<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[ X ]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                       OR

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

                         COMMISSION FILE NUMBER 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: NONE

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

                               TITLE OF EACH CLASS
                     COMMON STOCK, PAR VALUE $.001 PER SHARE
  10% SENIOR CONVERTIBLE REDEEMABLE PREFERRED STOCK, PAR VALUE $.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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         As of September 15, 1997, 11,500,000 shares of the registrant's Common
Stock, par value $.001 per share, were outstanding.

         Non-affiliates of the registrant owned shares of Common Stock as of
September 15, 1997 with an aggregate market value of approximately $3,828,375
(based upon the September 15, 1997 average bid and asked prices of the Common
Stock as quoted by the Nasdaq Small-Cap Market).




                       ----------------------------------
                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None
<PAGE>   2
                     COMMODORE SEPARATION TECHNOLOGIES, INC.

                           ANNUAL REPORT ON FORM 10-K
                     FOR THE FISCAL YEAR ENDED JUNE 30, 1997

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                            <C>
PART I............................................................................................................1

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

         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

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

         ITEM 7     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........12

         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

         ITEM 11.   EXECUTIVE COMPENSATION.......................................................................20

         ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................25

         ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................28


PART IV..........................................................................................................29

         ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..............................29


SIGNATURES.......................................................................................................32
</TABLE>
<PAGE>   3
                                     PART I

ITEM 1. BUSINESS

GENERAL

         Commodore Separation Technologies, Inc., a Delaware corporation (the
"Company"), has developed and intends to commercialize its separation technology
and recovery system known as SLiM(TM) (Supported Liquid Membrane technology).
Based on the results of more than 100 laboratory and other tests to date, the
Company believes that SLiM(TM) can separate and recover solubilized metals
(e.g., chromium, cadmium, silver, mercury, platinum, lead, zinc and nickel),
radionuclides, gas, organics and biochemicals. SLiM(TM) utilizes a process
whereby a contaminated liquid or gaseous feedstream is introduced into a fibrous
membrane unit or module containing a proprietary chemical solution, the
composition of which is customized depending on the types and concentrations of
compounds in the feedstream. As the feedstream enters the membrane, the targeted
substance reacts with SLiM(TM)'s proprietary chemical solution and is extracted
through the membrane into a strip solution where it is then stored. The
remaining feedstream is either recycled or discharged free of the extractant(s).
In some instances, additional treatment may be required prior to disposal.

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

         -        requires lower initial capital costs and lower operating
                  costs;

         -        has the capability of treating a variety of elements and
                  compounds in numerous industrial settings at greater speed and
                  with a higher degree of effectiveness, in a wide range of
                  contaminant concentrations and volume requirements;

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

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

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

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

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

         In August 1996, the Company completed an on-site demonstration of
SLiM(TM) for the decontamination of chromium-contaminated groundwater at the
Port of Baltimore, Maryland. During this demonstration, a SLiM(TM) unit, in a
single feedstream pass-through, reduced the contamination level of chromium from
over 630 parts per million (ppm) to less than one ppm. The results of this test
were verified by Artesian Laboratories, Inc., an independent testing laboratory.
The Company has since completed additional on-site demonstrations of SLiM(TM) at
the Port of Baltimore with similar results. Due to the success of such
demonstrations, in February 1997 the State of Maryland informed the Company that
it will recommend including the SLiM(TM) process as an eligible technology in
the bid documents to remediate chromium leachate at the Port of Baltimore. Based
on management studies and discussions with metals industry executives, the
Company believes that SLiM(TM) represents a significant technological
advancement in the area of environmental remediation.

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

         In January 1997, 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

                                       1
<PAGE>   4
license, to use and develop the technology related to the separation of the
radionuclides technetium and rhenium from mixed wastes containing radioactive
materials. Based on tests conducted at Oak Ridge since May 1994, the Company
believes that this technology is capable of selectively extracting and
recovering technetium, rhenium and other radioactive isotopes as a concentrated
aqueous solution which can be reused in various scientific applications or
disposed of by government-approved techniques including long-term storage. The
Company believes that this technology can be used to remediate nuclear waste
tanks stored at the Department of Energy's atomic energy plants in Rocky Flats,
Colorado; Idaho Falls, Idaho; Paducah, Kentucky; Weldon Springs, Missouri;
Frenchman Flat, Nevada; Los Alamos, New Mexico; Aiken, South Carolina; Oak
Ridge, Tennessee; Pantex, Texas; and Hanford, Washington, and intends to pursue
such opportunities. According to Department of Energy sources, there are
approximately 100 million gallons of mixed radioactive and hazardous chemical
waste stored at these plants.

         The Company markets its technology to industries engaged in
metallurgical processing, metal plating and mining, as well as companies
producing organic chemicals and biochemicals and those engaged in gas
separation. The Company is also targeting governmental agencies that have sites
which require remediation and has already completed an on-site demonstration at
the Port of Baltimore. The Company intends to pursue collaborative joint working
and marketing arrangements with, or acquisitions of or investments in, companies
that have a presence in target markets and those that focus on obtaining
environmental remediation projects, including clean-up of harbors, groundwater
and nuclear waste sites. Advanced Sciences, Inc., an affiliate of the Company
("Advanced Sciences"), will help market SLiM(TM) to the United States Department
of Energy ("DOE") and Department of Defense ("DOD").

         In April 1997, the Company successfully completed an initial public
offering of its equity securities (the "Initial Public Offering"), from which it
received net proceeds of approximately $11.1 million.

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

ORGANIZATION AND CAPITALIZATION OF THE COMPANY

         The Company was organized in November 1995 as a wholly owned subsidiary
of Commodore Environmental Services, Inc., a Delaware corporation
("Environmental"). Effective February 29, 1996, pursuant to an assignment of
technology agreement between the Company and Srinivas Kilambi, Ph.D., the
Company's Senior Vice President --Technology, the Company acquired rights to the
SLiM(TM) technology from Dr. Kilambi. In consideration for such technology, the
Company caused Environmental to issue 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 .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 the common stock, par value $.001 per share
("Common Stock"), of the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Certain Relationships and Related Transactions."

         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. Effective as of December 2, 1996, as part
of a corporate restructuring to consolidate all of its current environmental
technology businesses within Commodore Applied Technologies, Inc., a Delaware
corporation and 69.3%-owned, publicly-traded subsidiary of Environmental
("Applied"), Environmental transferred to Applied its 10,000,000 shares of
Company Common Stock, which at the time represented all of the outstanding
shares of capital stock of the Company, and 100 shares of common stock, par
value $.001 per share, of Commodore CFC Technologies, Inc., a Delaware
corporation ("CFC"), which represented all of the outstanding shares of capital
stock of CFC. 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 (the "Environmental Warrant") expiring December 2, 2003
to purchase 7,500,000 shares of Applied common stock (the "Warrant Shares") at
an exercise price of $15.00 per share. The Environmental 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 Initial Public Offering,
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," "Security Ownership
of Certain Beneficial Owners and Management" and "Certain Relationships and
Related Transactions."

                                       2
<PAGE>   5
MARKET OVERVIEW

         Based on market data compiled by the Company, the Company estimates
that, as of June 30, 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 to ten SLiM(TM) membrane units. The Company estimates that, as of
such date, there were approximately 50 companies in the United States involved
in industrial gas separation, and based on these companies' estimated sales, the
Company believes that on average each of these companies could utilize two to
four membrane units operating at significant volumes. Further, based on market
data compiled by the Company, the potential market from organic chemical
companies is in excess of 10,000 companies in the United States. Based on these
companies' estimated sales, the Company believes that on average each of these
companies could utilize two to four membrane units operating at significant
volumes. Additionally, there were more than 5,000 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 membrane units
operating at substantial volumes. The Company believes that the potential
international market for each of the above applications could be twice 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.

SLiM(TM)

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

         SLiM(TM) involves injecting a contaminated liquid or gaseous feedstream
into a fibrous membrane unit or module. This module is previously loaded with a
series of chemicals whose composition will vary depending on the types of
compounds in the feedstream. As the feedstream enters the membrane unit, the
metal or other substance to be extracted reacts with the proprietary chemical
combination in the fibrous membrane, and the metallic or other ions are
extracted through the membrane into a strip solution which is concentrated and
gathered in a separate storage container. The balance of the feedstream is
either recycled or simply discharged as normal effluent. In some instances,
additional treatment may be required prior to disposal, or disposal may need to
be made in a regulated manner. The Company believes that SLiM(TM) can be
utilized for the separation and recovery of solubilized metals (e.g., chromium,
cadmium, silver, mercury, platinum, lead, zinc and nickel), radionuclides, gas,
organics and biochemicals.

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

LABORATORY AND OTHER TEST RESULTS

         In more than 100 laboratory and other tests to date, SLiM(TM) has
demonstrated the ability to successfully separate a variety of metals and other
substances from liquid and gaseous process streams. In each instance, the
process stream was reduced to levels approaching federal guidelines under the
Federal Clean Water Act for the disposal of the reacted process stream as normal
wastewater effluent, and the recovered materials were of sufficient

                                       3
<PAGE>   6
quantity and purity as to economically permit the reuse thereof in most
commercial applications. Test results included the following:

<TABLE>
<CAPTION>
                                                                                               APPLICABLE
MATERIAL                     BEFORE TREATMENT               AFTER TREATMENT                    FEDERAL GUIDELINE
--------                     ----------------               ---------------                    -----------------
<S>                          <C>                            <C>                                <C>
Metals:

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

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

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

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

     Silver                  177 ppm                        1 ppm                              Less than 2 ppm

Organics:

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

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

Biochemicals:

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

Radionuclides:

     Rhenium                 5 ppm                          Less than 5 ppb                    Less than 10 ppb

Anions:

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

         All of these tests were performed on limited quantities of process
streams, and there can be no assurance that the same or similar results would or
could be obtained on a large-scale commercial basis or on any specific project.
Other than with respect to 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.

