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

                                  FORM 10-KSB

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

                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996

                                      OR

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

        FOR THE TRANSITION PERIOD FROM .............. TO................
                         COMMISSION FILE NUMBER 0-23402

                    VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)


          DELAWARE                                           11-2863244
State or other jurisdiction of                            (I.R.S. Employer
incorporation or organization                              Identification no.)
 
1335 GREG STREET, UNIT 104, SPARKS, NEVADA                       89431
(Address of principal executive offices)                       (Zip Code)


        Company's telephone number, including area code: (702) 331-5524

Securities registered pursuant to Section 12(b) of the Act:    None

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

TITLE OF CLASS:     COMMON STOCK, $0.005 PAR VALUE
---------------     ------------------------------

Check whether issuer (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 [ ]

Check if disclosure of delinquent filers pursuant to Item 405 of regulation S-B
is not contained herein and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]

     Issuer's revenue for its most current fiscal year:  $1,017,071

The aggregate market value of the common stock held by non-affiliates of the
registrant as of January 21, 1997 was approximately $8,994,000 (9,776,000
shares at $.92 per share).

As of January 21, 1997 there were 18,035,966 shares of common stock
outstanding, par value $.005 per share.

                   Documents Incorporated By Reference: None

                                       1
<PAGE>
 
                                     PART I

ITEM 1:  DESCRIPTION OF BUSINESS
         -----------------------

The discussions contained in this 10-KSB contain various "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which represents the Company's expectations or beliefs concerning future events,
including the ability of the Company to secure additional debt and/or equity
financing to fund future expansion and operations. In addition, statements
containing expressions such as "believes," "anticipates," "plans" or "expects"
used in the Company's periodic reports filed with the SEC are intended to
identify forward-looking statements. The Company cautions that these and similar
statements included in this and in previously filed periodic reports are further
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statement, including, without
limitation, the following: political and economic instability in international
markets; the effect of economic conditions; the effect of regulatory and
governmental actions; fluctuations in prices, exchange rates, tariffs and other
barriers.

HISTORY OF THE COMPANY
----------------------

Vector Environmental Technologies, Inc. ("VETI" or the "Company", which term
shall include, unless the context so requires, its subsidiaries). was originally
incorporated under the laws of the State of Delaware on April 3, 1987, as Arnex
Investment Group, Ltd.

On August 24, 1993, Amyn Dahya acquired approximately 72%, or 640,000 shares, of
the issued and outstanding common stock of the Company from an unrelated
company. At that time, Mr. Dahya was elected President and Chief Executive
Officer of the Company. On August 3, 1993, the name of the Company was
changed to Vector Environmental Technologies, Inc.

The Company operates through the following active subsidiaries:
 
<TABLE> 
<CAPTION> 
                                    JURISDICTION OF
        ENTITY                      ORGANIZATION          BUSINESS PURPOSE                
        ------                      ---------------       ----------------                
<S>                                  <C>                  <C>                                        
Vector Vietnam, Ltd. "VVL"            Vietnam             Holds and manages Vietnamese operations   
Vector Venture Corp. "VVC"            Canada              Holds certain technologies and licenses   
Vector India                          Nevada              Business development in India             
Vector Environmental Technologies     India               Hold and manage Indian operations
 (India) Private Limited
Vector Manufacturing Corp.            Nevada              Provides purchasing and manufacturing services
STOX Systems, Inc.                    Canada              Holds certain technologies                
Vector Water Technologies             U.A.E.              Business development in the United Arab Emirates
</TABLE>

                                       2
<PAGE>
 
<TABLE>
<S>                                     <C>                <C> 
CGL Technologies, Inc.                  Nevada             Research and development water purification
Alpine Water Purification, Inc.         Colorado           Holds patent on water purification cartridge
</TABLE>
Other than VVC, all of the above named corporations are wholly owned by the
Company. The Company owns approximately 95% of the outstanding shares of VVC .

BUSINESS - GENERAL
------------------

The Company's principal business is to develop or acquire environmental
technologies in the areas of water treatment, purification and depollution. VETI
has organized its business activities in four areas, all related to the
development and sale of water purification systems, safe water and related
technologies: sales of personal and household water purification systems to
retail and wholesale markets; the sale of purified water and water products
through retail water stores; the development and operation of water bottling
plants and related sales of bottled water; and the design, development and
utilization of technologies to address water treatment facilities which will
provide rural and semi-urban communities with a reliable supply of clean, safe
water. A description of the Company's products follows:

The Company's Diamond Rain(TM) water purification systems are designed to purify
water from rivers, lakes and other sources using a combination of filtration,
adsorption and microbial destruction processes to produce safe and healthy
drinking water, with technical and economic efficiency that is required for
conditions which exist in developing nations. The MCV process, used in selected
Diamond Rain(TM) systems, was the recipient of the NASA Invention of the Year
and Commercial Invention of the Year Awards in April, 1994.

