SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                   FORM 10-K

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

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

                                       OR

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

                   For the fiscal year ended December 31, 1998

                         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.)

          3240 Town Point Drive, Suite 200
          Kennesaw, Georgia                                30144
          (Address of Principal Executive Offices)       (Zip Code)

Registrant's telephone number, including area code: (770) 422-1518

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
26, 1999 with an aggregate  market value of  approximately  $112,000 (based upon
the average bid and asked prices of the Common Stock on March 26, 1999 as quoted
by the Nasdaq SmallCap Market).

     As of March 26, 1999,  11,515,575  shares of the registrant's  Common Stock
were outstanding. 
                                   ----------

                      DOCUMENTS INCORPORATED BY REFERENCE

                                      None


<PAGE>


                     COMMODORE SEPARATION TECHNOLOGIES, INC.

                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I........................................................................1


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

                    General...................................................1
                    The SLiM Technology.......................................1
                    Contracts.................................................3
                    Markets and Customers.....................................4
                    Raw Materials.............................................6
                    Backlog...................................................6
                    Research and Development..................................6
                    Intellectual Property.....................................6
                    Competition...............................................7
                    Government Regulation.....................................7
                    Environmental Matters.....................................8
                    Employees.................................................8

         ITEM 2. PROPERTIES...................................................8


         ITEM 3. LEGAL PROCEEDINGS............................................8


         ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........9


PART II......................................................................10


         ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 
                    STOCKHOLDER MATTERS......................................10

                    Market Information.......................................10
                    Dividend Information.....................................10

         ITEM 6. SELECTED FINANCIAL DATA.....................................11


         ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                    CONDITION AND RESULTS OF OPERATIONS......................13

                    General..................................................13
                    Results of Operations....................................13
                    Liquidity and Capital Resources..........................15
                    Net Operating Losses.....................................16
                    Year 2000 Considerations.................................16
                    Forward-Looking Statements...............................16
                    New Accounting Pronouncements ...........................17

                                       i
<PAGE>


         ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.17


         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................17


         ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON 
                    ACCOUNTING AND FINANCIAL DISCLOSURE......................17


PART III.....................................................................18


         ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........18

                    Executive Officers and Directors.........................18
                    Key Employees............................................20
                    Board Committees.........................................21
                    Compensation of Directors................................21
                    Compliance with Section 16(a) of the Exchange Act........21

         ITEM 11. EXECUTIVE COMPENSATION.....................................23

                    Summary Compensation.....................................23
                    Stock Options............................................24
                    Employment Agreements....................................24
                    Compensation Committee Interlocks and Insider 
                      Participation..........................................25
                    Report of the Compensation Committee on Executive 
                      Compensation...........................................25

         ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                    MANAGEMENT...............................................29


         ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............30

                    Organization and Capitalization of the Company...........30
                    Loans Involving Affiliates...............................31
                    Offices..................................................31
                    Services Agreement.......................................31
                    Future Transactions......................................32

PART IV......................................................................33


         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS 
                    ON FORM 8-K..............................................33


SIGNATURES...................................................................36


                                       ii
<PAGE>


                                     PART I

ITEM 1. BUSINESS.

GENERAL

     Commodore  Separation  Technologies,  Inc.,  a  Delaware  corporation  (the
"Company"),  has  developed  and  is  in  the  process  of  commercializing  its
separation  technology and recovery system known as SLiM(TM)  (supported  liquid
membrane). Based on its continuing 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.
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.  Under a license  agreement  with
Lockheed Martin Energy Research  Corporation,  the Company also has received the
exclusive  worldwide  license  (subject to a government  use license) to use and
develop its SLiM  technology for separating  the  radionuclides,  technetium and
rhenium,  from mixed wastes  containing  radioactive  materials.  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  experienced 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 26, 1999,  approximately  87% of the Company's  common
stock  was  owned  by  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.

     The Company was  incorporated  in Delaware in November  1995. The Company's
principal  executive  offices are located at 3240 Town Point  Drive,  Suite 200,
Kennesaw,  Georgia  30144,  and its  telephone  number at that  address is (770)
422-1518.

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.


                                       1
<PAGE>


     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 which is concentrated  and gathered in a separate  storage
container. The balance of the feedstream is either recycled or simply discharged
as normal  effluent.  In some  instances,  additional  treatment may be required
prior to 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 which  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 which require
further  post-treatment  prior to  disposal.  For example,  reverse  osmosis and
ultrafiltration  are incapable of separating chrome and chromium  materials from
wastewater streams,  and precipitation  results in the production of sludge 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 is a superior and 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
          industrial  settings  at  greater  speed  and with a higher  degree of
          effectiveness,  with  varying  contaminant  concentrations  and volume
          requirements;

     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 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


                                       2
<PAGE>


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                  400 ppm                0.05 ppm (field test)               Less than 0.05 ppm
     (hexavalent) 

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

     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

     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  Facility  at the  Port  of
Baltimore.  The  contract,  dated as of November  25, 1997 (the  "Hawkins  Point
Contract"),  provides  that  the  Company  will  lease a SLiM  unit to MES for a
one-time,  lump-sum lease payment of $250,000,  and will license its proprietary
SLiM  technology  to MES in  exchange  for a royalty  equal to  one-half  of any
savings  which  MES  realizes  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 and went into  commercial
operation in February 1999.

     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"),  provides that the Company will lease a SLiM unit to
MES for a one-time,  lump-sum  lease  payment of $350,000,  and will license its
proprietary  SLiM  technology to MES in exchange for a royalty equal to one-half
of any savings  which MES  realizes by using the SLiM  technology  as opposed to
conventional  non-proprietary  remediation  technology.  As in the  case  of the
Hawkins Point  Contract,  the Dundalk  Contract  provides 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  has  been  delivered  to  the  site.
Installation is scheduled to begin in April 1999 with startup  scheduled for May
1999.


                                       3
<PAGE>


     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,  which may be terminated at any time
solely by the  Company,  has a term which will last until the end of the life of
all patents or patentable  claims described in or ultimately  arising out of the
patent application filed jointly by the Company and three colleagues of Srinivas
Kilambi,  Ph.D.,  the Company's  former Senior Vice  President--Technology,  who
worked  with  him  at  Oak  Ridge,   covering   their   inventions   related  to
radionuclides. Based on tests conducted at Oak Ridge since May 1994, the Company
believes  that  this  technology  is  capable  of  selectively   extracting  and
recovering technetium,  rhenium and other radioactive isotopes as a concentrated
aqueous  solution  which  can  be  reused  in  various   scientific  or  medical
applications  or  disposed  of  by   government-approved   techniques  including
long-term  storage.  The Company  believes  that this  technology  may remediate
nuclear  waste water  stored at the DOE's atomic  energy  plants in Rocky Flats,
Colorado;  Idaho Falls,  Idaho;  Paducah,  Kentucky;  Weldon Springs,  Missouri;
Frenchman Flat,  Nevada;  Los Alamos,  New Mexico;  Aiken,  South Carolina;  Oak
Ridge, Tennessee;  Pantex, Texas; and Hanford, Washington, and intends to pursue
such  opportunities.  According  to DOE  sources,  there are  approximately  100
million  gallons of mixed  radioactive  and hazardous  chemical  waste stored at
these plants.

MARKETS AND CUSTOMERS

     Overview

     Based on market data compiled by the Company,  the Company  estimates that,
as of December 31, 1998,  there were  approximately  7,500  companies  operating
metal  plating  and metal  finishing  facilities  in the  United  States  and an
additional  1,500 such  facilities in Canada.  Based on estimated sales by these
facilities,  the Company believes that on average each of these facilities could
utilize four or more SLiM units, if they adopted the Company's technology. Based
on market data compiled by the Company,  the  potential  market from organic and
inorganic  chemical  companies  is in excess of 4,000  companies  in the  United
States and Canada.  The Company believes that on average each of these companies
could utilize two to four SLiM units, if they adopted the Company's  technology.
Additionally,  there were more than 1,000  biochemical,  bulk drug manufacturing
and  pharmaceutical  companies  operating in the United  States and Canada,  and
based on these companies'  estimated sales, the Company believes that on average
the typical  such  company  could  utilize two to four SLiM units  operating  at
substantial  volumes.  The Company  believes  that the  potential  international
market for each of the above  applications  could be up to two times the size of
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.

     Commercialization and Marketing Strategy

     During its initial commercialization phase, the Company will be leasing 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 will supply these modules at a reasonable mark-up over
their cost.  As new patents are filed and issued,  the Company  may, for certain
applications,  determine to make a direct sale of the equipment with  additional
long-term  royalty  payment  provisions.  The Company expects to obtain revenues
through  servicing the SLiM  equipment,  including  periodic  replacement of the
membrane  component.  In addition to leasing  and  selling  its  equipment,  the
Company will 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.
Although  the Company is  focusing  its  initial  marketing  efforts on domestic
businesses, the Company is also prepared to pursue


                                       4
<PAGE>


international  opportunities,  which may arise from successful  presentations to
multinational corporations or from overseas referrals by domestic entities.

     Metals Separation and Recovery. The Company's initial marketing efforts are
in the industrial  sector, in which the separation and recovery of metal-bearing
aqueous  solutions  present a  substantial  market.  Primary among the potential
customers in this area are metal plating and metal finishing  operations,  which
generate substantial volumes of mixed metals process streams for which a limited
number of  potentially  effective  technologies  are  available to effect proper
separation.

     In September  1997, the Company  installed a  demonstration  SLiM unit at a
metal  plating  company.  The unit  operated in a batch mode for one week,  and,
based on operating data results, successfully separated and recovered nickel and
zinc effluent  streams with  concentrations  of up to 2,800 ppm. An  independent
testing laboratory verified the results.

     Based  on  management   studies  and   discussions   with  metals  industry
executives, the Company believes that the major competitive technologies in this
area are  precipitation  and ion  exchange.  Precipitation  generates a metallic
sludge by-product  requiring further treatment prior to landfill  disposal.  Ion
exchange captures anions or cations,  but offers no selectivity  within a group.
Further,  ion exchange is only  approximately 90% efficient.  By contrast,  SLiM
does not generate harmful  metallic sludges and, in some cases,  enables process
water  recycling  while also  enabling  recovery of valuable  raw  materials  to
approximately 99% efficiency.  As costs of environmental  compliance continue to
mount,  the  Company  expects  SLiM to become a  preferred  alternative  to some
existing metals separation methods.

     Environmental  Remediation and Restoration.  The Company believes that SLiM
has  significant  potential for  application to  environmental  remediation  and
restoration.  In November  1997 and February  1998,  the Company was awarded its
first two commercial contracts for the removal of chromium-contaminated leachate
at Baltimore  Harbor.  In the case of a project,  such as the  Baltimore  Harbor
project,  it is  expected  that  the  remediation  technology  will  be  applied
continuously  over a period of many years,  until the subject  contamination (in
the case of the Baltimore  Harbor,  chromium  leaching from underlying soil into
the aquifer) has abated for a significant period of time.

     In contrast to other  remediation  technologies,  the Company believes that
SLiM has the attributes of lower initial  capital costs,  lower  operating costs
and the ability to recover heavy metals for reuse.

     To speed  its entry in this  market,  the  Company  intends  to enter  into
collaborative   joint  working  and  marketing   arrangements  with  established
engineering  and  environmental  service  organizations  which are  expected  to
provide technical and professional expertise, market presence and credibility.

     Radionuclide/Mixed  Waste  Separation.  In the  United  States,  there  are
numerous  sites  operated or maintained by the DOE and/or the DOD at which there
are present  "mixed wastes"  containing  radionuclides  intermingled  with other
hazardous  wastes.  These  sites  are also  contaminated  with  other  compounds
associated with nuclear weapons testing and energy.  SLiM may have  capabilities
in the separation of  radionuclides  such as strontium,  cesium,  technetium and
rhenium.  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  anticipates  pursuing this market
area in collaboration  with established  engineering and  environmental  service
organizations,  who can provide  technical and  professional  expertise,  market
presence and credibility.

