<PAGE>

                       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

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

                                       OR

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

           For the transition period from July 1 to December 31, 1997

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

         Non-affiliates of the registrant held shares of Common Stock as of
March 26, 1998 with an aggregate market value of approximately $4,026,000 (based
upon the average bid and asked prices of the Common Stock on March 26, 1998 as
quoted by the Nasdaq SmallCap Market).

         As of March 26, 1998, 11,515,575 shares of the registrant's Common
Stock were outstanding.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None

<PAGE>

                     COMMODORE SEPARATION TECHNOLOGIES, INC.

                         TRANSITION REPORT ON FORM 10-K
           FOR THE TRANSITION PERIOD FROM JULY 1 TO DECEMBER 31, 1997

                                TABLE OF CONTENTS

                                                                            Page

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

   ITEM 1.    BUSINESS....................................................    1
              General.....................................................    1
              The SLiM Technology.........................................    2
              Contracts...................................................    4
              Markets and Customers.......................................    5
              Raw Materials...............................................    7
              Backlog.....................................................    7
              Research and Development....................................    7
              Intellectual Property.......................................    7
              Competition.................................................    8
              Government Regulation.......................................    8
              Environmental Matters.......................................    8
              Employees...................................................    9

   ITEM 2.    PROPERTIES..................................................    9

   ITEM 3.    LEGAL PROCEEDINGS...........................................    9

   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...............   12
              General.....................................................   12
              Results of Operations.......................................   12
              Liquidity and Capital Resources.............................   13
              Net Operating Losses........................................   14
              Year 2000 Considerations....................................   14
              Forward-Looking Statements..................................   14

   ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..   15

                                       i

<PAGE>

   ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................   15

   ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE......................   15

PART III..................................................................   16

   ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........   16
              Executive Officers and Directors............................   16
              Key Employees...............................................   19
              Board Committees............................................   19
              Compensation of Directors...................................   20
              Compliance with Section 16(a) of the Exchange Act...........   20

   ITEM 11.   EXECUTIVE COMPENSATION......................................   21
              Summary Compensation........................................   21
              Stock Options...............................................   22
              Employment Agreements.......................................   23
              Compensation Committee Interlocks and Insider
              Participation...............................................   24
              Report of the Compensation Committee on Executive
              Compensation................................................   24

   ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT..................................................   28

   ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............   30
              Organization and Capitalization of the Company..............   30
              Loans Involving Affiliates..................................   30
              Offices.....................................................   30
              Services Agreement..........................................   31
              Future Transactions.........................................   31

PART IV...................................................................   32

   ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
              ON FORM 8-K.................................................   32

SIGNATURES................................................................   35

                                       ii

<PAGE>

         ON JULY 28, 1997, THE COMPANY CHANGED ITS FISCAL YEAR FROM A
TWELVE-MONTH PERIOD ENDING JUNE 30 TO A TWELVE-MONTH PERIOD ENDING DECEMBER 31,
EFFECTIVE JANUARY 1, 1998. CONSEQUENTLY, THE COMPANY IS FILING THIS TRANSITION
REPORT ON FORM 10-K FOR THE SIX-MONTH TRANSITION PERIOD FROM JULY 1 TO DECEMBER
31, 1997.


                                     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 the results of more than 100 laboratory and field tests to
date, 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 without any 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 the 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, 1998, approximately 87% of the Company's
common stock was owned by Commodore Applied Technologies, Inc., a Delaware
corporation ("Applied"), and approximately 43% of Applied's common stock was, in
turn, owned by Commodore Environmental Services, Inc., a Delaware corporation
("Environmental").

         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.


<PAGE>


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 on the manufacturing site at ambient temperatures and
pressures.

         SLiM involves passing a contaminated aqueous or gaseous feedstream
through a hollow, porous 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,
cadmium, silver, mercury, platinum, lead, zinc and nickel) 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 is exploring alternative design and sourcing of modules
that will perform equal to or better than those presently in service in order to
decrease the risk of supply interruptions. 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;

                                       2

<PAGE>

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

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

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

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

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

         Test Results

         In more than 100 laboratory and field tests to date, SLiM has
demonstrated the ability to successfully separate a variety of metals and other
substances from aqueous and possibly gaseous process streams. In each instance,
the process stream was reduced to levels approaching federal guidelines under
the Federal Clean Water Act for the disposal of the reacted process stream as
normal wastewater effluent, and the recovered materials were of sufficient
quantity and purity as to economically permit the reuse thereof in most
commercial applications. Test results included the following:
<TABLE>
<CAPTION>
                                                                                               Applicable
Material                     Before Treatment               After Treatment                    Federal Guideline
--------                     ----------------               ---------------                    -----------------
<S>                          <C>                            <C>                                <C>
Metals:

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

     Nickel                  1,500 ppm                      Less than 1.0 ppm (after 30        Less than 2 ppm
                                                            minutes)

     Chromium (hexavalent)   400 ppm                        0.05 ppm (field test)              Less than 0.05 ppm
     Aluminum                290 ppm                        Less than 20 ppm (after 15         Less than 30 ppm
                                                            minutes)

     Silver                  3,150 ppm                      Less than 2 ppm                    Less than 2 ppm

     Cobalt                  200 ppm                        Less than 1.1 ppm                  Less than 1.5 ppm

     Copper                  4,500 ppm                      Less than 0.3 ppm                  Less than 1.0 ppm

Radionuclides:
     Rhenium                 5 ppm                          Less than 5 parts per billion      Less than 10 ppb
                                                            (ppb)
</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 and chromium, no other tests conducted by the Company
have been independently verified.

                                       3

<PAGE>


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 Hawkins Point Contract followed the Company's successful completion
of several on-site demonstrations of SLiM at the Port of Baltimore. During the
Company's first on-site demonstration in August 1996, a single SLiM unit, in a
single pass-through of feedstream, processed 90 gallons of water containing more
than 630 ppm of hexavalent chromium and reduced the hexavalent chromium
concentration level to 0.7 ppm. The results of this test were verified by
Artesian Laboratories, Inc., an independent testing laboratory. The Company was
invited to conduct an additional demonstration at the Port of Baltimore in
February 1997. During this demonstration, approximately 1,500 gallons from the
same source were processed. Hexavalent chromium was reduced to 0.03 ppm, well
below the federal guidelines for unregulated discharge. Due to the success of
these demonstrations, the State of Maryland included the SLiM process as an
eligible technology in the bid documents to remediate chromium leachate at the
Port of Baltimore. The Company then engaged a professional engineering company
to design and build commercial-scale units capable of processing larger volumes
of contaminated water. A commercial unit was mobilized to the Port of Baltimore
and commenced operation in June 1997. The demonstration culminated with a
non-stop, 48-hour run in late August 1997. During this final test, the SLiM
equipment processed approximately 12,000 gallons of leachate and successfully
met the federal discharge standards for hexavalent chromium.

         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.

         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
provisional patent 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

                                       4
<PAGE>

can be reused in various scientific 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, 1997, 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 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

                                       5

<PAGE>

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 the 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 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 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.

                                       6

<PAGE>


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, 1997, total backlog for the Company was approximately
$600,000, as compared with no backlog at June 30, 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 $817,000 and $985,000 for the
transition period from July 1 to December 31, 1997 (the "Transition Period") and
for the fiscal year ended June 30, 1997, respectively.

INTELLECTUAL PROPERTY

         In September 1997, the Company filed two U.S. continuation-in-part
("CIP") provisional patent applications and one international patent application
covering the principal features of its SLiM technology. One of the CIP
provisional patent applications covers the joint inventions of Dr. Kilambi and
Lockheed Martin. The other CIP provisional patent application and the
international patent application cover the sole inventions of Dr. Kilambi.

         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

                                       7
<PAGE>

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 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.

                                       8

<PAGE>

         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, 1998, the Company had 19 full-time employees, of which
approximately 11 are engineers, scientists and other professionals. None of such
employees are covered by collective bargaining agreements, and the Company's
relations with its employees are believed to be good.