COMMERCIALIZATION AND MARKETING STRATEGY

         During its initial commercialization phase, the Company intends to
lease its equipment to customers, with the lease payments being due and payable
after installation and successful start-up of the equipment. When replacement
modules are required, the Company 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 also obtains
revenues through servicing the SLiM(TM) equipment, including periodic
replacement of the membrane component. In addition to leasing and selling its
equipment, the Company charges 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 focuses 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.

         In specific industries and for specific applications, the Company
emphasizes and exploits the following attributes of SLiM(TM).

         Metals Separation and Recovery

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

         In September 1996, the Company installed a prototype SLiM(TM) unit
on-line at a Columbus, Ohio metal plating company. The unit operated in a batch
and in a continuous mode for three months, and, based on operating

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<PAGE>   7
data results, successfully separated and recovered nickel and zinc effluent
streams with concentrations varying from 100 to 1,000 ppm. DLZ Laboratories,
Inc., an independent testing laboratory, verified that the SLiM(TM) unit
processed the initial batch of process effluent stream and reduced nickel and
zinc contamination from 900 ppm to 2 ppm in one hour. The decontaminated process
effluent stream was recycled into the plating line rinse tanks, saving the
normal consumption of make-up water at a rate of five gallons per minute.

         Based on management studies and discussions with metals industry
executives, the Company believes that the major competitive technology in this
area is precipitation, which generates a metallic sludge by-product requiring
further treatment prior to landfill disposal. By contrast, SLiM(TM) does not
generate harmful metallic sludges, and instead enables nearly 100% process water
recycling while also enabling recovery of valuable raw materials. As costs of
environmental compliance continue to mount, the Company expects SLiM(TM) to
become a preferred alternative to existing metals separation methods.

         Environmental Remediation and Restoration

         The Company believes that SLiM(TM) has significant potential for
application to environmental remediation and restoration. The Company is
currently involved in pilot projects for the decontamination of water at the
Port of Baltimore. In the case of a project such as the Port of Baltimore
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 Baltimore, chromium leaching from underlying soil into the aquifer)
has been demonstrated to have been abated for a significant period of time.

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

         In August 1996, the Company completed an on-site demonstration of
SLiM(TM) for the decontamination of water at the Port of Baltimore. During seven
hours of operation, a single SLiM(TM) unit, in a single pass-through of
feedstream, processed 90 gallons of water containing more than 630 ppm of
hexavalent chromium and reduced the 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 by the Port
and Maryland Environmental Service. During this demonstration, approximately
1,500 gallons of the same feedstream used in the first demonstration 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 has included the SLiM(TM) process as an
eligible technology in the bid documents to remediate chromium leachate at the
Port of Baltimore. The Company has 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 on June 18, 1997. By June 30, 1997, it had processed
approximately 10,000 gallons of chromium contaminated water. This demonstration
continued through late August 1997.

         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.
Although the Company has entered into memorandums of understanding with several
such companies, the Company has not to date entered into any definitive
agreements or received any firm contract awards.

         Radionuclide/Mixed Waste Separation

         In the United States, there are numerous sites operated or maintained
by the DOE and/or the DOD at which there are present "mixed wastes" containing
radionuclides intermingled with other hazardous wastes. These sites are also
contaminated with other compounds associated with nuclear weapons, testing and
energy. SLiM(TM) may have significant 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. Neither
the Company nor any of its collaborative partners have been awarded any
contracts to use SLiM(TM), and there can be no assurance as to whether or when
any such contracts may be obtained.

         In January 1997, the Company entered into the Lockheed License
Agreement with Lockheed Martin, manager of 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

                                       5
<PAGE>   8
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 Senior Vice President -- Technology, who worked
with him at Oak Ridge, covering their inventions related to radionuclides. Based
on tests conducted at Oak Ridge since May 1994, the Company believes that this
technology is capable of selectively extracting and recovering technetium,
rhenium and other radioactive isotopes as a concentrated aqueous solution which
can be reused in various scientific 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.

         Gas Separation

         The SLiM(TM) 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(TM) process is predicted to 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.

         Organics Separation and Recovery

         As of June 30, 1997, based on market data compiled by the Company,
there were more than 10,000 organic chemical industry companies operating in the
United States. These companies generate significant volumes of waste process
streams, including mixed organic/non-organic streams. SLiM(TM) may have
significant capabilities in the separation and recovery of a variety of
contaminants, including phenol and nitrophenol (a phenolic derivative), and the
Company believes that such capabilities, although untested, extend to other
organic chemicals such as volatile organic compounds, petrochemicals, other
phenolic derivatives, olefin alkanes and acid gases.

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

         Biochemicals Separation and Recovery

         SLiM(TM) may have significant 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(TM).

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

                                       6
<PAGE>   9
CFC SERVICES AGREEMENT

         The Company has entered into a services agreement (the "Services
Agreement") with CFC, which has developed and patented a process which, based on
test applications of limited quantities of chlorofluorocarbons, may be able to
separate mixtures of refrigerants so that they can be returned to productive use
at purity levels meeting industry standards. Pursuant to the Services Agreement,
the Company will provide advice, assistance and guidance, and, where necessary,
personnel to implement the same, in connection with, among others,
administrative, financial and related matters, product design, development and
promotion, and marketing, sales and related operations to CFC in connection with
its business and operations in exchange for which the Company will be paid an
annual fee equal to 75% of the net income of CFC, if any, and reimbursement of
expenses incurred in furnishing such services. The Services Agreement may be
terminated by either party at any time upon not less than 90 days' prior notice.

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, RCRA and OSHA, which may
require the Company, its prospective working partners or its customers to obtain
permits or approvals to utilize SLiM(TM) and related equipment on certain job
sites. In addition, if the Company begins to market SLiM(TM) 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(TM) and its by-products do not pose environmental
risks. There is no assurance that such studies, if successful, will not be more
costly or time-consuming than anticipated. Further, if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended, or are interpreted or enforced differently, the Company, its
prospective working partners and/or its customers may be required to meet
stricter standards of operation and to obtain additional operating permits or
approvals.

ENVIRONMENTAL MATTERS

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

         The Company maintains environmental liability insurance with limits of
$1.0 million per occurrence and $2.0 million in the aggregate. The Company also
maintains contractor's pollution liability insurance with limits of $1.0 million
per occurrence and $1.0 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 the Company's 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.

INTELLECTUAL PROPERTY

         The basic concepts underlying the SLiM(TM) technology were developed by
Srinivas Kilambi, Ph.D., the Company's Senior Vice President -- Technology.
Effective February 29, 1996, pursuant to an assignment of technology agreement
between the Company and Dr. Kilambi, the Company acquired rights to the SLiM(TM)
technology from Dr. Kilambi, together with associated patent rights,
confidential know-how and other property rights created or obtained by Dr.
Kilambi, whether then existing or thereafter created, relating to the
construction, design, development and exploitation of the processes, equipment
and technology related to SLiM(TM) and any other product or development
resulting from the acquired patent rights.

         In consideration for his assignment of the SLiM(TM) 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 its 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 .66% of net sales (less allowances for returns,
discounts, commissions, freight and excise or other taxes). See " --
Organization and Capitalization of the Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Certain Relationships and Related Transactions --
Organization and Capitalization of the Company."

                                       7
<PAGE>   10
         On September 15, 1997, the Company filed two United States
continuation-in-part ("CIP") provisional patent applications and, on September
16, 1997, filed one international patent application under the Patent
Cooperation Treaty covering the principal features of its SLiM(TM) 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 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 and chromatography. The Company believes that
most of these methods have certain drawbacks, including lack of selectivity in
the separation process, inability to handle certain metals in the process
streams, and the creation of sludges and other harmful by-products which require
further post-treatment prior to disposal. For example, reverse osmosis and
ultrafiltration are incapable of separating chrome and chromium materials from
wastewater streams, and precipitation results in the production of sludge which
requires dewatering, drying and disposal in a landfill. Certain of these other
technologies also entail long process times, and are relatively expensive.

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

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

RESEARCH AND DEVELOPMENT

         Research and development activities are ongoing and utilize internal
technical staff as well as independent consultants retained by the Company. All
such activities are Company-sponsored. Research and development expenditures for
the Company were $985,000 and $1,035,000 for the year ended June 30, 1997 and
for the period from November 15, 1995 (date of inception) to June 30, 1997,
respectively.

                                       8
<PAGE>   11
EMPLOYEES

         As of June 30, 1997, the Company had 18 full-time employees, including
11 with advanced scientific degrees. The Company believes that it has been
successful in attracting experienced and capable personnel. All of the Company's
employees have entered into agreements with the Company requiring them not to
disclose the Company's proprietary information, assigning to the Company all
rights to inventions made during their employment, and prohibiting them from
competing with the Company. The Company's employees are not represented by any
labor union. The Company believes that relations with its employees are
satisfactory.

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 $122,000 in rent per year under such
lease.

         The Company maintains marketing offices located in approximately 2,200
square feet of office space in McLean, Virginia, which also serves as offices of
Environmental and Applied. The Company also maintains executive offices located
in 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,
Paul E. Hannesson, the Chairman of the Board and Chief Executive Officer of the
Company, and the Chairman of the Board, President and Chief Executive Officer of
each of Environmental and Applied, and Bentley J. Blum, a director of each of
the Company, Environmental and Applied. See "Certain Relationships and Related
Transactions -- Offices."

ITEM 3. LEGAL PROCEEDINGS

         As of June 30, 1997, 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
fourth quarter of the fiscal year ended June 30, 1997.