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

     Nitrogen  is  typically  obtained  by  separating  it  from  oxygen,  using
processes such as cryogenic  distillation,  absorption,  catalytic removal,  and
permselective  polymeric membrane separation.  However,  each of these processes
has  disadvantages,  which can include  high energy  usage,  high  pressure  and
temperature requirements, and/or relatively low purity of the recovered gas. The
SLiM  process may  overcome  these  disadvantages  by yielding  relatively  pure
nitrogen


                                       5
<PAGE>


in a low-energy, lower capital cost process conducted at ambient temperature and
pressure.  The  Company  has not  developed  a strategy or targeted a market for
commercialization of the gas separation application.

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

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

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,  1998,  total  backlog  for the Company was  approximately
$600,000,  as compared with a $250,000 backlog at December 31, 1997. All of such
backlog  represents  work  for  which  the  Company  has  entered  into a signed
agreement  or purchase  order with  respect  thereto or has received an order to
proceed with work up to a specified dollar amount, and represents work which the
Company  expects  will be  completed  in the next 12 months.  While the  Company
expects that backlog  amounts will result in revenue,  no assurance can be given
that all amounts  included  in backlog  will  ultimately  be  realized,  even if
covered by written contracts or work orders.

RESEARCH AND DEVELOPMENT

     Research  and  development  activities  are ongoing  and  utilize  internal
technical staff, as well as independent  consultants retained by the Company and
its  subsidiaries.  All such  activities  are  company-sponsored.  Research  and
development  expenditures  for the Company were  $1,299,000 and $817,000 for the
year  ended  December  31,  1998 and for the  transition  period  from July 1 to
December 31, 1997 (the "Transition Period"), 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 Lockhead  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. In January 1999, the


                                       6
<PAGE>


Company  filed a U.S.  patent  application  for  chromium  removal and  recovery
covering the sole  invention  of Dr. W.S.  Winston Ho,  Senior Vice  President -
Technology.  In February 1999, the Company filed a U.S.  Patent  Application for
using a strip dispersion  technique with SLiM covering the sole invention 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 which 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 which requires dewatering,
drying and  disposal in a landfill.  Certain of these  other  technologies  also
entail long process times, and are relatively expensive.

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

     Separation  technologies  are  currently  utilized  by a  wide  variety  of
domestic and international  companies,  including several large companies having
substantially  greater financial and other resources than the Company.  Although
the Company believes that SLiM has substantial  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


                                       7
<PAGE>


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  will 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 is generally  limited to the
leasing of its specialized  technical equipment for use by its customers,  there
is always the risk of the  mishandling  of such  materials or  technological  or
equipment  failures,  which  could  result in  significant  claims  against  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 $15.0 million per occurrence and
$15.0 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 26,  1999,  the Company had 8 full-time  employees,  comprising
engineers, chemists and other professionals.  None of such employees are covered
by  collective  bargaining  agreements,  and the  Company's  relations  with its
employees  are believed to be good.  In October  1998,  the Company  reduced its
workforce by two-thirds to better  reflect its current human  resource needs and
to conserve cash.

ITEM 2.   PROPERTIES.

     The  Company's  principal  executive  offices are located in  approximately
20,800 square feet of space in Kennesaw,  Georgia (near  Atlanta)  under a lease
expiring in February 2002, which the Company began occupying in March 1997. Such
space also  serves as the  Company's  administrative  offices and  research  and
testing  laboratories.  The  Company  pays  $116,000 in rent per year under such
lease.

     The Company also 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, Applied and certain of their affiliates.


ITEM 3.   LEGAL PROCEEDINGS.

     During the year ended  December  31, 1998,  and as of March 26,  1999,  the
Company was not involved in any litigation.


                                       8
<PAGE>

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

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


                                       9
<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 26, 1999,
there  were 178  holders  of  record of Common  Stock,  one  holder of record of
Convertible Preferred Stock and 13 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 1997: ..............................  $ 5.00      $   2.13      $   10.00      $   7.50      $   1.88      $   0.88
Fourth Quarter(1)

TRANSITION PERIOD:
   July 1 to September 30, 1997 ...........    3.00          1.38           7.50          6.50          1.13          0.50
   October 1 to December 31, 1997 .........    3.75          1.00           7.63          2.75          1.38          0.25

FISCAL YEAR 1998
   January 1 to March 31, 1998 ............    3.50          1.63           7.50          4.13          1.25          0.31
   April 1 to June 30, 1998 ...............    2.75          1.19           5.00          2.00          0.56          0.22
   July 1 to September 30, 1998 ...........    2.00          0.06           3.00          1.13          0.34          0.02
   October 1 to December 31, 1998 .........    0.25          0.03           0.75          0.03          0.03          0.03
</TABLE>

----------
(1)  Reflects bid information  for the period  beginning April 3, 1997 (the date
     the Common Stock, Convertible Preferred Stock and Warrants began quoting on
     Nasdaq) through June 30, 1997.

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  therefor,  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. On March 31
and June 30,  1998,  the  Company  paid cash  dividends  to the  holders  of the
Convertible  Preferred Stock in the aggregate  amounts of $150,000 and $150,000,
respectively. While the Company currently intends to retain most of its earnings
to finance the growth and  development of its business and to repay  outstanding
indebtedness,  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.


                                       10
<PAGE>


     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.

ITEM 6.   SELECTED FINANCIAL DATA.

     The selected  financial data included in the following table as of June 30,
1996 and 1997,  and as of  December  31,  1997 and  1998,  for the  period  from
November 15, 1995 (date of inception) to June 30, 1996,  for the year ended June
30, 1997,  for the  six-month  period  ended  December 31, 1997 and for the year
ended December 31, 1998 are derived from the audited Financial Statements of the
Company appearing  elsewhere herein. The financial data for the six-month period
ended December 31, 1996 is unaudited and, in the opinion of management, includes
all adjustments  (consisting of normal recurring accruals)  considered necessary
for a  fair  presentation.  The  selected  financial  data  should  be  read  in
conjunction with  "Management's  Discussion and Analysis of Financial  Condition
and  Results of  Operations"  and the  Financial  Statements  and Notes  thereto
appearing elsewhere herein.

<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                          November 15, 1995                                December 31,                Year Ended
                                         (date of inception)    Year Ended            -----------------------         December 31,
Statement of Operations Data (1):         to June 30, 1996    June 30, 1997           1996               1997            1998
                                          ----------------    -------------           ----               ----         ------------
                                                                                            (unaudited)
<S>                                         <C>                <C>                <C>                <C>              <C>         
Costs and expenses ..................       $   (60,000)       $(3,265,000)       $  (857,000)       $(2,961,000)     $(3,749,000)

Revenue .............................                --              8,000              8,000                 --           19,000

Other income
  and (expense) .....................            (1,000)            86,000             (5,000)           195,000          101,000

Net loss ............................           (61,000)        (3,171,000)          (854,000)        (2,766,000)      (3,629,000)

Net loss per share--basic
   and diluted (2) ..................              (.01)              (.32)              (.09)              (.27)            (.37)
</TABLE>

<TABLE>
<CAPTION>
Balance Sheet Data:                        June 30, 1996      June 30, 1997    December 31, 1997  December 31, 1998
                                           -------------      -------------    -----------------  -----------------
<S>                                         <C>                <C>                <C>                <C>        
Working capital (deficit) ...........       $   (81,000)       $ 7,817,000        $ 4,462,000        $   549,000

Total assets ........................            23,000          9,850,000          6,660,000          2,665,000

Long-term liabilities ...............                --             18,000             13,000              4,000

Deficit accumulated during 
   development stage ................           (61,000)        (3,232,000)        (5,998,000)        (9,627,000)

Stockholders' equity (deficit) ......           (61,000)         8,708,000          5,652,000          2,105,000
</TABLE>

----------

(1)  The Company is a development  stage company and has had limited  commercial
     operations to date.  See Note 1 of Notes to Financial  Statements.


                                       11
<PAGE>


(2)  Net loss per share is  calculated on the basis of  10,000,000,  10,375,000,
     10,000,000,   11,502,000   and   11,514,000,   shares  of   Common   Stock,
     respectively, being outstanding for the periods.


                                       12
<PAGE>


ITEM 7. 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, 1998.  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, but expects to generate
additional revenues after the Company successfully completes the installation of
SLiM units at the Port of  Baltimore.  During the period from  November 15, 1995
(date of  inception)  to December 31, 1998,  the Company  incurred a net loss of
$9,627,000. For the year ended December 31, 1998, the Company incurred a loss of
$3,629,000 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.

     On July 28, 1997, the Company changed its fiscal year. Effective January 1,
1998,  the  Company's  new  fiscal  year will be a  twelve-month  period  ending
December 31.  Previously,  the Company's  fiscal year was a twelve-month  period
ending June 30. The  Transition  Period relates to the six months ended December
31, 1997 and, where applicable,  unaudited  comparative  information for the six
months ended December 31, 1996 has been presented.

RESULTS OF OPERATIONS

     Year ended December 31, 1998 compared
     to year ended December 31, 1997

     Research and development  costs were $1,299,000 for the year ended December
31, 1998 as compared to $1,390,000 for the year ended December 31, 1997.  During
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  $1,096,000  for the year ended
December  31, 1998 as compared to  $1,800,000  for the year ended  December  31,
1997. 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.

     Depreciation and  amortization  increased from $234,000 in 1997 to $408,000
in 1998 as a result of the purchase and related  depreciation  of fixed  assets.
These  fixed  assets  include  SLiM  units  and  modules  used in the  Company's
technology process.

     Corporate  overhead expenses  decreased from $1,616,000 in 1997 to $529,000
in 1998 as a result of reduced reliance on corporate personnel and a decrease in
other administrative expenses charged by its parent.

     Sales and marketing  expense increased from $281,000 in 1997 to $417,000 in
1998 as a  result  of the  Company's  focus on  getting  the  technology  out to
potential customers.  In addition, the Company is trying to identify new markets
for applications of its technology.


                                       13
<PAGE>


     Interest  income was $101,000 in 1998 as compared to $294,000 in 1997.  The
Company  successfully  completed  an initial  public  offering in April 1997 and
through 1998 has generated interest income from the proceeds of the offering.

     Six Months ended December 31, 1997 compared
     to Six Months ended December 31, 1996

     For the six months ended December 31, 1997, the Company  incurred  $817,000
of research  and  development  costs as compared to $412,000  for the six months
ended  December 31, 1996.  The increase is due to efforts to  commercialize  the
Company's technology.

     General and  administrative  expenses for the six months ended December 31,
1997 were $869,000 as compared to $443,000 for the six months ended December 31,
1996.   The  increase  is  due  to  hiring  of  personnel  and   acquisition  of
infrastructure  (e.g.,  office and lab  space) to  commercialize  the  Company's
technology.

     For the six months ended December 31, 1997, the Company  incurred  $230,000
of sales and  marketing  expense as  compared  to none for the six months  ended
December 31, 1996.  This increase is due to the Company's  efforts to obtain new
customers and identify markets for applications of its technology.

     For the six months  ended  December  31,  1997,  the  Company  was  charged
$911,000 by Applied as a management fee. This fee is a result of allocated wages
and salaries,  rent,  insurance  (including  directors' and officers'  liability
insurance),  and other administrative expenses. The management fees commenced in
April  1997.  See  "Certain  Relationships  and  Related  Transactions--Services
Agreement."

     Interest income was $195,000 for the six months ended December 31, 1997, as
compared to no interest income for the six month period ended December 31, 1996.
This  increase  resulted  from the  investment  of proceeds of the Company's IPO
since April 1997.

     Year ended June 30, 1997 compared to Seven Months
     (November 15, 1995 - Inception) ended June 30, 1996

     For the year ended June 30, 1997, the Company incurred $985,000 of research
and development costs as compared to $50,000 for the seven months ended June 30,
1996. The increase is due to efforts to commercialize the Company's  technology.
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 for the year ended June 30, 1997 were
$1,356,000, as compared to $10,000 for the seven months ended June 30, 1996. The
increase is due to hiring of personnel and acquisition of infrastructure  (e.g.,
office and lab space) to commercialize the Company's technology.