ITEM 2.       PROPERTIES.

         The Company's principal executive offices are located in 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, Applied and other affiliates of the Company. Such space also serves
as the principal executive offices of Environmental, Applied and certain of
their affiliates. The lease for the New York City space expires in December
1998. The Company pays an allocable portion of the rent per year under such
lease.


ITEM 3.       LEGAL PROCEEDINGS.

         During the Transition Period, and as of March 26, 1998, the Company was
not involved in any litigation.


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

         No matters were submitted to a vote of security holders during the
Transition Period.

                                       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
are traded and quoted on the Nasdaq SmallCap Market ("Nasdaq") under the symbols
CXOT, CXOTP and CXOTW, respectively. On March 26, 1998, there were 177 holders
of record of Common Stock, 1 holder of record of Convertible Preferred Stock and
9 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
</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
June 30, September 30 and December 31, 1997, the Company paid cash dividends to
the holders of the Convertible Preferred Stock in the aggregate amounts of
$138,000, $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, it does anticipate that it
will continue to pay similar cash dividends on its Convertible Preferred Stock
in the foreseeable future.

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

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

                                       10

<PAGE>



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, for the period from November 15,
1995 (date of inception) to June 30, 1996, for the year ended June 30, 1997 and
for the six-month period ended December 31, 1997 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,
                                                  (date of inception)      Year Ended       ------------------------
Statement of Operations Data (1):                  to June 30, 1996      June 30, 1997         1996         1997
                                                  -------------------    -------------      ------------------------
                                                                                            (unaudited)
<S>                                                   <C>                 <C>                <C>         <C>
Revenue......................................         $     --            $     8,000        $  8,000    $       --

Cost and expenses............................          (60,000)            (3,265,000)       (857,000)   (2,961,000)

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

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

Net loss per share--basic
   and diluted (2)...........................             (.01)                  (.32)           (.09)         (.27)


Balance Sheet Data:                                  June 30, 1996        June 30, 1997        December 31, 1997
                                                     -------------        -------------        -----------------
Working capital (deficit)....................          $(81,000)            $7,817,000            $4,462,000

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

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

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

Stockholders' equity (deficit)...............           (61,000)             8,708,000             5,652,000
</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.
(2) Net loss per share is calculated on the basis of 10,000,000, 10,375,000,
    10,000,000 and 11,502,000, shares of Common Stock, respectively, being
    outstanding for the periods.

                                       11

<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, 1997. 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, 1997, the Company incurred
a net loss of $5,998,000. For the six months ended December 31, 1997, the
Company incurred a loss of $2,766,000 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 Transition 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

         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. 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 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.

                                       12

<PAGE>

         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.

         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 Environmental and Applied. From
November 15, 1995 (date of inception) to December 31, 1997, the Company
purchased or constructed equipment totaling $1,078,000 and has incurred patent
filing and maintenance costs of $172,000. 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."

         The Company has sustained losses of $2,766,000, $3,171,000 and $61,000
for the six months ended December 31, 1997, for the year ended June 30, 1997 and
for the period from November 15, 1995 (date of inception) to June 30, 1996,
respectively. The Company had no significant revenues during the period from
November 15, 1995 (date of inception) to December 31, 1997. Substantially all of
the Company's losses are attributable to the expenses detailed above. At
December 31 and June 30, 1997, and at June 30, 1996, the Company had working
capital of $4,462,000, $7,817,000 and a working capital deficit of $81,000,
respectively, and stockholders' equity of $5,652,000, $8,708,000 and
stockholders' deficit of $61,000, respectively. The Company's increase in
working capital and stockholders' equity is principally due to the Company's
receipt of net proceeds of $11.1 million from its IPO in April and May 1997. The
decrease in working capital and stockholders' equity from June 30 to December
31, 1997 is principally due to the net loss for the period and dividends paid on
the Company's Convertible Preferred Stock.

                                       13
<PAGE>
         The Company believes it has adequate capital resources to sustain its
operations through approximately the third fiscal quarter of 1998, subject to
factors which cannot be predicted at this time and which may not be within the
Company's control. While the Company believes its capital requirements for the
remainder of 1998 will be met through the development of its business, the
Company may 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 Applied, 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 Applied.

NET OPERATING LOSSES

         At December 31, 1997, the Company had tax loss carryforwards of
approximately $5,998,000. 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 programs use only two digits to identify a year
in the date datum field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If uncorrected,
many computer applications could fail or create erroneous results by or at the
Year 2000. The Year 2000 issue affects virtually all companies and
organizations. The Company is currently evaluating Year 2000 issues and their
potential impact on its information systems and computer technologies. All
evaluation costs will be expensed as incurred. The Company 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.

FORWARD-LOOKING STATEMENTS

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

                                       14
<PAGE>

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

         Pursuant to the General Instructions to Item 305 of Regulation S-K, the
Company is not required to comply with the disclosure provisions of Item 305 of
Regulation S-K because the Company's market capitalization was less than $2.5
billion at January 28, 1997, and this Transition Report does not contain
financial statements for fiscal years ended after June 15, 1998.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The financial statements of the Company are included on pages F-1
through F-15 of this Transition Report and are incorporated herein by reference.

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

         On July 28, 1997, the Company and its former auditors, Tanner + Co.
("Tanner"), mutually agreed to terminate the client-auditor relationship between
the Company and Tanner effective as of such date. Additionally, as of July 28,
1997, the Company retained Price Waterhouse LLP to serve as independent
accountants. The decision to terminate the Company's client-auditor relationship
with Tanner and to retain Price Waterhouse LLP was recommended by the Audit
Committee of the Board of Directors and unanimously approved by the Board of
Directors of the Company.

         During the fiscal period ended June 30, 1996, Tanner's report on the
Company's financial statements neither contained any adverse opinion or
disclaimer of opinion, nor were qualified or modified as to any uncertainty,
audit scope or accounting principles, except that Tanner's auditors' report with
respect to the Company's financial statements for the fiscal period ended June
30, 1996 contained additional paragraphs relating to the Company continuing as a
going concern due to the Company's significant losses and deficit in working
capital.

         During the fiscal period ended June 30, 1996, there were no
disagreements between the Company and Tanner 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,
would have caused Tanner to make reference to the subject matter of the
disagreements in connection with its report.

         No "reportable events" as described under Item 304(a)(1)(v) of
Regulation S-K occurred during the fiscal period ended June 30, 1996.

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

                                       15
<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, 1998, are as
follows:
<TABLE>
<CAPTION>
Name                                        Age    Position
----                                        ---    --------
<S>                                         <C>    <C>
Paul E. Hannesson.....................       57    Chairman of the Board and Chief Executive Officer

Kenneth J. Houle......................       58    President and Chief Operating Officer

Michael D. Fullwood...................       51    Senior Vice President, Chief Financial and Administrative
                                                   Officer, Secretary and General Counsel

James M. DeAngelis....................       37    Senior Vice President--Sales & Marketing

Bentley J. Blum.......................       56    Director

Jeane J. Kirkpatrick, Ph.D............       71    Director

Kenneth L. Adelman, Ph.D..............       49    Director

David L. Mitchell.....................       76    Director

William R. Toller.....................       66    Director

Herbert A. Cohen......................       64    Director
</TABLE>
-------------

         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.

         Kenneth J. Houle was elected President and Chief Operating Officer of
the Company in January 1997. Mr. Houle previously served as the President of The
Hall Chemical Company, a manufacturer of inorganic metal catalysts and
compounds, from March 1995 to September 1996. Prior to such time, Mr. Houle had
served as Vice President and Business Director of the Personal Care Business
Unit of International Specialty Products, Inc., a producer of specialty
chemicals, from March 1992 to December 1994, and the President and Chief
Executive Officer of Ruetgers - Nease Chemical Company, a manufacturer of
organic chemical intermediates and surfactants, from February 1990 to January
1991. Mr. Houle was an independent consultant in the chemical industry from
October 1996 to January 1997. Mr. Houle is a graduate of Siena College, with a
Bachelor's degree in Chemistry, and the Accounting and Financial Management
Program at Columbia University. Mr. Houle also participated in the Masters
degree program in Organic

                                       16
<PAGE>

Chemistry at Iowa State University. He is a member of the Board of Trustees of
The Chemists' Club (New York, New York) and a member of the American Chemical
Society, American Institute of Chemical Engineers and Societe de Chemie
Industrielle (American section). Mr. Houle is also a trustee and board member of
the Ohio Center of Science and Industry.