During 1996, the Company's primary market focus was in Vietnam. However, the
Company is in the process of developing programs in other countries and regions
including: India, Ghana, South Africa and North America.

In Vietnam, the Company is actively marketing the full range of its water
related products and services.

In India, the Company is currently in negotiations with one of the largest
manufacturers of home appliances in India, which has several thousand
distribution outlets across India. The Company's products have passed the
testing and certification requirements for distribution in India. The Company
has formed a wholly owned subsidiary in India and expects to develop programs to
begin marketing selected products and services during 1997.

CONSUMER AND INSTITUTIONAL PRODUCTS
-----------------------------------

The Company has developed a product line of personal and household water
purification systems. In the North American market, the Company has developed a
line of products that enhance the quality of water provided by their respective
municipalities. In the international markets, the need for disinfection requires
the use of additional technologies such as various resins and ozonization. The
Company has used such technologies in the design of its product line. These
products include water purification systems sold or leased to schools and
hospitals in Vietnam, countertop and under counter systems, and plastic sports
water bottles that contain taste enhancing filtration systems which are also
marketed by the Company in North America. The Company anticipates that marketing
efforts for the North American products will continue. The Company, however,
plans to de-emphasize the international sale and leasing of consumer and
institutional products during 1997 due to marginal profitability and the
Company's desire to concentrate on its more profitable water bottling and
community water products described below.

BULK WATER SYSTEMS AND SALES
----------------------------

The Company currently sells purified water and water products through company
and third party operator owned retail water stores in Vietnam. This product line
uses the Company's water purification equipment and technologies to purify water
sold through stores on a point of sale basis. The purified water is dispensed in
containers provided by either the Company or the consumer. Under this product
category, the Company has installed Diamond Rain(TM) water purification systems
under a contract with Vietnam Airlines at the Hanoi Noi Bai International
Airport. These systems supply purified water to all of Vietnam Airlines' local
and international flights as well as for use within the airport terminal.

                                       3
<PAGE>

BOTTLED WATER
-------------

The Company's strategy in this product line is to utilize its technologies to 
establish bottling plants in close proximity to target markets.  The Company's 
Diamond Rain(TM) technology enables purification of water from municipal sources
rather than requiring a pristine natural water source from a remote location 
necessitating excessive transportation requirements.  Plants will be operated 
both by the Company and under license by the Company.

During 1996, the Company installed and commissioned its first bottling plant
utilizing Diamond Rain(TM) water purification systems in the Nam Ha Province of
Vietnam. This plant has an initial annual capacity of 6 million liters per year.
The capacity of the plant can be increased, on a modular basis, up to 16 million
liters per year to meet increases in demand.

The Company is presently studying opportunities for additional water bottling 
plants and distribution of bottled water in Vietnam and is considering other 
countries and markets where it determines its bottling plant concept is 
appropriate.  Identifying owner operators and/or distribution partners with 
access to markets and access to financing are the critical factors to the 
success of this product line.

COMMUNITY WATER SYSTEMS
-----------------------

The primary product in the Community Water System product line is the Company's 
Hi-Rate(TM) system.  These systems are designed to meet the needs of small to 
medium sized communities and can supply safe water to populations of up to 
100,000 persons.  Systems are modular in design and configured to meet specific 
site and operating requirements.  They can also be installed quickly and 
modified to meet changes in input water quality and increased demand as 
communities grow.  The systems utilize a number of technologies depending on 
input water quality including a variety of filtration and media options, 
alternative tank configurations and a range of control options.

During fiscal 1996, the Company installed its first Hi-Rate(TM) system in Huong 
Son, a Vietnamese community of approximately 10,000 people.  The Huong Son 
installation serves as the first in a series of systems planned to be installed 
during fiscal 1997.  The Company has received letters of intent along with cash 
deposits from various Vietnamese communities for the purchase and installation  
of water treatment facilities.  Should these installations take place, it will 
be the responsibility of the community to operate and maintain the systems on a 
day to day basis, while the Company will provide periodic maintenance and repair
services under a separate maintenance contract.  The Community Water Program in 
Vietnam will serve as the model for the Company's future expansion into 
additional countries.

The Company intends to concentrate its efforts on this product line in the
Vietnamese market during fiscal 1997. Success of the program however, depends
upon the Company being able to implement a financing program that is supported
by acceptable bank guarantees. This financing program anticipates VETI's ability
to finance between 40% and 60% of the capital cost of the program through
international financial sources. However, there is no assurance that such funds
will be available in the amounts necessary or under acceptable terms.

See Notes to Consolidated Financial Statements for information regarding the
Company's operations by geographic region.

