

     Nickel                    2,500 ppm                     Less than 1.0 ppm (after 30         Less than 2 ppm
                                                             minutes)
Radionuclides:

     Strontium                 5 ppm                         Less than 0.01 ppm                  -----
</TABLE>

         Some 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 the  Company's  tests  involving the  separation  and
recovery of zinc,  nickel,  chromium and strontium,  no other tests conducted by
the Company have been independently verified.


CONTRACTS

         As of December  31, 2000 and  subsequent  to that date the Company does
not have any operating contracts.  Contracts and agreements that the Company had
previously, have included:

         Port of Baltimore Contracts.  In November 1997, the Company was awarded
its  first  commercial  project  by the State of  Maryland  and  entered  into a
multi-year,    sole-source    contract    with   MES   for   the    removal   of
chromium-contaminated  leachate at the Hawkins Point  Hazardous  Waste Treatment

                                       3
<PAGE>

Facility at the Port of Baltimore.  The contract,  dated as of November 25, 1997
(the  "Hawkins  Point  Contract"),  provided that the Company would lease a SLiM
unit to MES for a  one-time,  lump-sum  lease  payment  of  $250,000,  and would
license its  proprietary  SLiM technology to MES in exchange for a royalty equal
to one-half of any savings  which MES realized by using the SLiM  technology  as
opposed to conventional non-proprietary remediation technology. The Company also
reserved  the  right  to  market  any  residual  chromium  captured  by its SLiM
technology and receive 50% of the revenues  generated from any commercial  sales
of such residual chromium.  The SLiM equipment was installed in 1998. Throughout
1999, the SLiM equipment installed at the Hawkins Point site experienced several
operation difficulties due to SLiM's inability to remove "total chromium" to the
specified limits on an ongoing  commercial basis. The SliM equipment removed the
Chromium VI to the  specified  limits but was unable to remove the Chromium III,
solely or in conjunction with third party  technology  designed for Chromium III
removal, to the specified limits of the Hawkins Point Contract.  The Company was
unable to remove the chromium III due to third party  technology  failures.  The
Company removed the SLiM based processing systems in June of 1999 at the request
of MES as it was unable to effectively meet the "total chromium"  removal limits
specified by the Hawkins  Point  Contract.  In 1999,  the Company had  generated
revenues of approximately $250,000 relating to this contract.

         In February 1998, the Company was awarded its second commercial project
by the State of  Maryland  and  entered  into  another  multi-year,  sole-source
contract with MES for the removal of  chromium-contaminated  leachate at Dundalk
Marine Terminal at the Port of Baltimore.  The contract, dated as of February 5,
1998 (the "Dundalk Contract"), provided that the Company would lease a SLiM unit
to MES for a one-time, lump-sum lease payment of $350,000, and would license its
proprietary  SLiM  technology to MES in exchange for a royalty equal to one-half
of any savings  which MES  realized by using the SLiM  technology  as opposed to
conventional  non-proprietary  remediation technology. The Company had satisfied
approximately 25% of the terms of the contract and therefore recorded $87,500 in
revenues for 1999.  As in the case of the Hawkins  Point  Contract,  the Dundalk
Contract  provided  that the Company shall have the right to market any residual
chromium  captured  by its  SLiM  technology  and  receive  50% of the  revenues
generated  from  any  commercial  sales  of such  residual  chromium.  The  SLiM
equipment had been delivered to the site.  Throughout the initial startup trials
at  the  Dundalk  Marine  Terminal,  the  SLiM  equipment  had  been  unable  to
consistently  meet the  "total  chromium"  removal  limits.  The SliM  equipment
removed the Chromium VI to the  specified  limits but was unable to remove trace
amounts of Chromium III to the  specified  limits of the Dundalk  Contract.  The
Company  was unable to remove the  chromium  III due to third  party  technology
failures.  The Company removed the SLiM based processing systems in June of 1999
at the request of MES as it was unable to effectively  meet the "total chromium"
removal limits specified by the Dundalk Contract.

         Lockheed License Agreement. In January 1997, the Company entered into a
license agreement (the "Lockheed License Agreement") with Lockheed Martin Energy
Research  Corporation  ("Lockheed  Martin"),  manager of the Oak Ridge  National
Laboratory,  a United States  Department  of Energy  national  laboratory  ("Oak
Ridge"). Under the terms of the Lockheed License Agreement, the Company 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. The Company also
received  under  the  Lockheed  License  Agreement  the  right  to  exploit  the
technology for other commercial  applications.  Pursuant to the Lockheed License
Agreement,  the  Company  made an  initial  cash  payment  of  $50,000  upon the
execution of the agreement and is obligated to pay 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,  the  Company  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  was  terminated  by the Company on
February  28,  2000.  The Company  determined  that the  patents  covered by the
Lockheed License Agreement were not commercially viable.

MARKETS AND CUSTOMERS

         Overview

         Based on market data  compiled by the  Company,  the Company  estimates
that,  as of  December  31,  2001,  there  were  approximately  5,000  companies
operating metal plating and metal finishing facilities in the United that may be
potential users of the SliM technology. Additionally, there were more than 1,000
biochemical,  bulk drug manufacturing and pharmaceutical  companies operating in
the United States and Canada that may be potential users of the SLiM technology.
The  Company  believes  that the  potential  international  market for the above
applications may be equal to the North American market. Federal, state and local
government entities are also a potential market for the Company, particularly in
the area of environmental remediation and clean-up.

                                       4
<PAGE>

         Commercialization and Marketing Strategy
         Currently,  the  Company  does  not  have an  active  commercialization
program. Historically, the Company intended 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,  the Company
would supply  these  modules at a  reasonable  mark-up  over their cost.  As new
patents  are filed and  issued,  the Company  might,  for certain  applications,
determine  to make a direct  sale of the  equipment  with  additional  long-term
royalty payment provisions. The Company might obtain additional revenues through
servicing the SLiM  equipment,  including  periodic  replacement of the membrane
component.  In addition to leasing and selling its equipment,  the Company might
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,  the  Company's
ongoing charges may be based on the volume of materials processed.  There are no
current marketing efforts for the Company's SliM technology.

         Metals Separation and Recovery. The Company's initial marketing efforts
were in this  industrial  sector,  in  which  the  separation  and  recovery  of
metal-bearing  aqueous solutions presented 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 a limited number of potentially  effective  technologies are available
to effect proper separation.

         Based on  historical  management  studies and  discussions  with metals
industry   executives,   the  Company   believes  that  the  major   competitive
technologies  in this  area  are  precipitation  and ion  exchange.  To date the
Company has been  unsuccessful  in placing  SLiM  equipment  in this  industrial
sector.

         Environmental  Remediation and  Restoration.  The Company believes that
SLiM  has  the  potential  for  application  to  environmental  remediation  and
restoration.  In the case of a  project,  it is  expected  that the  remediation
technology will be applied  continuously over a period of many years,  until the
subject  contamination has abated for a significant  period of time. To date the
SLiM technology has not performed profitability on a commercial scale.

         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  nuclear  energy.   SLiM  has
successfully  demonstrated  on a limited scale the capability for the separation
of  radionuclides  such as strontium and cesium.  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.  The Company
anticipated   pursuing  this  market  area  in  collaboration  with  established
engineering and environmental service organizations, which can provide technical
and professional expertise, market presence and credibility. To date the Company
has been unsuccessful in placing SLiM equipment in this market sector.

RAW MATERIALS

         The Company currently has a limited number of outside sources of supply
for some strategic  components  used in the SLiM process,  including  chemicals,
fibers and membrane casings.  Business disruptions or financial  difficulties of
such suppliers,  or raw material  shortages or other causes beyond the Company's
control, could adversely affect the Company by increasing the cost of goods sold
or reducing the availability of such components. In its development to date, the
Company has been able to obtain adequate supplies of these strategic components.
However, as it develops its commercial activities,  the Company may experience a
rapid and substantial increase in its requirements for these components.  If the
Company were unable to obtain a  sufficient  supply of required  components,  it
could experience significant delays in the manufacture of SLiM equipment,  which
could  result in the loss of orders  and  customers  and could  have a  material
adverse  affect on the Company's  business,  financial  condition and results of
operations.  In addition,  if the cost of raw  materials or finished  components
were to increase,  there can be no assurance  that the Company  would be able to
pass such increase to its customers.  The use of outside  suppliers also entails
risks of quality control and disclosure of proprietary information.

BACKLOG

         At December 31, 2001, the Company had no backlog.

                                       5
<PAGE>

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 were $0, $114,000 and $338,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.

INTELLECTUAL PROPERTY

         In September 1997, the Company filed two U.S. patent  applications  and
one international patent application covering the principal features of its SLiM
technology.  One of the patent  applications  covers the joint inventions of Dr.
Kilambi and Lockheed Martin.  The other patent application and the international
patent  application  cover the sole inventions of Dr.  Kilambi.  The U.S. Patent
Office has  decided to issue a patent  for one of the two  claims  covering  the
joint  inventions of Dr.  Kilambi and Lockheed  Martin.  The other claim will be
separated  from  the  original  application  and  filed  as  a  separate  patent
application.  Based on comments provided by the U.S. Patent Office,  the Company
has decided to abandon the two patent applications  covering the sole inventions
of Dr.  Kilambi.  The Company has been issued three US patents to date for using
strip  dispersion  for  the  separation  of  radionuclides,  heavy  metals,  and
chromium;  the sole  invention  of Dr.  W.S.  Winston  Ho,  former  Senior  Vice
President - Technology .  Additionally,  the Company has filed for one US patent
and two foreign patents for using a strip dispersion technique covering the sole
inventions of Dr. W.S. Winston Ho.

         The Company's liquid membrane  technology patent applications are based
on the selective  combination of different known solvents,  supports,  diluents,
carriers and other  components  to separate a variety of metals,  chemicals  and
other targeted substances. While the Company believes that its technology covers
many  separation  applications,   third  parties  may  have  developed,  or  may
subsequently  assert claims to, certain of these solvents,  supports,  diluents,
carriers or other  components  for one or more  specific  applications.  In such
event,  the Company may need to acquire  licenses to, or to contest the validity
of, issued or pending patents or claims of third parties.

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

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

COMPETITION

         The  most  common  alternative   methods  for  metals  separation  from
solubilized  process streams  presently  include ion exchange,  reverse osmosis,
precipitation,  ultrafiltration,  nanofiltration 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 that
require further post-treatment prior to disposal.  For example,  reverse osmosis
and  ultrafiltration  are  incapable  of  separating  chromium  from  wastewater
streams,  and  precipitation  results in the  production of sludge that requires
dewatering,   drying  and  disposal  in  a  landfill.  Certain  of  these  other
technologies also entail long process times, and are relatively expensive.

         By  contrast,  the Company  believes  SLiM may be capable of handling a
broad range of compounds in a faster and cost effective manner. Furthermore, the
expected by-products of the SLiM process consist primarily of wastewater,  which
can be  discharged  as  normal  wastewater  effluent,  and to a  lesser  extent,
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

                                       6
<PAGE>

the  Company  believes  that  SLiM may have  advantages  over many  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
SLiM.  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 SLiM 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  SLiM  is  a   technologically   superior  and
cost-effective  alternative  to other  separation  technologies  on a commercial
scale, the Company may not be able to compete successfully.

GOVERNMENT REGULATION

         The Company and its  customers  are required to comply with a number of
federal, state and local laws and regulations in the areas of safety, health and
environmental controls, including, without limitation, the Resource Conservation
and  Recovery  Act, as amended,  and the  Occupational  Safety and Health Act of
1970,  which may require the Company,  its prospective  working  partners or its
customers to obtain  permits or approvals to utilize SLiM and related  equipment
on  certain  job  sites.  In  addition,  if the  Company  begins to market  SLiM
internationally,  the  Company  would  be  required  to  comply  with  laws  and
regulations  and, when  applicable,  obtain  permits or approvals in those other
countries.  There is no assurance that such required  permits and approvals will
be obtained. Furthermore,  particularly in the environmental remediation market,
the  Company may be required to conduct  performance  and  operating  studies to
assure   government   agencies  that  SLiM  and  its  by-products  do  not  pose
environmental  risks.  There is no assurance  that such studies,  if successful,
will not be more costly or  time-consuming  than  anticipated.  Further,  if new
environmental  legislation or regulations are enacted or existing legislation or
regulations  are  amended,  or are  interpreted  or  enforced  differently,  the
Company,  its prospective  working partners and/or its customers may be required
to meet  stricter  standards of  operation  and to obtain  additional  operating
permits or approvals.

ENVIRONMENTAL MATTERS

         The Company'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 the Company's role would be 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 the
Company.  Any such claims against the Company could materially  adversely affect
the Company's business, financial condition and results of operations.

         The Company maintains  environmental liability insurance with limits of
$1.0  million  per  occurrence  and  $2.0  million  in  the  aggregate.  Applied
maintains,  on behalf of itself and its  subsidiaries  (including  the Company),
contractor's  pollution  liability  insurance  with  limits of $5.0  million per
occurrence  and $5.0 million in the  aggregate.  There can be no assurance  that
such insurance will provide coverage against all claims,  and claims may be made
against  the  Company  (even if  covered by an  insurance  policy)  for  amounts
substantially in excess of applicable policy limits. Any such event could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

EMPLOYEES

         As of March 1, 2002, the Company had no full-time employees.