     For the year ended June 30,  1997,  the  Company  was  charged  $705,000 by
Applied  as a  management  fee.  This fee is a result  of  allocated  wages  and
salaries,   rent,  insurance  (including   directors'  and  officers'  liability
insurance),  and other administrative expenses. The management fees commenced in
April  1997.  See  "Certain  Relationships  and  Related  Transactions--Services
Agreement."

     Gross revenues for the year ended June 30, 1997 were $8,000, as compared to
no revenues for the seven months  ended June 30, 1996.  The Company  performed a
site demonstration at a client's facility which provided nominal revenues.

     Interest  income was $99,000 for the year ended June 30, 1997,  as compared
to no income for the  seven-month  period  ended June 30,  1996.  This  increase
resulted from the investment of proceeds of the Company's IPO since April 1997.


                                       14
<PAGE>


     Interest  expense was $13,000 for the year ended June 30, 1997, as compared
to $1,000 for the seven-month period ended June 30, 1996. The increased interest
expense is due to a line of credit extended to the Company to fund the Company's
operations pending completion of its IPO, which occurred in April 1997.

LIQUIDITY AND CAPITAL RESOURCES

     Through April 1997, the Company financed its development efforts through
direct equity investments and loans from Commodore Environmental Services, Inc.
("Environmental") and Applied. From November 15, 1995 (date of inception) to
December 31, 1998, the Company purchased or constructed equipment totaling
$1,814,000 and has incurred patent filing and maintenance costs of $196,000. In
December 1996, as part of a corporate restructuring to consolidate all of its
current environmental technology businesses within Applied, Environmental
transferred to Applied all of the then outstanding shares of capital stock of
the Company and another Environmental subsidiary. 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 to purchase 7,500,000
shares of Applied common stock. See "Certain Relationships and Related
Transactions--Organization and Capitalization of the Company."

     Effective as of 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.  The  transaction  was
consummated on December 25, 1998. Environmental currently owns approximately 35%
of the outstanding  shares of Applied common stock.  Bentley J. Blum, a director
of Environmental and the owner of approximately 49% 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 has 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, will maintain their current management positions in
the Company. The acquisition of the Company by Environmental will be accounted
for under the purchase method of accounting.


     The Company has sustained  losses of $3,629,000,  $2,766,000 and $3,171,000
for the year ended December 31, 1998, for the six months ended December 31, 1997
and for  the  year  ended  June  30,  1997,  respectively.  The  Company  had no
significant  revenues  during  the  period  from  November  15,  1995  (date  of
inception) to December 31, 1998.  Substantially  all of the Company's losses are
attributable to the expenses  detailed above. At December 31, 1998 and 1997, and
June 30,  1997,  the Company had working  capital of  $549,000,  $4,462,000  and
$7,817,000, respectively, and stockholders' equity of $2,105,000, $5,652,000 and
$8,708,000,   respectively.  The  Company's  decrease  in  working  capital  and
stockholders'  equity from June 30, 1997 to December 31, 1998 is principally due
to the net loss for the period and dividends  paid on the Company's  Convertible
Preferred Stock.

     While the Company  believes its capital  requirements  for the remainder of
1999 will be met through the  development  of its business,  the Company will be
required to obtain financing through external sources. There can be no assurance
that such financing will be available or, if available, that it will be on terms
satisfactory  to the  Company.  In the  event  such  external  financing  is not
available on terms acceptable to the Company,  the Company may be able to obtain
interim financing from Environmental, the owner of 87% of the outstanding shares
of Common Stock.  There can be no assurance,  however,  that the Company will be
able to obtain any financing from Environmental.



                                       15
<PAGE>


     Letter of Intent

     The Company  signed a  non-binding  letter of intent on February 2, 1999 to
merge with and into American Technologies Group, Inc. ("ATEG").  ATEG is engaged
in the development, commercialization and sale of products and systems using its
patented and proprietary  technologies,  concentrating  in three core areas: (i)
IE(TM) technology, (ii) water purification and (iii) high-energy particle beams.

NET OPERATING LOSSES

     At  December  31,  1998,  the  Company  had  tax  loss   carryforwards   of
approximately $9,627,000. 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.

YEAR 2000 CONSIDERATIONS

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

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

     The Company has not quantified the total costs required to become year 2000
compliant,  but does not expect that the cost of addressing  any year 2000 issue
will be a material event or uncertainty that would cause its reported  financial
information  not to be  necessarily  indicative of future  operating  results or
future financial  condition,  or that the costs or consequences of incomplete or
untimely  resolution of any year 2000 issue  represent a known material event or
uncertainty that is reasonably likely to affect its future financial results, or
cause its reported  financial  information  not to be necessarily  indicative of
future operating results or future financial condition. As of December 31, 1998,
the total costs incurred to address the Company's year 2000 issues have not been
material  (approximately  $150.00).  However,  if the Company,  its customers or
vendors  encounter any  unanticipated  delays in, or costs  associated with, the
resolution of any year 2000 issue, the Company's  business,  financial condition
and results of operations could be materially  adversely affected.  Accordingly,
the  Company  plans to devote the  necessary  resources  to  becoming  year 2000
compliant in a timely  manner and intends to create a  contingency  plan by July
1999 to handle any year 2000 problems.

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


                                       16
<PAGE>


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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

     Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The  financial  statements of the Company are included on pages F-1 through
F-20 of this Annual Report and are incorporated herein by reference.

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

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


                                       17
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

EXECUTIVE OFFICERS AND DIRECTORS

     The names and ages of the executive  officers and directors of the Company,
and their positions with the Company as of March 26, 1999, are as follows:

Name                         Age       Position
----                         ---       --------
Paul E. Hannesson.........   58        Chairman of the Board and 
                                         Chief Executive Officer
                                      
Carl  O. Magnell .........   56        President and Chief Operating Officer
                                      
James M. DeAngelis........   38        Senior Vice President - Sales & Marketing
                                      
W.S. Winston Ho ..........   55        Senior Vice President - Technology
                                      
Bentley J. Blum...........   57        Director
                                      
Kenneth L. Adelman, Ph.D..   50        Director
                                      
David L. Mitchell.........   77        Director
                                      
William R. Toller.........   67        Director
                                      
Herbert A. Cohen..........   65        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 was
appointed  Chairman of the Board in November 1996. 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. 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 also currently
serves as the  Chairman of the Board and Chief  Executive  Officer of  Commodore
Solution Technologies, Inc., a wholly owned, subsidiary of Applied ("Solution"),
and Commodore CFC Technologies, Inc., a wholly-owned subsidiary of Applied ("CFC
Technologies").  Mr. Hannesson was a private  investor and business  consultant,
from 1990 to 1993,  and was also an officer  and  director of  Specialty  Retail
Services,  Inc.,  from 1989 to August  1991.  He also  served as Chairman of the
Board of Lanxide Corporation,  a company which specializes in the manufacture of
ceramic  bonding and refractory  materials.  ("Lanxide"),  from 1983 to February
1998. Mr. Hannesson is the  brother-in-law of Bentley J. Blum, a director of the
Company.

     Carl O.  Magnell,  P.E. has served as  President  of the Company  since May
1998, succeeding Kenneth J. Houle, former President and Chief Operating Officer,
upon Mr. Houle's death in May 1998. Mr. Magnell also served as Vice President of
Applied from June 1996,  was  appointed  Vice  President - Technology & Business
Development  of Applied  in June 1997 and from  February  1998 until  April 1998
served as Vice President - Technology and Sales & Sales of Applied.  Mr. Magnell
also served as Vice President of Environmental from September 1995 to June 1996.
From  1992 to 1995,  Mr.  Magnell  served  as  Director  of  Research  for Civil
Engineering  Research  Foundation (an  industry-sponsored  engineering  research
group),  and  from  1964 to 1992  Mr.  Magnell  served  in  various  engineering
capacities  with the U.S.  Army Corps of  Engineers.  Mr.  Magnell  holds a B.S.
degree from the United States Military Academy, and an M.S. in civil engineering
and political science from the Massachusetts Institute of Technology.


                                       18
<PAGE>


     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 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.

     W.S.  Winston  Ho  was  appointed  Senior  Vice   President--Technology  of
Separation in May 1998. Dr. Ho is considered one of the world's foremost experts
in the development and  commercialization of membrane  technology,  with over 27
years of research and development experience.  Prior to joining Separation,  Dr.
Ho served in various positions with Exxon Research and Engineering  Company from
1997 to 1984,  and from 1984 to April 1998 he served as its  Senior  Engineering
Associate. Dr. Ho served as Chairman of the Separations Division of the American
Institute of Chemical  Engineers  ("AIChE") in 1997 and currently  serves as its
Meeting Program  Chairman for the AIChE 2000 Spring National Meeting in Atlanta,
Georgia.  A New Jersey  Inventor of the Year in 1991,  Dr. Ho holds more than 40
United States patents in membrane and separation processes.  He is co-author and
editor of Membrane Handbook, the preeminent book on membranes,  for which he and
his co-author  received the Professional and Scholarly  Publishing Award for the
most outstanding  engineering work in 1993. A native of Taiwan,  Dr. Ho holds an
undergraduate  degree from National  Taiwan  University and a Masters degree and
Ph.D.   in   chemical   engineering   from  the   University   of   Illinois  at
Urbana-Champaign.

     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  which hold real estate
interests,  oil drilling  interests and other corporate  interests.  Mr. Blum is
also a director of Lanxide;  Federal Resources  Corporation,  a company formerly
engaged in manufacturing, retail distribution and natural resources development;
Specialty Retail  Services,  Inc., a former  distributor of professional  beauty
products;   and  North  Valley   Development  Corp.,  an  inactive  real  estate
development company. Mr. Blum is a principal stockholder of Environmental and is
the  brother-in-law  of Paul E.  Hannesson,  the Chairman of the Board and Chief
Executive Officer of the Company.

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

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


                                       19
<PAGE>


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

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

     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.

KEY EMPLOYEES

     The names and ages of the key employees of the Company, and their positions
with the Company as of March 26, 1999, are as follows:

Name                                Age   Position
----                                ---   --------
Michael D. Kiehnau, P.E......       37    Vice President--Finance & Operations

Andrew P. Oddi...............       37    Vice President and Treasurer


----------

     Michael D. Kiehnau, P.E. was appointed Vice President--Finance & Operations
of the  Company  in April  1997,  after  having  served as the  Company's  Chief
Financial  Officer  from  September  1996  to  January  1997,  and as  its  Vice
President--Operations  from  January to March  1997.  From August 1992 to August
1996,  Mr.  Kiehnau  served as a project  manager  for  Brown & Root,  Inc.  (an
engineering and construction firm), and from 1983 to 1990, Mr. Kiehnau served in
various  engineering  capacities  with the U.S.  Army Corps of  Engineers in the
United States,  Europe and Central America. From 1990 to 1992, Mr. Kiehnau was a
full-time  student.  Mr.  Kiehnau  holds a B.S.  degree  from the United  States
Military Academy, an M.A. in International Relations from Boston University, and
an M.B.A. from the Harvard Graduate School of Business  Administration.  He is a
licensed professional engineer.


                                       20
<PAGE>


     Andrew P. Oddi was appointed Vice President and Treasurer of the Company in
June 1997,  after having served as its Vice  President--Finance  since September
1996.  Mr. Oddi was also  appointed  Vice  President  and  Treasurer of Applied,
Environmental,  Solution and CFC  Technologies  in June 1997.  Mr. Oddi has also
served as a director of Specialty Retail Services, Inc., a former distributor of
professional  beauty products,  since December 1997. Mr. Oddi served as the Vice
President  of Finance,  Chief  Financial  Officer and  Secretary of Applied from
March to November  1996.  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  Environmental  from December 1990 to July 1996.  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.