                                      4 
<PAGE>
 
OTHER TRANSACTIONS
------------------

On June 19, 1995, the Company completed the acquisition of 8,670,618 shares of
VVC common stock (approximately 95%) through the issuance of the same number of
shares of Company common stock. VVC is related to the Company through the
existence of certain common officers, directors and significant stockholders.
Accordingly, the investment in VVC was accounted for as a combination of
entities under common control, which is a method similar to a pooling of
interests. Accordingly, the accompanying consolidated financial statements
include assets and liabilities of VVC at their historical cost and operations of
VVC for all periods presented.

During 1995, Casmyn Corp. ("Casmyn"), a company related through certain common
officers, directors and significant stockholders acquired a controlling interest
in the Company through the purchase of 3,000,000 of the Company's convertible
preferred shares, in exchange for approximately $2,400,000 in liabilities owing
to Casmyn. On September 29, 1995, Casmyn purchased an additional 1,000,000
preferred shares of the Company at $2.00 per share. On September 30, 1996,
Casmyn elected to convert its preferred shares into common shares of the
Company, resulting in Casmyn owning approximately 24.3% of the Company.

During the fourth quarter of 1996, the Company issued 1,532,700 of its
restricted common shares to Casmyn in exchange for 425,750 shares of Auromar
Development Corporation ("Auromar") common stock. Also, during the fourth
quarter of 1996, Casmyn exchanged 425,750 shares of Auromar Development
Corporation common stock for 1,532,700 shares of the Company's restricted common
stock, resulting in Casmyn increasing its percentage ownership in the Company to
approximately 31.2%. The Company recorded these shares at a value of $1,532,700
or $1.00 per share. This value reflects a discount from the price at which VETI
common shares were trading on the NASD Bulletin Board on the date of the
transaction. These shares were subsequently exchanged for 163,750 common shares
of Casmyn resulting from the merger of Casmyn and Auromar. The current market
value of the Casmyn shares trading on the NASD Bulletin Board approximates the
carrying value of those shares.

                                       5
<PAGE>
 
INDUSTRY OVERVIEW AND CERTAIN FACTORS RELATING TO THE COMPANY'S PROPERTIES
--------------------------------------------------------------------------

Marketing
---------

The Company's marketing strategy for water purification systems is to utilize
exclusive agreements with individuals, corporations, or organizations which
management believes provide contacts and expertise necessary to penetrate target
markets.  Initial market focus has been directed primarily to developing
nations where the need for purified drinking water is most critical and where
the Company's technology and its commitment to developing the infrastructure
necessary to assure long term water quality has an advantage over competitive
systems.

Competition
-----------

With the exception of large infrastructure projects involving municipal systems
for large cities, competition relating to water treatment equipment and services
in developing countries is weak and fragmented with most competitors offering
only a limited capacity in terms of technology and product diversification. The
Company maintains a product line which utilizes a wide variety of technologies
with a strategy of matching the right product utilizing the most effective
technology to meet consumer needs. All of the Company's products are
competitively priced in all of its target markets.

Purchasing and Principal Suppliers
----------------------------------

The raw materials used in the Company's products include primarily filters,
filter housings, treatment media, treatment chemicals, tanks, control systems,
valves and various other plumbing supplies. Most of these components are of a
standard nature and widely available.

The Company maintains relationships with several principal suppliers and
subcontractors due to quality considerations and in order to avail itself of
volume pricing.  No supplier is currently considered a sole source.  Alternative
suppliers with acceptable technology and quality have been identified for all
critical components.

Patents, Copyrights and Licenses
--------------------------------

The Company holds a patent relating to the design of one of its countertop water
purification cartridges.

Technologies relating to water purification and treatment and hazardous material
storage, while proprietary, are based on know how and trade secrets and are not
generally patented. The Company does not intend to patent these technologies due
to the nature of the technologies and the level of public disclosure involved in
the patent process.

Need for Additional Financing
-----------------------------

To fully develop markets for its products, the Company will require substantial
additional financing, there is no assurance that the Company will be able to
secure such financing on acceptable terms.

Certain Tax Considerations
--------------------------

The Company is predominantly invested in foreign subsidiaries.  Those 
subsidiaries are subjected to taxes imposed on them in the foreign jurisdictions
in which they operate and in which they are organized.  Further, their income is
subject to US federal and state income taxes when distributed, deemed 
distributed or otherwise attributed to, the Company, which is a US corporation. 
Complex US tax rules apply for purposes of determining the calculation of those
US taxes, the availability of a credit for any foreign taxes imposed on the 
foreign subsidiaries or the Company and the timing of the imposition of US tax.