         Michael D. Fullwood was appointed Senior Vice President, Chief
Financial and Administrative Officer, Secretary and General Counsel of the
Company, Applied, Environmental, Solution and CFC Technologies in May 1997. Mr.
Fullwood served as a director of Lanxide and as Senior Vice President, Chief
Financial and Administrative Officer and General Counsel of Lanxide from July
1997 to February 1998. From 1987 to August 1996, Mr. Fullwood held numerous
positions ranging from Senior Attorney to Executive Vice President and Chief
Financial Officer of Witco Corporation, a New York Stock Exchange-traded
manufacturer of quality specialty chemical and petroleum products ("Witco").
From 1983 to 1987, Mr. Fullwood served as Senior Attorney at Scallop Corporation
(Royal Dutch/Shell Group), where he specialized in corporate matters, mass tort
litigation and international law. Mr. Fullwood also previously served as Senior
Attorney of Caltex Petroleum and Arabian American Oil Company, handling
corporate, contractual and transnational matters. Mr. Fullwood holds a law
degree from Harvard Law School.

         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.

         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.

         Jeane J. Kirkpatrick, Ph.D. has served as a director of the Company and
Applied since December 1997. Dr. Kirkpatrick has a distinguished career which
includes being awarded the Medal of Freedom (the nation's highest civilian
honor) in May 1995, and the Department of Defense Distinguished Public Service
Medal (the highest civilian honor in the Department of Defense) in December
1992. Dr. Kirkpatrick served as the United States Representative to the United
Nations from 1981 to 1985 and as a member of the Cabinet of President Ronald
Reagan. Dr. Kirkpatrick also served as a member of President Reagan's Foreign
Intelligence Advisory Board from 1985 to 1990, and of the Defense Policy Review
Board from 1985 to 1993, and chaired the Secretary of Defense Commission on Fail
Safe and Risk Reduction of the nuclear command and control system in 1992. Dr.
Kirkpatrick is the author of a number of books and now serves on the faculty of
Georgetown University as Leavey Professor of Government. She is also a Senior
Fellow of the American Enterprise Institute. In addition to her responsibilities
at Georgetown and the American Enterprise Institute, Dr. Kirkpatrick writes and
speaks widely on foreign policy and security affairs. A noted academic, Dr.
Kirkpatrick received an A.B. degree from Barnard College, M.A. and Ph.D. degrees
from Columbia University, and has been awarded honorary degrees from a number of
universities.

         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

                                       17

<PAGE>

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.

         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.

                                       18
<PAGE>


KEY EMPLOYEES

         The names and ages of the key employees of the Company, and their
positions with the Company as of March 26, 1998, are as follows:

Name                            Age    Position
----                            ---    --------
Michael D. Kiehnau, P.E...       36    Vice President - Finance & Operations

Andrew P. Oddi............       36    Vice President and Treasurer

William E. Ingram.........       52    Vice President and Controller
----------------

         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.

         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.

         William E. Ingram was appointed Vice President and Controller of the
Company in June 1997. Mr. Ingram served as Applied's Vice President and
Controller from October 1996 to March 1997, as its Vice President--Finance from
March to May 1997, and was re-appointed Vice President and Controller in June
1997. Mr. Ingram was also appointed Vice President and Controller of
Environmental, Solution and CFC Technologies in June 1997. Prior to that Mr.
Ingram was Chief Financial Officer of HydroChem Industrial Services, Inc., a
privately owned, $160 million company providing high pressure water and chemical
cleaning services primarily to the petrochemical industry, from January 1995 to
September 1996. Mr. Ingram was Vice President and Region Controller for Chemical
Waste Management, Inc. (CWM) from September 1983 to December 1994. CWM, a
subsidiary of Waste Management, Inc., provides hazardous waste treatment and
disposal services to a wide range of government and industrial customers. He
also spent two years with the solid waste operations of Waste Management, Inc.
Mr. Ingram is a Certified Public Accountant and has an M.B.A. from the
University of Florida and a B.S. in Accounting from Florida Southern College.

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, 1998, was composed of David L. Mitchell (Chairman), Herbert A. Cohen
and William R. Toller, include recommending to the Board of Directors the firm
of independent accountants to be retained by the Company, reviewing with the
Company's independent accountants the scope and results of their audits,
reviewing with the independent accountants and management the Company's
accounting and reporting principles, policies and practices, as well as the
Company's accounting, financial and operating controls and staff, supervising
the Company's policies relating to business conduct and dealing with conflicts
of interest relating to officers and directors of the Company. The Compensation,
Stock Option and Benefits Committee, which, as of March 26, 1998,

                                       19
<PAGE>

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, 1998, and has the authority and responsibility of the
full Board of Directors to supervise and oversee the financial practices and
policies of the Company, to oversee the adoption of significant accounting
policies, and to manage the Company between meetings of the Board of Directors,
subject to certain limitations. The Executive and Finance Committee also has the
authority and responsibility for making recommendations to the Board of
Directors regarding nominees to serve as directors of the Company.

COMPENSATION OF DIRECTORS

         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 Transition Period, and upon a review of Form
5 and amendments thereto furnished to the Company with respect to the Transition
Period, or upon written representations received by the Company from certain
reporting persons that no Form 5 were required for those persons, the Company
believes that no director, executive officer or holder of more than 10% of the
shares of Common Stock of the Company failed to file on a timely basis the
reports required by Section 16(a) of the Exchange Act during, or with respect
to, the Transition Period, except the following: (i) Jeane J. Kirkpatrick, a
director of the Company, who inadvertently failed to timely file (a) a Form 3
with respect to her election as a director of the Company in December 1997 (such
Form 3 was filed late with the Commission on March 17, 1998) and (b) a Form 5
with respect to a transaction that occurred in December 1997 (such transaction
was reported on a Form 5 filed late with the Commission on March 17, 1998); and
(ii) Kenneth L. Adelman, a director of the Company, who inadvertently failed to
timely file a Form 4 with respect to a transaction that occurred in July 1997
(such transaction was reported on a Form 4 filed late with the Commission on
August 19, 1997).

                                       20

<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 Transition Period, for the fiscal year ended June
30, 1997 and for the fiscal period ended June 30, 1996 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,
and to one additional individual who served as an executive officer of the
Company during the Transition Period, but not at December 31, 1997.

                           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        1997(1)      80,067(3)    20,270(4)     4,865(5)         -0-           -0-         -0-         -0-
Chief Executive          1997(2)      49,375(3)    12,500(4)     3,000(5)         -0-         175,000       -0-         -0-
Officer                  1996            -0-          -0-          -0-            -0-           -0-         -0-         -0-

Kenneth J. Houle         1997(1)        90,000      27,000         -0-            -0-           -0-         -0-         -0-
President & Chief        1997(2)      77,596(6)     27,000         -0-            -0-         100,000       -0-         -0-
Operating Officer        1996            -0-          -0-          -0-            -0-           -0-         -0-         -0-

Michael D. Fullwood      1997(1)      40,683(7)    22,804(8)       -0-            -0-           -0-         -0-         -0-
Senior Vice              1997(2)      16,726(7)    9,375(8)        -0-            -0-         67,500        -0-         -0-
President                1996            -0-          -0-          -0-            -0-           -0-         -0-         -0-


James M. DeAngelis       1997(1)        72,500      20,500         -0-            -0-           -0-         -0-         -0-
Senior Vice              1997(2)       120,833      20,500         -0-            -0-         101,250       -0-         -0-
President                1996            -0-          -0-          -0-            -0-           -0-         -0-         -0-

Srinivas Kilambi, Ph.D.  1997(1)        55,000        -0-          -0-            -0-           -0-         -0-         -0-
Former Senior Vice       1997(2)       105,481      40,000         -0-            -0-         67,500        -0-         -0-
President--Technology(9) 1996           34,038        -0-          -0-            -0-           -0-         -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 year
    1997 was $395,000. 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.