BOARD COMMITTEES

     The  Company's  Board  of  Directors  has (i) an  Audit  Committee,  (ii) a
Compensation,  Stock Option and Benefits  Committee  and (iii) an Executive  and
Finance Committee.  The  responsibilities  of the Audit Committee,  which, as of
March 26, 1999, was composed of David L. Mitchell  (Chairman),  Herbert A. Cohen
and William R. Toller,  include  recommending to the Board of Directors the firm
of  independent  accountants  to be retained by the Company,  reviewing with the
Company's  independent  accountants  the  scope  and  results  of their  audits,
reviewing  with  the  independent   accountants  and  management  the  Company's
accounting  and reporting  principles,  policies and  practices,  as well as the
Company's  accounting,  financial and operating controls and staff,  supervising
the Company's  policies  relating to business conduct and dealing with conflicts
of interest relating to officers and directors of the Company. The Compensation,
Stock Option and Benefits  Committee,  which, as of March 26, 1999, was composed
of William R. Toller  (Chairman),  David L.  Mitchell and Herbert A. Cohen,  has
responsibility  for establishing and reviewing  employee and  consultant/advisor
compensation,  bonuses and  incentive  compensation  awards,  administering  and
interpreting   the  Company's  1996  Stock  Option  Plan,  and  determining  the
recipients,  amounts and other terms  (subject to the  requirements  of the 1996
Stock Option Plan) of options  which may be granted  under the 1996 Stock Option
Plan from time to time and providing  guidance to management in connection  with
establishing  additional  benefit plans. The Executive and Finance Committee was
composed of Paul E. Hannesson, Bentley J. Blum and William R. Toller as of March
26,  1999,  and has the  authority  and  responsibility  of the  full  Board  of
Directors to supervise and oversee the  financial  practices and policies of the
Company,  to oversee the adoption of  significant  accounting  policies,  and to
manage  the  Company  between  meetings  of the Board of  Directors,  subject to
certain limitations.  The Executive and Finance Committee also has the authority
and  responsibility  for  making  recommendations  to  the  Board  of  Directors
regarding nominees to serve as directors of the Company.

COMPENSATION OF DIRECTORS

     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, 1998,  and upon a
review of Forms 5 and amendments  thereto  furnished to the Company with respect
to the year ended December 31, 1999, or upon written representations received by
the Company from  certain  reporting  persons that no Forms 5 were  required for
those persons, the Company believes that no director, executive


                                       21
<PAGE>


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, 1998.


                                       22
<PAGE>


ITEM 11.  EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION

     The following table sets forth the amount of all  compensation  paid by the
Company  and/or its  affiliates  and allocated to the Company's  operations  for
services rendered during the fiscal year ended December 31, 1998, the Transition
Period and for the fiscal year ended June 30, 1997 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 Offer whose total
salary and bonus compensation exceeded $100,000 during any such period.

                                                     Summary Compensation Table

<TABLE>
<CAPTION>
                                                 Annual Compensation                           Long-Term Compensation
                                                 -------------------                           ----------------------
                                             
                                                                           Other                   Securities
                                                                           Annual    Restricted      Under-             All Other
                                                                           Compen-     Stock         lying       LTIP    Compen-
   Name and Principal                         Salary           Bonus       sation      Award(s)     Options     Payouts   sation
       Position                    Year        ($)              ($)         ($)         ($)           (#)         ($)      ($)
------------------------           ----       ------           -----       ------    ----------    ----------   ------- ---------
<S>                                <C>       <C>              <C>          <C>          <C>         <C>            <C>      <C>
Paul E. Hannesson                  1998       94,504(3)          -0-       2,610(5)     -0-         280,000       -0-      -0-
Chief Executive Officer            1997(1)    80,067(3)       20,270(4)    4,865(5)     -0-             -0-       -0-      -0-
                                   1997(2)    49,375(3)       12,500(4)    3,000(5)     -0-         175,000       -0-      -0-
                                                                                                    
James M. DeAngelis                 1998      107,005             -0-         -0-        -0-         187,500       -0-      -0-
Senior Vice President              1997(1)    72,500          20,500         -0-        -0-             -0-       -0-      -0-
                                   1997(2)   120,833          20,500         -0-        -0-         101,250       -0-      -0-
                                                                                                    
Kenneth J. Houle(7)                1998      100,243             -0-         -0-        -0-             -0-       -0-      -0-
Former President & Chief           1997(1)    90,000          27,000         -0-        -0-             -0-       -0-      -0-
Operating Officer                  1997(2)    77,596(6)       27,000         -0-        -0-         100,000       -0-      -0-
</TABLE>

----------
(1)  On July 28, 1997, the Company  changed its fiscal  year-end from June 30 to
     December  31.  Information  is for the  Transition  Period  from  July 1 to
     December 31, 1997.

(2)  Information  is presented for the Company's  fiscal year ending on June 30,
     1997.

(3)  Represents  the amount of Mr.  Hannesson's  base  salary  allocated  to the
     Company for such  period.  Mr.  Hannesson's  total base salary for calendar
     years  1998 and 1997 were  $434,500  and  $395,000,  respectively.  Certain
     portions  of  such  base  salary  were  also   allocated   to  Applied  and
     Environmental.      See     "Certain      Relationships     and     Related
     Transactions--Services Agreement."

(4)  Represents the amount of Mr.  Hannesson's  annual incentive bonus allocated
     to the Company for such period.  Mr.  Hannesson's  total  annual  incentive
     bonus for calendar year 1997 was $100,000.  Certain portions of such annual
     incentive bonus were also allocated to Applied and Environmental.

(5)  Represents the amount of Mr. Hannesson's  automobile allowance allocated to
     the Company for such period. Mr. Hannesson's total automobile allowance for
     calendar years 1998 and 1997 was $12,000 and $24,000, respectively. Certain
     portions of such  automobile  allowance  were also allocated to Applied and
     Environmental.


                                       23
<PAGE>


(6)  Represents  the amount of salary  paid to Mr.  Houle from  January 27, 1997
     (the date on which Mr.  Houle was  elected  President  and Chief  Operating
     Officer) to June 30, 1997.

(7)  Mr. Houle passed away in May 1998.

STOCK OPTIONS

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

                        Option Grants in Last Fiscal Year

<TABLE>
<CAPTION>
                                                         Individual Grants
                                 ----------------------------------------------------------------
                                                     Percent of                                       Potential Realizable Value at 
                                 Number of              Total                                            Assumed Annual Rates of    
                                 Securities            Options                                        Stock Price Appreciation for  
                                 Underlying            Granted          Exercise of                            Option Term          
                                  Options           To Employees        Base Price     Expiration    -------------------------------
          Name                   Granted (#)      In Fiscal Year(2)       ($/Sh)          Date         5% ($)              10% ($)  
          ----                   -----------      -----------------     -----------    ----------    ----------          -----------
<S>                              <C>                    <C>               <C>           <C>            <C>                 <C>   
    Paul E. Hannesson            280,000(1)             19.2%             0.9375        12/15/08       16,492              41,804

    James M. DeAngelis           187,500(1)             12.8%             0.9375        12/15/08       11,044              27,994
</TABLE>

----------
(1)  Options to purchase 280,000 and 187,500 shares of Common Stock were granted
     to Mr.  Hannesson  and Mr.  DeAngelis,  respectively,  on December 15, 1998
     pursuant  to the Plan.  The  foregoing  options  were  granted  to  Messrs.
     Hannesson  and  DeAngelis in partial  consideration  of the  surrender  and
     cancellation,  as of  December  15,  1998,  of 175,000  options and 101,250
     options granted to Mr. Hannesson and Mr. DeAngelis, respectively, under the
     Company's 1996 Stock Option Plan which was terminated.  The options granted
     on December 15, 1998 are exercisable by Messrs. Hannesson and Mr. DeAngelis
     each at the rate of 60% on the date of grant and 40% on  December  15, 1999
     and,  unless  exercised,  expire on  December  15,  2008  (subject to prior
     termination  in accordance  with the applicable  stock option  agreements).
     Upon announcement of a Change in Control (pursuant to and as defined in the
     Plan),  options not previously vested will become immediately  exercisable.
     Upon  consummation  of a Change in Control,  all  unexercised  options will
     terminate.

(2)  Percentages  based on 1,461,950 stock options granted during the year ended
     December 31, 1998.

EMPLOYMENT AGREEMENTS

     Paul E. Hannesson,  the Company's Chairman of the Board and Chief Executive
Officer,  entered into an employment agreement with Environmental as of November
18, 1996 for a term expiring on December 31, 1999.  Pursuant to such  employment
agreement, Mr. Hannesson agreed to devote his business and professional time and
efforts to the business of Environmental as a senior executive  officer,  and to
serve  in  senior  executive  positions  with  one or  more  of  Environmental's
affiliates,  including the Company.  The employment  agreement provides that Mr.
Hannesson shall receive,  among other things, a base salary at an annual rate of
$395,000  through  December  31, 1997,  and will receive not less than  $434,500
through  December 31, 1998 and not less than $477,950 through December 31, 1999,
for  services  rendered  to  Environmental  and its  affiliates,  including  the
Company.  Pursuant to the employment 


                                       24
<PAGE>

agreement,  Mr. Hannesson  received,  among other things: (i) a signing bonus of
(a) $150,000  cash and (b) stock  options to purchase  950,000  shares of common
stock of  Environmental,  which  options  vested  on the date of his  employment
agreement;  and (ii) options to purchase an  aggregate  of  2,500,000  shares of
Environmental  common stock,  exercisable in installments  over a period of five
years  commencing on the date of his employment  agreement.  Mr.  Hannesson also
received  options to  purchase  common  stock of the  Company and Applied in the
amount of 1.0% of each company's total outstanding shares of common stock on the
date of grant,  and is  eligible  to  receive  incentive  compensation  of up to
$225,000 per year for achieving certain goals.

     In June 1998,  Mr.  Hannesson's  Employment  Agreement  was  assigned  from
Environmental to Applied. On September 28, 1998, the Company was sold by Applied
to  Environmental  and effective as of that date the costs  associated  with Mr.
Hannesson's employment agreement ceased being allocated to the Company.

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

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The individuals who served as members of the Compensation, Stock Option and
Benefits Committee (the "Compensation Committee") during the year ended December
31, 1998 were  William R. Toller  (Chairman),  David L.  Mitchell and Herbert A.
Cohen. Mr. Mitchell and Mr. Cohen  constituted  two-thirds of the  Compensation,
Stock  Option and  Benefits  Committees  of Applied at December  31,  1998.  Mr.
Mitchell has served as a consultant to Applied from July 15, 1997 through August
14,  1998 and  received  compensation  in the  amount of  $10,000  per month for
services rendered to Applied in such capacity.

REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION

     The Compensation  Committee was established in June 1997 and is responsible
for, among other things,  establishing the compensation  policies  applicable to
executive  officers of the Company.  The Compensation  Committee was composed of
William R. Toller (Chairman), David L. Mitchell and Herbert A. Cohen at December
31, 1998, all of whom were non-employee  directors of the Company.  Mr. Mitchell
and Mr. Cohen also constituted two-thirds of the Compensation,  Stock Option and
Benefits Committee of Applied at December 31, 1998. Decisions on compensation of
the  executive  officers  of  Applied  were  made by such  individuals  in their
capacities as members of the Compensation,  Stock Option and Benefits Committee.
All decisions of the Compensation  Committee relating to the compensation of the
Company's  executive  officers  are  reviewed  by, and are  subject to the final
approval of, the full Board of  Directors  of the Company.  Set forth below is a
report  prepared by Messrs.  Toller,  Mitchell and Cohen in their  capacities as
members of the  Compensation  Committee  at December 31,  1998,  addressing  the
Company's  compensation  policies  for  1998  as  they  affected  the  Company's
executive officers.

     Overview and Philosophy

     The Company's  executive  compensation  program is designed to be linked to
corporate  performance and returns to stockholders.  Of particular importance to
the Company is its ability to grow and enhance its  competitiveness for the rest
of the decade and beyond. Shorter-term performance,  although scrutinized by the
Compensation  Committee,  stands  behind the issue of  furthering  the Company's
strategic goals. To this end, the 


                                       25
<PAGE>

Company has developed an overall compensation strategy and specific compensation
plans that tie a significant portion of executive  compensation to the Company's
success in meeting specified performance goals.