                                       9
<PAGE>   12
                                     PART II

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

         The Company's Common Stock, 10% Senior Convertible Preferred Stock, par
value $.001 per share ("Convertible Preferred Stock"), and Redeemable Common
Stock Purchase Warrants ("Warrants") have been traded and quoted on the Nasdaq
Small-Cap Market ("Nasdaq") since April 3, 1997. The following table sets forth,
for the period indicated, the high and low bid prices of the Common Stock,
Convertible Preferred Stock and Warrants 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>
                                    COMMON STOCK              CONVERTIBLE PREFERRED STOCK                 WARRANTS
                             ----------------------------    ------------------------------    -----------------------------
                               HIGH              LOW            HIGH              LOW              HIGH             LOW
<S>                          <C>                 <C>         <C>                  <C>          <C>                  <C>
Quarter ended September          $2.25             $1.50          $7.50              $6.50           $0.875           $0.50
30, 1997(1)

Quarter ended June 30,           $5.00            $2.125         $10.00              $7.50           $1.875          $0.875
1997(2)
</TABLE>
--------------------------

         (1)      Reflects bid information for the period beginning July 1, 1997
                  through September 15, 1997.

         (2)      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.


         As of June 30, 1997, there were 12 owners of record of Common Stock,
two owners of record of Convertible Preferred Stock and 10 owners of record of
Warrants.

DIVIDEND INFORMATION

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

              On June 30, 1997, the Company paid a cash dividend to the holders
of the Convertible Preferred Stock in an aggregate amount of $138,000.
Cumulative dividends in respect of the Convertible Preferred Stock are payable
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, when, as and if declared by
the Board of Directors of the Company, before any dividends are declared or paid
on the Common Stock or any capital stock ranking junior to the Convertible
Preferred Stock.

                                       10
<PAGE>   13
ITEM 6. SELECTED FINANCIAL DATA

         The selected financial data included in the following table as of June
30, 1996 and 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 period from November
15, 1995 (date of inception) to June 30, 1997 are derived from the audited
Financial Statements appearing elsewhere herein. 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>
                                         NOVEMBER 15, 1995                                       NOVEMBER 15, 1995
STATEMENT OF OPERATIONS                 (DATE OF INCEPTION)             YEAR ENDED              (DATE OF INCEPTION)
DATA:(1)                                  TO JUNE 30, 1996            JUNE 30, 1997              TO JUNE 30, 1997
                                        -------------------           -------------             -------------------
<S>                                     <C>                           <C>                       <C>
Costs and expenses.............              $(60,000)                $(3,265,000)                  $(3,325,000)
Other income and (expense).....               $(1,000)                    $94,000                       $93,000
Net loss.......................              $(61,000)                $(3,171,000)                  $(3,232,000)
Net loss per share(2)..........                  (.01)                       (.31)                         (.32)
Ratio of earnings to preferred
stock dividends(3).............                     -                           -                             -
</TABLE>


<TABLE>
<CAPTION>
BALANCE SHEET DATA:                                   JUNE 30, 1996                JUNE 30, 1997
                                                      -------------                -------------
<S>                                                   <C>                          <C>
Working capital (deficit)....................            $(81,000)                   $7,817,000
Total assets.................................              23,000                     9,850,000
Total current liabilities....................              84,000                     1,124,000
Deficit accumulated during development stage.             (61,000)                   (3,232,000)
Stockholders' equity (deficit)...............             (61,000)                    8,708,000
</TABLE>

(1)      The Company is in the development stage, and has had no 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
         and 10,231,000 shares of Common Stock, respectively, being outstanding
         for the period.

(3)      The Company's operating results are not sufficient to cover the
         Convertible Preferred Stock cash dividends.

                                       11
<PAGE>   14
           MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

         The Company was organized in November 1995, has had no commercial
operations to date and has not generated material revenues or any profits to
date. Since its inception, the Company has been engaged principally in
organizational activities, including developing a strategic operating plan,
entering into contracts, hiring personnel, developing commercial-scale units and
installing and operating units on a limited basis for demonstration or test
purposes. Accordingly, the Company has no relevant 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 and will not
generate any material revenues until after the Company successfully completes
the installation of units in a significant number of industrial companies, of
which no assurance can be given. During the period from November 15, 1995 (date
of inception) to June 30, 1996, the Company incurred a net loss of $(61,000).
For the year ended June 30, 1997, the Company incurred additional losses of
$(3,171,000) 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 Financial Statements.

RESULTS OF OPERATIONS

         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 related to its executive offices
in New York and its marketing office in Virginia. The management fees commenced
in April 1997.

         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 $0 for the seven-month period ended June 30, 1996. This increase
resulted from the investment of proceeds of the Company's Initial Public
Offering 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 Initial Public Offering, which
occurred in April 1997.

                                       12
<PAGE>   15
LIQUIDITY AND CAPITAL RESOURCES

         Through April 1997, the Company has financed its development efforts
through direct equity investments and loans from Environmental and Applied. From
November 15, 1995 (date of inception) to June 30, 1997, the Company purchased or
constructed equipment totaling $766,000 and has incurred patent filing and
maintenance costs of $58,000. Effective as of December 2, 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 the Environmental Warrant. See "Business
--Organization and Capitalization of the Company" and "Certain Relationships and
Related Transactions --Organization and Capitalization of the Company."

         The Company has sustained losses of $(3,171,000) and $(61,000) 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 revenues during
the period from November 15, 1995 (date of inception) to June 30, 1996 and had
revenues of $8,000 for the year ended June 30, 1997 as a result of billings from
the Port of Baltimore field test of the SLiM(TM) process. Substantially all of
the Company's losses are attributable to the expenses detailed above. At June
30, 1997 and June 30, 1996, the Company had working capital and working capital
deficit of $7,817,000 and $(81,000), respectively, and stockholders' equity and
deficit of $8,708,000 and $(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 Initial Public Offering in
April 1997. The Company anticipates that the proceeds from the Initial Public
Offering will meet its funding needs through June 30, 1998.

         The Company has leased a new facility of approximately 20,800 square
feet near Atlanta, Georgia, which it began occupying in March 1997 and which
comprises the Company's principal executive offices, administrative offices and
research and testing laboratories. Approximately $500,000 was required in
connection with leasing the facility and related leasehold improvements.
Additionally, approximately $1.0 million will be required to purchase equipment
or licensing technology necessary to manufacture the modules and produce the
chemicals used in SLiM(TM). The Company anticipates spending approximately $2.8
million to purchase SLiM(TM) components for use in connection with initial
demonstrations and/or installations of SLiM(TM) at customer sites. The Company
has allocated approximately $2.0 million to meet technology and development
costs, including the hiring of additional personnel (including marketing
personnel) and the costs associated with conducting ongoing tests,
demonstrations and enhancements of SLiM(TM).

         The Company has also allocated a portion of working capital
(approximately $900,000) to finance a portion of the purchase price relating to
possible acquisitions of, or investments in, complementary (including
competitive) businesses, products or technologies. The Company currently has no
commitments or agreements with respect to any such acquisitions or investments.
In the event any such acquisition or investment opportunity arises in the
future, it is probable that the Company will also be required to obtain
additional financing to complete such transaction.

         The Company has also allocated approximately $1.0 million to fund
proposed collaborative arrangements. These costs include, but are not limited
to, salaries and benefits of personnel, equipment design and procurement costs,
costs of leasing or otherwise obtaining additional operating facilities,
analytical and other testing costs, professional fees, insurance and other
administrative expenses. As of June 30, 1997, the Company has not determined the
amount to be applied to any one particular proposed collaborative arrangement.
The estimated allocation for funding of proposed collaborative arrangements is
on an aggregate basis.

         In April 1997, the Company repaid a $1.5 million line of credit
provided by a commercial bank to the Company in March 1997. The line of credit
was utilized to repay advances made by Applied since December 1, 1996 for
providing equipment installed in the Company's new Atlanta facility and for
working capital purposes.


NET OPERATING LOSSES

         At June 30, 1997, the Company had tax loss carryforwards of
approximately $3,232,000. 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.

                                       13
<PAGE>   16
         A full valuation allowance has been established because of the
uncertainty about whether the Company will realize the benefit of net operating
losses.

FORWARD-LOOKING STATEMENTS

         The Company, or its executive officers and directors on behalf of the
Company, may from time to time make "forward-looking statements" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934, as amended (the "Exchange Act" and,
together with the Securities Act, the "Acts"). The Company is filing this Annual
Report on Form 10-K to avail itself of the safe harbor provided in the Acts with
respect to any such (i) forward-looking statements that may be contained in the
Company's reports and other documents filed with the Securities and Exchange
Commission under sections 13 or 15(d) of the Exchange Act and (ii) oral
forward-looking statements made by the Company's executive officers and
directors on behalf of the Company to the press, potential investors, securities
analysts and others. Such forward-looking statements could involve, among other
things, statements regarding the Company's intent, belief or expectation with
respect to (i) the Company's results of operations and financial condition, (ii)
the consummation of acquisition and financing transactions and the effect
thereof on the Company's business, and (iii) 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, 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; foreign
and domestic competition; product demand and industry pricing; cost of
compliance with environmental regulations; and management's estimates of niche
market data. 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>   17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

         Report of Independent Accountants.

         Balance Sheet as of June 30, 1997 and June 30, 1996.

         Statement of Operations 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 June 30,
                  1997.

         Statement of Changes in Stockholders' Equity for the period from
                  November 15, 1995 (date of inception) through June 30, 1997.

         Statement of Cash Flows 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 June 30,
                  1997.

         Notes to Financial Statements.