Normally, all foreign income earned by a US multinational Company eventually 
will be subject to US tax. Income earned by a foreign branch of a US company is
taxable currently in the United States, and income earned by a foreign
subsidiary could be subject to US tax either in the year distributed to the US
as a dividend or in the year earned by means of Subpart F, foreign personal
holding company or other federal tax rules requiring current recognition of
certain income earned by foreign subsidiaries.

Income earned in foreign countries often is subject to foreign income taxes.  In
order to relieve double taxation, the US federal tax law generally allows US 
corporations a credit against their US tax liability in the year the foreign 
earnings become subject to US tax in the amount of the foreign taxes paid on 
those earnings.  The credit is limited, however, under complex limitation 
rules, to, in general, the US (pre-credit) tax imposed on the US corporation's 
foreign source income.  Further, complex rules exist for allocating and 
apportioning interest, research and development expenses and certain other 
expense deductions between US and foreign sources.  Limiting provisions of the 
source rules decrease the amount of foreign source income many US multinationals
can generate.  Reduced foreign source income results in a smaller foreign tax 
credit limitation, as the limitation is based on the ratio of foreign source 
net income to total net income.

These rules can prevent US multinationals from crediting all of the foreign 
taxes they pay.  To the extent that foreign taxes are not creditable, foreign 
source income bears a tax burden higher than the US tax rate.

General Political Risks
-----------------------

The Company is actively engaged in business activities in Vietnam and 
anticipates conducting business in various other countries in the future.  The 
political situation in these countries introduces a certain degree of risk. The
governments exercise control over licensing, importing and exporting, which may
impact on the Company's ability to carry out its business activities.

Government Approval/Regulations
-------------------------------

                                       6
<PAGE>
 
The operations of the Company are not subject to specific governmental approval
or regulation.  The products of the Company are, however, significantly impacted
by environmental, health and import/export related government regulations and
programs.  In many instances these regulations and programs provide strength to
the Company's marketing efforts. The Diamond Rain(TM) water purification systems
help rural communities in developing countries, as well as others, meet World
Health Organization and governmental standards for drinking water quality.
Anticipated costs relating to government approval regulation, other than those
encountered in the normal course of business, are considered minimal.

Research and Development
------------------------

The Company is committed to ongoing research and development. The nature of
environmental issues provides a constant supply of challenges and opportunities
for technology based solutions. The Company spent $675,891, $185,053 and
$484,520 on research and development activities during fiscal years ended
September 30, 1996, 1995 and 1994, respectively. During the past year, the
Company devoted substantially all of its research and development efforts toward
the review and development of water purification systems and technologies. While
a broad line of water purification systems has been developed, continued
research and development in this area is ongoing. This research is expected to
produce additional product offerings, address new problem areas, reduce the
capital cost and maintenance of equipment and improve efficiency. Research and
development is conducted or coordinated in part through contracts with Casmyn.

Casmyn employs qualified scientists and engineers experienced in the fields of
environmental protection, water purification, treatment of effluents from
mineral processing operations, and pollution control of water. Casmyn provides 
research and development services to the Company to develop commercial
applications for water purification technologies. In addition, Casmyn provides
technical staff to the Company as required. Casmyn bills the Company for these
at rates approximating cost recovery.

ITEM 2:  DESCRIPTION OF PROPERTY
         -----------------------

Nam Ha, Vietnam, Bottling Plant
-------------------------------

VVL's bottling plant is located on approximately 0.5 acres, in the city of Nam
Dinh, in the Nam Ha province of Vietnam which is approximately 180 kilometers
south of the capital city of Hanoi. The building, a 7,800 square foot masonry
structure, houses the plant which was completed in April 1996. A 4,000 gallon
underground tank serves as a buffer for the plant's feed water. Various smaller
buildings are located on the property that house support equipment and supplies.
These facilities are under a lease agreement at a cost of approximately $6,900
per year expiring in 2014.

The bottling and office activities are contained in a climate controlled area
which is partitioned from warehouse operations. The bottling area is
approximately 1,800 square feet and contains all process equipment for filling
operations. Included in this area are Diamond Rain(TM) filtration and
purification equipment, purified water storage tanks, a bottle rinser and the
bottle fill line. The portion of the line where bottles are filled and capped is
further segregated into a "clean room." In this critical area, filtered air is
injected to maintain a positive air pressure so as to prevent contamination of
the finished product.

                                       7
<PAGE>
 
The plant is equipped with a laboratory where trained quality assurance
personnel monitor water quality. In the lab, various tests are conducted
including tests for microbiological contamination. Water samples and testing
records are also maintained in this area. Another portion of the warehouse
contains blow molding operations.

Other
-----

The Company headquarters are located in Sparks, Nevada in office space leased by
Casmyn. These operations occupy a portion of a 6,500 square foot unit which
includes office and laboratory facilities which are shared with Casmyn. The
Company reimburses Casmyn approximately $2,300 per month for a portion of the
monthly rent. These facilities are adequate for the current level of operations
and sufficient office and laboratory space is conveniently located to support
future growth.