                                       21
<PAGE>

(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 year 1997 was $100,000. Certain portions of such automobile
    allowance were also allocated to Applied and Environmental.

(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) Represents the amount of Mr. Fullwood's base salary allocated to the
    Company for such period. Mr. Fullwood's total base salary for calendar year
    1997 was $133,805. Certain portions of such base salary were also allocated
    to Applied and Environmental.

(8) Represents the amount of Mr. Fullwood's annual incentive bonus allocated to
    the Company for such period. Mr. Fullwood's total annual incentive bonus for
    calendar year 1997 was $75,000. Certain portions of such annual incentive
    bonus were also allocated to Applied and Environmental.

(9) Dr. Kilambi resigned as an executive officer of the Company in December
    1997.

STOCK OPTIONS

         The Company did not grant any options under the Plan to the individuals
listed in the Summary Compensation Table during the Transition Period. The
Company has no outstanding stock appreciation rights and granted no stock
appreciation rights during the Transition Period.

         In July 1997, the Company modified the term of all outstanding options
under the Plan from five years to ten years. No other terms of such options were
changed.

         The following table sets forth certain information concerning the
exercise of options during the Transition Period and the value of unexercised
options held under the Plan at December 31, 1997 by the individuals listed in
the Summary Compensation Table.
<TABLE>
<CAPTION>
                                                                                    Number Of                      Value Of
                                                                                   Securities                     Unexercised
                                                                                   Underlying                    In-The-Money
                                                                                   Unexercised                      Options
                                                                                     Options                    At Fiscal Year-
                                    Shares              Value                 At Fiscal Year-End(#)                 End($)
                                 Acquired On          Realized                   Exercisable/                   Exercisable/
      Name                       Exercise (#)           ($)(1)                    Unexercisable                Unexercisable(2)
--------------------------       ------------         ---------               ---------------------            ----------------
<S>                            <C>                    <C>                     <C>                               <C>
Paul E. Hannesson.........           -0-                 -0-                     70,000/105,000                     -0-/-0-

Kenneth J. Houle..........           -0-                 -0-                      20,000/80,000                     -0-/-0-

Michael D. Fullwood.......           -0-                 -0-                      13,500/54,000                     -0-/-0-

James M. DeAngelis........           -0-                 -0-                      40,500/60,750                     -0-/-0-

Srinivas Kilambi, Ph.D....           -0-                 -0-                      13,500/54,000                     -0-/-0-
</TABLE>
--------------
(1) Represents the difference between the exercise price and the closing price
    on the date of exercise, multiplied by the number of shares acquired.

(2) Represents the difference between the last bid price of the Common Stock of
    $2.00 on December 31, 1997, and the exercise price of the options multiplied
    by the applicable number of options.

                                       22

<PAGE>


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 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.

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

         Each of Kenneth J. Houle, James M. DeAngelis and Srinivas Kilambi,
Ph.D. entered into an employment agreement with the Company for a term expiring
on December 31, 1999. Pursuant to these employment agreements, Messrs. Houle,
DeAngelis and Kilambi agreed to devote substantially all of their business and
professional time and efforts to the business of the Company as executive
officers. The employment agreements provide that Messrs. Houle, DeAngelis and
Kilambi shall receive a fixed base salary at an annual rate of $180,000,
$145,000 and $110,000, respectively, for services rendered in such positions,
and each may be entitled to receive, at the sole discretion of the Board of
Directors of the Company or a committee thereof, bonuses and/or stock options
based on the achievement (in whole or in part) by the Company of its business
plan and by the employee of fixed personal performance objectives. Dr. Kilambi
resigned as an executive officer of the Company in December 1997, and his
employment agreement was terminated at that time.

         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
Company has obtained commitments for $1,000,000 key-man life insurance policies
in respect of each of Messrs. Houle (pending completion of a physical exam) and
DeAngelis.

         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

                                       23
<PAGE>

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 Transition
Period were William R. Toller (Chairman), David L. Mitchell and Edwin L. Harper,
Ph.D. Dr. Harper was appointed to the Compensation Committee on December 16,
1997. Messrs. Mitchell and Harper also constituted two-thirds of the
Compensation, Stock Option and Benefits Committees of Applied and Environmental
at December 31, 1997. Dr. Harper served as the President and Chief Operating
Officer of Applied and Environmental from November 1996 to April 1997, as Vice
Chairman of the Company, Applied and Environmental from April to December 1997,
and as the Chairman of the Board and Chief Executive Officer of the Company,
Solution and CFC Technologies from January to April 1997. Dr. Harper also served
as a consultant to the Company and its affiliates from May to December 1997. Dr.
Harper resigned as an executive officer of, and as a consultant to, the Company
and each of its affiliates effective upon his appointment to the Compensation
Committee on December 16, 1997, and resigned as a director of the Company and
each of its affiliates on March 13, 1998. Mr. Toller has served as a consultant
to Environmental since July 1, 1997 and receives compensation in the amount of
$2,000 per diem in such capacity. Mr. Mitchell has served as a consultant to
Applied since July 15, 1997 and receives 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 Edwin L. Harper,
Ph.D. at December 31, 1997, all of whom were non-employee directors of the
Company. Messrs. Mitchell and Harper also constituted two-thirds of the
Compensation, Stock Option and Benefits Committees of Applied and Environmental
at December 31, 1997. Decisions on compensation of the executives officers of
Applied and Environmental were made by such individuals in their capacities as
members of the Compensation, Stock Option and Benefits Committees of such
companies. 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 Harper, in
their capacities as members of the Compensation Committee at December 31, 1997,
addressing the Company's compensation policies for 1997 as they affected the
Company's executive officers.

         Overview and Philosophy

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

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

         o attract, motivate and retain the highest quality executives;

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

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

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

                                       24
<PAGE>

         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
1997 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 1997, 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 and Environmental, receives
annual compensation based upon, among other things, the terms of his employment
agreement with Environmental. Pursuant to the terms of his employment agreement,
Mr. Hannesson is entitled to receive a base salary at an annual rate of not less
than $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 Environmental and certain of its affiliates, including the Company.

         The amount actually received by Mr. Hannesson each year as base salary
for services rendered to Environmental and its affiliates, including the
Company, is established by the members of the Compensation, Stock Option and
Benefits Committee of Environmental (the "Environmental Compensation
Committee"), who also constituted the Compensation, Stock Option and Benefits
Committee of Applied at December 31, 1997. Also, as set forth above, two of the
three members of the Environmental Compensation Committee constituted two-thirds
of the Compensation Committee of the Company's Board of Directors at December
31, 1997. In establishing Mr. Hannesson's base salary for 1997, the
Environmental 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 Environmental Compensation Committee reviewed in

                                       25

<PAGE>

detail Mr. Hannesson's achievement of his 1996 goals and his individual
contributions to the Company and its affiliates. The Environmental Compensation
Committee concluded that he had achieved his 1996 goals and had provided a
leadership role in achieving the Company's and its affiliates' strategic
priorities for 1996. The Environmental 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 Environmental Compensation Committee exercised its discretion and
judgement based on the above factors, and no specific formula was applied to
determine the weight of each factor. The salary decisions of the Environmental
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 $310,627 for calendar year
1996 to $395,000 for calendar year 1997, representing an increase of
approximately 27%. 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 $129,442, $250,256 and $15,302, respectively, of
such salary. Mr. Hannesson also received an automobile allowance of $24,000 for
the 1997 calendar year, and the Company, Applied and Environmental paid $7,865,
$15,205 and $930, 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 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 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. 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 330,000 stock options were granted in 1997 pursuant to the
Plan, 40,000 of which were granted to Mr. Hannesson and 167,500 of which were
granted (in the aggregate) to two other individuals named in the