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


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

         The Company and its former auditors, Tanner + Co. ("Tanner"), mutually
agreed on July 28, 1997 to terminate their relationship. During the fiscal
period ended June 30, 1996, and through and including July 28, 1997, Tanner's
reports on the Company's financial statements neither contained any adverse
opinions nor were qualified or modified as to any uncertainty, except that
Tanner's auditors' 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, and through and including
July 28, 1997, there were no disagreements with Tanner on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Tanner, would have caused it to make reference to the subject matter of the
disagreements in connection with its report.

         The Company has retained Price Waterhouse LLP as its auditors as of
July 28, 1997. The decision to terminate the Company's 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.

                                       15
<PAGE>   18
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
NAME                                        AGE       POSITION
----                                        ---       --------
<S>                                          <C>      <C>
Paul E. Hannesson.....................       56       Chairman of the Board and Chief Executive Officer
                                                    
Edwin L. Harper, Ph.D.................       55       Vice Chairman
                                                    
Kenneth J. Houle......................       58       President and Chief Operating Officer
                                                    
Michael D. Fullwood...................       50       Senior Vice President, Chief Financial and Administrative
                                                      Officer, Secretary and General Counsel
                                                    
James M. DeAngelis....................       36       Senior Vice President -- Marketing & Sales
                                                    
Srinivas Kilambi, Ph.D................       33       Senior Vice President -- Technology
                                                    
Michael D. Kiehnau, P.E...............       36       Vice President A Finance & Operations
                                                    
Andrew P. Oddi........................       36       Vice President and Treasurer
                                                    
William E. Ingram.....................       51       Vice President and Controller
                                                    
Bentley J. Blum.......................       56       Director
                                                    
Kenneth L. Adelman, Ph.D..............       49       Director
                                                    
David L. Mitchell.....................       75       Director
                                                    
William R. Toller.....................       66       Director
</TABLE>
                                                 

         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.

         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 1,
1997, and was reelected Chairman of the Board and elected Chief Executive
Officer effective May 1, 1997. Mr. Hannesson has been a director of Applied
since March 1996 and was elected 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
reelected Chief Executive Officer of Applied on November 18, 1996 and President
on May 1, 1997. Mr. Hannesson has been a director of Environmental since
February 1993 and was elected 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 reelected President on May
1, 1997. Mr. Hannesson also currently serves as the Chairman of the Board and
Chief Executive Officer of Commodore Advanced Sciences, Inc., a wholly owned
subsidiary of Applied ("CAS"), and CFC. Mr. Hannesson was a private investor and
business consultant from 1990 to 1993, and was also an officer and director of
Specialty Retail Services, Inc. from 1989 to August 1991. He currently serves as
Chairman of the Board of Lanxide Corporation, a research and development company
developing metal and ceramic materials ("Lanxide"), where he also serves on its
Executive Committee. Mr. Hannesson is the brother-in-law of Bentley J. Blum, a
director of the Company.

         EDWIN L. HARPER, PH.D. has been a director of the Company since January
1, 1997 and was elected Vice Chairman of the Company effective May 1, 1997. Dr.
Harper served as Chairman of the Board and Chief Executive Officer of the
Company from January 1, 1997 to April 1997, and also as President of the Company
for an interim period from January 1 to January 27, 1997. Dr. Harper was also
elected a director of Applied, Environmental, CAS and CFC in May 1997, after
having served as President and Chief Operating Officer of both Environmental and
Applied from November 1996 to April 1997, and was elected Vice Chairman of
Environmental and Applied effective May 1, 1997. Dr. Harper had been the
President and Chief Executive Officer of the Association of American 

                                       16
<PAGE>   19
Railroads, a trade association for the major railroads in North America, since
January 1992. Prior to such appointment, Dr. Harper was the Co-Chief Executive
Officer of Campbell Soup Company from November 1989 to January 1990, and its
Executive Vice President and Chief Financial Officer from 1986 to 1991. Dr.
Harper has held several other senior executive officer positions in the past,
with Dallas Corporation (1983 to 1986), Emerson Electric Company (1978 to 1981)
and CertainTeed Corporation (1975 to 1978), and served in the White House as
Assistant to the President, Deputy Director of the Office of Management and
Budget and Chairman of the President's Council on Integrity and Efficiency in
Government from 1981 to 1983. Dr. Harper holds a Ph.D. degree from the
University of Virginia.

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

         MICHAEL D. FULLWOOD was elected Senior Vice President, Chief Financial
and Administrative Officer, Secretary and General Counsel of the Company,
Applied, Environmental, CAS and CFC effective May 12, 1997. Mr. Fullwood was
elected a director of Lanxide effective July 6, 1997. From 1987 to 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 and mass tort litigation and handled international law for Royal
Dutch/Shell Group. 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 elected Senior Vice President -- Marketing &
Sales of the Company effective September 1, 1996. He served prior to such time
as Vice President -- Marketing of Environmental and President of CFC since
January 1993. Prior to January 1993, 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.

         SRINIVAS KILAMBI, PH.D. was elected Senior Vice President -- Technology
of the Company on April 1, 1997. Dr. Kilambi served as Vice President --
Technology of the Company from February 1996 to March 31, 1997, and was a
part-time consultant to the Company from December 1995 to the time he became an
officer of the Company. Prior to joining the Company, Dr. Kilambi was a graduate
student at the University of Tennessee, where he received a Ph.D. in Chemical
Engineering in January 1996. During the course of his graduate studies, Dr.
Kilambi also performed research at Clarkson University, Potsdam, New York (from
August 1991 to June 1993) and Oak Ridge National Laboratory, Oak Ridge,
Tennessee (from September 1993 to June 1996), and briefly served as an
environmental consultant to Jacobs Engineering Group, Inc. from December 1993 to
May 1994. Prior to his graduate studies in the United States, Dr. Kilambi served
as the President and Managing Director of Chemopol Complex India, Pvt. Ltd., a
developer of chemical and biochemical products, from 1987 to August 1991.

         MICHAEL D. KIEHNAU, P.E. was elected Vice President -- Finance &
Operations on April 1, 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 1, 1997 to March 31, 1997. From 1992 to August 1996,
Mr. Kiehnau served as a 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 elected Vice President and Treasurer of the Company
effective May 1, 1997, after having served as its Vice President -- Finance
since January 1, 1997. Mr. Oddi was also elected Vice President and Treasurer of
Applied, Environmental, CAS and CFC effective May 1, 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

                                       17
<PAGE>   20
of Finance & Administration and Chief Financial Officer of Environmental from
1987 to April 1997. From 1982 to 1987, Mr. Oddi was employed by Ernst & Young,
independent accountants, and held the position of audit manager in 1986 and
1987. Mr. Oddi is a Certified Public Accountant.

         WILLIAM E. INGRAM was elected Vice President and Controller of the
Company effective May 1, 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 April 1997, and was reelected Vice President and Controller effective
May 1, 1997. Mr. Ingram was also elected Vice President and Controller of
Environmental, CAS and CFC effective May 1, 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. Mr. Ingram was Vice President
and Region Controller for Chemical Waste Management, Inc. (CWM) for eleven
years. CWM, a subsidiary of WMX Technologies, provides hazardous waste treatment
and disposal services to a wide range of government and industrial customers. He
also spent two years with the solid waste operations of WMX Technologies. Mr.
Ingram is a Certified Public Accountant and has an MBA from the University of
Florida and a B.S. in Accounting from Florida Southern College.

         BENTLEY J. BLUM has been a director of the Company since August 1996.
Mr. Blum served as Chairman of the Board of Applied from March to November 1996,
and has served as a director of Applied since that date. Mr. Blum served as the
Chairman of the Board of Environmental from 1984 to November 1996, and has
served as a director of Environmental since that date. For more than 15 years,
Mr. Blum has been a private investor 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
CAS; CFC; 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 the controlling stockholder of Environmental, and is the brother-in-law
of Paul E. Hannesson, the Chairman of the Board and Chief Executive Officer of
the Company.

         KENNETH L. ADELMAN, PH.D. joined the Board of Directors of the Company
in April 1997. Dr. Adelman has been a member of the Board of Directors of
Applied and Environmental since July 1996, and was elected Executive Vice
President, Marketing and International Development of Applied as of May 1, 1997.
Since 1987, Dr. Adelman had been an independent consultant on international
issues to various corporations, including Lockheed Martin Corporation and Loral
Corporation. Dr. Adelman held positions of responsibility in arms control during
most of the Reagan Administration. From 1983 to the end of 1987, he was Director
of the United States Arms Control and Disarmament Agency. Dr. Adelman is a
professor at Georgetown University and national editor of Washingtonian
Magazine. Dr. Adelman accompanied President Reagan on summits with Mikhail
Gorbachev and negotiated with Soviet diplomats on nuclear and chemical weapons
control issues, from 1983 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. For the past 13 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.

                                       18
<PAGE>   21
         WILLIAM E. TOLLER joined the Board of Directors of the Company in April
1997. Mr. Toller is also currently the Vice Chairman of Lanxide and Chairman and
Chief Executive Officer of Titan Consultants, Inc.. Mr. Toller was a director
and the Chairman and Chief Executive Officer of Witco. Mr. Toller had been the
Chairman and Chief Executive Officer of Witco since October 1990 and recently
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.

BOARD COMMITTEES

         The Company's Board of Directors has an Audit Committee, a
Compensation, Stock Option and Benefits Committee and an Executive and Finance
Committee. The responsibilities of the Audit Committee (which consists of
Messrs. Mitchell (Chairman) and 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, and reviewing with the independent accountants and management the
Company's accounting and reporting principles, policies and practices, as well
as the Company's accounting, financial and operating controls and staff. The
Compensation, Stock Option and Benefits Committee (which consists of Messrs.
Toller (Chairman) and Mitchell) has responsibility for establishing and
reviewing employee compensation, administering and interpreting the Company's
1996 Stock Option Plan (the "Plan"), and determining the recipients, amounts,
and other terms (subject to the requirements of the Plan) of options which may
be granted under the Plan from time to time. The Executive and Finance Committee
(which consists of Messrs. Hannesson (Chairman), Blum and Toller) has
responsibility for establishing the Company's executive, accounting and
reporting principles, policies and practices, as well as the Company's internal
accounting, financial and operating controls.