VVL occupies office space in Ho Chi Minh City under a lease at an approximate
cost of $5,000 per month. This facility includes offices, temporary living
quarters and product show rooms. VVL also operates five retail water stores in
Ho Chi Minh City and Ha Noi.

ITEM 3.  LEGAL PROCEEDINGS

The Company is not a party to any material litigation, whether pending or
threatened, to which it is or may become a party.

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

       None.

                                       8
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is publicly traded in the over-the-counter market and
is listed on the Bulletin Board maintained by  members of the National
Association of Securities Dealers, Inc. under the symbol "VETI". For the six
fiscal quarters prior to April 1994, there was no established public trading
market for the Company's common stock.  The following table sets forth the range
of approximate high and low bid quotations since March 31, 1994, which represent
prices between dealers, do not include retail markups, markdowns or commissions
and may not represent actual transactions.  The prices are based upon
information obtained from the National Daily Quotation Service published by the
National Daily Quotation Bureau, Inc.

<TABLE>
<CAPTION>
   ---------------------------------------------------------------
                                              High           Low    
   ---------------------------------------------------------------
   <S>                                       <C>            <C>     
   Quarter from April 1, 1994                $ 6.00         $ 2.75  
   to June 30, 1994                                                 
   ---------------------------------------------------------------
   Quarter from July 1, 1994                 $2.375         $ 2.09  
   to September 30, 1994                                            
   ---------------------------------------------------------------
   Quarter from October 1, 1994              $ 3.25         $ 2.00  
   to December 31, 1994                                             
   ---------------------------------------------------------------
   Quarter from January 1, 1995              $ 2.39         $ 1.25  
   to March 31, 1995                                                
   ---------------------------------------------------------------
   Quarter from April 1, 1995                $ 2.50         $ 1.00  
   to June 30, 1995                                                 
   ---------------------------------------------------------------
   Quarter from July 1, 1995                 $ 3.00         $1.625  
   to September 30, 1995                                            
   ---------------------------------------------------------------
   Quarter from October 1, 1995              $ 3.50         $ 1.94  
   to December 31, 1995                                             
   ---------------------------------------------------------------
   Quarter from January 1, 1996              $ 2.50         $ 1.69  
   to March 31, 1996                                                
   ---------------------------------------------------------------
   Quarter from April 1, 1996                $ 2.75         $ 1.44  
   to June 30, 1996                                                 
   ---------------------------------------------------------------
   Quarter from July 1, 1996                 $ 1.88         $ 1.13  
   to September 30, 1996                                            
   ---------------------------------------------------------------
</TABLE>

On January 21, 1997, the closing bid quotation for the Company's common stock
was $.92 per share. However, there is no assurance that a market in the
Company's securities will continue.  As of September 30, 1996, there were 503
shareholders of record of the Company's common stock (including brokerage firms
and/or other nominees who may hold shares for multiple investors).

Holders of common stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available subject to the
dividend and liquidation rights of any preferred stock that may be issued.

                                       9
<PAGE>
 
The Company has never paid cash dividends on its common stock and does not
anticipate doing so in the foreseeable future. Rather, the Company has
determined to utilize any earnings in the expansion of its business. Such policy
is subject to change, based on current industry and market conditions, as well
as other factors beyond the control of the Company.

                                       10
<PAGE>
 
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

During the years ended September 30, 1996, 1995 and 1994, the Company operated
in one business segment, water purification systems ("water purification"). See
Note 2 of Notes to the Consolidated Financial Statements.

Due to the operating losses of the Company or the availability of net operating
loss carryforwards, there were no provisions for income taxes recorded in the
consolidated financial statements for the years ended September 30, 1996, 1995
and 1994.

Results of Operations
---------------------

Year Ended September 30, 1996 Compared to the Year Ended September 30, 1995

Sales for the year ended September 30, 1996 were $1,017,071 compared to $382,158
for the year ended September 30, 1995. The $634,913 increase was due to higher
sales volume of water purification products in Vietnam ($195,659) and the United
Arab Emirates ($215,564), and sales of bottled water in Vietnam from the
Company's water bottling plant ($261,658) which commenced operations in June
1996. These amounts were offset by lower sales volume in North America of water
purification products in 1996 compared to 1995 ($37,968). The gross profit for
the year ended September 30, 1996 was $160,521 (approximately 16%) compared to a
loss of $107,471 in the period ended September 30, 1995. The gross loss in the
fiscal year ended September 30, 1995 was due mainly to writing off obsolete
water purification inventory items.