                                       26

<PAGE>

Summary Compensation Table. The number of stock options granted in 1997 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
                                                                 Edwin L. Harper

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

                                       27

<PAGE>

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

         The following table sets forth certain information, as of March 26,
1998, with respect to the beneficial ownership of Common Stock by each person
known to the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock of the Company, each director, each executive
officer listed in the Summary Compensation Table and all executive officers and
directors of the Company as a group, as reported by such persons. Unless
otherwise indicated, the owners have sole voting and investment power with
respect to their respective shares.
<TABLE>
<CAPTION>
                                                  Number of Shares of Common      Percentage of Outstanding
Name and Address                                      Stock Beneficially                 Common Stock
of Beneficial Owner(1)                                     Owned(2)                   Beneficially Owned
--------------------------------------------      ---------------------------     -------------------------
<S>                                                <C>                            <C>
Commodore Applied Technologies, Inc.........              10,000,000                        86.8%

Commodore Environmental
  Services, Inc.(3).........................               4,252,096                        36.9%

Bentley J. Blum(4)..........................               2,099,749                        18.2%

Paul E. Hannesson(5)........................                 664,889                         5.8%

Kenneth J. Houle(6).........................                  40,000                          *

Michael D. Fullwood(7)......................                  59,506                          *

James M. DeAngelis(8).......................                  88,096                          *

Kenneth L. Adelman(9).......................                 134,895                          *

David L. Mitchell(10).......................                  62,920                          *

William R. Toller(11).......................                  30,375                          *

Jeane J. Kirkpatrick (12)...................                  23,646                          *

Herbert A. Cohen (13).......................                  47,733                          *

All executive officers and directors
as a group (10 persons).....................               3,251,809                        28.2%
</TABLE>
------------------
* Percentage ownership is less than 1%.

(1) The address of each of Commodore Applied Technologies, Inc., Commodore
    Environmental Services, Inc., Bentley J. Blum, Paul E. Hannesson, Michael D.
    Fullwood, Kenneth L. Adelman, Ph.D., David L. Mitchell, William R. Toller,
    Jeane J. Kirkpatrick, Ph.D. and Herbert A. Cohen is 150 East 58th Street,
    Suite 3400, New York, New York 10155. The address of Kenneth J. Houle and
    James M. DeAngelis is 3240 Town Point Drive, Suite 200, Kennesaw, Georgia
    30144. 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) Represents Environmental's indirect beneficial ownership of Common Stock
    based upon Environmental's beneficial ownership of approximately 43% of the
    outstanding shares of Applied common stock.

                                       28
<PAGE>

(4)  Represents Mr. Blum's indirect beneficial ownership of Common Stock based
     upon Mr. Blum's beneficial ownership of 28,479,737 shares and his spouse's
     ownership of 2,000,000 shares of common stock of Environmental,
     representing together 49.4% of the outstanding shares of Environmental
     common stock. Does not include 450,400 shares of Environmental common stock
     owned by Simone Blum, the mother of Mr. Blum, and 385,000 shares of
     Environmental common stock owned by Samuel Blum, the father of Mr. Blum.
     Mr. Blum disclaims any beneficial interest in the shares of Environmental
     common stock owned by his spouse, mother and father.

(5)  Consists of: (a) 62,000 shares of Common Stock underlying currently
     exercisable stock options granted to Mr. Hannesson by the Company under the
     Plan; and (b) Mr. Hannesson's indirect beneficial ownership of Common Stock
     based upon his beneficial ownership of an aggregate of (i) 2,650,000 shares
     of Environmental common stock owned by Suzanne Hannesson, the spouse of Mr.
     Hannesson, (ii) 2,650,000 shares of Environmental common stock owned by the
     Hannesson Family Trust (Suzanne Hannesson and John D. Hannesson, trustees)
     for the benefit of Mr. Hannesson's spouse, (iii) currently exercisable
     options to purchase 2,450,000 shares of Environmental common stock,
     representing 12.1% of the outstanding shares of Environmental common stock,
     and (iv) 240,000 shares of Applied common stock underlying currently
     exercisable stock options granted to Mr. Hannesson under Applied's 1996
     Stock Option Plan. Does not include 1,000,000 shares of Environmental
     common stock owned by each of Jon Paul and Krista Hannesson, the adult
     children of Mr. Hannesson, and additional stock options to purchase
     1,500,000 shares of Environmental common stock at $0.84 per share, which
     vest and become exercisable ratably on November 18 of each of 1998 through
     2000. Mr. Hannesson disclaims any beneficial interest in the shares of
     Environmental common stock owned by or for the benefit of his spouse and
     children.

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

(7)  Consists of: (a) 27,000 shares of Common Stock underlying currently
     exercisable stock options granted to Mr. Fullwood by the Company under the
     Plan; and (b) Mr. Fullwood's indirect beneficial ownership of Common Stock
     based upon his beneficial ownership of (i) 200,000 shares of Environmental
     common stock underlying currently exercisable stock options granted to Mr.
     Fullwood by Environmental and (ii) 50,000 shares of Applied common stock
     underlying currently exercisable stock options granted to Mr. Fullwood by
     Applied.

(8)  Consists of: (a) 1,000 shares of Common Stock; (b) 1,000 shares of Common
     Stock underlying currently exercisable warrants; (c) 40,500 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
     (i) 580,000 shares of Environmental common stock and (ii) 15,000 shares of
     Applied common stock underlying currently exercisable stock options granted
     to Mr. DeAngelis by Applied.

(9)  Consists of: (a) 30,450 shares of Common Stock; (b) 30,375 shares of Common
     Stock underlying currently exercisable stock options granted to Dr. Adelman
     by the Company under the Plan; and (c) Dr. Adelman's indirect beneficial
     ownership of Common Stock based upon his beneficial ownership of (i)
     currently exercisable options to purchase 385,000 shares of Environmental
     common stock and (ii) currently exercisable options to purchase 127,500
     shares of Applied common stock.

(10) Consists of: (a) 30,375 shares of Common Stock underlying currently
     exercisable stock options granted to Mr. Mitchell by the Company under the
     Plan; and (b) Mr. Mitchell's indirect beneficial ownership of Common Stock
     based upon his beneficial ownership of currently exercisable options to
     purchase (i) 67,500 shares of Applied common stock and (ii) 105,000 shares
     of Environmental common stock.

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

(12) Consists of: (a) 15,188 shares of Common Stock underlying currently
     exercisable stock options granted to Dr. Kirkpatrick by the Company under
     the Plan; and (b) Dr. Kirkpatrick's indirect beneficial ownership of

                                       29

<PAGE>

     Common Stock based upon her beneficial ownership of currently exercisable
     options to purchase 22,500 shares of Applied common stock.

(13) Represents Mr. Cohen's indirect beneficial ownership of Common Stock
     based upon his beneficial ownership of currently exercisable options to
     purchase (i) 67,500 shares of Applied common stock and (ii) 105,000 shares
     of Environmental common stock.

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."

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.

                                       30

<PAGE>

         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.

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.

                                       31

<PAGE>

                                     PART IV

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

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

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

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

         Balance Sheet as of December 31, 1997, June 30, 1997 and June 30, 1996......................     F-2

         Statement of Operations for the six months ended December 31, 1997,
              for the year ended June 30, 1997, for the period from November 15, 1995
              (date of inception) to June 30, 1996, and for the period from November 15, 1995
              to December 31, 1997...................................................................     F-3

         Statement of Stockholders' Equity for the period from November 15,
              1995 (date of inception) through December 31, 1997.....................................     F-4

         Statement of Cash Flows for the six months ended December 31, 1997, for the
              year ended June 30, 1997, for the period from November 15, 1995
              (date of inception) to June 30, 1996, and for the period from
              November 15, 1995 to December 31, 1997.................................................     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.
<TABLE>
<CAPTION>
Exhibits.