COMPENSATION OF DIRECTORS

         Each non-management director of the Company receives a directors' 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 intend to separately compensate employees for serving as
directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         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 ownership and reports
of changes in ownership of shares of Common Stock with the Securities and
Exchange Commission (the "Commission"). 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 fiscal year ended June 30, 1997, and upon a
review of Form 5 and amendments thereto furnished to the Company with respect to
the fiscal year ended June 30, 1997, 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 the fiscal year ended June 30, 1997, except Michael D. Kiehnau, who
inadvertently failed to file a Form 4 with respect to a transaction that
occurred in April 1997 (such transaction was subsequently reported on a Form 5
filed with the Commission on July 29, 1997).

                                       19
<PAGE>   22
ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

         The following table sets forth the amount of all compensation paid by
the Company and/or its affiliates and allocated to the Company's operations for
services rendered during each of fiscal years 1997 and 1996 to the person
serving as the Company's current Chief Executive Officer and to each of the
Company's four most highly compensated executive officers other than the Chief
Executive Offer whose total salary and bonus compensation exceeded $100,000
during any such year (the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                     ANNUAL COMPENSATION                         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(1)          ($)        ($)          ($)             ($)             (#)        ($)          ($)
  --------               -------          ---        ---          ---             ---             ---        ---          ---
<S>                      <C>            <C>        <C>        <C>             <C>             <C>           <C>       <C>
Paul E. Hannesson         1997            -0-        -0-         49,375(2)        -0-           175,000      -0-          -0-
Chief Executive           1996            -0-        -0-          -0-             -0-             -0-        -0-          -0-
Officer                   1995            --          --           --              --             --          --           --
                         
Kenneth J. Houle          1997            77,596(3)  -0-          -0-             -0-           100,000      -0-          -0-
President & Chief         1996            -0-        -0-          -0-             -0-             -0-        -0-          -0-
Operating Officer         1995             --         --           --              --              --         --           --
                         
Michael D.                1997            -0-        -0-         16,442(2)        -0-            67,500      -0-          -0-
Fullwood                  1996            -0-        -0-          -0-             -0-             -0-        -0-          -0-
Senior Vice               1995             --         --           --              --              --         --           --
President                 
                         
James M. DeAngelis        1997           120,833     -0-          -0-             -0-           101,250      -0-          -0-
Senior Vice               1996            -0-        -0-          -0-             -0-             -0-        -0-          -0-
President                 1995             --         --           --              --              --         --           --
                         
Srinivas Kilambi,         1997           105,481      40,000      -0-             -0-            67,500      -0-          -0-
Ph.D.                     1996            34,038     -0-          -0-             -0-             -0-        -0-          -0-
Senior Vice               1995             --         --           --              --              --         --           --
President --             
Technology               
</TABLE>
                       
(1)      Information is presented for the Company's fiscal year ending on June
         30.

(2)      Represents amounts charged by Applied for 50% of the salaries of
         Messrs. Hannesson and Fullwood.

(3)      Represents 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.

                                       20
<PAGE>   23
STOCK OPTIONS

         The following table sets forth certain information concerning options
granted in fiscal 1997 to the Named Executive Officers under the Plan. The
Company has no outstanding stock appreciation rights and granted no stock
appreciation rights during fiscal 1997.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                      INDIVIDUAL GRANTS
                              ------------------------------------------------------------------
                                                    PERCENT OF
                                NUMBER OF             TOTAL                                         POTENTIAL REALIZABLE VALUE AT
                               SECURITIES            OPTIONS                                           ASSUMED ANNUAL RATES OF
                               UNDERLYING            GRANTED          EXERCISE OF                   STOCK PRICE APPRECIATION FOR
                                 OPTIONS           TO EMPLOYEES       BASE PRICE     EXPIRATION              OPTION TERM
      NAME                     GRANTED (#)      IN FISCAL YEAR(5)       ($/SH)          DATE            5% ($)          10% ($)
      ----                     -----------      -----------------       ------          ----            ------          -------
<S>                            <C>              <C>                   <C>            <C>            <C>                 <C>
Paul E. Hannesson               135,000(1)             15.7%              5.00         12/31/01            -0-              -0-
                                 40,000(2)              4.7%              2.50         12/31/01            -0-              -0-

Kenneth J. Houle                100,000(3)             11.6%              5.00         12/31/01            -0-              -0-

Michael D. Fullwood              67,500(4)              7.9%              2.50         12/31/01            -0-              -0-

James M. DeAngelis              101,250(1)             11.8%              5.00         12/31/01            -0-              -0-

Srinivas Kilambi, Ph.D.          67,500(1)              7.9%              5.00         12/31/01            -0-              -0-
</TABLE>

         (1)  Options were granted in September 1996. 20% of such options are
              currently exercisable, and 20% vest each year through September
              2000.

         (2)  Options were granted in June 1997. 20% of such options are
              currently exercisable, and 20% vest each year through June 2001.

         (3)  Options were granted in January 1997. 20% of such options are
              currently exercisable, and 20% vest each year through January
              2001.

         (4)  Options were granted in May 1997. 20% of such options are
              currently exercisable, and 20% vest each year through May 2001.

         (5)  Percentages based on 860,000 stock options granted to employees in
              fiscal year 1996.

                                       21
<PAGE>   24
         The following table sets forth certain information concerning the
exercise of options and the value of unexercised options held under the Plan at
June 30, 1997 by the Named Executive Officers.

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


<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-                    35,000/140,000                 -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-                     20,250/81,000                 -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 $2.25 on September 15, 1997, and the exercise price of
              the Common Stock options multiplied by the applicable number of
              options. Since the last bid price on such date was below the
              exercise price of the options, a zero (-0-) value is computed.

                                       22
<PAGE>   25
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 is also eligible to receive options
to purchase common stock of each publicly-traded affiliate of Environmental in
the amount of 1.0% of such affiliate's total outstanding shares of common stock
on the date of grant, and 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 in such
capacities with one or more of Environmental's affiliates, 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, among other things: (i) 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 is also eligible to receive options to purchase 125,000 shares of
common stock of Applied and 67,500 shares of Common Stock of the Company, and
incentive compensation of up to $75,000 per year for achieving certain goals.

         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 have 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. Each of
Messrs. Houle, DeAngelis and Kilambi are entitled to participate in the Plan and
the Company's Executive Bonus Plan.

         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 intends to obtain commitments for $1,000,000 key-man life insurance
policies in respect of each of Messrs. Houle, DeAngelis and Kilambi.

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The members of the Compensation, Stock Option and Benefits Committee
during the fiscal year ended June 30, 1997 were William R. Toller (Chairman) and
David L. Mitchell. No member of the Compensation, Stock Option and Benefits
Committee has any interlocking relationship with any corporation that requires
disclosure under this heading.

                                       23
<PAGE>   26
REPORT OF THE COMPENSATION, STOCK OPTION AND BENEFITS COMMITTEE ON EXECUTIVE
COMPENSATION

         The Compensation, Stock Option and Benefits Committee (the "Committee")
of the Board of Directors of the Company was established in June 1997 and
conducted a meeting on June 17, 1997. The duties and responsibilities of the
Committee include the following:

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

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

         (c)      administration and interpretation of the Plan, and
                  determination of the recipients, amounts and other terms
                  (subject to the requirements of the Plan) of options which may
                  be granted under the Plan from time to time; and

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

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

         During the fiscal year ended June 30, 1997, the full Board of Directors
approved bonuses and granted options to certain of its executive officers and
certain employees. In each case, the Board of Directors' decision was based upon
the principles and procedures outlined above.

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

                                       24
<PAGE>   27
               SECURITY OWNERSHIP OF CERTAIN
ITEM 12.       BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth certain information as of September 15,
1997 with respect to (i) the beneficial ownership of the Common Stock of the
Company by each beneficial owner of more than 5% of the outstanding shares of
Common Stock of the Company, each director, each executive officer and all
executive officers and directors of the Company as a group, and (ii) the number
of shares of Common Stock owned by each such person and group. Unless otherwise
indicated, the owners have sole voting and investment power with respect to
their respective shares.

<TABLE>
<CAPTION>
                                                  NUMBER OF SHARES OF COMMON      PERCENTAGE OF OUTSTANDING
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                        87.0%

Commodore Environmental
  Services, Inc.(3).........................              10,000,000                        87.0%

Bentley J. Blum(4)..........................              10,000,000                        87.0%

Paul E. Hannesson(5)........................                 896,151                         7.8%

Edwin L. Harper(6)..........................                 200,201                         1.7%

Kenneth J. Houle(7).........................                  20,000                          *

Michael D. Fullwood(8)......................                  35,326                          *

James M. DeAngelis(9).......................                  94,690                          *

Srinivas Kilambi, Ph.D.(10).................                  37,133                          *

Michael D. Kiehnau(11)......................                  16,125                          *

Andrew P. Oddi(12)..........................                  50,390                          *

William E. Ingram(13).......................                  12,033                          *

Kenneth L. Adelman(14)......................                  80,913                          *

David L. Mitchell(15).......................                  59,448                          *

William R. Toller(16).......................                  15,188                          *

All executive officers and directors
as a group (13 persons).....................              10,000,000                        87.0%
</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 and
         William R. Toller is 150 East 58th Street, Suite 3400, New York, New
         York 10155. The address of Edwin L. Harper, Ph.D. is 6867 Elm Street,
         Suite 210, McLean, Virginia 22101. The address of Kenneth J. Houle,
         James M. DeAngelis, Srinivas Kilambi and Michael D. Kiehnau is 3240
         Town Point Drive, Suite 200, Kennesaw, Georgia 30144. The address of
         William E. Ingram is 1420 N. Sam Houston Parkway E., Suite 190,
         Houston, Texas 77032. The address of Andrew P. Oddi is 40 Cutter Mill
         Road, Suite 509, Great Neck, New York 11021. Bentley J. Blum and Paul
         E. Hannesson are brothers-in-law.