Costs and expenses were $4,252,238 for the year ended September 30, 1996,
compared to $3,161,994 for the year ended September 30, 1995, an increase of
$1,090,244. Selling, general and administrative expenses increased $495,589 to
$3,440,258. Compensation and benefits increased $343,525 for the year ended
September 30, 1996 compared to the year ended September 30, 1995 due primarily
to higher staff levels primarily in Vietnam staff and support personnel.
Advertising and marketing costs increased $24,341 for the year ended September
30, 1996 compared to the year ended September 30, 1995 due principally to
increased costs relating to development of the Company's new water purification
product line which was introduced in North American market in the current fiscal
year. Travel related expenses increased by $191,331 in the fiscal year ended
September 30, 1996 as compared to the year ended September 30, 1995 due to
market development activities in India, and travel to Vietnam and the United
Arab Emirates required for on-going business in those countries. Other general
and administrative expenses decreased $63,608 for the year ended September 30,
1996 compared to the year ended September 30, 1995 due primarily to decreased
professional and consulting expenses. Research and development expenses for the
year ended September 30, 1996 were $675,891 compared to $185,053 for the year
ended September 30, 1995 and increase of $490,838 due to increased research,
product design, testing and product certification costs relating to the
Company's new North American product line which was introduced in the current
fiscal year, the commissioning of the Vietnam bottling plant and the Huong Son
Community water system. Depreciation expense increased $103,817 for the year
ended September 30, 1996 due to increased fixed assets in the Company's water
bottling plant in Vietnam.

Other income was $129,371 in the year ended September 30, 1996 compared to other
expense of $128,805 in the year ended September 30, 1995, due mainly to the
Company receiving interest income on investments in the current year and lower
interest expense on amounts due to Casmyn Corp. in fiscal 1996 compared to 1995.

Year Ended September 30, 1995 Compared to the Year Ended September 30, 1994

                                       11
<PAGE>
 
Sales for the year ended September 30, 1995 were $382,158 compared to $566,331
for the year ended September 30, 1994. The $184,173 decrease was due to lower
sales volume on water purification products resulting from sales efforts being
directed to market analysis, new product design and testing, thereby reducing
sales volume. The gross loss for the year ended September 30, 1995 was $107,431
compared to a gross loss of $36,347 for the year ended September 30, 1994. The
increased loss was due mainly to writing off obsolete water purification
inventory items.

Costs and expenses were $3,161,994 for the year ended September 30, 1995,
compared to $4,065,702 for the year ended September 30, 1994, a decrease of
$903,708. Selling, general and administrative expenses increased $130,790 to
$2,944,669. Compensation and benefits increased $467,642 for the year ended
September 30, 1995, compared to the year ended September 30, 1994, due primarily
to higher staff levels in the U.S. and Vietnam and to the Company recording
$99,500 in compensation expense related to the granting of non-qualified stock
options. Advertising and marketing costs decreased $117,766 for the year ended
September 30, 1995 compared to the year ended September 30, 1994 due to a lower
level of advertising expense being incurred as efforts were being directed at
new product design and testing. Other general and administrative expenses
decreased $219,086 for the year ended September 30, 1995 compared to the year
ended September 30, 1994 due primarily to decreased professional and consulting
expenses. Research and development expenses for the year ended September 30,
1995 were $185,053 compared to $484,520 for the year ended September 30, 1994
due to fewer basic research projects related to the development of water
purification technologies. The increase in costs and expenses in 1995 was offset
by a write down of assets of $758,059 because no such transaction occurred in
1995.

Other income decreased by $157,327 in the fiscal year ended September 30, 1995,
compared to the fiscal year ended September 30, 1994, due mainly to interest
accrued on the note payable to Casmyn Corp.

The Company discontinued its metal fabrication business segment in fiscal 1995
recognizing a loss from discontinued operations in the year ended September 30,
1995 of $77,354 compared to a loss of $643,767 for the year ended September 30,
1994. A gain of $109,783 was recognized on the disposal of certain metal
fabrication equipment during 1995.

Capital Resources and Liquidity
-------------------------------

At September 30, 1996, the Company had negative working capital of $13,818,
including $327,553 in cash and and restricted investments. In addition, the
Company received cash of $4,375,000 in October 1995 which was classified as
stock subscriptions receivable at September 30, 1995. The Company has continued
its sales and marketing programs in Vietnam, the United Arab Emirates and North
America.

                                       12
<PAGE>
 

During the year ended September 30, 1995, the Company completed private
placements of 500,000 common shares and 1,000,000 units for total net proceeds
of $3,375,000 (including $2,375,000 in subscriptions receivable collected in
October 1995). There were also 221,210 shares issued in connection with the
exercise of VVC warrants for net proceeds of $325,660 during the year ended
September 30, 1995. In addition, the Company issued 4,000,000 preferred shares
in exchange for $2,378,475 in debt owing to Casmyn and net cash of $2,000,000
(included in subscriptions receivable collected in October 1995).