Exhibit No.                                          Description
-----------                                          -----------
<S>       <C>
1.1       Form of Underwriting Agreement between the Company and National Securities Corporation, as
          Representative of the several Underwriters listed therein (the "Representative").(5)

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

3.2       By-Laws of the Company.(1)

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

4.1       Specimen Common Stock Certificate.(2)

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

4.3       Specimen Warrant Certificate.(3)
</TABLE>

                                       32

<PAGE>

<TABLE>
<CAPTION>
<S>        <C>
 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)

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)
</TABLE>
                                       33

<PAGE>

<TABLE>
<CAPTION>
<S>        <C>
*10.1     Equipment Lease, dated as of November 25, 1997, between the Company and Maryland Environmental Service.

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

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

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

 22.1      Subsidiaries of the Company.(1)

*27.1     Financial Data Schedule.
---------------
* 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. 33-11813)
          (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.
</TABLE>

Reports on Form 8-K:

         On July 31, 1997, the Company filed with the Commission a Current
Report on Form 8-K, dated July 28, 1997, with respect to the mutual agreement of
the Company and Tanner + Co. to terminate their relationship and the Company's
decision to change its fiscal year-end from June 30 to December 31. Such events
were reported under Item 5 of Form 8-K and no financial statements were included
in such report.

                                       34

<PAGE>

                                   SIGNATURES

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

Date:  March 30, 1998             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>
<CAPTION>
<S>                                            <C>                                       <C>
/s/Paul E. Hannesson                           Chairman of the Board and Chief           March 30, 1998
------------------------------------------     Executive Officer (principal executive
Paul E. Hannesson                              officer)

/s/Michael D. Fullwood                         Senior Vice President, Chief Financial    March 30, 1998
------------------------------------------     and Administrative Officer, Secretary
Michael D. Fullwood                            and General Counsel (principal
                                               financial and accounting officer)
/s/Paul E. Hannesson
------------------------------------------     Chairman of the Board                     March 30, 1998
Paul E. Hannesson

/s/Bentley J. Blum
------------------------------------------     Director                                  March 30, 1998
Bentley J. Blum

/s/David L. Mitchell
------------------------------------------     Director                                  March 30, 1998
David L. Mitchell

/s/William R. Toller
------------------------------------------     Director                                  March 30, 1998
William R. Toller

/s/Kenneth L. Adelman
------------------------------------------     Director                                  March 30, 1998
Kenneth L. Adelman, Ph.D.

/s/Jeane J. Kirkpatrick
------------------------------------------     Director                                  March 30, 1998
Jeane J. Kirkpatrick, Ph.D.

/s/Herbert A. Cohen
------------------------------------------     Director                                  March 30, 1998
Herbert A. Cohen
</TABLE>


                                       35

<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 Sheet as of December 31, 1997, June 30, 1997 and June 30, 1996...................F-2

         Statement of Operations for the six months ended December 31, 1997, for
              the year ended June 30, 1997, for the period from November 15,
              1995 (date of inception) to June 30, 1996, and for the period from
              November 15, 1995 to December 31,
              1997................................................................................F-3

         Statement of Stockholders' Equity for the period from November 15,
              1995 (date of inception) through December 31, 1997..................................F-4

         Statement of Cash Flows for the six months ended December 31, 1997, for
              the year ended June 30, 1997, for the period from November 15,
              1995 (date of inception) to June 30, 1996, and for the period from
              November 15, 1995 to December 31, 1997..............................................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.


<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 sheet 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, 1997 and June 30, 1997, and
the results of its operations and its cash flows for the six months ended
December 31, 1997, the year ended June 30, 1997 and the period from November 15,
1995 (inception) through December 31, 1997, 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
audit provides a reasonable basis for the opinion expressed above.


Price Waterhouse LLP





Philadelphia, Pennsylvania
February 26, 1998








                                       F-1

<PAGE>

                        INDEPENDENT AUDITORS' REPORT


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


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

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

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


/s/ Tanner + Co.

Salt Lake City, Utah
August 1, 1996

                                      F-1A



<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Balance Sheet
(dollars in thousands, except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                      December 31,              June 30,
                                                                     -------------        ------------------
                                                                         1997             1997          1996
                                                                         ----             ----          ----
<S>                                                                      <C>                <C>           <C>

                                                    Assets
Current assets:
  Cash and cash equivalents                                             $ 4,951         $8,893          $  3
  Restricted cash                                                            88              -             -
  Inventory                                                                 360              -             -
  Receivables from related party                                             17             12             -
  Prepaid assets and other current receivables                               41             36             -
                                                                        --------        ------          ----
    Total current assets                                                  5,457          8,941             3

Property and equipment:
  Technical equipment                                                       690            411             7
  Office equipment                                                          388            355             3
  Leasehold improvements                                                    205            203             -
                                                                        --------        ------          ----
                                                                          1,283            969            10
  Less accumulated depreciation                                             247            116             -
                                                                        --------        ------          ----
  Net property and equipment                                              1,036            853            10
Intangible assets, net of accumulated amortization of $5, $2 and $0         167             56            10
                                                                        --------        ------          ----
                                                                        $ 6,660         $9,850          $ 23
                                                                        =======         ======          ====

                               Liabilities and Stockholders' Equity (Deficit)

Accounts payable                                                        $   405         $  288          $ 18
Accrued liabilities                                                         328            141            12
Due to related party                                                        262            695            54
                                                                        --------        ------          ----
    Total current liabilities                                               995          1,124            84

Capital lease obligation                                                     13             18             -
Commitments and contingencies
Stockholders' equity (deficit):
  Preferred stock, $.001 par value, 10% non-cumulative,
   5,000,000 shares authorized, 600,000, 600,000 and 0 shares
   issued and outstanding, respectively                                       1              1             -
  Common stock, $.001 par value, 50,000,000 shares
   authorized, 11,503,650, 11,500,000 and 10,000,000 shares issued
   and outstanding, respectively                                             11             11            10
Additional paid in capital                                               11,638         11,928             5
Subscription receivable                                                       -              -           (15)
Deficit accumulated during the development stage                         (5,998)        (3,232)          (61)
                                                                        --------        ------          ----
   Total stockholders' equity (deficit)                                   5,652          8,708           (61)
                                                                        --------        ------          ----
                                                                        $ 6,660         $9,850          $ 23
                                                                        =======         ======          ====
</TABLE>

                 See accompanying notes to financial statements

                                       F-2


<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Operations
(dollars in thousands, except per share data)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


                                                                                          Period from             Cumulative
                                                                                          November 15,           Amounts From
                                                                                             1995                November 15,
                                                    Six Months              Year           (Date of                  1995
                                                       Ended               Ended           Inception)              (Date of
                                                   December 31,           June 30,         to June 30,            Inception to
                                                       1997                 1997              1996             December 31, 1997
                                                   ------------           --------        ------------        ------------------
<S>                                                   <C>                   <C>                <C>                     <C>
Costs and expenses:
  Research and development                          $   817              $   985            $   50                  $ 1,852
  General and administrative                            869                1,356                10                    2,235
  Depreciation and amortization                         134                  118                 -                      252
  Corporate overhead expenses                           911                  705                 -                    1,616
  Sales and marketing                                   230                   51                 -                      281
  Licensing fee                                           -                   50                 -                       50
                                                    -------              -------            ------                  -------
   Total costs and expenses                           2,961                3,265                60                    6,286
                                                    -------              -------            ------                  -------
Revenue                                                   -                    8                 -                        8
Interest income                                         195                   99                 -                      294
Interest expense                                          -                  (13)               (1)                     (14)
                                                    -------              -------            ------                  -------
   Net loss before income taxes                      (2,766)              (3,171)              (61)                  (5,998)
Income tax benefit                                       -                     -                 -                        -
                                                    -------              -------            ------                  -------

   Net loss                                         $(2,766)             $(3,171)            $ (61)                 $(5,998)
                                                    =======              =======             ======                 =======
Net loss per share - basic and diluted                (0.27)               (0.32)            (0.01)
                                                    =======              =======             ======