ITEM 2.       PROPERTIES.
-------       -----------

         The Company  maintains  executive  offices  located in New York City in
approximately  2,000  square feet of space  leased by an affiliate of Bentley J.
Blum, a director and principal  stockholder of  Environmental  and a director of
the  Company.  Such  space also  serves as the  principal  executive  offices of
Environmental.

ITEM 3.       LEGAL PROCEEDINGS.
-------       ------------------

         The  Company,  along  with  several  other  entities,  in a prior  year

                                       7
<PAGE>

guaranteed a performance  bond of  Separation  relating to the Port of Baltimore
contract. The Company was notified on June 28, 2000 that the performance bond is
being called.  It is not known, at this time, the amount,  if any, the Company's
share will be.

         As of March 15, 2002, no litigation has been filed against the Company,
Separation,   or  any  of  the  Company's  subsidiaries  with  respect  to  this
indemnification  issue.  The  Company  is  currently  investigating  all  of the
relevant facts and circumstances in connection with the Surety's potential claim
or cause of action.  In the event that the Company is obligated to indemnify the
Surety,  the Company estimates that its liability will not exceed  approximately
$390,000.


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 year ended December 31, 2001.

                                       8
<PAGE>

                                     PART II
                                     -------

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

MARKET INFORMATION

         The  Company's  common  stock,  par value  $0.001  per  share  ("Common
Stock"),  10% Senior  Convertible  Preferred  Stock,  par value $0.001 per share
("Convertible  Preferred Stock"),  and Redeemable Common Stock Purchase Warrants
("Warrants")  began trading publicly on April 3, 1997 at initial public offering
prices of $5.00 and $10.00 per share,  respectively,  and $0.10 per  Warrant and
were  traded and  quoted on the  Nasdaq  SmallCap  Market  ("Nasdaq")  under the
symbols CXOT,  CXOTP and CXOTW,  respectively,  until  February 18, 1999. At the
close of business on February 18, 1999, at which time the  Company's  securities
were delisted from the Nasdaq Stock Market because of the Company's inability to
satisfy the  revised  maintain  standards  for  continued  listing on the Nasdaq
Market System.  The Company is currently  listed on the OTC Bulletin  Board.  On
March 1, 2002,  there were 177 holders of record of Common Stock, two holders of
record of Convertible Preferred Stock and 16 holders of record of Warrants.

         The following table sets forth, for the periods shown, the high and low
bid  prices of the  Common  Stock,  Convertible  Preferred  Stock  and  Warrants
(rounded  to the  nearest  cent) as quoted by Nasdaq.  Such  quotations  reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>

                                                                                 Convertible
                                                 Common Stock                  Preferred Stock                      Warrants
                                           ---------- ---- ----------    ---------- --- -------------    ----------- --- -----------
                                             High             Low          High             Low             High            Low
                                           ----------      ----------    ----------     -------------    -----------     -----------
<S>                                            <C>             <C>           <C>               <C>            <C>             <C>
FISCAL YEAR 2001
   January 1 to March 31, 2001.......          $0.07           $0.04         $0.10             $0.04          $0.00           $0.00
   April 1 to June 30, 2001..........           0.06            0.01          0.04              0.04           0.00            0.00
   July 1 to September 30, 2001......           0.01            0.01          0.00              0.00           0.00            0.00
   October 1 to December 31, 2001....           0.01            0.01          0.00              0.00           0.00            0.00

FISCAL YEAR 2000
   January 1 to March 31, 2000.......          $0.75           $0.04         $0.88             $0.38          $0.00           $0.00
   April 1 to June 30, 2000..........           0.37            0.06          0.38              0.25           0.00            0.00
   July 1 to September 30, 2000......           0.24            0.06          0.25              0.25           0.00            0.00
   October 1 to December 31, 2000....           0.08            0.04          0.19              0.06           0.00            0.00
</TABLE>

DIVIDEND INFORMATION

         The holders of the Company's  Convertible  Preferred Stock are entitled
to receive  if,  when and as  declared  by the Board of  Directors  out of funds
legally available therefore, cumulative dividends at the rate of $1.00 per share
per annum,  quarterly on the last  business day of March,  June,  September  and
December of each year,  before any  dividends are declared or paid on the Common
Stock or any capital stock ranking junior to the  Convertible  Preferred  Stock.
The Company  ceased  paying  cash  dividends  to the Holders of the  Convertible
Preferred Stock commencing with the Dividend for the quarter ended September 30,
1998. The Company does not anticipate  that it will continue to pay similar cash
dividends on its Convertible Preferred Stock in the foreseeable future.

         The Company has never paid cash  dividends on its Common Stock and does
not  anticipate  paying cash  dividends on its Common  Stock in the  foreseeable
future.

         Any future  determination  as to the payment of cash  dividends  on the
capital  stock of the  Company  will  depend on the  ability  of the  Company to
service its outstanding indebtedness and future earnings,  capital requirements,
the  financial  condition of the Company and such other factors as the Company's
Board of Directors may consider.

                                       9
<PAGE>

ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS
-------       OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
              -------------------------------------------------

GENERAL

         The  Company was  organized  in November  1995,  and has not  generated
material revenues or any profits through December 31, 2001. Since its inception,
the Company has been engaged principally in organizational activities, including
research and development,  developing a strategic  operating plan, entering into
contracts, hiring personnel, developing and manufacturing commercial-scale units
and installing and operating  units on an extended  basis for  demonstration  or
test purposes.  Accordingly,  the Company has a limited  operating  history upon
which an evaluation of its performance and prospects can be made. The Company is
subject  to  all  of  the  business  risks  associated  with  a new  enterprise,
including, but not limited to, risks of unforeseen capital requirements, failure
of  market  acceptance,   failure  to  establish  business  relationships,   and
competitive disadvantages as against larger and more established companies.

         The Company has generated  nominal revenues to date.  During the period
from  November 15, 1995 (date of  inception)  to December 31, 2001,  the Company
incurred a net loss of  $13,419,000.  For the year ended  December 31, 2001, the
Company incurred a loss of $91,000 and anticipates that it may continue to incur
significant losses for the foreseeable  future.  There can be no assurance as to
whether  or  when  the  Company  will  generate  material  revenues  or  achieve
profitable  operations.  See "Business"  and the Financial  Statements and Notes
thereto included elsewhere in this Annual Report.

         In April  2000,  the Company  was  notified  by Maryland  Environmental
Services  ("MES")  requesting the removal of the SliM equipment from the Port of
Baltimore  Dundalk Marine Terminal and Hawkins Point  facilities.  MES cited the
fact that the  Company had removed  Chromium VI as per the  requirements  in the
contract,  however there remained trace amounts of Chromium III in the leachate,
which resulted in the total chromium concentrations to exceed contract specified
amounts.  The  Company has made  several  attempts  to remove  trace  amounts of
Chromium III, including the use of alternative technologies,  however was unable
to satisfy MES requirements. It should be noted that the original samples tested
from the leachate  solution did not have Chromium III present and therefore this
problem was not foreseen.  As a result,  the Company has withdrawn its equipment
from the Port of Baltimore and  transferred  it, along with its inventory,  to a
storage facility in Albuquerque, New Mexico.

         In June 2000, the Company closed its Kennesaw,  Georgia facility.  As a
result,  the Company  transferred  approximately  $227,000 of lab  equipment and
furniture   and   fixtures   to   Commodore    Environmental    Services,   Inc.
"Environmental",  the owner of 87% of the issued and outstanding common stock of
the  Company,  in  exchange  for  $227,000  of  intercompany  indebtedness.  The
remainder of equipment and inventory was  transferred  to a storage  facility in
Albuquerque, New Mexico. As a result of the closure, all of the employees in the
Georgia facility have found other employment or have been released.

         As a result of the  closure,  the  Company  has  recorded a reserve for
inventory  obsolescence of $519,000,  an impairment reserve on long-lived assets
$428,000,  a write off of  leasehold  improvements  of  $85,000  and a write off
intangibles  of $175,000 in the year ended  December 31, 2000. The Company plans
to continue to search for applications for its technology.

         RESULTS OF OPERATIONS

Year ended December 31, 2001  compared to year ended December 31, 2000

         The  Company  had no  revenues  or cost of sales in 2001.  The  Company
obtained a contract  from a customer  in March  2000 and  recorded  revenues  of
$66,000 for the year ended December 31, 2000. Cost of sales amounted to $107,000
for the years ended December 31, 2000. Cost of sales primarily  include the cost
of equipment, shipping and set up costs.

         There were no research  and  development  costs in 2001.  Research  and
development  costs were $114,000 for the year ended December 31, 2000.  Research
and  development  costs  include  salaries,  wages  and other  related  costs of
personnel  engaged in research and development  activities,  as well as contract
services and equipment used in research and development activities. Research and
development costs are expensed when incurred.

                                       10
<PAGE>

         General and  administrative  expenses  were  $95,000 for the year ended
December 31, 2001 as compared to $313,000 for the year ended  December 31, 2000.
In 2000,  the company  closed its Kennesaw  facility  and its current  costs are
costs associated with maintaining its public company status..

         In June 2000, the Company closed its Kennesaw,  Georgia facility.  As a
result,  the Company  transferred  approximately  $227,000 of lab  equipment and
furniture   and   fixtures   to   Commodore    Environmental    Services,   Inc.
"Environmental",  the owner of 87% of the issued and outstanding common stock of
the  Company,  in  exchange  for  $227,000  of  intercompany  indebtedness.  The
remainder of equipment and inventory was  transferred  to a storage  facility in
Albuquerque, New Mexico. As a result of the closure, all of the employees in the
Georgia facility have found other employment or have been released.

         As a result of the  closure,  the  Company  has  recorded a reserve for
inventory  obsolescence of $519,000,  an impairment reserve on long-lived assets
of $428,000  and a write off of  leasehold  improvements  of $85,000 in the year
ended  December 31, 2000.  The Company also recorded an impairment of intangible
assets of $175,000 in the year ended  December  31, 2000.  The Company  plans to
continue  to search for  applications  for its  technology.  The  Company has no
ongoing operations as of December 31, 2001.

         Depreciation  and amortization was $235,000 in 2000. As a result of the
write  down of  fixed  assets  in June of  2000,  there  is no  depreciation  or
amortization expense in 2001. These fixed assets included SLiM units and modules
used in the Company's technology process.

         Sales and  marketing  expense  was  $18,000 in 2000.  The  Company  was
focusing on trying to identify new markets for applications of its technology.

         Interest  income  was  $4,000 in 2001 as  compared  to $13,000 in 2000.
Interest was earned on the restricted cash which was invested in certificates of
deposit.  These certificates of deposit  collateralized  outstanding  letters of
credit relating to the Port of Baltimore projects.

Year ended December 31, 2000 compared to year ended December 31, 1999

         The  Company  obtained  a  contract  from a  customer  in March 2000 ad
recorded  revenues of $66,000 for the year ended  December 31, 2000. The Company
commenced  its  contracts  with  the  Port of  Baltimore  in  February  1999 and
generated  revenues of $337,000 for the year ended  December  31, 1999.  Cost of
sales  amounted to $107,000 and  $541,000 for the years ended  December 31, 2000
and 1999.  Cost of sales primarily  include the cost of equipment,  shipping and
set up costs.

         Research  and  development  costs  were  $114,000  for the  year  ended
December 31, 2000 as compared to $338,000 for the year ended  December 31, 1999.
Since  1998,  the  Company  began to shift  its  focus  to  commercializing  the
technology,  thereby  reducing its efforts in the research and development  area
and focusing on getting the technology out to potential customers.  Research and
development costs include  salaries,  wages and other related costs of personnel
engaged in research and development activities, as well as contract services and
equipment used in research and development activities.  Research and development
costs are expensed when incurred.

         General and  administrative  expenses  were $313,000 for the year ended
December 31, 2000 as compared to $743,000 for the year ended  December 31, 1999.
In 1998, the Company began an effort to reduce its overhead  expenses and placed
more of a focus on developing its technology and getting it out to customers. In
October 1998, the Company reduced the number of employees from twenty-three down
to eight and has reduced its reliance on corporate infrastructure.  In 2000, the
company closed its Kennesaw facility.

         In June 2000, the Company closed its Kennesaw,  Georgia facility.  As a
result,  the Company  transferred  approximately  $227,000 of lab  equipment and
furniture   and   fixtures   to   Commodore    Environmental    Services,   Inc.
"Environmental",  the owner of 87% of the issued and outstanding common stock of
the  Company,  in  exchange  for  $227,000  of  intercompany  indebtedness.  The
remainder of equipment and inventory was  transferred  to a storage  facility in
Albuquerque, New Mexico. As a result of the closure, all of the employees in the
Georgia facility have found other employment or have been released.

                                       11
<PAGE>

         As a result of the  closure,  the  Company  has  recorded a reserve for
inventory  obsolescence of $519,000,  an impairment reserve on long-lived assets
of $428,000  and a write off of  leasehold  improvements  of $85,000 in the year
ended  December 31, 2000.  The Company also recorded an impairment of intangible
assets of $175,000 in the year ended  December  31, 2000.  The Company  plans to
continue  to search for  applications  for its  technology.  The  Company has no
ongoing operations as of December 31, 2000.