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

     o    attract, motivate and retain the highest quality executives;

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

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

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

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

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

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

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

     Executive Officer Compensation

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

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

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

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

     Mr. Hannesson, the Chairman of the Board and Chief Executive Officer of the
Company, Solution and CFC Technologies, and the Chairman of the Board, President
and Chief Executive Officer of Applied, receives annual compensation based upon,
among other things, the terms of his employment agreement with Applied. 


                                       26
<PAGE>

Pursuant to the terms of his employment agreement,  Mr. Hannesson is entitled to
receive  a base  salary  at an annual  rate of not less  than  $395,000  through
December 31, 1997, not less than $434,500 through December 31, 1998 and not less
than  $477,950  through  December 31, 1999 for services  rendered to Applied and
certain of its affiliates, including the Company.

     The amount actually  received by Mr. Hannesson each year as base salary for
services  rendered to Applied and its  affiliates,  including  the  Company,  is
established  by the  members of the  Compensation,  Stock  Option  and  Benefits
Committee of Applied (the "Applied Compensation Committee"). As set forth above,
one  of the  two  members  of the  Applied  Compensation  Committee  constituted
one-half of the  Compensation  Committee of the Company's  Board of Directors at
December 31, 1998. In  establishing  Mr.  Hannesson's  base salary for 1998, the
Applied Compensation Committee took into account the salaries of chief executive
officers at other similar public  companies,  future  objectives and challenges,
and Mr. Hannesson's individual  performance,  contributions and leadership.  The
Applied Compensation Committee reviewed in detail Mr. Hannesson's achievement of
his  1997  goals  and  his  individual  contributions  to the  Company  and  its
affiliates.  The Applied  Compensation  Committee concluded that he had achieved
his 1997 goals and had provided a leadership role in achieving the Company's and
its  affiliates'   strategic  priorities  for  1997.  The  Applied  Compensation
Committee also considered Mr. Hannesson's decisive management of operational and
strategic issues, his drive to reinforce a culture of innovation and his ability
and dedication to enhance the long-term  value of the Company and its affiliates
for their respective  stockholders.  In making its salary decisions with respect
to Mr. Hannesson,  the Applied  Compensation  Committee exercised its discretion
and judgment based on the above factors,  and no specific formula was applied to
determine  the  weight of each  factor.  The  salary  decisions  of the  Applied
Compensation  Committee  with  respect  to Mr.  Hannesson  as they  specifically
related to the Company were then  presented to the full  Compensation  Committee
which reviewed such decisions.

     Mr.  Hannesson's base salary increased from $395,000 for calendar year 1997
to $434,500 for calendar year 1998,  representing  an increase of  approximately
10%. Such base salary was allocated among the Company, Applied and Environmental
based  upon the  amount  of time and  effort  devoted  by Mr.  Hannesson  to the
respective businesses of such companies.  Consequently, the Company, Applied and
Environmental paid $94,504, $250,526 and $58,658,  respectively, of such salary.
Mr.  Hannesson  also  received an  automobile  allowance of $12,000 for the 1998
calendar year, and the Company,  Applied and Environmental  paid $2,610,  $7,770
and $1,620, respectively, of such allowance.

     Annual Incentive Bonus. Annual incentive bonuses for executive officers are
intended  to reflect the  Compensation  Committee's  belief  that a  significant
portion  of  the  annual  compensation  of  each  executive  officer  should  be
contingent upon the performance of the Company.

     For 1998, no incentive bonuses were paid to any officers or employees.

     For 1997,  annual incentive  bonuses were paid to the individuals  named in
the Summary  Compensation  Table and certain other officers and employees of the
Company in part based upon  recommendations  of senior executive officers of the
Company as to appropriate  levels of incentive  compensation.  The  Compensation
Committee  exercised  its  discretion  to determine the final value of each 1997
incentive award,  which values were then reviewed and approved by the full Board
of Directors.  The Compensation Committee assessed performance against goals and
leadership performance,  with each of these two categories weighted equally. The
goal category  included an evaluation of  performance  areas such as increase in
stockholder  value,  operations  development  and  employee  satisfaction.   The
leadership  category  was  evaluated  based  upon the  Compensation  Committee's
judgment  of  leadership  performance,  including  factors  such as  innovation,
strategic vision,  marketplace  orientation,  customer focus,  collaboration and
managing change.

     Pursuant to his employment  agreement with Environmental,  Mr. Hannesson is
eligible  to  receive  incentive  compensation  of up to  $225,000  per year for
achieving  certain of the performance  goals set forth above. For the year ended
December  1998,  no  bonuses  were  awarded.  For the 1997  calendar  year,  Mr.
Hannesson was awarded an incentive  bonus of $100,000.  Such bonus was allocated
among the Company,  Applied and Environmental  based upon the amount of time and
effort devoted by Mr. Hannesson to the respective  businesses of such companies.

                                       27
<PAGE>

Consequently,  the Company,  Applied and Environmental paid $32,770, $63,356 and
$3,874, respectively, of such bonus.

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

     A total of 1,461,950  stock  options  were granted in 1998  pursuant to the
Plan,  280,000 of which were granted to Mr.  Hannesson and 187,500 of which were
granted  to Mr.  DeAngelis.  The  number of stock  options  granted in 1998 were
determined by reference to the long-term  compensation for comparable  positions
at other  similar  public  companies  and based upon an assessment of individual
performance.

     Impact of Section 162(m) of the Internal Revenue Code

     The Compensation Committee's policy is to structure compensation awards for
executive  officers that will be  consistent  with the  requirements  of Section
162(m) of the U.S.  Internal  Revenue Code of 1986 (the "Code").  Section 162(m)
limits  the  Company's  tax  deduction  to $1.0  million  per year  for  certain
compensation  paid in a given year to the Chief  Executive  Officer and the four
highest  compensated  executives other than the Chief Executive Officer named in
the  Summary  Compensation  Table.  According  to  the  Code  and  corresponding
regulations,  compensation  that is  based  on  attainment  of  pre-established,
objective performance goals and complies with certain other requirements will be
excluded from the $1.0 million deduction limitation.  The Company's policy is to
structure  compensation  awards  for  covered  executives  that  will  be  fully
deductible  where doing so will further the purposes of the Company's  executive
compensation  program.  However,  the  Compensation  Committee also considers it
important to retain flexibility to design compensation programs that recognize a
full range of  performance  criteria  important to the Company's  success,  even
where compensation payable under such programs may not be fully deductible.  The
Company expects that all compensation payments in 1997 to the individuals listed
in the Summary Compensation Table will be fully deductible by the Company.

     Conclusion

     The  Compensation   Committee   believes  that  the  quality  of  executive
leadership  significantly  affects the long-term  performance of the Company and
that  it is in the  best  interest  of the  stockholders  to  compensate  fairly
executive leadership for achievement meeting or exceeding the high standards set
by the  Compensation  Committee,  so long as there is a corresponding  risk when
performance  falls short of such standards.  A primary goal of the  Compensation
Committee  is to relate  compensation  to  corporate  performance.  Based on the
Company's  performance in 1997,  the  Compensation  Committee  believes that the
Company's  current executive  compensation  program meets such standards and has
contributed,  and  will  continue  to  contribute,  to  the  Company's  and  its
stockholders' long-term success.


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

     The Report of the Compensation  Committee on Executive  Compensation  shall
not be deemed  incorporated by reference by any general statement  incorporating
by reference  this Annual  Report into any filing under the  Securities  


                                       28
<PAGE>

Act,  or  under  the  Exchange  Act,  except  to the  extent  that  the  Company
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.

ITEM 12. 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 26, 1999 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.

<TABLE>
<CAPTION>
                                                  Number of Shares of        Percentage of Outstanding
Name and Address                               Common Stock Beneficially           Common Stock
of Beneficial Owner(1)                                 Owned(2)                  Beneficially Owned
----------------------                                 --------                  ------------------
<S>                                                  <C>                             <C>  
Commodore Environmental Services, Inc. .........     10,000,000                      86.8%
Bentley J. Blum(3) .............................     10,050,000                      86.9%
Paul E. Hannesson(4) ...........................      1,166,971                      10.0%
James M. DeAngelis(5) ..........................        206,862                       1.8%
Kenneth L. Adelman(6) ..........................         80,450                         *
David L. Mitchell(7) ...........................         50,000                         *
William R. Toller(8) ...........................         50,000                         *
Herbert A. Cohen(9) ............................         50,000                         *
W. S. Winston Ho(10) ...........................         37,500                         *
All executive officers and directors
as a group (8 persons) .........................     11,691,783                      87.7%
</TABLE>

----------
*    Percentage ownership is less than 1%.

(1)  The address of each of Commodore Environmental  Services,  Inc., Bentley J.
     Blum,  Paul E.  Hannesson,  Kenneth L. Adelman,  Ph.D.,  David L. Mitchell,
     William R. Toller and Herbert A. Cohen is 150 East 58th Street, Suite 3400,
     New York,  New York 10155.  The address of James M.  DeAngelis is 3240 Town
     Point Drive, Suite 200,  Kennesaw,  Georgia 30144. The address of Andrew P.
     Oddi is 40 Cutter Mill Road, Suite 201, Great Neck, New York 11021. 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) 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 52.0%
     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.

(4)  Consists  of:  (a)  168,000  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) 


                                       29
<PAGE>

     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  11.1% 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.

(5)  Consists of: (a) 1,000 shares of Common  Stock;  (b) 1,000 shares of Common
     Stock  underlying  currently  exercisable  warrants;  (c) 112,500 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.

(6)  Represents  shares of Common Stock underlying  currently  exercisable stock
     options granted to Dr. Adelman by the Company under the Plan.

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

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

     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  currently  owns 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."



                                       30
<PAGE>

     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.  The  acquisition  was
consummated on December 25, 1998. Environmental currently owns approximately 35%
of the outstanding  shares of Applied common stock.  Bentley J. Blum, a director
of COES  and  the  owner  of  approximately  49% 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 has 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,  will maintain their current  management  positions in
the Company.  The acquisition of the Company by Environmental  will be accounted
for under the purchase method of accounting.

LOANS INVOLVING AFFILIATES

     In March 1997, the Company  entered into a $1,500,000 line of credit with a
commercial  bank. The entire line of credit was borrowed prior to the completion
of the  Company's  IPO to repay  advances  made by Applied to the Company  since
December 1, 1996 for providing  equipment installed in the Company's new Atlanta
facility and for working capital purposes.  The line of credit was guaranteed by
Applied and secured by cash collateral  provided by Applied.  Upon completion of
the IPO, the Company  applied  $1,500,000 of the net proceeds to repay such line
of credit, and such guarantee and cash collateral was released to Applied.

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.

     In addition,  prior to the Company's  occupation  of its Kennesaw,  Georgia
facility in March 1997,  the Company  shared  facilities in Columbus,  Ohio with
Applied and certain of its other  subsidiaries.  The Company  paid an  allocable
share of rent equal to $750 per month for such space. The Company terminated the
existing lease in Columbus, Ohio on March 31, 1997.

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,
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.



                                       31
<PAGE>

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.



                                       32
<PAGE>


                                     PART IV

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

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

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

         Independent Auditor's Report................................................................     F-1A

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

         Statements of Operations for the year ended December 31, 1998,
              for the six months ended December 31, 1997,
              for the year ended June 30, 1997,
              and for the period from November 15, 1995 to December 31, 1998.........................     F-3

         Statements of  Stockholders'  Equity  for the year ended  December  31, 1998,
              for the six months ended December  31, 1997,
              for the year ended June 30, 1997
              and for the period from November 15, 1995 to December 31, 1998.........................     F-4

         Statements of Cash Flows for the year ended  December 31, 1998,
              for the six months ended December 31, 1997,
              for the year ended June 30, 1997
              and for the period from November 15, 1995 to December 31, 1998.........................     F-5

         Notes to Financial Statements...............................................................     F-6
</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)



                                       33
<PAGE>

 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.

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

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)



                                       34
<PAGE>

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)

22.1           Subsidiaries of the Company.(1)

*27.1          Financial Data Schedule.

99.1           Debt  repayment  and  change  in  control  agreement, dated as of
               September 28, 1998 between Environmental and Applied.(9)

----------
* 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.

Reports on Form 8-K:

     None.