</TABLE>

                 See accompanying notes to financial statements



                                       F-3

<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Stockholders' Equity
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>



                                                                   Common Stock                Preferred Stock
                                                              -----------------------        ------------------     Subscription
                                                                Shares         Amount        Shares      Amount      Receivable
                                                              ----------       ------        ------      ------     -------------
 <S>                                                           <C>             <C>            <C>        <C>          <C>

 Common stock issued for cash on
    November 15, 1995 (inception) at $1 per share                    100            -           -             -              -
 Stock split of 150,000 shares for one share
    on September 5, 1996                                      14,999,900      $    15           -             -       $    (15)
 Reverse stock split of 1.50 shares
    for one share on November 26, 1996                        (5,000,000)          (5)          -             -              -
 Net loss for the period from
    November 15, 1995 through June 30, 1996                           -             -           -             -              -
                                                             -----------      -------     --------     --------      ---------
 Balance, June 30, 1996                                       10,000,000           10                                      (15)

 Collection of subscription receivable                                 -            -            -            -             15
 Conversion of notes payable to capital                                -            -                                        -
 Proceeds from sale of common stock and warrants               1,500,000            1                                        -
 Proceeds from sale of preferred stock and warrants                    -            -      600,000     $      1              -
 Dividend on preferred stock                                           -            -            -            -              -
 Net loss for the year ended June 30, 1997                             -            -            -            -              -
                                                             -----------      -------      -------     --------      ---------
 Balance, June 30, 1997                                       11,500,000           11      600,000            1              -
 Issuance of common stock                                          3,650            -            -            -              -
 Dividend on preferred stock                                           -            -            -            -              -
 Net loss for the six months ended December 31, 1997                   -            -            -            -              -
                                                              ----------      -------      -------     --------      ---------
                                                              11,503,650      $    11      600,000     $      1      $       -
                                                              ==========      =======      =======     ========      =========
</TABLE>

<TABLE>
<CAPTION>

                                                                               Deficit
                                                                             Accumulated         Total
                                                               Additional     During the      Shareholders'
                                                                Paid in      Development         Equity
                                                                 Capital        Stage           (Deficit)
                                                              ----------    ------------      -------------
 <S>                                                           <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
 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                                             5             (61)              (61)

 Collection of subscription receivable                              -               -                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 and warrants             4,977               -             4,978
 Dividend on preferred stock                                     (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                                     (300)             -               (300)
 Net loss for the six months ended December 31, 1997                -         (2,766)            (2,766)
                                                            ---------      ---------            -------
                                                            $  11,638      $  (5,998)           $ 5,652
                                                            =========      =========            =======
</TABLE>

                 See accompanying notes to financial statements


                                       F-4
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Statement of Cash Flows
(dollars in thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>



                                                                                              Period from         Cumulative
                                                                                              November 15,       Amounts From
                                                              Six Months         Year             1995           November 15,
                                                                Ended            Ended        (Inception)            1995
                                                              December 31,     June 30,        to June 30,     (Inception) to
                                                                  1997           1997             1996        December 31, 1997
                                                              ------------     --------       ------------    -----------------
<S>                                                               <C>             <C>               <C>                <C>
Cash flows from operating activities:
  Net loss                                                      $ (2,766)        $(3,171)          $ (61)         $  (5,998)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation and amortization                                  134             118               -                252
      Issuance of Common Stock                                        10               -               -                 10
      Changes in assets and liabilities:
      Inventory                                                     (360)              -               -               (360)
      Accounts payable                                               117             270              18                405
      Accrued liabilities                                            187             129              12                328
      Receivables from related party                                  (5)            (12)              -                (17)
      Other assets                                                    (5)            (36)              -                (41)
                                                                --------        --------           -----          ---------
        Net cash used in operating activities                     (2,688)         (2,702)            (31)            (5,421)
                                                                --------        --------           -----          ---------
Cash flows from investing activities:
  Acquisition of intangible assets                                  (114)            (48)            (10)              (172)
  Purchase of property and equipment                                 (33)           (352)             (3)              (388)
  Acquisition of leasehold improvements                               (2)           (203)              -               (205)
  Construction of technical equipment                               (279)           (404)             (7)              (690)
  Increase in certificate of deposit                                 (88)              -               -                (88)
                                                                --------        --------           -----          ---------
        Net cash used in investing activities                       (516)         (1,007)            (20)            (1,543)
                                                                --------        --------           -----          ---------
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)          (138)               -               (438)
  Borrowings from (repayments to) stockholder                       (433)            641              54                262
  Collection of subscription receivable                                -              15               -                 15
  Contributed capital                                                  -             976               -                976
  Increase (decrease) in capital lease obligation                     (5)             18               -                 13
                                                                --------        --------           -----          ---------

        Net cash (used in) provided by financing activities         (738)         12,599              54             11,915
                                                                --------        --------           -----          ---------
Increase (decrease) in cash                                       (3,942)          8,890               3              4,951
Cash, beginning of period                                          8,893               3               -                  -
                                                                --------        --------           -----          ---------
Cash, end of period                                              $ 4,951        $  8,893           $   3          $   4,951
                                                                ========        ========           =====          =========
Supplemental disclosure of cash flow information
  Cash paid during the period for:
  Interest                                                       $     -        $     13           $   1          $      14
                                                                ========        ========           =====          =========
  Income taxes                                                   $     -        $      -           $   -                  -
                                                                ========        ========           =====          =========
</TABLE>



                 See accompanying notes to financial statements


                                       F-5

<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
-------------------------------------------------------------------------------

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 5.
    Pursuant to these agreements, 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.

    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.

2.  Summary of Significant Accounting Policies

    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. As of
    December 31, 1997, recorded book value approximates fair value.

    Cash and Cash Equivalents
    The Company considers cash and cash equivalents to include cash and
    investments in commercial paper, U.S. Treasuries and Agencies and money
    funds with maturities of up to 90 days.

    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.

    Intangible Assets
    The Company has incurred costs associated with applying for certain patents.
    These costs are amortized over 17 years.

                                       F-6

<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

    Income Taxes
    Deferred income taxes are provided in amounts sufficient to give effect to
    temporary differences between financial and tax reporting.

    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.

    New Accounting Pronouncements
    In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
    130, "Reporting on Comprehensive Income," effective for fiscal years
    beginning after December 15, 1997. SFAS 130 requires that an enterprise (a)
    classify items of other comprehensive income by their nature in the
    financial statements and (b) display the accumulated balance of other
    comprehensive income separately from retained earnings and additional
    paid-in-capital on the balance sheet.

    Also in June 1997, the FASB issued SFAS 131, "Disclosures About Segments of
    an Enterprise and Related Information," effective for fiscal years beginning
    after December 15, 1997.

    The Company is currently analyzing the effect these standards will have upon
    the financial statements and notes thereto.

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

    Contracts
    In November 1997, the Company entered into a contract with the State of
    Maryland for the removal of chromium-contaminated leachate at the Hawkins
    Point Hazardous Waste Treatment Facility at the Port of Baltimore. As of
    December 31, 1997, the Company had not yet commenced work on this contract
    and accordingly, had not recorded revenue related to the contract.

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 is 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

                                       F-7
<PAGE>
Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

    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.
<TABLE>
<CAPTION>

                                                                                                                 Period from
                                                                                                                 November 15,
                                                                        Six Months              Year                 1995
                                                                           Ended               Ended             (Inception)
                                                                       December 31,           June 30,            to June 30,
                                                                            1997                1997                 1996
                                                                       ------------           --------           ------------
                                                                          (Dollars in thousands except per share data)
   <S>                                                                    <C>                   <C>                   <C>

    Net loss                                                           $    (2,766)       $    (3,171)        $       (61)
    Add: Preferred stock dividends                                            (300)              (138)                  -
                                                                       -----------        -----------          -----------
   Net loss available to common shareholders                           $   (3,066)        $    (3,309)        $       (61)
                                                                       ===========        ============        ============
   Weighted average common shares outstanding (basic)                   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)               $11,502,000        $ 10,375,000         $10,000,000
                                                                       ===========        ============        ============
    Loss per share (basic)                                             $     (0.27)       $     (0.32)         $     (0.01)
                                                                       ===========        ============        ============
</TABLE>


    (*) Due to the Company's loss from continuing operations for 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

    Effective December 2, 1996, Environmental transferred 100% of the capital
    stock of the Company and notes receivable from the Company which aggregated
    $976,200 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 has been 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.