         Depreciation  and  amortization  decreased  to  $235,000  in 2000  from
$507,000 in 1999 as a result of the write down of fixed  assets in June of 2000.
These  fixed  assets  include  SLiM  units  and  modules  used in the  Company's
technology process.

         Sales and marketing  expense  increased to $18,000 in 2000 from $12,000
in 1999 as a result of the Company  focusing  on trying to identify  new markets
for applications of its technology.

         Interest  income was  $13,000 in 2000 as  compared  to $18,000 in 1999.
Interest was earned on the restricted cash which was invested in certificates of
deposit.  These certificates of deposit  collateralized  outstanding  letters of
credit relating to the Port of Baltimore projects.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has sustained losses of $91,000,  $1,915,000 and $1,786,000
for the years ended December 31, 2001, 2000 and 1999, respectively.  The Company
had no  significant  revenues  during the period from November 15, 1995 (date of
inception) to December 31, 2001.  Substantially  all of the Company's losses are
attributable  to the expenses  detailed  above. At December 31, 2001 the Company
had a working  capital  deficit of  $3,756,000  and a  stockholders'  deficit of
$3,756,000.  The Company's decrease in working capital is principally due to the
net  loss  for the  period  and  dividends  paid  or  accrued  on the  Company's
Convertible Preferred Stock. The net loss includes impairments and write-offs of
the Company's assets.

         The Company has been obtaining  financing from Commodore  Environmental
Services,  Inc.,  the owner of 86% of the  outstanding  shares of Common  Stock,
however  there can be no assurance  that the Company will continue to be able to
obtain additional financing from Environmental.  The Company's continuation as a
going concern is dependent  upon its ability to obtain  additional  financing as
may be required, and ultimately to attain profitability.

         The Company has a working  capital  deficit,  a deficit in equity,  has
incurred  substantial  losses from  operations  and has not generated  cash from
operating  activities.  Presently,  the Company  does not have  sufficient  cash
resources to meet its  requirements in 2002 or the necessary  working capital to
develop profitable operations from using its patented technology.  The financial
statements  do not include any  adjustments  that might be necessary  should the
Company be unable to continue as a going concern.

NET OPERATING LOSSES

         At  December  31,  2001,  the  Company  had tax loss  carryforwards  of
approximately  $13,419,000.  The amount of and ultimate  realization  of benefit
from the net operating loss for income tax purposes is dependent,  in part, upon
the tax laws in effect, future earnings of the Company, and other future events,
the effects of which cannot be determined.  A change in ownership of the Company
may reduce the amount of loss allowable. These net operating carryforwards begin
to expire in 2011. A full valuation  allowance has been  established  because of
the  uncertainty  about  whether  the  Company  will  realize the benefit of net
operating losses.

FORWARD-LOOKING STATEMENTS

         Certain  matters  discussed in this Annual Report are  "forward-looking
statements" intended to qualify for the safe harbors from liability  established
by Section 27A of the Securities Act and Section 21E of the Securities  Exchange
Act of 1934, as amended (the "Exchange Act"). These  forward-looking  statements
can generally be  identified  as such because the context of the statement  will
include words such as the Company "believes,"  "anticipates," "expects" or words
of similar  import.  Similarly,  statements  that describe the Company's  future
plans, objectives or goals are also forward-looking  statements. Such statements
may address future events and  conditions  concerning,  among other things,  the
Company's  results of operations and financial  condition;  the  consummation of
acquisition and financing  transactions  and the effect thereof on the Company's

                                       12
<PAGE>

business;  capital  expenditures;   litigation;   regulatory  matters;  and  the
Company's  plans and  objectives for future  operations and expansion.  Any such
forward-looking  statements would be subject to the risks and uncertainties that
could cause actual results of  operations,  financial  condition,  acquisitions,
financing transactions,  operations, expenditures, expansion and other events to
differ  materially  from those  expressed  or  implied  in such  forward-looking
statements.  Any such forward-looking statements would be subject to a number of
assumptions  regarding,  among other things,  future  economic,  competitive and
market  conditions  generally.  Such  assumptions  would be  based on facts  and
conditions  as they  exist  at the  time  such  statements  are  made as well as
predictions as to future facts and conditions,  the accurate prediction of which
may be  difficult  and involve the  assessment  of events  beyond the  Company's
control.  Further,  the Company's  business is subject to a number of risks that
would affect any such forward-looking statements.  These risks and uncertainties
include, but are not limited to, the ability of the Company to commercialize its
technology;  product demand and industry pricing;  the ability of the Company to
obtain patent  protection  for its  technology;  developments  in  environmental
legislation  and  regulation;  the  ability  of the  company  to  obtain  future
financing on favorable  terms;  and other  circumstances  affecting  anticipated
revenues and costs. These risks and uncertainties  could cause actual results of
the  Company  to differ  materially  from  those  projected  or  implied by such
forward-looking statements.


ITEM 7.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------       --------------------------------------------

         The  financial  statements  of the  Company  are  included on pages F-1
through F-24 of this Annual Report and are incorporated herein by reference.


ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
-------       ON ACCOUNTING AND FINANCIAL DISCLOSURE.
              ---------------------------------------

         On  August  17,  1999,  the  Company  dismissed  its  former  auditors,
PricewaterhouseCoopers  LLP ("PwC").  Additionally  as of August 17,  1999,  the
Company retained Tanner + Co. ("Tanner") to serve as their independent auditors.
The decision to terminate its relationship with PwC was approved by the Board of
Directors of the Company.

         For the year ended  December 31, 1998,  for the six-month  period ended
December  31,  1997 and for the year ended  June 30,  1997,  PwC  reports on the
Company's  financial  statements (a development stage company) neither contained
any adverse  opinions or  disclaimers of opinions nor were qualified or modified
as to  uncertainty,  audit  scope or  accounting  principle,  except  that PwC's
auditors report on the Company's  consolidated financial statements for the year
ended  December  31, 1998  contained  an  additional  paragraph  relating to the
Registrant  continuing as a going concern due to the Company's  recurring losses
from operations and net cash outflows from operations.

         In connection with the audits for the year ended December 31, 1998, for
the six month  period  ended  December  31, 1997 and for the year ended June 30,
1997 and through August 17, 1999,  there were no  disagreements  with PwC on any
matter of accounting principles or practices,  financial statement disclosure or
auditing  scope  or  procedure,  which  disagreements,  if not  resolved  to the
satisfaction  of PwC,  would have  caused it to make  reference  to the  subject
matter of the disagreements in connection with its report.

         No  "reportable   events"  as  described  under  Item  304(a)(1)(v)  of
Regulation  S-K occurred  during the year ended  December  31, 1998,  during the
six-month  period  ended  December  31,  1997 and during the year ended June 30,
1997.

         Prior to engaging Tanner,  the Company did not consult Tanner regarding
any of the  matters  or  events  set  forth  in Item  304(a)(2)(i)  and  (ii) of
Regulation S-K.

                                       13
<PAGE>

                                    PART III
                                    --------

ITEM 9.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------       ---------------------------------------------------

EXECUTIVE OFFICERS AND DIRECTORS

         The names  and ages of the  executive  officers  and  directors  of the
Company,  and their  positions  with the  Company  as of March 1,  2002,  are as
follows:

Name                     Age    Position
----                     ---    --------

Paul E. Hannesson......  62    Chairman of the Board and Chief Executive Officer

Andrew P. Oddi.........  40    President

James M. DeAngelis.....  41    Senior Vice President - Sales & Marketing

Bentley J. Blum........  60    Director

_______________________

         Paul  E.  Hannesson  has  been a  director  of the  Company  since  its
inception,  served as its  Chairman of the Board from  November  1995 to January
1997, and was  re-appointed  Chairman of the Board and appointed Chief Executive
Officer in May 1997.  Mr.  Hannesson  has been a director of Applied since March
1996 and served as  Chairman of the Board from  November  1996  through  January
2001. Mr. Hannesson also served as Chief Executive Officer of Applied from March
to October 1996 and as President  of Applied from March to September  1996,  and
was  re-appointed  Chief  Executive  Officer  of Applied  in  November  1996 and
President in May 1997, positions he served until January 2001. Mr. Hannesson has
been a director of  Environmental  since  February  1993 and was  appointed  its
Chairman  of the  Board  and Chief  Executive  Officer  in  November  1996.  Mr.
Hannesson also served as President of  Environmental  from February 1993 to July
1996 and was  re-appointed  President in May 1997.  Mr.  Hannesson was a private
investor  and  business  consultant,  from 1990 to 1993.  Mr.  Hannesson  is the
brother-in-law of Bentley J. Blum, a director of the Company.

         Andrew P. Oddi has served as President of the Company  since July 2001,
succeeding Mr.  Magnell.  Mr. Oddi was appointed Vice President and Treasurer of
the Company, Applied, Environmental, Solution and CFC Technologies in June 1997.
Mr. Oddi also served as Vice  President  of Finance &  Administration  and Chief
Financial  Officer of  Environmental  from 1987 to May 1997 and as a director of
the  Environmental  from December 1990 to July 1996. Mr. Oddi also served as the
Vice President of Finance, Chief Financial Officer and Secretary of Applied from
March to November 1996, and as the Vice  President--Finance  of Separation  from
September 1996 to May 1997.  From 1982 to 1987, Mr. Oddi was employed by Ernst &
Young, independent  accountants,  and held the position of audit manager in 1986
and 1987. Mr. Oddi is a Certified Public Accountant.

         James  M.  DeAngelis  was  appointed  Senior  Vice  President--Sales  &
Marketing  of the  Company  in  July  1996,  after  having  served  as its  Vice
President--Marketing  since November  1995. Mr.  DeAngelis is currently the Vice
President of Finance and Chief Financial  Officer of Applied.  Mr. DeAngelis has
also served as the  President of CFC  Technologies  since  September  1994,  and
served as Vice  President--Marketing  of  Environmental  from  September 1992 to
September 1995. Prior to September 1992, Mr. DeAngelis was completing M.B.A. and
Masters in International Management degrees from the American Graduate School of
International  Management.  Mr.  DeAngelis  holds B.S.  degrees  in Biology  and
Physiology from the University of Connecticut.

         Bentley J. Blum has been a director of the Company  since  August 1996.
Mr. Blum has served as a director of Applied  since March 1996 and served as its
Chairman  of the Board from March to  November  1996.  Mr.  Blum has served as a
director  of  Environmental  since 1984 and served as its  Chairman of the Board
from 1984 to  November  1996.  Mr. Blum also  currently  serves as a director of
Solution  and CFC  Technologies.  For  more  than 15  years,  Mr.  Blum has been
actively  engaged  in  real  estate  acquisitions  and  currently  is  the  sole
stockholder  and  director  of a number of  corporations  that hold real  estate
interests,  oil drilling interests and other corporate interests.  Mr. Blum is a
principal  stockholder of  Environmental  and is the  brother-in-law  of Paul E.
Hannesson, the Chairman of the Board and Chief Executive Officer of the Company.

                                       14
<PAGE>

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

COMPENSATION OF DIRECTORS

         Each  non-management  director of the Company receives a director's fee
of $500 per  meeting  for  attendance  at Board of  Directors  meetings,  and is
reimbursed  for actual  expenses  incurred  in respect of such  attendance.  The
Company does not separately compensate employees for serving as directors.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

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

         Based  solely  upon a review  of Forms 3 and 4 and  amendments  thereto
furnished to the Company  during the year ended  December  31, 2001,  and upon a
review of Forms 5 and amendments  thereto  furnished to the Company with respect
to the year ended December 31, 2001, or upon written representations received by
the Company from  certain  reporting  persons that no Forms 5 were  required for
those  persons,  the Company  believes  that no director,  executive  officer or
holder of more than 10% of the shares of Common  Stock of the Company  failed to
file on a timely basis the reports required by Section 16(a) of the Exchange Act
during, or with respect to, the year ended December 31, 2001.