                                       35
<PAGE>

                                   SIGNATURES

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

Date:  April 14, 1999             COMMODORE 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.

<TABLE>
<S>                                            <C>                                       <C>
/s/ James M. DeAngelis                         Senior Vice President, Sales and          April 14, 1999
-----------------------------------            Marketing (principal financial and
James M. DeAngelis                             accounting officer)               
                                               

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

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

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

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

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

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


                                       36
<PAGE>


                         INDEX TO FINANCIAL STATEMENTS

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

         Independent Auditor's Report................................................................     F-1A

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

         Statements of Operations for the year ended December 31, 1998,
              for the six months ended December 31, 1997,
              for the year ended June 30, 1997,
              and for the period from November 15, 1995 to December 31, 1998.........................     F-3

         Statements of  Stockholders' Equity for the year ended December 31, 1998,
              for the six months ended December 31, 1997,
              for the year ended June 30, 1997
              and for the period from November 15, 1995 to December 31, 1998.........................     F-4

         Statements of Cash Flows for the year ended December 31, 1998,
              for the six months ended December 31, 1997,
              for the year ended June 30, 1997
              and for the period from November 15, 1995 to December 31, 1998.........................     F-5

         Notes to Financial Statements...............................................................     F-6
</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.




                                       37
<PAGE>


                        Report of Independent Accountants


To the Board of Directors and Stockholders of
Commodore Separation Technologies, Inc. (a development stage company):

In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Commodore Separation Technologies,
Inc. (a development stage company) at December 31, 1998 and 1997, and the
results of its operations and its cash flows for the year ended December 31,
1998, the six months ended December 31, 1997, the year ended June 30, 1997 and
the period from November 15, 1995 (inception) through December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial statements,  the Company has suffered recurring losses from operations
and net cash outflows from operations. These facts raise substantial doubt about
the  Company's  ability to continue as a going  concern.  Management's  plans in
regard to these matters are also  described in Note 2. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.





PricewaterhouseCoopers LLP


Philadelphia, Pennsylvania
April 13, 1999


                                      F-1


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


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


     We have audited financial statements of operations,  stockholders' deficit,
and cash flows for the period from November 15, 1995 (date of inception) to June
30, 1996,  of Commodore  Separation  Technologies,  Inc. (a  developement  stage
company).  These financial  statements are the  responsibility  of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audit.

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

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  results of  operations  and cash flows for the
period from November 15, 1995 (date of inception) to June 30, 1996, of Commodore
Separation  Technologies,  Inc. (a development stage company) in conformity with
generally accepted accounting principles.

     The accompanying  financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in note 2, the Company's
significant  operating losses and deficits in working capital and  stockholder's
equity 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 uncertainty.


                                  TANNER + CO.



Salt Lake City, Utah
August 1,1996


                                      F-1A
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Balance Sheets
(amounts in thousands, except shares and share data)
================================================================================

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                               --------------------
                                                                                 1998         1997
<S>                                                                            <C>         <C>     
                                     Assets
Current assets:
     Cash and cash equivalents                                                 $    209    $  4,951
     Restricted cash                                                                210          88
     Inventory, net                                                                 685         360
     Prepaid and other current assets                                                 1          58
                                                                               --------    --------
           Total current assets                                                   1,105       5,457

Property and equipment:
     Technical equipment                                                          1,411         690
     Office equipment                                                               403         388
     Leasehold improvements                                                         210         205
                                                                               --------    --------
                                                                                  2,024       1,283
     Less accumulated depreciation                                                  646         247
                                                                               --------    --------
     Net property and equipment                                                   1,378       1,036
Intangible assets, net of accumulated amortization of $14 and $5                    182         167
                                                                               --------    --------
           Total assets                                                        $  2,665    $  6,660
                                                                               ========    ========

                      Liabilities and Stockholders' Equity

Accounts payable                                                               $     23    $    405
Accrued expenses                                                                     56         328
Unearned revenue                                                                    450          --
Due to related party                                                                 27         262
                                                                               --------    --------
           Total current liabilities                                                556         995

Capital lease obligation                                                              4          13
                                                                               --------    --------
           Total liabilities                                                        560       1,008

Commitments and Contingencies                                                        --          --

Stockholders' equity:
     Preferred  stock, Series A, $.001 par value, 10% cumulative, 5,000,000
       shares authorized, 600,000 shares
       issued and outstanding at December 31, 1998 and 1997, 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, 1998          --          --
     Common stock, $.001 par value, 50,000,000 shares
       authorized, 11,515,575 and 11,503,650, shares issued
       and outstanding at December 31, 1998 and 1997, respectively                   11          11
     Additional paid in capital                                                  11,720      11,638
     Deficit accumulated during the development stage                            (9,627)     (5,998)
                                                                               --------    --------
           Total stockholders' equity                                             2,105       5,652
                                                                               --------    --------
                                                                               $  2,665    $  6,660
                                                                               ========    ========
</TABLE>


                 See accompanying notes to financial statements.


                                      F-2
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Statements of Operations
(amounts in thousands, except shares and share data)
================================================================================

<TABLE>
<CAPTION>
                                                                                              Period from       Cumulative
                                                                                              November 15,     Amounts From
                                                                                                 1995          November 15,
                                                                Six Months       Year          (Date of            1995
                                              Year Ended          Ended          Ended         Inception)        (Date of
                                              December 31,     December 31,     June 30,       to June 30,     Inception) to
                                                  1998             1997           1997            1996      December 31, 1998
<S>                                              <C>             <C>             <C>             <C>             <C>     
Costs and expenses:
     Research and development                    $  1,299        $    817        $    985        $     50        $  3,151
     General and administrative                     1,096             869           1,356              10           3,331
     Depreciation and amortization                    408             134             118              --             660
     Corporate overhead expenses                      529             911             705              --           2,145
     Sales and marketing                              417             230              51              --             698
     Licensing fee                                     --              --              50              --              50
                                                 --------        --------        --------        --------        --------

     Total costs and expenses                       3,749           2,961           3,265              60          10,035
                                                 --------        --------        --------        --------        --------

Revenue                                                19              --               8              --              27
Interest income                                       101             195              99              --             395
Interest expense                                       --              --             (13)             (1)            (14)
                                                 --------        --------        --------        --------        --------

     Net loss before income taxes                  (3,629)         (2,766)         (3,171)            (61)         (9,627)

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

     Net loss                                    $ (3,629)       $ (2,766)       $ (3,171)       $    (61)       $ (9,627)
                                                 ========        ========        ========        ========        ========

Net loss per share - basic and diluted           $  (0.37)       $  (0.27)       $  (0.32)       $  (0.01)
                                                 ========        ========        ========        ========

Weighted average number of shares
     outstanding (in thousands)                    11,514          11,502          10,375          10,000
                                                 ========        ========        ========        ========
</TABLE>

                 See accompanying notes to financial statements.


                                      F-3
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Stockholders' Equity
(amounts in thousands, except shares and share data)
================================================================================

<TABLE>
<CAPTION>
                                                                                                                                    
                                                                                                                                    
                                                           Preferred Stock           Preferred Stock                                
                                                              Series A                  Series B                 Common Stock       
                                                      -----------------------   -----------------------   ------------------------
                                                         Shares      Amount        Shares       Amount      Shares         Amount
<S>                                                       <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
Reverse stock split of 1.50 shares
     for one share on November 26, 1996                        --          --            --          --    (5,000,000)          (5)
Net loss for the period from
     November 15, 1995 through June 30, 1996                   --          --            --          --            --           -- 
                                                      -----------   ---------   -----------   ---------   -----------    ---------
Balance, June 30, 1996                                         --          --            --          --    10,000,000           10

Collection of subscription receivable                          --          --            --          --            --           -- 
Conversion of notes payable to capital                         --          --            --          --            --           -- 
Proceeds from sale of common
     stock and warrants                                        --          --            --          --     1,500,000            1
Proceeds from sale of preferred stock,
     Series A,  and warrants                              600,000   $       1            --          --            --           -- 
Dividend on preferred stock, Series A                          --          --            --          --            --           -- 
Net loss for the year ended June 30, 1997                      --          --            --          --            --           -- 
                                                      -----------   ---------   -----------   ---------   -----------    ---------
Balance, June 30, 1997                                    600,000           1            --          --    11,500,000           11

Issuance of common stock                                       --          --            --          --         3,650           -- 
Dividend on preferred stock, Series A                          --          --            --          --            --           -- 
Net loss for the six months
     ended December 31, 1997                                   --          --            --          --            --           -- 
                                                      -----------   ---------   -----------   ---------   -----------    ---------
Balance, December 31, 1997                                600,000           1            --          --    11,503,650           11

Issuance of common stock                                       --          --            --          --        11,925           -- 
Issuance of preferred stock, Series B                          --          --         3,570                        --           -- 
Gain on troubled debt restructuring                            --          --            --          --            --           -- 
Dividends on preferred stock, Series A                         --          --            --          --            --           -- 
Net loss for the year ended December 31, 1998                  --          --            --          --            --           -- 
                                                      -----------   ---------   -----------   ---------   -----------    ---------

Balance, December 31, 1998                                600,000   $       1         3,570   $      --    11,515,575    $      11
                                                      ===========   =========   ===========   =========   ===========    =========

<CAPTION>
                                                                                                 Deficit               
                                                                                               Accumulated        Total   
                                                                                 Additional    During the      Shareholders'        
                                                                 Subscription      Paid in     Development        Equity
                                                                  Receivable       Capital        Stage         (Deficit)
<S>                                                               <C>            <C>            <C>            <C>        
Common stock issued for cash on
     November 15, 1995 (inception) at $1 per share                         --             --             --             --
Stock split of 150,000 shares for one share
     on September 5, 1996                                         $       (15)            --             --             --
Reverse stock split of 1.50 shares
     for one share on November 26, 1996                                    --    $         5             --             --
Net loss for the period from
     November 15, 1995 through June 30, 1996                               --             --    $       (61)   $       (61)
                                                                  -----------    -----------    -----------    -----------
Balance, June 30, 1996                                                    (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                                                    --          6,108             --          6,109
Proceeds from sale of preferred stock,
     Series A,  and warrants                                               --          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                                                     --         11,928         (3,232)         8,708

Issuance of common stock                                                   --             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                                                 --         11,638         (5,998)         5,652

Issuance of common stock                                                   --             25             --             25
Issuance of preferred stock, Series B                                      --            143             --            143
Gain on troubled debt restructuring                                        --            214             --            214
Dividends on preferred stock, Series A                                     --           (300)            --           (300)
Net loss for the year ended December 31, 1998                              --             --         (3,629)        (3,629)
                                                                  -----------    -----------    -----------    -----------

Balance, December 31, 1998                                        $        --    $    11,720    $    (9,627)   $     2,105
                                                                  ===========    ===========    ===========    ===========
</TABLE>

                 See accompanying notes to financial statements.