(2)      As used herein, the term beneficial ownership with respect to a
         security is defined by Rule 13d-3 under the Securities Exchange Act of
         1934, as amended, as consisting of sole or shared voting power
         (including the power to vote or direct the vote) and/or sole or shared
         investment power (including the power to dispose or direct the
         disposition of) with respect to the security through any contract,
         arrangement, understanding, relationship or otherwise, including a
         right to acquire such power(s) during the next 60 days. Unless
         otherwise noted, beneficial ownership consists of sole ownership,
         voting and investment rights.

                                       25
<PAGE>   28
(3)      Represents all of the shares of Common Stock held by Applied, its
         69.3%-owned subsidiary.

(4)      Represents all of the shares of Common Stock held indirectly by
         Environmental, based upon Mr. Blum's beneficial ownership of 28,224,050
         shares and his spouse's ownership of 2,000,000 shares of common stock
         of Environmental, representing together 51.7% of the outstanding shares
         of Environmental common stock. Does not include 440,000 shares of
         Environmental common stock owned by Simone Blum, the mother of Mr.
         Blum, and 395,000 shares of Environmental common stock owned by Samuel
         Blum, the father of Mr. Blum. Mr. Blum disclaims any beneficial
         interest in the shares of Environmental common stock owned by his
         spouse, mother and father.

(5)      Consists of: (a) 35,000 shares of Common Stock, representing 20% of the
         175,000 stock options granted to Mr. Hannesson under the Plan, which
         are currently exercisable; and (b) Mr. Hannesson's indirect beneficial
         interest in the shares of Common Stock, based upon 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
         1,950,000 shares of Environmental common stock, representing 12.0% of
         the outstanding shares of Environmental common stock, and (iv) 80,000
         shares of Applied common stock, representing 20% of the 400,000 stock
         options granted to Mr. Hannesson under Applied's 1996 Stock Option
         Plan, which are currently exercisable. Does not include 1,000,000
         shares of Environmental common stock owned by each of Jon Paul and
         Krista Hannesson, the adult children of Mr. Hannesson, and additional
         stock options to purchase 2,000,000 shares of Environmental common
         stock at $.84 per share, which vest and become exercisable ratably on
         November 18 of each of 1998 through 2001. Mr. Hannesson disclaims any
         beneficial interest in the shares of Environmental common stock owned
         by or for the benefit of his spouse and children.

(6)      Consists of: (a) Dr. Harper's indirect beneficial interest in the
         shares of Common Stock, based upon his ownership of (i) currently
         exercisable options to purchase 950,000 shares of Environmental common
         stock, and (ii) currently exercisable options to purchase 162,375
         shares of Applied common stock; and (b) 25,000 shares of Common Stock,
         representing 20% of the 125,000 stock options granted to Dr. Harper
         under the Plan, which are currently exercisable.

(7)      Consists of 20,000 shares of Common Stock, representing 20% of the
         100,000 stock options granted to Mr. Houle under the Plan, which are
         currently exercisable.

(8)      Consists of: (a) Mr. Fullwood's indirect beneficial interest in the
         shares of Common Stock, based upon his ownership of (i) 100,000 shares
         of Environmental common stock, representing 20% of the options to
         purchase 500,000 shares of Environmental common stock granted to Mr.
         Fullwood, which are currently exercisable and (ii) 25,000 shares of
         Applied common stock, representing 20% of the options to purchase
         125,000 shares of Applied common stock granted to Mr. Fullwood under
         Applied's 1996 Stock Option Plan, which are currently exercisable; and
         (b) 13,500 shares of Common Stock, representing 20% of the options to
         purchase 67,500 shares of Common Stock granted to Mr. Fullwood under
         the Plan, which are currently exercisable.

(9)      Consists of: (a) Mr. DeAngelis' indirect beneficial interest in the
         shares of Common Stock, based upon his ownership of (i) 480,000 shares
         of Environmental common stock, (ii) currently exercisable options to
         purchase 100,000 shares of Environmental common stock and (iii) 15,000
         shares of Applied common stock, representing 20% of the 75,000 stock
         options granted to Mr. DeAngelis under Applied's 1996 Stock Option
         Plan, which are currently exercisable; and (b) 20,250 shares of Common
         Stock, representing 20% of the 101,250 stock options granted to Mr.
         DeAngelis under the Plan, which are currently exercisable.

(10)     Consists of: (a) Dr. Kilambi's indirect beneficial interest in the
         shares of Common Stock, based upon his ownership of 200,000 shares of
         Environmental common stock; and (b) 13,500 shares of Common Stock,
         representing 20% of the 67,500 stock options granted to Dr. Kilambi
         under the Plan, which are currently exercisable.

(11)     Consists of 1,000 shares of the Company's Common Stock and 15,125
         shares of Common Stock, representing 20% of the 75,625 stock options
         granted to Mr. Kiehnau under the Plan, which are currently exercisable.

(12)     Consists of: (a) Mr. Oddi's indirect beneficial interest in the shares
         of Common Stock, based upon his ownership of (i) 250,000 shares of
         Environmental common stock, (ii) 40,000 shares of Environmental common
         stock, representing 20% of the options to purchase 200,000 shares of
         Environmental common stock 

                                       26
<PAGE>   29
         granted to Mr. Oddi, which are currently exercisable, and (iii) 15,000
         shares of Applied common stock, representing 20% of the options to
         purchase 75,000 shares of Applied common stock granted to Mr. Oddi
         under Applied's 1996 Stock Option Plan, which are currently
         exercisable; and (b) 10,125 shares of Common Stock, representing 20% of
         the 50,625 stock options granted to Mr. Oddi under the Plan, which are
         currently exercisable.

(13)     Consists of Mr. Ingram's indirect beneficial interest of common stock,
         based upon his ownership of 30,000 shares of Applied common stock,
         representing 20% of the 150,000 stock options granted to Mr. Ingram
         under Applied's 1996 Stock Option Plan, which are currently
         exercisable.

(14)     Consists of: (a) 5,000 shares of the Company's Common Stock; (b) 15,188
         shares of Common Stock, representing 33-1/3% of the 45,563 stock
         options granted to Dr. Adelman under the Plan, which are currently
         exercisable; and (c ) Dr. Adelman's indirect beneficial interest in the
         shares of Common Stock based upon his ownership of (i) currently
         exercisable options to purchase 805,000 shares of Environmental common
         stock and (ii) currently exercisable options to purchase 135,000 shares
         of Applied common stock.

(15)     Consists of: (a) Mr. Mitchell's indirect beneficial interest in the
         shares of Common Stock based upon his ownership of currently
         exercisable options to purchase 135,000 shares of Applied common stock;
         and (b) 15,188 shares of Common Stock, representing 33 1/3% of the
         45,563 stock options granted to Mr. Mitchell under the Plan, which are
         currently exercisable.

(16)     Consists of 15,188 shares of Common Stock, representing 33-1/3% of the
         45,563 stock options granted to Mr. Toller under the Plan, which are
         currently exercisable.

                                       27
<PAGE>   30
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. Effective February 29, 1996, pursuant to an assignment of
technology agreement between the Company and Srinivas Kilambi, Ph.D., the
Company's Senior Vice President -- Technology, the Company acquired rights to
the SLiM(TM) 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 .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 "Business -- Organization
and Capitalization of the Company" and "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. Effective as of December 2, 1996, as part
of a corporate restructuring to consolidate all of its current environmental
technology businesses within Applied, Environmental transferred to Applied its
10,000,000 shares of Company Common Stock, which at the time represented all of
the outstanding shares of capital stock of the Company, and 100 shares of common
stock of CFC, which represented all of the outstanding shares of capital stock
of CFC. 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 the
Environmental Warrant expiring December 2, 2003 to purchase 7,500,000 Warrant
Shares at an exercise price of $15.00 per share. The Environmental 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 Initial Public
Offering, Applied currently owns 87% of the outstanding shares of Common Stock
of the Company. See "Business -- Organization and Capitalization of the Company"
and "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 Initial Public Offering 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 Initial Public Offering, 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 offices located in approximately 2,200 square
feet of space in McLean, Virginia, which also serve as offices of Environmental
and Applied, and also maintains approximately 2,000 square feet of office space
in New York, New York, which also serves as offices of Environmental, Applied,
certain of their affiliates, and Messrs. Bentley J. Blum and Paul E.
Hannesson.

         In addition, prior to the Company's occupation of its Kennesaw, Georgia
facility in March 1997, the Company shared facilities in Columbus, Ohio with
Environmental 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.

FUTURE TRANSACTIONS

         In connection with the Initial Public Offering, 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.

                                       28
<PAGE>   31
                                    PART IV

                  EXHIBITS, FINANCIAL STATEMENT

ITEM 14. SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements.

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

         Report of Independent Accountants.

         Balance Sheet as of June 30, 1997 and June 30, 1996.

         Statement of Operations 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 June 30, 1997.

         Statement of Changes in Stockholders' Equity for the period from
              November 15, 1995 (date of inception) through June 30, 1997.