                                       15
<PAGE>

ITEM 10.      EXECUTIVE COMPENSATION.
--------      -----------------------

SUMMARY COMPENSATION

         The following table sets forth the amount of all  compensation  paid by
the Company and/or its affiliates and allocated to the Company's  operations for
services  rendered  during the fiscal years ended  December  31, 2001,  2000 and
1999, to the person serving as the Company's current Chief Executive Officer, to
each of the Company's most highly compensated  executive officers other than the
Chief  Executive  Officer  whose total  salary and bonus  compensation  exceeded
$100,000 during any such period.
<TABLE>
<CAPTION>

                                             Summary Compensation Table

                                             Annual Compensation                          Long-Term Compensation
                              --------------------------------------------------  --------------------------------------
                                                                        Other                     Securities
                                                                       Annual      Restricted       Under-                 All Other
----------------------------                                           Compen-        Stock         Lying         LTIP       Compen-
                                            Salary        Bonus        sation       Award(s)       Options       Payouts     sation
Name and Principal Position   Year           ($)          ($)           ($)           ($)           (#)           ($)         ($)
----------------------------

<S>                           <C>             <C>          <C>          <C>            <C>            <C>         <C>         <C>
Paul E. Hannesson             2001            -0-          -0-          -0-            -0-            -0-         -0-         -0-
Chief Executive Officer       2000            -0-          -0-                         -0-            -0-         -0-         -0-
                              1999            -0-          -0-                         -0-            -0-         -0-         -0-


James M. DeAngelis            2001            -0-          -0-          -0-            -0-            -0-         -0-         -0-
Senior Vice President         2000            -0-          -0-          -0-            -0-            -0-         -0-         -0-
                              1999            -0-          -0-          -0-            -0-            -0-         -0-         -0-


Andrew Oddi                   2001            -0-          -0-          -0-            -0-            -0-         -0-         -0-
President                     2000            -0-          -0-          -0-            -0-            -0-         -0-         -0-
                              1999            -0-          -0-          -0-            -0-            -0-         -0-         -0-
</TABLE>

____________________


STOCK OPTIONS

         No stock options were granted in 2001, 2000 or 1999. The Company has no
outstanding stock appreciation  rights and granted no stock appreciation  rights
during the year ended December 31, 2001.



ITEM 11.      SECURITY OWNERSHIP OF CERTAIN
--------      BENEFICIAL OWNERS AND MANAGEMENT.
              ---------------------------------

         The following table sets forth certain  information with respect to the
beneficial  ownership of the  Company's  common stock as of March 1, 2002 by (i)
each person known to the Company to be the  beneficial  owner of more than 5% of
the outstanding  shares of the Company's common stock, (ii) each director of the
Company,  (iii) each  executive  officer of the Company,  and (iv) all executive
officers and  directors of the Company as a group,  as reported by such persons.
Unless  otherwise  indicated,  the owners have sole voting and investment  power
with respect to their respective shares.

                                       16
<PAGE>
<TABLE>
<CAPTION>


                                                    Number of Shares of Common   Percentage of Outstanding
Name and Address                                       Stock Beneficially               Common Stock
of Beneficial Owner(1)                                     Owned(2)                  Beneficially Owned
--------------------------------------------        ---------------------------  --------------------------

<S>                                                      <C>                                <C>
Commodore Environmental Services, Inc.......             12,380,000(3)                      87.7%

Bentley J. Blum.............................              5,126,987(4)                      36.8%

Paul E. Hannesson...........................              1,242,987(5)                       8.8%

James M. DeAngelis..........................                278,370(6)                       2.3%

Andrew P. Oddi................................              239,681(7)                       2.0%

All executive officers and directors
as a group (4 persons)......................              6,888,025                         55.8%
________________________
</TABLE>

* Percentage ownership is less than 1%.

(1)      The address of each of Commodore Environmental Services,  Inc., Bentley
         J. Blum,  Paul E.  Hannesson,  James M. Deangelis and Andrew P. Oddi is
         150 East 58th Street,  Suite 3238, New York, New York 10155. 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 vote) and/or sole or shared
         investment  power  (including  the  power  to  dispose  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)      Consists of: (a) 10,000,000  shares of the Company's  Common Stock held
         by Commodore  Environmental  Services LLC, a wholly owned subsidiary of
         Commodore Environmental Services, Inc.; and (b) 2,380,000 shares of the
         Company's  Common Stock underlying 3,570 shares of the Company's Series
         B preferred stock held by Commodore Environmental Services, Inc.

(4)      Consists of: (a) 50,000 shares of the Company's Common Stock underlying
         currently  exercisable options granted to Mr. Blum by the Company under
         the Plan;  and (b) Mr.  Blum's  indirect  beneficial  ownership  of the
         Company's  common stock based upon Mr. Blum's  beneficial  ownership of
         (i) 28,479,737 shares and his spouse's ownership of 2,000,000 shares of
         common  stock of  Environmental,  and (ii)  4,500,000  shares of common
         stock of Environmental  underlying currently exercisable stock options,
         representing  together 41.0% of the outstanding shares of Environmental
         common stock.  Does not include 450,400 shares of Environmental  common
         stock owned by Simone Blum,  the mother of Mr. Blum, and 385,000 shares
         of  Environmental  common stock owned by Samuel Blum, the father of Mr.
         Blum.  Mr.  Blum  disclaims  any  beneficial  interest in the shares of
         Environmental common stock owned by his spouse, mother and father.

(5)      Consists of: (a) 280,000  shares of Common Stock  underlying  currently
         exercisable stock options granted to Mr. Hannesson by the Company under
         the Plan  and (b) Mr.  Hannesson's  indirect  beneficial  ownership  of
         Common Stock based upon his beneficial ownership of an aggregate of (i)
         2,650,000  shares  of  Environmental  common  stock  owned  by  Suzanne
         Hannesson,  the  spouse  of Mr.  Hannesson,  (ii)  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,  (iii) 500,000 shares of Environmental common stock
         issued to the  Hannesson  Family Trust in exchange for the surrender of
         options to purchase 950,000 shares of  Environmental  common stock (iv)
         currently   exercisable   options  to   purchase   525,705   shares  of
         Environmental  common stock,  representing in the aggregate 7.8% of the
         outstanding  shares of  Environmental  common  stock.  Does not include
         1,000,000  shares of  Environmental  common  stock owned by each of Jon
         Paul and Krista  Hannesson,  the adult children of Mr.  Hannesson.  Mr.
         Hannesson   disclaims  any   beneficial   interest  in  the  shares  of
         Environmental  common  stock  owned by or for the benefit of his spouse
         and children.

(6)      Consists  of: (a) 1,000  shares of Common  Stock;  (b) 1,000  shares of
         Common Stock underlying  currently  exercisable  warrants;  (c) 187,500
         shares of Common Stock underlying  currently  exercisable stock options
         granted to Mr.  DeAngelis  by the Company  under the Plan;  and (d) Mr.
         DeAngelis' indirect beneficial ownership of Common Stock based upon his
         beneficial ownership of 580,000 shares of Environmental common stock.

(7)      Consists  of: (a) 93,750  shares of Common Stock  underlying  currently
         exercisable  stock options granted to Mr. Oddi by the Company under the
         Plan; and (d) Mr. Oddi's indirect beneficial  ownership of Common Stock
         based upon his beneficial  ownership of 250,000 shares of Environmental
         common  stock and  currently  exercisable  options to purchase  979,061
         shares of Environmental common stock.


ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
--------      -----------------------------------------------

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

                                       17
<PAGE>

         The Company was organized in November 1995 as a wholly-owned subsidiary
of  Environmental.  In February  1996,  pursuant to an  assignment of technology
agreement between the Company and Srinivas Kilambi,  Ph.D., the Company's former
Senior  Vice  President--Technology,  the  Company  acquired  rights to the SLiM
technology from Dr. Kilambi.  In consideration for such technology,  the Company
caused  Environmental to transfer to Dr. Kilambi 200,000 shares of Environmental
common stock and agreed to pay Dr.  Kilambi a royalty  through  December 3, 2002
equal to 2% of the Company's  revenues  actually  received and attributed to the
commercial  application  of the  acquired  technology,  except for  applications
related to the radionuclides,  technetium and rhenium,  for which Dr. Kilambi is
entitled  to  receive  a  royalty  of 0.66% of net sales  (less  allowances  for
returns,  discounts,  commissions,  freight,  and  excise  or other  taxes).  In
exchange for Environmental's  issuance of such shares to Dr. Kilambi, as well as
Environmental's  funding  and  support of the  Company,  the  Company  issued to
Environmental  10,000,000 shares of Common Stock. See  "Management's  Discussion
and Analysis of Financial  Condition  and Results of  Operations--Liquidity  and
Capital Resources."

         From the Company's inception to December 1996,  Environmental  financed
the research and  development  activities of the Company  through  direct equity
investments  and loans to the Company.  In December 1996, as part of a corporate
restructuring  to consolidate  all of its  environmental  technology  businesses
within  Applied,  Environmental  transferred  to Applied all of the  outstanding
shares of  capital  stock of the  Company  and CFC  Technologies.  In  addition,
Environmental assigned to Applied outstanding Company notes aggregating $976,200
at December 2, 1996,  representing  advances previously made by Environmental to
the  Company.  Such  advances  have been  capitalized  by Applied as its capital
contribution to the Company.  In consideration for such transfers,  Applied paid
Environmental  $3,000,000 in cash and issued to Environmental a warrant expiring
December  2, 2003 to purchase  7,500,000  shares of Applied  common  stock at an
exercise price of $15.00 per share.  Such warrant was  subsequently  amended to,
among other things,  reduce the exercise  price thereof from $15.00 per share to
$10.00 per share. Such warrant is valued at $2.4 million and contains provisions
granting certain  registration  rights with respect to the warrant shares.  As a
result of the IPO,  Applied owned 87% of the outstanding  shares of Common Stock
of the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

         Effective September 28, 1998, Commodore  Environmental  Services LLC, a
Delaware  limited  liability  company  wholly owned by  Environmental,  acquired
10,000,000  shares of common  stock,  par value  $.001 per share  (the  "Company
Stock"),  of the  Company,  representing  approximately  87% of the  issued  and
outstanding shares of capital stock of the Company,  from Applied,  as part of a
debt   repayment   plan  between   Environmental   and  Applied.   In  addition,
Environmental  received 3,570 shares of the Company's  Series B Preferred  Stock
that converts into  2,380,000  shares of the Company's  common stock in exchange
for indebtedness to the Company of $357,000.  The acquisition was consummated on
December  25,  1998.  Environmental  currently  owns  approximately  16%  of the
outstanding shares of Applied common stock.  Bentley J. Blum, a director of COES
and the  beneficial  owner of  approximately  38% of the  outstanding  shares of
Environmental common stock, is also a director of Applied and the Company.

         By virtue of the  foregoing  transaction,  the  Company  had become the
direct,  87%-owned subsidiary of Environmental.  Paul E. Hannesson, the Chairman
of the Board,  President and Chief Executive Officer of Applied and the Chairman
of the Board and Chief Executive Officer of the Company, and James M. DeAngelis,
the  Vice   President--Finance   and   Treasurer   of   Applied   and  the  Vice
President--Sales & Marketing of the Company, maintained their current management
positions in the Company.  The acquisition of the Company by  Environmental  was
accounted for under the purchase method of accounting.

OFFICES

         The Company maintains  approximately  2,000 square feet of office space
in New York, New York, which also serves as offices of  Environmental,  Applied,
certain of their affiliates, and Messrs. Bentley J. Blum and Paul E. Hannesson.

SERVICES AGREEMENT

         In  September  1997,  the  Company,  Applied,  Environmental,  Advanced
Sciences, and certain other affiliates of the Company (the "Affiliated Parties")
entered into a services agreement,  dated as of September 1, 1997 (the "Services
Agreement"),  whereby the Company and the Affiliated Parties agreed to cooperate
in sharing, where appropriate,  costs related to accounting services,  financial
management,   human  resources  and  personnel  management  and  administration,
information systems,  executive  management,  sales and marketing,  research and
development,  engineering,  technical assistance,  patenting, and other areas of
service as are appropriately  and necessarily  required in the operations of the
Company and the Affiliated Parties (collectively,  the "Services").  Pursuant to
the  Services  Agreement,  services  provided by  professional  employees of the
Company  and the  Affiliated  Parties to one another are charged on the basis of
time  actually  worked as a percentage  of salary  (including  cost of benefits)
attributable to that  professional.  In addition,  charges for rent,  utilities,

                                       18
<PAGE>

office  services  and other  routine  charges  regularly  incurred in the normal
course of business are apportioned to the professionals working in the office on
the  basis of  salary,  and then  charged  to any party in  respect  of whom the
professional  devoted such time based upon time  actually  worked.  Furthermore,
charges  from  third  parties,  including,   without  limitation,   consultants,
attorneys and accountants,  are levied against the party actually  receiving the
benefit of such services.  Pursuant to the Services  Agreement,  Applied acts as
the  coordinator of billings and payments for Services on behalf of itself,  the
Company and the other Affiliated Parties.

FUTURE TRANSACTIONS

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

                                       19
<PAGE>

                                     PART IV
                                     -------

ITEM 13.      EXHIBITS, FINANCIAL STATEMENT
--------      SCHEDULES AND REPORTS ON FORM 8-K.
              ----------------------------------

The following documents are filed as part of this Annual Report:
<TABLE>
<CAPTION>

Financial Statements.                                                                                      Page No.
---------------------                                                                                      --------

         <S>                                                                                                <C>
         Report of Tanner + Co.......................................................................       F-1

         Balance Sheets as of December 31, 2001 and 2000.............................................       F-2

         Statements of Operations for the years ended December 31, 2001, 2000 and 1999,
              and cumulative amounts since inception.................................................       F-3

         Statements of Stockholders' (Deficit)
              for the period from November 15, 1995 (date of inception) to December 31, 2001.........       F-4

         Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999
              and cumulative amounts since inception.................................................       F-7

         Notes to Financial Statements...............................................................       F-9
</TABLE>

         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.