The following is a discussion of the principal sources and uses of cash and cash
equivalents for the Company in fiscal 1996.

Net Cash Used in Operating Activities. Net cash used in operating activities was
$4,109,494 in 1996 compared to $2,015,209 in 1995. The increase in the net cash
used in operations in 1995 was due principally to the increase in inventory
levels and accounts receivable related to Vietnam and North American sales
activities and the net loss due to increased costs and expenses relating to
sales of water purification systems as discussed above. Net cash used in
operating activities was $3,294.475 for the year ended September 30, 1994, due
primarily to net losses related to sales of water purification systems.

Net Cash Provided by (Used in) Investing Activities. During 1996, the Company
used $916,160 net cash in investing activities compared to net cash provided by
investing activities of $100,999 in the fiscal year ended September 30, 1995.
The $1,107,159 increase in cash used in investing activities was mainly due to
an increase in the purchase of property and equipment ($577,847) and an increase
in restricted investments ($250,000). In 1995 the Company received $191,709
from the sale of assets, there were no similar sales in the year ended September
30, 1996. In 1994, investments in and advances to affiliate of $508,343 and
purchase of equipment and improvements and increase in other assets of $151,944,
offset by proceeds from the sale of assets of $2,000 accounted for cash used in
investing activities of $657,687.

Net Cash Provided by Financing Activities. As discussed above, during 1996 the
Company received $4,375,000 from the issuance of preferred and common stock in
private placements. In addition, the Company received $235,000 from borrowings
under a line of credit and $33,500 from the exercise of stock options. These
activities resulted in net cash provided by financing activities of $4,643,500
in the year ended September 30, 1996. During 1995, the Company received
$1,325,660 from the issuance of common stock of the Company and VVC in private
placements. During 1994 the Company received $3,080,820 from the issuance of
common stock of the Company and VVC, $1,100,000 from the proceeds of a note
payable to Casmyn, offset by repurchase of treasury stock of $55,000, resulting
in net cash provided by financing activities of $4,125,820.

Management anticipates that the net use of cash by operations will increase
during the foreseeable future due to expenditures on development of various
markets for VETI's water purification technologies, particularily in the United
States and Vietnam. The Company will use proceeds from private placements of its
common and preferred stock to fund the on-going projects in the short term and
anticipates that it will be able to secure a debt financing source to fund
longer term projects. As evidence of the Company's ability to secure debt and/or
equity financing, on September 11, 1995, in an exempt private transaction the
Company sold 500,000 shares of its restricted common stock for $1,000,000. On
September 29, 1995, in an exempt private transaction the Company sold 1,000,000
units to Societe Generale for $2,375,000 ($2.50 per share, net of an investment
banking fee of $125,000). Each unit including one common share and one-half
warrant to purchase an additional 500,000 shares of common stock at $3.00 per
share. Also on September 29, 1995, in an exempt private

                                       13
<PAGE>
 
transaction the Company sold 1,000,000 shares of preferred stock to Casmyn for
$2,000,000. The Company used the proceeds from the private placements to fund
production and marketing activities as well as for general corporate purposes.

The Company is currently in a negative cash flow position and is funding current
operations through a combination of collection of accounts receivable from sale 
of inventory and interest bearing loans from Casmyn Corp.  The Company is 
currently discussing potential debt and/or equity financing opportunities with 
an investment banking firm.  The Company is also discussing financing programs 
with several banks to fund the Community Water Program discussed above. There is
no assurance, however, that such funds will be available in the future in
amounts, or on terms, acceptable to the Company.

The Company is organized with a relatively small, highly trained management and
professional staff and anticipates that the overall staff level will remain low
in the foreseeable future. The Company utilizes research, technical and
management services provided by Casmyn to develop commercial applications for
water purification technologies. Casmyn bills the Company for these services at
rates approximating cost recovery. Casmyn billed the Company $285,730, 223,677
and $930,093 for these services for the years ended September 30, 1996, 1995 and
1994, respectively. The Company believes that this arrangement will not require
a significant investment by the Company in either personnel or facilities.

                                       14
<PAGE>
 
ITEM 7.      FINANCIAL STATEMENTS

The following financial statements are filed as part of this Report:

<TABLE> 
<CAPTION> 
                                                                        Page
                                                                        ----
      <S>                                                               <C>
      Independent Auditors' Report....................................   16
 
      Consolidated Balance Sheets as of September 30, 1996 and 1995...   17
 
      Consolidated Statements of Operations for the Years Ended
      September 30, 1996, 1995 and 1994...............................   18
 
      Consolidated Statements of Stockholders' Equity (Deficiency)
      for the Years Ended September 30, 1996, 1995 and 1994...........   19
 
      Consolidated Statements of Cash Flows for the Years
      Ended September 30, 1996, 1995 and 1994.........................   20
 
      Notes to the Consolidated Financial Statements..................   21
 
</TABLE>

                                       15
<PAGE>
 
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Vector Environmental Technologies,
Inc.