    For the six months ended December 31, 1997 and the year ended June 30, 1997,
    the Company was charged a management fee by Applied of $911,000 and
    $705,000, 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.

                                       F-8
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

    The Company owed unsecured advances of $54,000 as of June 30, 1996 to
    Environmental, and $262,000 and $695,000 to Applied as of December 31, 1997
    and June 30, 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 $750 for the research and
    development facility.

5.  Income Taxes

    The difference between the income tax benefit at statutory rates for the
    periods ended December 31, 1997, June 30, 1997 and June 30, 1996,
    respectively, and the amount presented in the financial statements are as
    follows:



                                                   (in thousands)
                                             December 31,       June 30,
                                                1997          1997     1996
                                                ----          ----     ----
    Tax benefit at statutory rates           $ (940)       $ (1,078)  $ (21)
    Valuation allowance                         940           1,078      21
                                              -----        --------   -----
                                             $    -        $      -   $   -
                                             ======        ========   =====


 Deferred tax assets are as follows:

                                                   (in thousands)

                                            December 31,        June 30,
                                               1997           1997      1996
                                               ----           ----      ----

    Net operating loss carryforward         $ (2,039)      $ (1,099)   $ (21)
    Valuation allowance                        2,039          1,099       21
                                            --------       --------    -----
    Net deferred tax asset                  $      -       $      -    $   -
                                            ========       ========    =====

    At December 31, 1997, the Company had tax loss carryforwards of
    approximately $5,998,000. 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.

6.  Royalty Agreements

    As described in Note 1, 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 through December 3, 2002, except for applications related to the

                                       F-9
<PAGE>


Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

    radionuclides technetium and rhenium, for which the former officer is
    entitled to receive a royalty of .66% of net sales (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 $50,000 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 $4,000,000 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 $15,000.

7.  Capital Structure

    On September 5, 1996, the Company amended its Certificate of Incorporation
    authorizing up to 5,000,000 shares of Preferred Stock, $.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, which were all held by Environmental. 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 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             $5,564,000   $5,214,000
    Proceeds allocated to warrants            2,086,000      846,000
                                             ----------   ----------
    Gross proceeds                            7,650,000    6,060,000

    Less: Discount and offering expenses      1,541,000    1,082,000
                                             ----------   ----------
    Net proceeds                             $6,109,000   $4,978,000
                                             ==========   ==========

    The underwriter of the offering exercised its right to purchase an
    additional 315,000 Warrants for $31,500.

    Preferred Stock
    The Convertible Preferred Stock has a par value of $.01 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

                                      F-10

<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

    declared or paid on the Common Stock or any capital stock ranking junior to
    the Convertible Preferred Stock. Failure to pay any quarterly dividend will
    result in a reduction of the conversion price as described below.

    The Convertible Preferred Stock 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 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.

    The Convertible Preferred Stock 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.

    The holders of Convertible Preferred Stock have the right, voting as a
    class, to approve or disapprove of the issuance of any class or series of
    stock ranking senior to or on a parity with the Convertible Preferred Stock
    with respect to declaration and payment of dividends or the distribution of
    assets on liquidation, dissolution or winding-up. In addition, if the
    company fails to pay dividends on the Convertible Preferred Stock for four
    consecutive quarterly dividend payment periods, holders of Convertible
    Preferred Stock 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 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.

    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 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

                                      F-11

<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

    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 Plan

    The Company's 1996 Stock Option Plan (the "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 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 Plan to non-employee directors. These
    options also became effective upon completion of the 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 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 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 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 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.

    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.



                                      F-12
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------


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




                                                              Year Ended                  Six Months Ended
                                                             June 30, 1997                December 31, 1997
                                                         --------------------             -----------------
                                                                    Weighted-                      Weighted-
                                                                     Average                        Average
                                                                    Exercise                        Exercise
                                                       Shares         Price        Shares            Price
                                                     ----------     ----------   ----------        ---------
        <S>                                             <C>             <C>           <C>             <C>
    Options outstanding at beginning of year                -              -        996,689         $  4.42
    Granted                                           996,689         $ 4.42      1,042,252            4.31
    Exercised                                               -              -              -               -
    Forfeited                                               -              -              -               -
    Rescinded                                               -              -       (996,689)           4.42
                                                      -------                     ---------
    Options outstanding at end of year                996,689           4.42      1,042,252            4.31
                                                      =======                     =========
    Options exercisable at year end                   217,564                       384,313
                                                      =======                     =========
    Weighted average fair value of options
      granted during the period                                       $ 2.47                        $  1.42

</TABLE>

    The following table summarizes information about stock options outstanding
    at December 31, 1997:

                                             Weighted-
                                              Average
                                             Remaining
   Exercise             Number              Contractual              Options
     Price            Outstanding               Life              Exercisable
   ----------         -----------           -----------           ------------
   $     5.00            766,689                 8.79               323,125
   $     2.50            230,000                 9.45                46,000
   $     1.88             45,563                 9.95                15,188
                       ---------                                    -------
                       1,042,252                 8.98               384,313
                       =========                                    =======







                                      F-13

<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------


    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 Ended         Year Ended
                                       December 31, 1997       June 30, 1997
                                       -----------------       -------------
     Net loss - as reported                $(2,766,000)         $(3,171,000)
     Net loss - pro form                   $(3,114,000)         $(3,706,000)
     Loss per share - as reported          $      (.27)              $ (.32)
     Loss per share - pro forma            $      (.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 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 6.50 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
     ----------                       -------------       ----------
         1998                           $   10,000         $ 129,000
         1999                                9,000           129,000
         2000                                    -           132,000
         2001                                    -           132,000
         2002                                    -                 -
                                        ----------         ---------
                                            19,000           522,000
         Amount representing interest       (6,000)
                                        ----------
                                        $   13,000
                                        ==========

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




                                      F-14
<PAGE>

Commodore Separation Technologies, Inc.
(a development stage company)
Notes to the Financial Statements
--------------------------------------------------------------------------------

                  Technical equipment                           $26,000
                     Less: Accumulated Depreciation              (1,000)
                                                                -------
                                                                $25,000
                                                                =======

    Rent expense approximated $56,000 for the six months ended December 31, 1997
    and $72,000 for the year ended June 30, 1997.

    Employment Agreements

    The Company has employment agreements with three executives and key
    personnel. Aggregate minimum payments under the employment agreements are as
    follows:

               1998                                  $431,000
               1999                                   431,000
                                                     --------
               Total                                 $862,000
                                                     ========

    In 1997, the Board of Directors approved bonuses of $187,700. These bonuses
    were accrued as of December 31, 1997 and paid in January 1998.

    Litigation

    The Company has no matters of litigation arising in the ordinary course of
    business which in the opinion of management will not have a material adverse
    effect on its financial condition or results of operation.

11. Comparative Financial Information (Unaudited)

    The selected financial data included in the following table for the six
    month period 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.

               Cost and expenses                           $ (857,000)
               Revenues                                         8,000
               Interest expense                                (5,000)
               Income taxes                                         -
                                                           ----------
               Net loss                                    $ (854,000)
                                                           ==========
               Net loss per share                          $     (.09)
                                                           ==========






                                      F-15

<PAGE>

                                  EXHIBIT INDEX



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)

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

4.1               Specimen Common Stock Certificate.(2)

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

4.3               Specimen Warrant Certificate.(3)

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

4.5               Specimen Convertible Preferred Stock Certificate.(3)

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)
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

22.1              Subsidiaries of the Company.(1)

*27.1             Financial Data Schedule.

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

* 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.


<PAGE>

(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.