Exhibits.
---------

Exhibit No.                        Description
-----------                        -----------

1.1           Form of  Underwriting  Agreement  between the Company and National
              Securities   Corporation,   as   Representative   of  the  several
              Underwriters listed therein (the "Representative").(5)

3.1           Restated Certificate of Incorporation of the Company.(1)

3.2           By-Laws of the Company.(1)

4.1           Specimen Common Stock Certificate.(2)

4.2           Form of Warrant  Agreement among the Company,  the  Representative
              and the Bank of New York.(5)

4.3           Specimen Warrant Certificate.(3)

4.4           Form of Representative's Warrant Agreement between the Company and
              the  Representative,  including form of  Representative's  Warrant
              therein.(5)

4.5           Specimen Convertible Preferred Stock Certificate.(3)

4.6           Form of Certificate of Designation,  Preferences and Rights of 10%
              Senior Convertible Redeemable Preferred Stock of the Company.(6)

4.7           Certificate  of  Designation,  Preferences  and Rights of Series B
              Convertible Redeemable Preferred Stock of the Company. (10)

10.1          Employment  Agreement,  dated as of August 1,  1996,  between  the
              Company and Alan R. Burkart.(1)

                                       20
<PAGE>

10.2          Employment  Agreement,  dated as of September 1, 1996, between the
              Company and Carl O. Magnell.(1)

10.3          Employment  Agreement,  dated as of September 1, 1996, between the
              Company and James M. DeAngelis.(1)

10.4          Employment  Agreement,  dated as of September 1, 1996, between the
              Company and Srinivas Kilambi, Ph.D.(1)

10.5          Employment  Agreement,  dated as of September 1, 1996, between the
              Company and Michael D. Kiehnau.(1)

10.6          1996 Stock Option Plan of the Company.(1)

10.7          Executive Bonus Plan of the Company.(1)

10.8          Memorandum of  Understanding,  dated August 30, 1996,  between the
              Company and  Teledyne  Brown  Engineering,  a Division of Teledyne
              Industries, Inc., as amended.(1) and (5)

10.9          Memorandum of  Understanding,  dated August 29, 1996,  between the
              Company and Sverdrup Environmental, Inc., as amended.(1) and (5)

10.10         Services Agreement, dated August 31, 1996, between the Company and
              Commodore CFC Technologies, Inc.(1)

10.11         Assignment of Technology Agreement,  dated as of December 4, 1995,
              by  and   between  the  Company   (formerly   Commodore   Membrane
              Technologies, Inc.) and Srinivas Kilambi, Ph.D.(1)

10.12         Employment  Agreement,  dated  as of  October  31,  1996,  between
              Environmental and Edwin L. Harper, Ph.D.(3)

10.13         Undivided  Rights  (Sole  Commercial)  License  Agreement,   dated
              January  5,  1997,   between   Lockheed   Martin  Energy  Research
              Corporation and the Company.(3)

10.14         Stock  Purchase  Agreement,  dated as of December 2, 1996,  by and
              between Environmental and Applied.(3)

10.15         Form  of  Revolving  Credit  Agreement  between  the  Company  and
              Environmental.(5)

10.16         Employment  Agreement,  dated as of January 27, 1997,  between the
              Company and Kenneth J. Houle.(4)

10.17         Employment  Agreement,  dated as of  November  18,  1996,  between
              Environmental and Paul E. Hannesson.(7)

10.18         Employment Agreement, dated May 7, 1997, between Environmental and
              Michael D. Fullwood.(7)

10.19         Equipment  Lease,  dated as of  November  25,  1997,  between  the
              Company and Maryland Environmental Service.(8)

10.20         License  Agreement,  dated as of November  25,  1997,  between the
              Company and Maryland Environmental Service.(8)

10.21         Equipment Lease, dated as of February 5, 1998, between the Company
              and Maryland Environmental Service.(8)

10.22         License  Agreement,  dated as of  February  5,  1998  between  the
              Company and Maryland Environmental Service.(8)

                                       21
<PAGE>

10.23         Debt repayment  agreement,  dated as of September 28, 1998 between
              Environmental and Applied.(9)

22.1          Subsidiaries of the Company.(1)

__________________________

* Filed herewith.

(1)           Incorporated  herein by  reference  and filed as an Exhibit to the
              Registrant's  Registration  Statement  on Form S-1 filed  with the
              Securities and Exchange Commission on September 12, 1996 (File No.
              333-11813) (the "Registration Statement").

(2)           Incorporated  herein  by  reference  and  filed as an  Exhibit  to
              Amendment  No.  1 to the  Registration  Statement  filed  with the
              Securities and Exchange Commission on October 18, 1996.

(3)           Incorporated  herein  by  reference  and  filed as an  Exhibit  to
              Amendment  No.  3 to the  Registration  Statement  filed  with the
              Securities and Exchange Commission on January 23, 1997.

(4)           Incorporated  herein  by  reference  and  filed as an  Exhibit  to
              Amendment  No.  4 to the  Registration  Statement  filed  with the
              Securities and Exchange Commission on January 28, 1997.

(5)           Incorporated  herein  by  reference  and  filed as an  Exhibit  to
              Amendment  No.  5 to the  Registration  Statement  filed  with the
              Securities and Exchange Commission on March 13, 1997.

(6)           Incorporated  herein  by  reference  and  filed as an  Exhibit  to
              Amendment  No.  6 to the  Registration  Statement  filed  with the
              Securities and Exchange Commission on March 25, 1997.

(7)           Incorporated  herein by  reference  and filed as an Exhibit to the
              Company's  Annual  Report on Form 10-K for the  fiscal  year ended
              June 30, 1997.

(8)           Incorporated  herein by  reference  and filed as an Exhibit to the
              Company's  Transition Report on Form 10-K for the six months ended
              December 31, 1997.

(9)           Incorporated  herein by  reference  and filed as an Exhibit to the
              Company's  Form 8-K dated  December  25,  1998 and filed  with the
              Securities and Exchange Commission on January 5, 1999.

(10)          Incorporated  herein  by reference  and filed as an Exhibit to the
              Company's Annual  Report  on Form 10-K for the year ended December
              31, 1998.


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

         None.

                                       22
<PAGE>

                                   SIGNATURES

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

Date:  March  22, 2002               COMMODORE SEPARATION TECHNOLOGIES, INC.


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

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


/s/ James M. DeAngelis       Senior Vice President, Sales and     March 22, 2002
----------------------       Marketing (principal financial and
James M. DeAngelis           accounting officer)

/s/  Paul E. Hannesson       Chairman of the Board and Chief      March 22, 2002
----------------------       Executive Officer (principal
Paul E. Hannesson            executive officer)

/s/  Bentley J. Blum         Director                             March 22, 2002
----------------------
Bentley J. Blum


                                       23
<PAGE>

COMMODORE SEPARATION TECHNOLOGIES, INC.
Financial Statements
December 31, 2001 and 2000

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                           Index

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


                                                                          Page
                                                                          ----

Independent Auditors' Report                                              F-1

Balance Sheet as of December 31, 2001 and 2000                            F-2

Statement of Operations for the years ended
  December 31, 2001, 2000 and 1999,
  and cumulative amounts since inception                                  F-3

Statement of Stockholders' Deficit
  Period November 15, 1995 (date of inception)
  through December 31, 2001                                               F-4

Statement of Cash Flows for the years ended
  December 31, 2001, 2000 and 1999,
  and cumulative amounts since inception                                  F-7

Notes to Financial Statements                                             F-9

<PAGE>

                                                    INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders
of Commodore Separation Technologies, Inc.

We have audited the balance sheet of Commodore Separation Technologies,  Inc. (a
development  stage  company)  as of  December  31, 2001 and 2000 and the related
statements  of  operations,  stockholders'  deficit and cash flows for the years
ended  December 31, 2001,  2000, and 1999, and the period from November 15, 1995
(date of inception) to December 31, 2001.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,   the  financial   position  of  Commodore   Separation
Technologies,  Inc. (a  development  stage  company) as of December 31, 2001 and
2000,  and the results of its  operations and its cash flows for the years ended
December 31, 2001,  2000,  and 1999, and the period from November 15, 1995 (date
of  inception)  to December 31, 2001 in conformity  with  accounting  principles
generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern.  As discussed in note 2, the Company's
significant operating losses, deficits in working capital, and net stockholders'
deficit  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  Management's  plans in regard to these  matters are also  described in
note 2. The accompanying financial statements do not include any adjustment that
might be the result from the outcome of this uncertainly.

                                   TANNER+CO.

Salt Lake City, Utah
January 24, 2002

                                                                             F-1


<PAGE>
<TABLE>
<CAPTION>



                                                                     COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                               Balance Sheet

                                                            (In thousands, except shares and per share data)
------------------------------------------------------------------------------------------------------------

                                                                                   December 31,
                                                                       -------------------------------------
                                                                              2001              2000
                                                                       -------------------------------------
          Assets
          ------
<S>                                                                    <C>                   <C>
Current assets:
     Cash and cash equivalents                                         $               11    $            1
     Restricted cash                                                                    -               233
                                                                       -------------------------------------

                  Total current assets                                                 11               234
                                                                       -------------------------------------

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

         Liabilities and Stockholders' Deficit
         -------------------------------------

Current liabilities:
     Accounts payable                                                  $              296    $          269
     Accrued expenses                                                                 134               134
     Advance deposits                                                                  53               263
     Due to related parties                                                         1,215             1,164
     Accrued dividends                                                              2,069             1,515
                                                                       -------------------------------------

                  Total current liabilities                                         3,767             3,345

Commitments and contingencies                                                           -                 -

Stockholders' deficit:
     Preferred stock, Series A, $.001 par value, 10%
       cumulative, 5,000,000 shares authorized, 518,600
       and 569,500 shares issued and outstanding
       at December 31, 2001 and 2000, respectively                                      1                 1
     Preferred stock, Series B, $.001 par value, 6%
       cumulative, 4,000 shares authorized, 3,570 shares
       issued and outstanding at December 31, 2001
       and 2000                                                                         -                 -
     Common stock, $.001 par value, 50,000,000 shares
       authorized, 11,732,640 and 11,596,908 shares issued
       and outstanding at December 31, 2001 and 2000,
       respectively                                                                    12                11
     Additional paid-in capital                                                     9,650            10,205
     Deficit accumulated during development stage                                 (13,419)          (13,328)
                                                                       -------------------------------------

                  Total stockholders' deficit                                      (3,756)           (3,111)
                                                                       -------------------------------------

                  Total liabilities and stockholders' deficit          $               11    $          234
                                                                       -------------------------------------

------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                          F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                                                     COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                    Statement of Operations

                                                                       (In thousands, except per share data)
------------------------------------------------------------------------------------------------------------

                                                                                              Cumulative
                                                                                             Amounts From
                                                                                             November 15,
                                                                                             1995 (Date of
                                                         Years Ended December 31,            Inception) to
                                               --------------------------------------------- December 31,
                                                     2001            2000          1999            2001
                                               -------------------------------------------------------------
<S>                                            <C>               <C>            <C>           <C>
Contract revenues                              $             -   $         66   $       337   $         403

Costs and expenses:
     Cost of sales                                           -            107           541             648
     Research and development                                -            114           338           3,603
     General and administrative                             95            313           743           4,482
     Impairment of inventory                                 -            519             -             519
     Impairment of property and equipment                    -            513             -             513
     Impairment of intangible assets                         -            175             -             175
     Depreciation and amortization                           -            235           507           1,402
     Corporate overhead expenses                             -              -             -           2,145
     Sales and marketing                                     -             18            12             728
     Licensing fee                                           -              -             -              50
                                               -------------------------------------------------------------

         Total costs and expenses                           95          1,994         2,141          14,265
                                               -------------------------------------------------------------

         Loss from operations                              (95)        (1,928)       (1,804)        (13,862)

Other income                                                 -              -             -              27
Interest income                                              4             13            18             430
Interest expense                                             -              -             -             (14)
                                               -------------------------------------------------------------

         Net loss before  income taxes                     (91)        (1,915)       (1,786)        (13,419)

Income taxes                                                 -              -             -               -
                                               -------------------------------------------------------------

Net loss                                       $           (91)  $     (1,915)  $    (1,786)  $     (13,419)
                                               -------------------------------------------------------------

Net loss per share -
  basic and diluted                            $          (.06)  $       (.22)  $      (.21)  $       (1.46)
                                               -------------------------------------------------------------

Weighted average number of
  shares outstanding ( in thousands)                    11,677         11,575        11,516          11,198
                                               -------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                          F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                                                                             COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                                  Statement of Stockholders' Deficit

                                                                                               (In thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------------------

                           Preferred Stock     Preferred Stock                                                               Total
                              Series A            Series B           Common Stock                   Additional               Stock-
                           ----------------------------------------------------------  Subscription  Paid-in   Accumulated  holders'
                           Shares    Amount    Shares    Amount    Shares      Amount   Receivable    Capital     Deficit   Deficit
                           ---------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>       <C>       <C>      <C>          <C>         <C>       <C>          <C>        <C>
Common stock issued
for cash on November
15, 1995 (inception)
at $1 per share               -    $      -        -   $     -          100  $      -    $      -   $      -    $       -  $      -

Stock split of 150,000
shares for one share
on September 5, 1996          -           -        -         -   14,999,900        15         (15)         -            -         -