                                      F-4
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Statements of Cash Flows
(amounts in thousands, except shares and share data)
================================================================================

<TABLE>
<CAPTION>
                                                                                                      Period from      Cumulative
                                                                                                      November 15,    Amounts From
                                                                             Six Months      Year         1995        November 15,
                                                                Year Ended     Ended         Ended    (Inception)        1995
                                                               December 31,  December 31,   June 30,   to June 30,  (Inception) to
                                                                  1998          1997         1997         1996     December 31, 1998
<S>                                                              <C>          <C>          <C>          <C>          <C>      
Cash flows from operating activities:
    Net loss                                                     $ (3,629)    $ (2,766)    $ (3,171)    $    (61)    $ (9,627)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation and amortization                                 408          134          118           --          660
        Issuance of Common Stock for services                          25           10           --           --           35
        Gain on troubled debt restructuring (See Note 4)              214           --           --           --          214
        Changes in assets and liabilities:
        Inventory, net                                               (325)        (360)          --           --         (685)
        Accounts payable                                             (382)         117          270           18           23
        Accrued expenses                                             (272)         187          129           12           56
        Unearned revenue                                              450           --           --           --          450
        Other assets                                                   57          (10)         (48)          --           (1)
                                                                 --------     --------     --------     --------     --------

           Net cash used in operating activities                   (3,454)      (2,688)      (2,702)         (31)      (8,875)
                                                                 --------     --------     --------     --------     --------

Cash flows from investing activities:
    Acquisition of intangible assets                                  (24)        (114)         (48)         (10)        (196)
    Purchase of property and equipment                                (15)         (33)        (352)          (3)        (403)
    Acquisition of leasehold improvements                              (5)          (2)        (203)          --         (210)
    Construction of technical equipment                              (721)        (279)        (404)          (7)      (1,411)
    Increase in certificate of deposit                               (122)         (88)          --           --         (210)
                                                                 --------     --------     --------     --------     --------

           Net cash used in investing activities                     (887)        (516)      (1,007)         (20)      (2,430)
                                                                 --------     --------     --------     --------     --------

Cash flows from financing activities:
    Proceeds from sale of common stock and warrants                    --           --        6,109           --        6,109
    Proceeds from sale of preferred stock and warrants                 --           --        4,978           --        4,978
    Preferred stock dividend                                         (300)        (300)        (138)          --         (738)
    Borrowings from (repayments to) stockholder                       (92)        (433)       1,617           54        1,146
    Collection of subscription receivable                              --           --           15           --           15
    Repayment of capital lease obligation                              (9)          (5)          18           --            4
                                                                 --------     --------     --------     --------     --------

           Net cash (used in) provided by
             financing activities                                    (401)        (738)      12,599           54       11,514
                                                                 --------     --------     --------     --------     --------

(Decrease) increase in cash and cash equivalents                   (4,742)      (3,942)       8,890            3          209
Cash and cash equivalents, beginning of period                      4,951        8,893            3           --           --
                                                                 --------     --------     --------     --------     --------

Cash and cash equivalents, end of period                         $    209     $  4,951     $  8,893     $      3     $    209
                                                                 ========     ========     ========     ========     ========
Supplemental disclosure of cash flow information
    Cash paid during the period for:
      Interest                                                   $     --     $     --     $     13     $      1     $     14
                                                                 ========     ========     ========     ========     ========

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

Non cash investing and financing activities:
    Issuance of preferred stock in exchange for the
      forgiveness of indebtness (See Note 4)                     $    143     $     --     $     --     $     --     $    143
                                                                 ========     ========     ========     ========     ========

    Issuance of common stock in exchange for
      subscription receivable                                    $     --     $     --     $     --     $     15     $     15
                                                                 ========     ========     ========     ========     ========
</TABLE>
                 See accompanying notes to financial statements.


                                      F-5
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

1.   Background

     Commodore Separation Technologies,  Inc. (a development stage company) (the
     "Company")  was  incorporated  on November 15, 1995,  under the laws of the
     State of 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.

     Effective December 2, 1996, Commodore Environmental Services, Inc.
     ("Environmental") transferred 100% of the capital stock of the Company and
     notes receivable from the Company which aggregated $976 to its then 69.3%
     owned subsidiary, Commodore Applied Technologies, Inc. ("Applied") in
     exchange for cash and a warrant to purchase shares of Applied common stock.
     Concurrent with this transaction, Applied contributed the notes receivable
     from the Company as a capital contribution. The transfer was accounted for
     as a transaction between entities under common control. Accordingly, the
     assets and liabilities of the Company were recorded at Environmental's
     carryover basis.

     On September 28, 1998, Commodore Environmental Services LLC, a Delaware
     limited liability company wholly owned by Environmental, acquired
     10,000,000 shares of common stock of the Company representing approximately
     87% of the issued and outstanding shares of capital stock from Applied, a
     35% owned affiliate of Environmental, as part of a debt repayment plan
     between Environmental and Applied. Because of the outstanding publicly
     traded preferred stock of the Company, the resultant purchase accounting
     adjustments have not been recorded by the Company.

2.   Summary of Significant Accounting Policies

     Liquidity

     The  accompanying   financial  statements  have  been  prepared  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  for the years ended  December  31,  1998,  the six months ended
     December  31,  1997,  the year  ended  June 30,  1997 and the  period  from
     November 15, 1995  (inception)  through June 30, 1996, the Company incurred
     losses from  operations of $3,629,  $2,766,  $3,171 and $61,  respectively.
     Presently,  the Company does not have sufficient cash resources to meet its
     requirements  in  1999.  The  financial   statements  do  not  include  any
     adjustments  that  might be  necessary  should  the  Company  be  unable to
     continue as a going concern. 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. Potential sources of cash
     include new  contracts,  the  issuance of  external  debt,  the sale of new
     shares


                                      F-6
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     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.

     Fair Value of Financial Instruments

     The fair value of  financial  instruments  is  determined  by  reference to
     various  market  data  and  other  valuation   techniques  as  appropriate.
     Financial  instruments  include cash, cash equivalents and restricted cash.
     As of December 31, 1998, recorded book value approximates fair value.

     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
     compensating  balance  for  $600  of  letters  of  credit  which  represent
     collateral  for a  performance  bond  related  to  the  Port  of  Baltimore
     contract.

     Research and Development Expenditures

     Research  and  development   expenditures  are  charged  to  operations  as
     incurred.

     Inventory

     Inventory represents finished goods and consists of machinery and equipment
     built and held for sale. Inventory is recorded at historical cost per unit.

     Property and Equipment

     Property and equipment are stated at cost. Major additions and improvements
     are  capitalized and minor  replacements,  maintenance and repairs which do
     not  increase  the useful  lives of the assets are  expensed  as  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.

     Intangible Assets

     The Company has incurred  costs  associated  with  application  for certain
     patents. These costs are capitalized and amortized over 17 years.

     Income Taxes

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


                                      F-7
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     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.

     Use of Accounting Estimates

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

     Stock Compensation

     The Company has adopted the intrinsic  value method of accounting for stock
     options and warrants  under  Accounting  Principles  Board  Opinion No. 25.
     Under this standard,  no compensation expense is recorded when the exercise
     price of options  granted to  employees is equal to or less 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.

     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.

     Contracts

     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.  As of
     December 31, 1998,  the Company had not yet commenced work on this contract
     and accordingly,  had not recorded  revenue related to the contract.  Costs
     incurred in  preparation  for the  commencement  of the contract  have been
     recorded as expenses as incurred.

     Unearned Revenue

     The Company has collected a $450 deposit related to the contract  described
     in the  preceding  paragraph.  Such  amount  has been  deferred  until  the
     commencement of the contract.

     Revenue

     Revenue  recorded  during  the  development   stage  related  primarily  to
     reimbursement  for certain  testing  procedures  performed  by the Company,
     related to the acquisition of the Port of Baltimore contracts.

     New Accounting Pronouncements

     The Company has adopted SFAS 129,  "Disclosure of Information About Capital
     Structure." The financial  statements and footnotes reflect the disclosures
     required under this standard.



                                      F-8
<PAGE>



Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     The Company has adopted  SFAS 130,  "Reporting  on  Comprehensive  Income."
     During the years presented in these consolidated financial statements,  the
     Company did not experience any other comprehensive income.

     The  Company  has  adopted  SFAS 131,  "Disclosures  About  Segments  of an
     Enterprise and Related Information." The financial statements and footnotes
     reflect  the  disclosures  required  under  this new  standard.  Under  the
     definitions  provided in SFAS 131, the Company operates in only in one line
     of business.

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

3.   Earnings Per Share

     All  earnings per share  amounts  reflect the  implementation  of SFAS 128,
     "Earnings  per Share,"  which  establishes  new standards for computing and
     presenting  earnings per share and  requires all prior period  earnings per
     share data be restated to conform  with the  provisions  of the  statement.
     Basic  earnings per share are computed by dividing net income  available to
     common  shareholders by the weighted  average number of shares  outstanding
     during  the  period.  Diluted  earnings  per share are  computed  using the
     weighted average number of shares determined for the basic 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.




                                      F-9
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

<TABLE>
<CAPTION>
                                                                                                                       Period from
                                                                                                                       November 15,
                                                                                Six Months            Year                 1995
                                                            Year Ended            Ended               Ended            (Inception)
                                                            December 31,       December 31,          June 30,           to June 30,
                                                               1998                1997                1997                1996
                                                                           (Dollars in thousands except per share data)
                                                           ------------------------------------------------------------------------
<S>                                                        <C>                 <C>                 <C>                 <C>          
Net loss                                                   $     (3,629)       $     (2,766)       $     (3,171)       $        (61)
Preferred stock dividends                                          (300)               (300)               (138)                 --
Dividends on Series A Preferred Stock
    (not declared)                                                 (300)                 --                  --                  --
                                                           ------------        ------------        ------------        ------------

Net loss applicable to common shareholders                 $     (4,229)       $     (3,066)       $     (3,309)       $        (61)
                                                           ------------        ------------        ------------        ------------

Weighted average common shares
    outstanding (basic)                                      11,514,000          11,502,000          10,375,000          10,000,000
Convertible Preferred Stock                                         (*)                 (*)                 (*)                  --
Warrants issued in initial public offering                          (*)                 (*)                 (*)                  --
Employee stock options                                              (*)                 (*)                 (*)                  --
                                                           ------------        ------------        ------------        ------------

Weighted average common shares
    outstanding (diluted)                                    11,514,000          11,502,000          10,375,000          10,000,000
                                                           ------------        ------------        ------------        ------------

Loss per share (basic)                                     $       (.37)       $       (.27)       $       (.32)       $       (.01)
                                                           ============        ============        ============        ============

Loss per share (diluted)                                   $       (.37)       $       (.27)       $       (.32)       $       (.01)
                                                           ============        ============        ============        ============
</TABLE>


     (*) Due to the Company's loss from continuing operations for the year ended
     December 31, 1998,  the six months ended  December 31, 1997, the year ended
     June 30, 1997 and the period from November 15, 1995 (inception) to June 30,
     1996, the incremental  shares issuable in connection with these instruments
     are anti-dilutive and accordingly not considered in the calculation.

4.   Related Party Transactions

     In connection with Environmental's September 1998 acquisition of 87% of the
     Company's common stock from Applied,  Applied transferred a $357 receivable
     due from the Company to Environmental. In December 1998, the Company issued
     3,570 shares of Series B Preferred Stock (see Note 7) valued by independent
     appraisal at $143 to  Environmental in exchange for the forgiveness of $357
     of indebtedness.  Because Environmental owns 87% of the common stock of the
     Company,  the $214 gain on troubled  debt  restructuring  was recorded as a
     direct reduction in additional paid in capital.



                                      F-10
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     For the nine months ended September 30, 1998, the six months ended December
     31,  1997 and the year  ended  June  30,  1997,  the  Company  was  charged
     management  fees by  Applied  of $529,  $911 and $705,  respectively.  This
     management fee is a result of allocated wages and salaries, rent, insurance
     (including   director   and   officer   liability   insurance)   and  other
     administrative  expenses.  The  management  fees  commenced  in April 1997.
     Management  fees were not  charged by  Environmental  for the three  months
     ended December 31, 1998.

     The Company owed  uncollaterized  advances of $27 and $262 to Applied as of
     December 31, 1998 and 1997, respectively.

     Through June 30, 1996, the Company had an unwritten  agreement  pursuant to
     which  its sole  stockholder  provided  space  for the  Company's  New York
     offices at no cost,  and another  company  under  common  control  provided
     research  and  development  facility  space  to  the  Company  at no  cost.
     Subsequent to June 30, 1996,  the Company paid a monthly rent of $1 for the
     research and development facility.

     Pursuant to the royalty agreements with the investor of the technology, the
     Company  caused its then parent,  Commodore  Environmental  Services,  Inc.
     ("Environmental"), to issue 200,000 shares of Environmental common stock to
     the inventor of the technology upon inception of 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 1998 and 1997 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.