         Statement of Cash Flows 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 June 30, 1997.

         Notes to Financial Statements.

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

Exhibits.

<TABLE>
<CAPTION>
EXHIBIT NO.                       DESCRIPTION
-----------                       -----------
<S>               <C>
1.1               Form of Underwriting Agreement between the Company and
                  National Securities Corporation, as Representative of the
                  several Underwriters listed therein (the "Representative").(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)
</TABLE>

                                       29
<PAGE>   32
<TABLE>
<CAPTION>
<S>               <C>
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.

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

22.1              Subsidiaries of the Company.(1)

*27.1             Financial Data Schedule.
</TABLE>

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

* Filed herewith.

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


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

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

                                       30
<PAGE>   33
(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.


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.

                                       31
<PAGE>   34
                                   SIGNATURES

         Pursuant to the requirements to Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on September 24, 1997.


                                 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
----------------------------------             Chief Executive Officer (Principal        September 24, 1997
Paul E. Hannesson                              Executive Officer)

/s/ Michael D. Fullwood
----------------------------------             Chief Financial and Administrative        September 24, 1997
Michael D. Fullwood                            Officer (Principal Financial Officer)

/s/ Paul E. Hannesson
----------------------------------             Chairman of the Board                     September 24, 1997
Paul E. Hannesson

/s/ Edwin L. Harper
----------------------------------             Vice Chairman                             September 24, 1997
Edwin L. Harper, Ph.D.

/s/ Bentley J. Blum
----------------------------------             Director                                  September 24, 1997
Bentley J. Blum

/s/ David L. Mitchell
----------------------------------             Director                                  September 24, 1997
David L. Mitchell

/s/ William E. Toller
----------------------------------             Director                                  September 24, 1997
William E. Toller

/s/ Kenneth L. Adelman
----------------------------------             Director                                  September 24, 1997
Kenneth L. Adelman, Ph.D.
</TABLE>

                                       32
<PAGE>   35
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS                                                     PAGE NO.
--------------------                                                     --------
<S>                                                                        <C>
Report of Independent Accountants                                           F-1

Independent Auditors' Report                                                F-1A

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

Statement of Operations 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 June 30, 1997   F-3

Statement of Changes in Stockholders' Equity for the period from
         November 15, 1995 (date of inception) through June 30, 1997        F-4

Statement of Cash Flows 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 June 30,1997    F-5

Notes to Financial Statements                                               F-6

Financial Statement Schedules                                               None
</TABLE>


<PAGE>   36
                        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 changes in 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 June 30, 1997, and the
results of its operations and its cash flows for the year then ended and the
period from November 15, 1995 (inception) through June 30, 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 audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.



Price Waterhouse LLP

Philadelphia, Pennsylvania
August 6, 1997








                                      F-1

<PAGE>   37
                          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.


                                                              TANNER + CO.







Salt Lake City, Utah
August 1, 1996



                                      F-1A

<PAGE>   38
Commodore Separation Technologies, Inc.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                           JUNE 30,
                                                                                  -------------------------
                                                                                    1997            1996
<S>                                                                               <C>             <C>
                                     ASSETS
Current assets:
     Cash                                                                         $    166        $      3
     Temporary investments                                                           8,727              --
     Receivables from related party                                                     12              --
     Prepaid assets and other current receivables                                       36              --
                                                                                  --------        --------

          Total current assets                                                       8,941               3

Property and equipment:
     Technical equipment                                                               411               7
     Office equipment                                                                  355               3
     Leasehold improvements                                                            203              --
                                                                                  --------        --------

                                                                                       969              10
     Less accumulated depreciation                                                     116              --
                                                                                  --------        --------

     Net property and equipment                                                        853              10

Intangible assets, net of accumulated amortization of $2 and $0                         56              10
                                                                                  --------        --------

                                                                                  $  9,850        $     23
                                                                                  ========        ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Accounts payable                                                                  $    288        $     18
Accrued liabilities                                                                    141              12
Due to related party                                                                   695              54
                                                                                  --------        --------

          Total current liabilities                                                  1,124              84

Capital lease obligation                                                                18              --
Commitments and contingencies
Stockholders' equity (deficit):
     Preferred stock, $.001 par value, 10% non-cumulative, 
       5,000,000 shares authorized, 600,000 and 0 shares
       issued and outstanding, respectively                                              1              --
     Common stock, $.001 par value, 50,000,000 shares
       authorized, 11,500,000 and 10,000,000 shares issued
       and outstanding, respectively                                                    11              10
     Additional paid in capital                                                     11,928               5
     Subscription receivable                                                            --             (15)
     Deficit accumulated during the development stage                               (3,232)            (61)
                                                                                  --------        --------

          Total stockholders' equity (deficit)                                       8,708             (61)
                                                                                  --------        --------

                                                                                  $  9,850        $     23
                                                                                  ========        ========
</TABLE>



                 See accompanying notes to financial statements

                                      F-2
<PAGE>   39



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,
                                           YEAR         (DATE OF                  1995
                                           ENDED       INCEPTION)               (DATE OF
                                          JUNE 30,     TO JUNE 30,            INCEPTION) TO
                                           1997          1996                 JUNE 30, 1997
<S>                                     <C>           <C>                    <C>
Costs and expenses:
     Research and development            $   985        $    50                   $ 1,035
     General and administrative            1,356             10                     1,366
     Depreciation and amortization           118             --                       118
     Corporate overhead expenses             705             --                       705
     Sales and marketing                      51             --                        51
     Licensing fee                            50             --                        50
                                         -------        -------                   -------

     Total costs and expenses              3,265             60                     3,325
                                         -------        -------                   -------

Revenue                                        8             --                         8
Interest income                               99             --                        99
Interest expense                             (13)            (1)                      (14)
                                         -------        -------                   -------

     Net loss before income taxes         (3,171)           (61)                   (3,232)

Income tax benefit                            --             --                        --
                                         -------        -------                   -------

     Net loss                            $(3,171)       $   (61)                  $(3,232)
                                         =======        =======                   =======

Net loss per share                       $ (0.31)       $ (0.01)                  $ (0.32)
                                         =======        =======                   =======
</TABLE>






                 See accompanying notes to financial statements

                                      F-3
<PAGE>   40
cOMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>


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

Balance, June 30, 1996                                    10,000,000                 10                 --                 --

Collection of subscription receivable                             --                 --                 --                 --
Conversion of notes payable to capital                            --                 --                 --                 --
Proceeds from sale of common stock and warrants            1,500,000                  1                 --                 --
Proceeds from sale of preferred stock 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
                                                         ===========        ===========        ===========        ===========

</TABLE>

<TABLE>
<CAPTION>
                                                                                                 DEFICIT
                                                                                               ACCUMULATED          TOTAL
                                                                              ADDITIONAL        DURING THE      SHAREHOLDERS'
                                                          SUBSCRIPTION         PAID IN         DEVELOPMENT         EQUITY
                                                           RECEIVABLE          CAPITAL            STAGE           (DEFICIT)
<S>                                                      <C>                 <C>               <C>              <C>
Common stock issued for cash on
     November 15, 1995 (inception) at $1 per share                --                 --                 --                 --
Stock split of 150,000 shares for one share
     on September 5, 1996                                        (15)
Reverse stock split of 1.50 shares
     for one share on November 26, 1996                           --                  5                 --                 --
Net loss for the period from
     November 15, 1995 through June 30, 1996                      --                 --                (61)               (61)
                                                         -----------        -----------        -----------        -----------

Balance, June 30, 1996                                           (15)                 5                (61)               (61)

Collection of subscription receivable                             15                 --                 --                 15
Conversion of notes payable to capital                            --                976                 --                976
Proceeds from sale of common stock and warrants                   --              6,108                 --              6,109
Proceeds from sale of preferred stock 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
                                                         ===========        ===========        ===========        ===========

</TABLE>

                See accompanying notes to financial statements

                                      F-4
<PAGE>   41
Commodore Separation Technologies, Inc.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                    PERIOD FROM           CUMULATIVE
                                                                                    NOVEMBER 15,         AMOUNTS FROM
                                                                                        1995             NOVEMBER 15,
                                                                   YEAR               (DATE OF               1995
                                                                   ENDED             INCEPTION)            (DATE OF
                                                                 JUNE 30,           TO JUNE 30,          INCEPTION) TO
                                                                   1997                 1996             JUNE 30, 1997


<S>                                                            <C>                  <C>                 <C>
Cash flows from operating activities:
     Net loss                                                    $ (3,171)            $    (61)            $ (3,232)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
         Depreciation and amortization                                118                   --                  118
         Changes in assets and liabilities:
         Accounts payable                                             270                   18                  288
         Accrued liabilities                                          129                   12                  141
         Receivables from related party                               (12)                  --                  (12)
         Other assets                                                 (36)                  --                  (36)
                                                                 --------             --------             --------

              Net cash used in operating activities                (2,702)                 (31)              (2,733)

Cash flows from investing activities:
     Acquisition of intangible assets                                 (48)                 (10)                 (58)
     Purchase of property and equipment                              (352)                  (3)                (355)
     Acquisition of leasehold improvements                           (203)                  --                 (203)
     Construction of technical equipment                             (404)                  (7)                (411)
     Temporary investments purchased                               (8,727)                  --               (8,727)
                                                                 --------             --------             --------

              Net cash used in investing activities                (9,734)                 (20)              (9,754)
                                                                 --------             --------             --------

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                                        (138)                  --                 (138)
     Borrowings from stockholder                                      641                   54                  695
     Collection of subscription receivable                             15                   --                   15
     Contributed capital                                              976                   --                  976
     Increase in capital lease obligation                              18                   --                   18
                                                                 --------             --------             --------

              Net cash provided by financing activities            12,599                   54               12,653

Increase in cash                                                      163                    3                  166
Cash, beginning of period                                               3                   --                   --
                                                                 --------             --------             --------

Cash, end of period                                              $    166             $      3             $    166
                                                                 ========             ========             ========

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>   42
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENTAL STAGE COMPANY)
NOTES TO 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
     Enviornmental Services, Inc. ("Enviornmental") to issue 200,000 shares of
     Enviornmental 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 gaseous process streams. The Company has not
     commenced planned principal operations. As such, the Company is considered
     a development stage company as defined in 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. There
     are no material differences in instruments from the recorded book value as
     of June 30, 1997.