Reverse stock split
of 1.50 shares for
one share on November
26, 1996                      -           -        -         -  (5,000,000)        (5)          -          5            -         -

Net loss for the
period from November
15, 1995 through
June 30, 1996                 -           -        -         -            -         -           -          -          (61)      (61)
                        ------------------------------------------------------------------------------------------------------------

Balance, June 30, 1996        -           -        -         -   10,000,000        10         (15)         5          (61)      (61)

Collection of
subscription
receivable                    -           -        -         -            -         -          15          -            -        15

Conversion of notes
payable to capital            -           -        -         -            -         -           -        976            -       976

Proceeds from sale of
common stock and
warrants                      -           -        -         -    1,500,000         1           -      6,108            -     6,109

Proceeds from sale of
preferred stock,
Series A, and warrants  600,000           1        -         -            -         -           -      4,977            -     4,978

Dividend on preferred
stock, Series A               -           -        -         -            -         -           -       (138)            -     (138)

Net loss for the year
ended June 30, 1997           -           -        -         -            -         -           -          -      (3,171)    (3,171)
                        ------------------------------------------------------------------------------------------------------------

Balance, June 30, 1997  600,000           1        -         -   11,500,000        11           -     11,928      (3,232)     8,708

------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                                                  F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                                                                             COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                                  Statement of Stockholders' Deficit
                                                                                                                           Continued

                                                                                               (In thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------------------

                           Preferred Stock     Preferred Stock                                                               Total
                              Series A            Series B           Common Stock                   Additional               Stock-
                           ----------------------------------------------------------  Subscription  Paid-in   Accumulated  holders'
                           Shares    Amount    Shares    Amount    Shares      Amount   Receivable    Capital     Deficit   Deficit
                           ---------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>       <C>       <C>      <C>          <C>         <C>       <C>          <C>        <C>
Issuance of common
stock                         -           -        -         -        3,650         -           -         10            -        10

Dividend on preferred
stock, Series A               -           -        -         -            -         -           -       (300)           -      (300)

Net loss for the six
months ended December
31, 1997                      -           -        -         -            -         -           -          -       (2,766)   (2,766)
                        ------------------------------------------------------------------------------------------------------------

Balance, December 31,
1997                    600,000           1        -         -   11,503,650        11           -     11,638       (5,998)    5,652

Issuance of common
stock                         -           -        -         -       11,925         -           -         25            -        25

Issuance of preferred
stock, Series B               -           -    3,570         -            -         -           -        143            -       143

Gain on troubled debt
restructuring                 -           -        -         -            -         -           -        214            -       214


Dividends on preferred
stock, Series A               -           -        -         -            -         -           -       (600)           -      (600)

Net loss for the year
ended December 31, 1998       -           -        -         -            -         -           -          -       (3,629)   (3,629)
                        ------------------------------------------------------------------------------------------------------------

Balance, December 31,
1998                    600,000           1    3,570         -   11,515,575        11           -     11,420       (9,627)    1,805

Dividends on preferred
stock, Series A               -           -        -         -            -         -           -       (600)           -      (600)

Dividends on preferred
stock, Series B               -           -        -         -            -         -           -        (16)           -       (16)

Net loss for the year
ended December 31,
1999                          -           -        -         -            -         -           -          -       (1,746)   (1,786)
                        ------------------------------------------------------------------------------------------------------------

Balance, December 31,
1999                    600,000           1    3,570         -   11,515,575        11           -     10,804      (11,413)     (597)

------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                                                  F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                                                                             COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                                  Statement of Stockholders' Deficit
                                                                                                                           Continued

                                                                                               (In thousands, except per share data)
------------------------------------------------------------------------------------------------------------------------------------

                           Preferred Stock     Preferred Stock                                                               Total
                              Series A            Series B           Common Stock                   Additional               Stock-
                           ----------------------------------------------------------  Subscription  Paid-in   Accumulated  holders'
                           Shares    Amount    Shares    Amount    Shares      Amount   Receivable    Capital     Deficit   Deficit
                           ---------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>       <C>       <C>      <C>          <C>         <C>       <C>          <C>        <C>
Dividends on preferred
stock, Series A               -           -        -         -            -         -           -       (578)           -      (578)

Dividends on preferred
stock, Series B               -           -        -         -            -         -           -        (21)           -       (21)

Conversion of Series A
Preferred stock to
common                  (30,500)          -        -         -       81,333         -           -          -            -         -

Net loss for the year
ended December 31,
2000                          -           -        -         -            -         -           -          -       (1,915)   (1,915)
                        ------------------------------------------------------------------------------------------------------------

Balance, December 31,
2000                    569,500           1    3,570         -   11,596,908        11           -     10,205      (13,328)   (3,111)

Dividends on preferred
stock, Series A               -           -        -         -            -         -           -       (533)           -      (533)

Dividends on preferred
stock, Series B               -           -        -         -            -         -           -        (21)           -       (21)

Conversion of Series A
Preferred stock to
common                  (50,900)          -        -         -      135,732         1           -         (1)           -         -

Net loss for the year
ended December 31,
2001                          -           -        -         -            -         -           -          -          (91)      (91)
                        ------------------------------------------------------------------------------------------------------------

Balance, December 31,
2001                    518,600    $      1    3,570   $     -   11,732,640  $     12    $      -  $   9,650    $ (13,419) $ (3,756)
                        ------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                                                  F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                                    COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                    Statement of Cash Flows

                                                                      (In thousands, except per share data)
-----------------------------------------------------------------------------------------------------------

                                                                                            Cumulative
                                                                                           Amounts From
                                                                                           November 15,
                                                        Year Ended December 31,           1995 (Inception)
                                              -----------------------------------------   to December 31,
                                                   2001          2000          1999            2001
                                               ------------------------------------------------------------
<S>                                            <C>            <C>            <C>           <C>
 Cash flows from operating activities:
    Net loss                                   $         (91) $      (1,915) $     (1,786) $        (13,419)
    Adjustments to reconcile net loss to cash
      used in operating activities:
      Inventory impairment                                 -            519             -               519
      Impairment of intangibles                            -            175             -               175
      Property and equipment impairment                    -            513             -               513
      Depreciation and amortization                        -            235           507             1,402
      Issuance of Common Stock for services                -              -             -                35
      Gain on troubled debt restructuring                  -              -             -               214
      (Increase) decrease in:
        Accounts receivable                                -             10           (10)                -
        Inventory, net                                     -              -           166              (519)
        Accounts payable                                  27            (83)          329               296
        Accrued expenses                                   -             56            22               134
      Increase (decrease) in:
        Deposits                                        (210)             -          (187)               53
        Other assets                                       -              -             1                 -
                                               ------------------------------------------------------------

          Net cash used in
          operating activities                          (274)          (490)         (958)          (10,597)
                                               ------------------------------------------------------------

 Cash flows from investing activities:
    Acquisition of intangible assets                       -             (7)          (10)             (213)
    Purchase of property and equipment                     -              -             -              (403)
    Acquisition of leasehold improvements                  -              -             -              (210)
    Construction of technical equipment                    -              -           (80)           (1,491)
    (Increase) liquidation of certificate of
       deposit                                           233            (13)          (10)                -
                                               ------------------------------------------------------------

          Net cash used in
          investing activities                           233            (20)         (100)           (2,317)
                                               ------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.                                                         F-7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>


                                                                    COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                                                    Statement of Cash Flows
                                                                                                  Continued

                                                                      (In thousands, except per share data)
-----------------------------------------------------------------------------------------------------------

                                                                                            Cumulative
                                                                                           Amounts From
                                                                                           November 15,
                                                        Year Ended December 31,           1995 (Inception)
                                              -----------------------------------------   to December 31,
                                                   2001          2000          1999            2001
                                               ------------------------------------------------------------
<S>                                            <C>            <C>            <C>           <C>
  Cash flows from financing activities:
     Proceeds from sale of common stock and
        warrants                                           -              -              -            6,109
     Proceeds from sale of preferred stock and
        warrants                                           -              -              -            4,978
     Preferred stock dividend                              -              -              -             (738)
     Borrowings from stockholder                          51            495            869            2,561
     Collection of subscription receivable                 -              -              -               15
     Repayment of capital lease obligation                 -              -            (4)                -
                                               ------------------------------------------------------------

           Net cash provided by
           financing activities                           51            495            865           12,925
                                               ------------------------------------------------------------

  (Decrease) increase in cash and cash
    equivalents                                           10            (15)         (193)               11

  Cash and cash equivalents, beginning of
    period                                                 1             16            209                -
                                               ------------------------------------------------------------

  Cash and cash equivalents, end of period     $          11  $           1  $         16  $             11
                                               ------------------------------------------------------------

  Supplemental disclosure of cash flow
  information

     Cash paid during the period for:

           Interest paid                       $           -  $           -  $          -  $             14
                                               ------------------------------------------------------------

           Income taxes paid                   $           -  $           -  $          -  $              -
                                               ------------------------------------------------------------

</TABLE>

Non cash investing and financing activities:

The Company  accrued  dividends on preferred  stock of $554, $599 and $616 which
were not declared,  or paid,  for the years ending  December 31, 2001,  2000 and
1999, respectively.

During the year ended  December  31, 2001,  50,900  shares of Series A preferred
stock were converted to 135,732 shares of common stock.

During the year ended  December 31, 2000,  the Company  reduced a payable to its
parent  company,  Commodore  Environmental  Services,  by $227,  in exchange for
assets.

--------------------------------------------------------------------------------
See accompanying notes to financial statements.                              F-8

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements

                                (In thousands, except shares and per share data)
--------------------------------------------------------------------------------

1.   Organization       Organization
     and                Commodore Separation  Technologies,  Inc. (a development
     Significant        stage  company)  (the  "Company")  was  incorporated  on
     Accounting         November  15,  1995,  under  the  laws of the  State  of
     Policies           Delaware.  Effective  February  29,  1996,  the  Company
                        acquired  the  rights  to  its  proprietary   separation
                        technology and entered into a royalty agreement with the
                        inventor of the technology as described in Note 6.

                        The Company is a process  technology  company  which has
                        developed and intends to  commercialize  its  separation
                        technology and recovery system,  known as SLiM(TM).  The
                        Company  believes  SLiM(TM)  is capable  of  effectively
                        separating and extracting various solubilized materials,
                        including  metals,   organic  chemicals,   biochemicals,
                        radionuclides and other targeted substances, from liquid
                        and possibly  gaseous process  streams.  The Company has
                        commenced  planned  principal  operations  but  has  not
                        received  significant  revenue  therefrom.  As such, the
                        Company is  considered a  development  stage  company as
                        defined in Statement of Financial  Accounting  Standards
                        ("SFAS") No. 7.

                        Cash and Cash Equivalents
                        Cash and cash  equivalents  include cash and investments
                        in money market funds with  remaining  maturities  of 90
                        days or less at the time of purchase.

                        Restricted Cash
                        Restricted cash consists of certificates of deposit that
                        act  as a  partial  compensating  balance  for  $600  of
                        letters  of  credit  which  represent  collateral  for a
                        performance  bond related to a contract with the Port of
                        Baltimore.

                        Inventory
                        Inventory  represents  finished  goods and  consists  of
                        machinery  and  equipment   built  and  held  for  sale.
                        Inventory  is recorded at the lower of  historical  cost
                        per unit or market.  During the year ended  December 31,
                        2000,  the  Company   determined  the  market  value  of
                        inventory  to  be  zero  and  as a  result  recorded  an
                        impairment allowance of $519.

--------------------------------------------------------------------------------
                                                                             F-9

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------

1.   Organization       Property and Equipment
     and                Property  and  equipment  are  stated  at  cost.   Major
     Significant        additions and  improvements  are  capitalized  and minor
     Accounting         replacements,  maintenance  and  repairs  which  do  not
     Policies           increase  the useful lives of the assets are expensed as
     Continued          incurred.  Depreciation  and  amortization  are recorded
                        using a straight-line method over estimated useful lives
                        of the  assets,  which vary from two to ten  years.  The
                        cost and  related  accumulated  depreciation  of  assets
                        sold,  retired or otherwise disposed of are removed from
                        the respective accounts,  and any resulting gain or loss
                        is included in the statement of  operations.  During the
                        year ended  December 31, 2000,  the Company  recorded an
                        impairment  on the  full  book  value  of the  remaining
                        assets  of  $513  due to  the  Company's  assessment  of
                        recoverability  of the assets  through  operations.  The
                        assets  have  been  moved  to  a  storage   facility  in
                        Albuquerque, New Mexico.

                        Intangible Assets
                        The  Company  has   incurred   costs   associated   with
                        application  for  certain   patents.   These  costs  are
                        capitalized and amortized over 17 years. During the year
                        ended  December  31,  2000,  the  Company   recorded  an
                        impairment  on the  full  remaining  book  value  of the
                        assets  of  $175  due to  the  Company's  assessment  of
                        recoverability of the assets through operations.

                        Advance Deposits
                        The  Company  collected  a  $263  deposit  related  to a
                        contract  with the Port of  Baltimore.  The contract was
                        subsequently   terminated.   During  2001,  the  Company
                        reimbursed  $210 to the  Port of  Baltimore,  leaving  a
                        balance of $53 as of December 31, 2001.