     The  provision  for income taxes for results in an effective tax rate which
     differs from federal income tax rates as follows:

<TABLE>
<CAPTION>
                                                                         Six Months
                                                        Year Ended         Ended                     June 30,
                                                       December 31,     December 31,        -------------------------
                                                          1998              1997              1997              1996
<S>                                                     <C>               <C>               <C>               <C>     
Expected tax benefit at federal statutory rate          $(1,234)          $  (941)          $(1,078)          $   (21)
State income tax benefits, net of federal income tax
  benefit                                                  (218)             (166)             (190)               (3)
Change in valuation allowance                             1,452             1,107             1,268                24
                                                        -------           -------           -------           -------

Income taxes                                            $    --           $    --           $    --           $    --
                                                        =======           =======           =======           =======
</TABLE>


                                      F-11
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

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


<TABLE>
<CAPTION>
                                                        Six Months
                                        Year Ended        Ended                 June 30,
                                       December 31,    December 31,      ----------------------
                                          1998            1997            1997            1996
<S>                                      <C>             <C>             <C>             <C>     

Net operating loss carryforward          $3,851          $2,398          $1,292          $   24
Less:  Valuation allowance                3,851           2,398           1,292              24
                                         ------          ------          ------          ------

Net deferred tax asset                   $   --          $   --          $   --          $   --
                                         ======          ======          ======          ======
</TABLE>


     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.  As of December
     1998 and 1997,  the Company has  established a valuation  allowance for the
     entire amount of net deferred tax assets.

     At December 31, 1998, the Company had tax loss carryforwards of
     approximately $9,600. 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 CST that took place in September 1998 could limit the Company's
     ability to utilize all existing tax loss carryforwards. These net operating
     carryforwards begin to expire in 2011.

6.   Royalty Agreements

     The Company has an agreement with a former officer of 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).

     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. No royalties have been paid as of December 31, 1998.


                                      F-12
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

7.   Capital Structure

     On September 5, 1996, the Company amended its Certificate of  Incorporation
     authorizing up to 5,000,000 shares of Preferred Stock,  Series A, $.001 par
     value and up to  50,000,000  shares of Common Stock,  $.001 par value.  The
     Company also effected a stock split of 150,000  shares for one share.  This
     increased the total number of shares of Common Stock issued and outstanding
     to 15,000,000  shares.  On November 26, 1996, the  outstanding  shares were
     reduced to  10,000,000  based on a  1-for-1.50  reverse  stock  split.  The
     financial  statements  have been  prepared  as though the above  changes in
     stockholders' equity had occurred at November 15, 1995.

     In April  1997,  the  Company  completed  an  Initial  Public  Offering  of
     1,500,000  units each consisting of one share of Common Stock and a Warrant
     to purchase one share of Common Stock, and 600,000 units each consisting of
     one share of  Convertible  Preferred  Stock,  Series  A, and a  Warrant  to
     purchase one share of Common Stock.

     Proceeds from the offering were as follows:


                                                        Common      Preferred
                                                         Units        Units

     Proceeds allocated to shares                       $5,564       $5,214
     Proceeds allocated to warrants                      2,086          846
                                                        ------       ------
              Gross proceeds                             7,650        6,060

     Less: Discount and offering expenses                1,541        1,082
                                                        ------       ------
              Net proceeds                              $6,109       $4,978
                                                        ======       ======


     The  underwriter  of the  offering  exercised  its  right  to  purchase  an
     additional 315,000 Warrants for $32.

     Preferred Stock, Series A

     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 in each instance in a reduction of
     $.50 per share in the conversion  price but not below $3.75 per share. 


                                      F-13
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     The Company did not pay  dividends  on  September  30, 1998 or December 31,
     1998,  therefore  adjusting  the effective  conversion  price from $6.00 to
     $5.00.

     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 $10.00 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 $10.00 per share or, after April 3,
     2001,  at  certain  cash  redemption  prices  plus  accumulated  and unpaid
     dividends.  Accumulated and unpaid  dividends at December 31, 1998 amounted
     to $300, an amount equal to $0.50 per share.

     The  holders  of  Convertible  Preferred  Stock,  Series A, 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 $10.00 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 $100.00 per share.  Cumulative  dividends  are
     payable  at the rate of $6.00 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. Failure to pay any quarterly  dividend will result in a reduction of the
     conversion price as described below.

     The Convertible  Preferred Stock, Series B is convertible 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 $105.00
     per share, plus accumulated and unpaid dividends.

                                      F-14
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     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 $15.00
     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.

     Representative's Warrants

     In connection  with the Initial  Public  Offering,  the 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 $12.00 per share of
     Convertible  Preferred Stock,  $6.00 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.

9.   Stock Option Plans

     The Company's  1996 Stock Option Plan (the "1996 Plan")  provides the Board
     of Directors  the  authority to issue  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.  Through January
     1997, the Board of Directors had awarded  630,000  five-year  non-qualified
     options  under the 1996 Plan to officers.  These options  became  effective
     upon the completion of the Company's  initial public offering in April 1996
     and carried an exercise price equal to the initial public  offering  price.
     These  options  vest 20% per year,  with the first 20% vesting  immediately
     upon the date of grant.

     In  addition,  in  September  1996  the  Board  awarded  136,689  five-year
     non-qualified options under the 1996 Plan to non-employee directors.  These
     options also became  effective  upon  completion of the 


                                      F-15
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     Company's  initial public offering and carry an exercise price equal to the
     initial public  offering  price.  These options vest 33-1/3% per year, with
     the first third vesting immediately upon the date of grant.

     In May and June 1997, the Company awarded 230,000  five-year  incentive and
     non-qualified  options  under the 1996 Plan to certain  key  employees  and
     officers.  These  options  carry an exercise  price of $2.50,  equal to the
     market  price at the time of the awards.  These  options vest 20% per year,
     with the first 20% vesting immediately upon the date of grant.

     In July  1997,  the  Company  modified  the  term of all  existing  options
     outstanding  under  the  1996  Plan to ten  years.  No  other  terms of the
     existing  awards  were  changed.  This  did  not  result  in  a  charge  to
     compensation as the market value on the date of modification  was less than
     the exercise  price for all options  outstanding.  For purposes of the SFAS
     123 disclosures in the following paragraphs,  this modification was treated
     as a rescission of the initial awards and a grant of new awards.

     In December 1997, the Company awarded 45,563 ten-year non-qualified options
     under  the 1996  Plan to a new  member  of the  Board of  Directors.  These
     options carry an exercise price of $1.88,  equal to the market price at the
     time of the award.  These  options  vest  33-1/3% per year,  with the first
     third vesting immediately upon the date of grant.

     In  December  1998,  the  Company  terminated  the 1996 Plan and all of the
     outstanding   options   granted  were   surrendered   to  the  Company  for
     cancellation.  In addition,  the Company's Board of Directors  approved the
     Company's  1998 Stock Option Plan (the "1998  Plan").  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.



                                      F-16
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     A summary of the status of  options  granted  under the Plan as of June 30,
     1997,  December  31, 1997 and  December  31,  1998 and  changes  during the
     periods then ended is presented below:

<TABLE>
<CAPTION>
                                                  Year Ended                    Six Months Ended              Year Ended
                                                December 31, 1998              December 31, 1997             June 30, 1997
                                           ----------------------------    ---------------------------  ------------------------
                                                              Weighted-                     Weighted-                 Weighted-
                                                               Average                       Average                   Average
                                                              Exercise                       Exercise                  Exercise
                                              Shares           Price          Shares          Price       Shares        Price
<S>                                            <C>               <C>          <C>               <C>        <C>           <C>
Options outstanding at
    beginning of year                          1,042,252         $4.31          996,689         $4.42           --           --
Granted                                        1,461,950           .19        1,042,252          4.31      996,689       $ 4.42
Exercised                                             --                             --            --           --           --
Forfeited                                             --                             --            --           --           --
Rescinded                                     (1,092,252)         4.14         (996,689)         4.42           --           --
                                           -------------                  -------------                -----------

Options outstanding at end of year             1,411,950           .19        1,042,252          4.31      996,689         4.42
                                           =============                  =============                ===========

Options exercisable at year end                  950,890                        384,313                    217,564
                                           =============                  =============                ===========
Weighted average fair value of
    options granted during the period                             $.12                          $1.42                    $ 2.47
</TABLE>


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


                                          Weighted-
                                           Average
                                          Remaining
        Exercise         Number           Contractual        Options
         Price        Outstanding             Life        Exercisable
      
       $ 5.00               25,000            7.79              25,000
       $  .09            1,386,950            9.95             925,890
                      ------------                        ------------
      
                         1,411,950            9.77             950,890
                      ============                        ============

                                      F-17
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

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

                                                     Six Months
                                      Year Ended        Ended       Year Ended
                                      December 31,   December 31,    June 30,
                                         1998           1997           1997

     Net loss - as reported           $  (3,629)     $  (2,766)     $  (3,171)
     Net loss - pro forma             $  (4,303)     $  (3,114)     $  (3,706)
     Loss per share - as reported     $    (.37)     $    (.27)     $    (.32)
     Loss per share - pro forma       $    (.43)     $    (.30)     $    (.37)


     SFAS 123 requires  stock options to be valued using an approach such as the
     Black-Scholes  option pricing model. The Black-Scholes model calculates the
     fair value of the grant based upon certain assumptions about the underlying
     stock. The expected  dividend yield of the stock is zero, the expected life
     of the options is 10 years for the year ended  December  31,  1998, 9 years
     for the six months  ended  December 31, 1997 and 5 years for the year ended
     June 30, 1997,  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.

10.  Commitments and Contingencies

     Leases

     The Company is  committed  under  non-cancelable  leases for office  space,
     machinery and equipment.  Future  obligations under the leases for the next
     five years are as follows:

                                                             Operating
       Fiscal                              Capital Lease       Lease
     Year Ended                               Payments        Payments

        1999                                     $ 9             $129
        2000                                      --              132
        2001                                      --              132
                                               -----             ----

                                                   9             $393
                                                                 ====
Amount representing interest                      (5)
                                               -----
                                                 $ 4
                                               =====

                                      F-18
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

     Property and equipment at December 31, 1998 and 1997 includes the following
     amounts for capitalized leases:

                                                         1998         1997

     Technical equipment                                 $ 26         $ 26
         Less: Accumulated Depreciation                    (4)          (1)
                                                         ----         ----

                                                         $ 22         $ 25
                                                         ====         ====


     Rent expense  approximated  $114 for the year ended  December 31, 1998, $56
     for the six months ended  December 31, 1997 and $72 for the year ended June
     30, 1997.

     Employment Agreements

     The Company has employment agreements with one executive. Aggregate minimum
     payments under the employment agreement are $106 in 1999.

     Litigation

     The Company has no matters of litigation  arising in the ordinary course of
     business  which in the opinion of management  will have a material  adverse
     effect on its financial condition, results of operations or cash flows.

11.  Comparative Financial Information (Unaudited)

     The selected  financial  data included in the following  table for the year
     ended  December  31,  1997 and the six months  ended  December  31, 1996 is
     unaudited  and,  in the opinion of  management,  includes  all  adjustments
     consisting  of  only  normal  recurring  adjustments  necessary  for a fair
     presentation of such data.

                                                                  (unaudited)
                                               (unaudited)         Six Months
                                                Year Ended           Ended
                                               December 31,       December 31,
                                                   1997              1996

     Cost and expenses                           $(5,369)          $  (857)
     Revenues                                         --                 8
     Interest income                                 294                --
     Interest expense                                 (8)               (5)
     Income taxes                                     --                --
                                                 -------           -------

     Net loss                                    $(5,083)          $  (854)
                                                 -------           -------

     Net loss per share                          $  (.46)          $  (.09)
                                                 =======           =======


                                      F-19
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
(amounts in thousands, except shares and share data)
================================================================================

12.  Subsequent Events

     The Company  signed a  non-binding  letter of intent on February 2, 1999 to
     merge with and into American  Technologies  Group, Inc.  ("ATEG").  ATEG is
     engaged in the  development,  commercialization  and sale of  products  and
     systems using its patented and proprietary  technologies,  concentrating in
     three core areas: (i) IE(TM) technology, (ii) water purification, and (iii)
     high energy particle beams.

     The Company  commenced  operation of its first commercial  project with the
     State of Maryland and as such,  has entered into a multi-year,  sole-source
     contract   with  Maryland   Environmental   Services  for  the  removal  of
     chromium-contaminated leachate at the Port of Baltimore.


                                      F-20