     RESEARCH AND DEVELOPMENT EXPENDITURES

     Research and development expenditures are charged to operations as
     incurred except for those costs relating to the design or construction of
     an asset having an economic useful life which are then capitalized and
     depreciated over the estimated life.

     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. Accumulated amortization
     was $1,792 and $101 at June 30, 1997 and June 30, 1996, respectively.

     LOSS PER SHARE

     Loss per share is computed based on the average number of shares
     outstanding of 10,375,000, 10,000,000 and 10,231,000 shares for the year
     ended June 30, 1997, for the period November 15, 1995 (date of inception)
     to June 30, 1996 and for the period November 15, 1995 to June 30, 1997,
     respectively.


                                     F-6

<PAGE>   43
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
     timing 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.

3.   RELATED PARTY TRANSACTIONS

     For the year ended June 30, 1997, the Company was charged a management fee
     by Commodore Applied Technologies Inc. ("Applied") of $705,000. This
     management fee is a result of allocated wages and salaries, rent,
     insurance (including director and officer liability insurance) and other
     administrative expenses relating to its executive offices in New York and
     its marketing office in Virginia. The management fees commenced in April
     1997.

     The Company owed unsecured advances of $54,000 as of June 30, 1996 to its
     then sole stockholder, Environmental, and $695,000 to its current majority
     stockholder, Applied, as of June 30, 1997.

     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 69.3% owned subsidiary, 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
     historical basis of Environmental's investment and the net assets of the
     Company were not adjusted.

     Through June 30, 1996, the Company had an unwritten agreement in which its
     sole stockholder provided space for the Company's New York offices at no
     cost, and another company under common control provided the Ohio facility
     space to the Company at no cost. Subsequent to June 30, 1996, the Company
     paid a monthly rent of $750 for the Ohio space.



                                     F-7
<PAGE>   44
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS


4.   INCOME TAXES

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

<TABLE>
<CAPTION>
                                                          (in thousands)
                                                             JUNE 30,
                                                       1997            1996

<S>                                                  <C>             <C>
Tax benefit at statutory rates                       $ (1,078)       $    (21)
Valuation allowance                                     1,078              21
                                                     ---------       ---------
                                                     $      -        $      -
                                                     =========       =========

Deferred tax assets are as follows:

<CAPTION>
                                                          (in thousands)
                                                             JUNE 30,
                                                       1997            1996

<S>                                                  <C>             <C>
Net operating loss carryforward                      $ (1,099)       $    (21)
Valuation allowance                                     1,099              21
                                                     ---------       ---------
Net deferred tax asset                               $      -        $      -
                                                     =========       =========
</TABLE>

     At June 30, 1997, the Company had tax loss carryforwards of approximately
     $3,232,000. 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.

5.   ROYALTY AGREEMENTS

     As described in Note 1, the Company has an agreement with an officer of
     the Company pursuant to which the 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
     radionuclides technetium and rhenium, for which the 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, whereby Lockheed Martin received
     a $50,000 licensing fee during the year ended June 30, 1997,





                                     F-8
<PAGE>   45
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS


     and 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.

6.   RECENT ACCOUNTING PRONOUNCEMENTS

     The Financial Accounting Standards Board has issued Statement of Financial
     Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and No. 129,
     "Disclosure of Information About Capital Structure." Both statements are
     effective for periods ending after December 15, 1997 and neither is
     expected to have a material impact on the financial position or results of
     operations of the Company.

7.   PUBLIC STOCK OFFERING

     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:

<TABLE>
<CAPTION>
                                               COMMON           PREFERRED
                                               UNITS              UNITS
                                               -----              -----
<S>                                          <C>                <C>
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
                                            ============       ============
</TABLE>

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

8.   CAPITAL STRUCTURE

     COMMON STOCK:

     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.




                                     F-9
<PAGE>   46
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS


     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.

     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, quarterly on the last business day of
     March, June, September and December of each year, commencing June 30,
     1997, when, and if declared by the Board of Directors, before any
     dividends are declared or paid on the Common Stock or any capital stock
     ranking junior to the Convertible Preferred Stock. 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.  
                                                                         

                                     F-10

<PAGE>   47
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS


     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 National Securities,
     (the "Underwriter"), for $.0001 per warrant, warrants to purchase from the
     Company up to 60,000 shares of Convertible Preferred Stock, 150,000 shares
     of Common Stock and/or 210,000 Warrants (the "Representative's Warrants").
     The Representative's Warrants are exercisable at a price of $12.00 per
     share of Convertible Preferred Stock, $6.00 per share of Common Stock and
     $.12 per Warrant from April 3, 1998 through April 3, 2001, 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

     On September 5, 1996, Environmental (as sole stockholder of the Company)
     approved the Company's 1996 Stock Option plan, as previously adopted by the
     Company's Board of Directors (the "Plan"), pursuant to which officers,
     directors, and/or key employees and/or consultants of the company can
     receive incentive stock options and non-qualified stock options to purchase
     up to an aggregate of 1,350,000 shares of the Company's Common Stock (of
     which no more than 1,147,500 shares may be issued pursuant to non-qualified
     stock options). On September 5, 1996, December 18, 1996, and January 27,
     1997, the Company's Board of Directors awarded, effective upon completion
     of the initial public offering, non-qualified stock options under the Plan
     to certain key executive officers entitling them to purchase an aggregate
     of 630,000 shares of Common Stock, all of which provide for an exercise
     price equal to the initial public offering price of the Common Stock, are
     exercisable at the rate of 20% of the number of options granted in each of
     calendar 1996 (1997 in the case of one executive officer) through 2000,
     inclusive, beginning on the closing date of the initial public offering
     and, unless exercised, expire on December 31, 2001 (subject to prior
     termination in accordance with the applicable stock option agreements).




                                     F-11
<PAGE>   48
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS


     In addition, non-qualified options to purchase an aggregate of 136,689
     shares of Common Stock were awarded, effective upon completion of the
     initial public offering, to members of the Board of Directors who are not
     employed or otherwise affiliated with the Company, all of which are
     exercisable at the rate of 33-1/3% of the number of options granted in each
     of calendar 1996 through 1998, inclusive, beginning on the closing date of
     the initial public offering, and, unless exercised, expire on December 31,
     2001 (subject to prior termination in accordance with the applicable stock
     option agreements). The exercise price applicable to all outstanding stock
     options represents not less than 100% of the fair market value of the
     underlying Common Stock as of the date that such options were granted, as
     determined by the Board of Directors of the Company on the date that such
     options were granted. In December 1996 and January 1997, Applied as
     purchaser of 100% of the capital stock of the Company, ratified the Plan
     and all issuances thereunder.

     In May and June 1997, the Company granted incentive and non-qualified stock
     options to purchase an aggregate of 230,000 shares of the Company's common
     stock.

     As of June 30, 1997, none of the aforementioned stock options had been
     exercised.

     The Company has adopted the intrinsic value method of accounting for stock
     options and warrants under Accounting Principles Board Opinion No. 25 with
     footnote disclosures of the pro forma effects as if the SFAS 123 fair value
     method had been adopted.

     Had compensation expense for the Company's employee stock options been
     determined based on the fair value at the grant date for awards in 1996
     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:

<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                      JUNE 30, 1997
            <S>                                       <C>
            Net loss - as reported                    $(3,171,000)
            Net loss - pro forma                      $(3,706,000)
            Loss per share - as reported              $  (.31)
            Loss per share - pro forma                $  (.35)
</TABLE>

     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 5 years, 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. The weighted average remaining contractual life of all
     options outstanding at June 30, 1997 is 4.2 years. The weighted average
     fair value of options granted during the year ended June 30, 1997 is $2.47.
     No options were granted in the prior period.




                                     F-12

<PAGE>   49
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS


10.  COMMITMENTS AND CONTINGENCIES

     OPERATING LEASES

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

         <TABLE>                                             
         <S>                                     <C>         
              1998                               $   122,000 
              1999                                   122,000 
              2000                                   122,000 
              2001                                   122,000 
              2002                                    92,000 
                                                -------------
                                                 $   580,000 
                                                -------------
         </TABLE>                                            

     Rent expense approximated $72,000 for the year ended June 30, 1997.

     EMPLOYMENT AGREEMENTS

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

          <TABLE>                                              
          <S>                                   <C>          
              1998                               $   523,000 
              1999                                   523,000 
              2000                                   261,500 
                                                -------------
              Total                              $ 1,307,500 
                                                -------------
          </TABLE>                                             



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

     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.



                                     F-13
<PAGE>   50
                                EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                       DESCRIPTION
-----------                       -----------
<S>               <C>
1.1               Form of Underwriting Agreement between the Company and
                  National Securities Corporation, as Representative of the
                  several Underwriters listed therein (the "Representative").(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)
</TABLE>

                                       
<PAGE>   51
<TABLE>
<CAPTION>
<S>               <C>
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.

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

22.1              Subsidiaries of the Company.(1)

*27.1             Financial Data Schedule.
</TABLE>

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

* Filed herewith.

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


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

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

                                   
<PAGE>   52
(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.