                        Contract Revenues
                        In November  1997,  the Company  entered into a contract
                        with  the  State  of  Maryland  for  the   treatment  of
                        chromium-contaminated  leachate  at  the  Hawkins  Point
                        Hazardous  Waste  Treatment  Facility  at  the  Port  of
                        Baltimore.  During 1999,  the Company  commenced work on
                        this  contract and  accordingly,  has  recorded  revenue
                        related to the contract.  Costs  incurred in preparation
                        for the  commencement  of the  contract  are recorded as
                        expenses as  incurred.  For the year ended  December 31,
                        1999,  substantially  all of the Company's  revenues are
                        from  this  contract.  As  of  December  31,  2000,  the
                        contract was terminated.


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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------

1.   Organization       Research and Development Expenditures
     and                Research  and  development  expenditures  are charged to
     Significant        operations as incurred.
     Accounting
     Policies           Income Taxes
     Continued          Income taxes are determined in accordance with Statement
                        of Financial  Accounting  Standards  ("SFAS") 109, which
                        requires  recognition of deferred income tax liabilities
                        and assets for the expected  future tax  consequences of
                        events  that  have  been   included  in  the   financial
                        statements or tax returns.  Under this method,  deferred
                        income tax liabilities  and assets are determined  based
                        on the difference  between  financial  statement and tax
                        bases of assets and liabilities  using enacted tax rates
                        in  effect  for the year in which  the  differences  are
                        expected  to  reverse.  SFAS 109 also  provides  for the
                        recognition  of deferred tax assets if it is more likely
                        than not that the  assets  will be  realized  in  future
                        years.

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

                        Impairment of Long-Lived Assets
                        The  Company  periodically   performs  analyses  on  the
                        recoverability of long-lived  assets.  Any excess of the
                        carrying  amount of an asset over the  estimated  future
                        undiscounted  cash flows associated with the asset would
                        be recorded as an  impairment  loss in the  statement of
                        operations.  During the year ended December 31, 2000 the
                        Company   recorded   impairment   losses  on  inventory,
                        property and  equipment and  intangible  assets of $519,
                        $513 and $175, respectively.

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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


1.   Organization       Stock Compensation
     and                The Company has adopted the  intrinsic  value  method of
     Significant        accounting   for  stock   options  and  warrants   under
     Accounting         Accounting  Principles  Board Opinion No. 25. Under this
     Policies           standard,  no compensation  expense is recorded when the
     Continued          exercise price of options  granted to employees is equal
                        to or greater  than the market  price of the  underlying
                        stock on the date of the grant.  The Company has elected
                        the  disclosure-only   provisions  of  SFAS  123,  which
                        requires  fair value  accounting  for options  issued to
                        employees.

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


2.   Going              The accompanying financial statements have been prepared
     Concern            under the assumption that the Company will continue as a
                        going  concern.   Such   assumption   contemplates   the
                        realization   of   assets   and  the   satisfaction   of
                        liabilities  in the normal course of business.  As shown
                        in the financial  statements,  the Company has a working
                        capital  deficit,  a deficit  in  equity,  has  incurred
                        substantial losses from operations and has not generated
                        cash from operating activities.  Presently,  the Company
                        does  not have  sufficient  cash  resources  to meet its
                        requirements in 2002 or the necessary working capital to
                        develop  profitable  operations  from using its patented
                        technology.  The financial statements do not include any
                        adjustments  that might be necessary  should the Company
                        be unable to continue as a going concern.


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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------

2.   Going              The  Company's   continuation  as  a  going  concern  is
     Concern            dependent   upon  its   ability  to  obtain   additional
     Continued          financing as may be required,  and  ultimately to attain
                        profitability.  Potential  sources of cash  include  new
                        contracts,  the issuance of external  debt,  the sale of
                        new shares of Company stock or alternative  methods such
                        as mergers or sale  transactions.  No assurances  can be
                        given,  however, that the Company will be able to obtain
                        any of these potential sources of cash.


3.   Earnings Per       Basic  earnings  per share are  computed by dividing net
     Share              income available to common  shareholders by the weighted
                        average number of shares  outstanding during the period.
                        Diluted  earnings  per  share  are  computed  using  the
                        weighted  average  number of shares  determined  for the
                        basic  computation  plus the  number of shares of common
                        stock that  would be issued  assuming  all  contingently
                        issuable shares having a dilutive effect on earnings per
                        share were outstanding for the period.

                                                                 Period From
                                                                 November 15,
                                                                    1995
                              Years Ended December 31,          (Inception) to
                      ---------------------------------------    December 31,
                          2001          2000         1999          2001
                      -------------------------------------------------------

 Net loss             $        (91)  $   (1,915) $    (1,786) $     (13,419)
 Dividends on
   Series A
   Preferred Stock
   (not declared)             (533)        (578)        (600)        (2,849)
 Dividends on
   Series B
   Preferred Stock
   (not declared)              (21)         (21)         (16)           (58)
                      -------------------------------------------------------

 Net loss applicable
   to common
   shareholders       $       (645)  $   (2,514) $    (2,402) $     (16,226)
                      -------------------------------------------------------

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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------

3.   Earnings Per
     Share
     Continued

 Weighted average
   common shares
   outstanding (basic)    11,677,000    11,575,000   11,516,000   11,198,000
 Convertible Preferred
   Stock                     (*)           (*)          (*)          (*)
 Warrants issued in
   initial public
 offering                    (*)           (*)          (*)          (*)
 Employee stock
   options                   (*)           (*)          (*)          (*)
                        -----------------------------------------------------

 Weighted average
   common shares
   outstanding
 (diluted)                11,677,000    11,575,000   11,516,000   11,198,000
                        -----------------------------------------------------

 Loss per share -
   basic and diluted    $      (.06) $       (.22)  $     (.21) $     (1.46)
                        -----------------------------------------------------

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

4.   Related Party      The Company owed  advances of $179 to Commodore  Applied
     Transactions       Technologies,  Inc.  (Applied)  as of December 31, 2001,
                        2000 and 1999. At December 31, 2001,  2000 and 1999, the
                        Company also owed Commodore Environmental Services, Inc.
                        (Environmental) $1,036, $985 and $717, respectively, for
                        uncollateralized  advances to the  Company.  Applied and
                        Environmental   have   direct  or   indirect   ownership
                        interests in the Company.

5.   Income Taxes       The  Company  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 2001, 2000
                        and  1999  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.


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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


5.   Income Taxes       The  provision  for  income  taxes  which  differs  from
     Continued          federal income tax rates is follows:

                                                                 Cumulative
                               Years Ended December 31,            Amounts
                        ---------------------------------------     Since
                             2001         2000         1999       Inception
                        -----------------------------------------------------

 Expected tax benefit
 at federal statutory
 rate                   $       (31) $      (651) $      (598) $     (4,559)
 State income tax
 benefits, net of
 federal income
 tax benefit                     (4)         (87)         (90)         (749)
 Change in valuation
 allowance                       35          738          688         5,308
                        -----------------------------------------------------

 Income taxes           $         -  $         -  $         -  $          -
                        -----------------------------------------------------

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

                                               Years Ended December 31,
                                           ----------------------------------
                                                 2001             2000
                                           ----------------------------------

 Net operating loss carryforward           $          5,312 $          5,277
 Less: valuation allowance                           (5,312)          (5,277)
                                           ----------------------------------

 Net deferred tax asset                    $              - $              -
                                           ----------------------------------

                        The  Company  conducts  a  periodic  examination  of its
                        valuation   allowance.   Factors   considered   in   the
                        evaluation  include recent and expected  future earnings
                        and the Company's  liquidity and equity  positions.  For
                        the years ended  December 31, 2001,  2000 and 1999,  the
                        Company has  established  a valuation  allowance for the
                        entire amount of net deferred tax assets.

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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------

5.   Income Taxes       At  December  31,   2001,   the  Company  had  tax  loss
     Continued          carryforwards  of approximately  $13,400.  The amount of
                        and  ultimate   realization  of  benefit  from  the  net
                        operating loss for income tax purposes is dependent,  in
                        part,  upon the tax laws in effect,  future  earnings of
                        the  Company,  and other future  events,  the effects of
                        which cannot be determined. The change in control of the
                        Company  that took place in  September  1998 could limit
                        the  Company's  ability  to  utilize  all prior tax loss
                        carryforwards.  These net operating  carryforwards begin
                        to expire in 2011.

6.   Royalty            The Company has an  agreement  with a former  officer of
     Agreements         the Company  pursuant to which the former  officer is to
                        receive a royalty of 2% of collected  revenues  from the
                        Company's  membrane   separation   technology   directly
                        attributable to his patentable property through December
                        3,  2002,   except  for  applications   related  to  the
                        radionuclides  technetium  and  rhenium,  for  which the
                        former  officer is entitled to receive a royalty of .66%
                        of net sales  directly  attributable  to his  patentable
                        property  (less   allowances  for  returns,   discounts,
                        commissions,  freight  and  excise or other  taxes).  No
                        royalties have been accrued as of December 31, 2001.

                        The Company also has a license  agreement  with Lockheed
                        Martin Energy Research  Corporation,  manager of the Oak
                        Ridge National  Laboratory,  a U.S. Department of Energy
                        national laboratory, for which the Company paid Lockheed
                        Martin a $50  licensing  fee  during the year ended June
                        30, 1997.  Under this  agreement,  Lockheed Martin is to
                        receive  a royalty  of 2% of net sales of the  Company's
                        products or processes  covered under the agreement (less
                        allowances for returns, discounts, commissions, freight,
                        and  excise  or other  taxes)  up to total  net sales of
                        $4,000 and 1% of net sales thereafter.  In addition, the
                        Company  has  agreed  to  guarantee   Lockheed   Martin,
                        commencing in the third year of the agreement, an annual
                        minimum  royalty of $15. As of December 31, 2001, $30 of
                        royalties have been paid.

--------------------------------------------------------------------------------
                                                                            F-16

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


7.   Capital            Preferred Stock, Series A
     Structure          The  Convertible  Preferred  Stock,  Series A, has a par
                        value of $.001 per  share  and a stated  value of $10.00
                        per share.  Cumulative dividends are payable at the rate
                        of  $1.00  per  share  per  annum,   payable  quarterly,
                        commencing  June 30, 1997,  when, and if declared by the
                        Board of Directors, before any dividends are declared or
                        paid on the Common  Stock or any capital  stock  ranking
                        junior to the  Convertible  Preferred  Stock,  Series A.
                        Failure to pay any  quarterly  dividend will result in a
                        reduction of the conversion price as described below.

                        The   Convertible   Preferred   Stock,   Series   A,  is
                        convertible  into  Common  Stock  at any  time  prior to
                        redemption at a conversion rate of 1.67 shares of Common
                        Stock for each share of Convertible  Preferred Stock (an
                        effective  conversion price of $6.00 per share of Common
                        Stock),    subject   to    adjustment    under   certain
                        circumstances,  including  the failure of the Company to
                        pay a  dividend  on  the  Convertible  Preferred  Stock,
                        Series A,  within 30 days of a  dividend  payment  date,
                        which will result each  instance in a reduction  of $.50
                        per share in the  conversion  price but not below  $3.75
                        per share.  Since June of 1998 the  Company has not paid
                        dividends,  and  therefore  has adjusted  the  effective
                        conversion   price   from  $6.00  to  $3.75  per  share.
                        Accumulated  and unpaid  dividends  at December 31, 2001
                        and 2000 amounted to $2,011 and $1,478,  an amount equal
                        to $3.60 and $2.60 per  share,  respectively.  Dividends
                        will  not  be  declared   until  there  are   sufficient
                        accumulated earnings.

                        The Convertible Preferred Stock, Series A is redeemable,
                        in whole but not in part,  by the  Company  upon 30 days
                        prior  written  notice  after  April 3,  2000 at $10 per
                        share, plus accumulated and unpaid  dividends,  provided
                        the closing  bid price of the Common  Stock for at least
                        20  consecutive  trading  days  ending  not more than 10
                        trading  days  prior  to  the  date  of  the  notice  of
                        redemption  equals or  exceeds  $10 per share or,  after
                        April 3, 2001,  at certain cash  redemption  prices plus
                        accumulated and unpaid dividends.

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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


7.   Capital            Preferred Stock, Series A - Continued
     Structure          The holders of Convertible  Preferred  Stock,  Series A,
     Continued          have  the  right,  voting  as a  class,  to  approve  or
                        disapprove  of the  issuance  of any  class or series of
                        stock  ranking  senior  to,  or on a  parity  with,  the
                        Convertible  Preferred Stock,  Series A, with respect to
                        declaration and payment of dividends or the distribution
                        of assets on liquidation,  dissolution or winding-up. In
                        addition,  if the company  fails to pay dividends on the
                        Convertible   Preferred   Stock,   Series  A,  for  four
                        consecutive quarterly dividend payment periods,  holders
                        of  Convertible   Preferred  Stock,   Series  A,  voting
                        separately  as a class  will be  entitled  to elect  one
                        director; such voting right will be terminated as of the
                        next  annual  meeting  of  stockholders  of the  Company
                        following payment of all accrued dividends.

                        Upon  liquidation,  dissolution  or  winding  up of  the
                        company,  holders of Convertible Preferred Stock, Series
                        A, are  entitled  to receive  liquidation  distributions
                        equivalent to $10 per share (plus accumulated and unpaid
                        dividends)  before  any  distribution  to holders of the
                        Common Stock or any capital stock ranking  junior to the
                        convertible Preferred Stock, Series A.

                        Preferred Stock, Series B
                        In December  1998,  the Company  issued  3,570 shares of
                        Preferred Stock, Series B. The Preferred Stock, Series B
                        ranks junior to Preferred Stock,  Series A and senior to
                        Common Stock.

                        The  Convertible  Preferred  Stock,  Series B, has a par
                        value of $.001 per share and a stated  value of $100 per
                        share.  Cumulative  dividends are payable at the rate of
                        $6 per share per annum,  payable  quarterly  in arrears,
                        commencing  June 30, 1999,  when, and if declared by the
                        Board of Directors, before any dividends are declared or
                        paid on the Common  Stock or any capital  stock  ranking
                        junior to the Convertible Preferred Stock, Series B. The
                        Company  has not paid  any  dividends  on these  shares.
                        Accumulated  and unpaid  dividends  at December 31, 2001
                        and 2000  amounted  to  approximately  $58 and  $37,  an
                        amount   equal  to  $16.25   and   $10.36   per   share,
                        respectively.


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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


7.   Capital            Preferred Stock, Series B - Continued
     Structure          The Convertible Preferred Stock, Series B is convertible
     Continued          into Common Stock at any time prior to  redemption  at a
                        conversion  rate of 666.67  shares  of Common  Stock for
                        each share of Convertible  Preferred Stock, Series B (an
                        effective  conversion  price of $.15 per share of Common
                        Stock),    subject   to    adjustment    under   certain
                        circumstances.

                        The   Convertible   Preferred   Stock,   Series   B,  is
                        redeemable, in whole but not in part, by the Company not
                        less than 30 nor more than 60 days prior to the Business
                        Day designated by written notice as the Redemption  Date
                        at  $105  per  share,   plus   accumulated   and  unpaid
                        dividends.

                        The holders of Convertible  Preferred  Stock,  Series B,
                        have  the  right,  voting  as a  class,  to  approve  or
                        disapprove  of the  issuance  of any  class or series of
                        stock  ranking  senior  to,  or on a  parity  with,  the
                        Convertible Preferred Stock.

                        Upon  liquidation,  dissolution  or  winding  up of  the
                        Company,  holders  of  Convertible  Preferred  Stock are
                        entitled to receive liquidation distributions equivalent
                        to  $100  per  share   (plus   accumulated   and  unpaid
                        dividends)  before  any  distribution  to holders of the
                        Common Stock or any capital stock ranking  junior to the
                        convertible Preferred Stock, Series B.

                        Warrants
                        Each Warrant entitles the holder thereof to purchase, at
                        any time from April 3, 1998 through  April 3, 2002,  one
                        share of  Common  Stock at a price of $5.50  per  share,
                        subject to adjustment.  Commencing  October 3, 1998, the
                        Warrants are subject to  redemption  by the Company,  in
                        whole but not in part,  at $.10 per  Warrant  on 30 days
                        prior written notice  provided that the average  closing
                        sale price of the Common Stock equals or exceeds $15 per
                        share,  subject to  adjustment,  for any 20 trading days
                        within a period of 30 consecutive trading days ending on
                        the fifth trading day prior to the date of the notice of
                        redemption.


--------------------------------------------------------------------------------
                                                                            F-19

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


7.   Capital            Representative's Warrants
     Structure          In  connection  with the Initial  Public  Offering,  the
     Continued          Company sold to the  Underwriter for $.0001 per warrant,
                        warrants  to  purchase  from the  Company  up to  60,000
                        shares of Convertible Preferred Stock, 150,000 shares of
                        Common    Stock    and/or    210,000    Warrants    (the
                        "Representative's   Warrants").   The   Representative's
                        Warrants are  exercisable at a price of $12 per share of
                        Convertible  Preferred  Stock,  $6 per  share of  Common
                        Stock and $.12 per  Warrant  from April 3, 1998  through
                        April 3, 2002, and are restricted  from sale,  transfer,
                        assignment or hypothecation  prior to that date,  except
                        to officers  of the  Underwriter.  The  Representative's
                        Warrants   provide  for  adjustment  in  the  number  of
                        securities  issuable  upon  the  exercise  thereof  as a
                        result of certain  subdivisions  and combinations of the
                        Common Stock. The Representative's Warrants grant to the
                        holders thereof  certain rights of registration  for the
                        securities issuable upon exercise thereof.

8.   Non-Qualified      The  Company's  1996 Stock Option Plan (the "1996 Plan")
     Stock Option       provides the Board of Directors  the  authority to issue
     Plan               incentive and non-qualified stock options to purchase up
                        to  1,350,000  shares of the  Company's  Common Stock to
                        officers, directors, key employees and/or consultants.

                        Under the 1998  Non-Qualified  Stock Option  Plan,  (the
                        Option  Plan),  a maximum of  2,000,000  options  may be
                        granted to purchase common stock at prices generally not
                        less than the fair market  value of common  stock at the
                        date of grant.  Under the Option Plan, grants of options
                        may  be  made  to  employees,  officers,  and  directors
                        without regard to any performance measures.  The options
                        may be immediately  exercisable or may vest over time as
                        determined by the Board of Directors.

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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


8.   Non-Qualified      Information  regarding  the  option  plan  is summarized
     Stock Option       below:
     Plan
     Continued                                                   Weighted
                                                                  Average
                                                   Number of      Exercise
                                                    Options        Price
                                                 ----------------------------

 Outstanding at year ended June 30, 1997         $      996,689 $       4.42
      Granted                                         1,042,252         4.31
      Exercised                                               -
      Forfeited                                               -
      Rescinded                                       (996,689)         4.42
                                                 ----------------------------
 Outstanding at six months ended December 31,         1,042,252         4.31
 1997
      Granted                                         1,461,950         0.19
      Exercised                                               -
      Forfeited                                               -
      Rescinded                                     (1,092,252)         4.14
                                                 ----------------------------
 Outstanding at year ended December 31, 1998          1,411,950         0.19
      Granted                                                 -
      Exercised                                               -
      Forfeited                                        (80,900)         0.10
      Rescinded                                               -
                                                 ----------------------------
 Outstanding at year ended December 31, 1999          1,331,050         0.19
      Granted                                                 -
      Exercised                                               -
      Forfeited                                       (507,300)         0.09
      Rescinded                                               -
                                                 ----------------------------
 Outstanding at year ended December 31, 2000            823,750         0.24
      Granted                                                 -
      Exercised                                               -
      Forfeited                                               -
      Rescinded                                               -
                                                 ----------------------------
 Outstanding at year ended December 31, 2001     $      823,750 $       0.24
                                                 ----------------------------


--------------------------------------------------------------------------------
                                                                            F-21

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


8.   Non-Qualified      Options  exercisable  and available for future grant are
     Stock Option       as follows:
     Plan
     Continued                                        December 31,
                                       --------------------------------------
                                           2001         2000        1999
                                       --------------------------------------

 Options exercisable                         823,750     748,750   1,066,460

 Options available for grant               1,176,250   1,176,250     668,950


                        In December 1998,  the Company  terminated the 1996 Plan
                        and  all  of  the   outstanding   options  granted  were
                        surrendered to the Company for cancellation. The Company
                        awarded 1,386,950 five year non-qualified  options under
                        the 1998  Plan to  employees,  officers  and  directors.
                        These options carry an exercise price of $.09375,  equal
                        to the  market  price  at the  time of the  awards.  For
                        purposes of the SFAS 123  disclosures  in the  following
                        paragraphs, this transaction was treated as a rescission
                        of the initial awards and a grant of new awards.

9.   Stock Based        The Company has adopted the  disclosure-only  provisions
     Compensation       of Statement of Financial  Accounting  Standards  (SFAS)
                        No.  123,   Accounting  for  Stock-Based   Compensation.
                        Accordingly, no compensation cost has been recognized in
                        the financial statements.  Had compensation cost for the
                        Company's  stock option plans been  determined  based on
                        the fair  value at the  grant  date for  awards in 1997,
                        consistent  with  the  provisions  of SFAS  No 123,  the
                        Company's net earnings and earnings per share would have
                        been reduced to the pro forma amounts indicated below:

                                                                    Cumulative
                                   Year Ended December 31,           Amounts
                               ---------------------------------     Since
                                 2001       2000       1999         Inception
                               ----------------------------------------------

 Net loss - as reported        $    (91)  $ (1,915) $   (1,786)  $  (13,419)
 Net loss - pro forma          $    (91)  $ (1,915) $   (1,791)  $  (18,909)
 Loss per share - as reported  $   (.06)  $   (.22) $     (.21)  $    (1.46)
 Loss per share - pro forma    $   (.06)  $   (.22) $     (.21)  $    (1.96)


--------------------------------------------------------------------------------
                                                                            F-22

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


9.   Stock Based        SFAS 123  requires  stock  options to be valued using an
     Compensation       approach such as the Black-Scholes option pricing model.
     Continued          The Black-Scholes model calculates the fair value of the
                        grant   based  upon   certain   assumptions   about  the
                        underlying  stock.  For options granted during 1998, the
                        expected  dividend  yield  of the  stock  is  zero,  the
                        expected  life of the options is 10 years,  the expected
                        volatility  is 60 percent,  and the  expected  risk-free
                        rate  of  return  is  between   4.6  and  6.5   percent,
                        calculated  as  the  rate  offered  on  U.S.  Government
                        securities  with the same term at the  expected  life of
                        the options. No options were granted in 2000 or 2001.

                        The following table summarizes  information  about stock
                        options outstanding at December 31, 2001:


                Options Outstanding                   Options Exercisable
 ----------------------------------------------------------------------------
                              Weighted
                              Average    Weighted                 Weighted
   Range of      Number      Remaining   Average                  Average
   Exercise    Outstanding  Contractual  Exercise      Number     Exercise
    Prices     at 12/31/00  Life (Years)   Price     Exercisable    Price
 ----------------------------------------------------------------------------

 $       5.00        25,000         4.97  $    5.00        25,000 $     5.00
 $       0.09       798,750         6.96  $    0.09       798,750 $     0.09
 ----------------------------------------------------------------------------

 $  0.09-5.00       823,750         7.92  $     .24       823,750 $     0.24
 ----------------------------------------------------------------------------


10.  Commitments        Claim
     and                The Company has a matter of possible  litigation arising
     Contingencies      out of the Port of Baltimore  contract.  It is not known
                        what  amount if any that the  Company may be required to
                        pay. The December 31, 2001 financial  statements reflect
                        $53 as a liability  related to the  contract.  It is not
                        known if any additional amounts will be incurred.

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

<PAGE>

                                         COMMODORE SEPARATION TECHNOLOGIES, INC.
                                                   Notes to Financial Statements
                                                                       Continued

                                           (In thousands, except per share data)
--------------------------------------------------------------------------------


11.  Recent             In July 2001, SFAS No. 141, "Business  Combinations" and
     Accounting         SFAS No. 142,  "Goodwill  and Other  Intangible  Assets"
     Pronounce-         were issued. SFAS 142 addresses financial accounting and
     ments              reporting  for acquired  goodwill  and other  intangible
                        assets. It requires,  among other things, that companies
                        no longer amortize  goodwill,  but instead test goodwill
                        for impairment at least  annually.  SFAS 142 is required
                        to be applied for fiscal years  beginning after December
                        15,  2001.  Currently,   the  Company  has  no  recorded
                        goodwill  and will  assess how the  adoption of SFAS 141
                        and SFAS 142 will  impact  its  financial  position  and
                        results of operations in any future acquisitions.

                        The  FASB  recently   issued  FASB   Statement  No.  143
                        Accounting  for  Asset  Retirement   Obligations.   This
                        Statement addresses  financial  accounting and reporting
                        for  obligations   associated  with  the  retirement  of
                        tangible  long-lived  assets  and the  associated  asset
                        retirement   costs.   This  Statement   applies  to  all
                        entities.  It  applies to legal  obligations  associated
                        with the  retirement  of  long-lived  assets that result
                        from the acquisition, construction, development and (or)
                        the normal operation of a long-lived  asset,  except for
                        certain  obligations of leases.  This  Statement  amends
                        SFAS 19. The effective  date for this  Statement is June
                        15,  2002.  Currently,   the  Company  has  no  tangible
                        long-lived assets.

                        The  FASB  recently   issued  FASB  Statement  No.  144,
                        Accounting  for the Impairment or Disposal of Long-Lived
                        Assets.   The   new   guidance   resolves    significant
                        implementation issues related to FASB Statement No. 121,
                        Accounting for the  Impairment of Long-Lived  Assets and
                        for Long-Lived  Assets to be Disposed of.  Statement 144
                        is effective for fiscal years  beginning  after December
                        15, 2001.  Management  does not expect the  Statement to
                        have a  material  impact on its  financial  position  or
                        results of operations.

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

<PAGE>