We have audited the accompanying consolidated balance sheets of Vector
Environmental Technologies, Inc. and subsidiaries (collectively, the "Company")
as of September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity (deficiency), and cash flows for each of the
three years in the period ended September 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 audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Vector Environmental Technologies,
Inc. and subsidiaries as of September 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP

Reno, Nevada
December 21, 1996

                                      16
<PAGE>
 
                    VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------       
                                                                      SEPTEMBER 30,       SEPTEMBER 30,           
                                                                          1996                1995
---------------------------------------------------------------------------------------------------------       
<S>                                                                   <C>               <C>                     
                         ASSETS                                                                                        
                         ------                                                                                        
CURRENT ASSETS:                                                                                                
  Cash and cash equivalents                                            $     77,553     $    459,707                 
  Restricted investments                                                    250,000                -
  Stock subscriptions receivable                                                  -        4,375,000
  Accounts receivable                                                       232,802           17,452
  Inventories                                                             2,026,141          312,069                    
  Other assets                                                               58,962          102,652           
                                                                       ------------     ------------
     Total current assets                                                 2,645,458        5,266,880           
INVESTMENT IN AFFILIATES                                                  1,715,950                -           
PROPERTY AND EQUIPMENT, NET                                                 674,157          141,689           
OTHER ASSETS                                                                 42,243           77,890           
                                                                       ------------     ------------
TOTAL ASSETS                                                           $  5,077,808     $  5,486,459           
                                                                       ============     ============
---------------------------------------------------------------------------------------------------------      
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                           
------------------------------------                                                                           
CURRENT LIABILITIES:                                                                                           
  Accounts payable                                                     $    437,977     $    228,202           
  Accrued liabilities                                                       213,447          161,034           
  Due to related parties, net                                             1,772,852          220,045           
  Line of credit                                                            235,000                -           
                                                                       ------------     ------------
     Total current liabilities                                            2,659,276          609,281           
                                                                       ------------     ------------
                                                                                                               
COMMITMENTS AND CONTINGENCIES                                                                                  
                                                                                                               
STOCKHOLDERS' EQUITY:                                                                                          
  5% Cumulative convertible preferred stock, $.00001 par value; 
     10,000,000 shares authorized; 0 and 4,000,000 shares
     issued and outstanding, liquidation preference
     $0 and $4,037,500                                                            -               40           
  Common stock, $.005 par value; 25,000,000 shares 
     authorized; 18,035,966 and 12,444,766 shares issued and 
     outstanding                                                             90,180           62,224           
  Additional paid-in capital                                             17,962,534       16,249,250           
  Accumulated deficit                                                   (15,643,692)     (11,443,846)          
  Foreign currency translation adjustment                                     9,510            9,510           
                                                                       ------------     ------------
     Total stockholders' equity                                           2,418,532        4,877,178           
                                                                       ------------     ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             $  5,077,808     $  5,486,459             
                                                                       ============     ============
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
  statements

                                      17
<PAGE>
 
                    VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>    
<CAPTION>
===============================================================================================================
                                                                    1996             1995             1994      
---------------------------------------------------------------------------------------------------------------       
                                                                                                           
<S>                                                            <C>              <C>              <C>       
  SALES                                                          $ 1,017,071      $   382,158     $   566,331
  COST OF GOODS SOLD                                                 856,550          489,589         602,678
                                                                 ----------------------------------------------              
  GROSS PROFIT (LOSS)                                                160,521         (107,431)        (36,347)
                                                                 ----------------------------------------------             
                                                                                                           
COSTS AND EXPENSES:                                                                                        
  Selling, general and administrative expense                      3,440,258        2,944,669       2,813,879
  Depreciation and amortization                                      136,089           32,272           9,244
  Research and development                                           675,891          185,053         484,520
  Write down of assets                                                     -                -         758,059
                                                                 ----------------------------------------------              
     Total cost and expenses                                       4,252,238        3,161,994       4,065,702
                                                                 ----------------------------------------------              

LOSS FROM OPERATIONS                                              (4,091,717)      (3,269,425)     (4,102,049)

OTHER INCOME (EXPENSE)                                               129,371         (128,805)         28,522
                                                                 ----------------------------------------------             
LOSS FROM CONTINUING OPERATIONS                                   (3,962,346)      (3,398,230)     (4,073,527)
                                                                 ----------------------------------------------             
DISCONTINUED OPERATIONS:                                                                                   
  Loss from discontinued operations                                        -          (77,354)       (643,767)
  Gain on disposal of discontinued operations                              -          109,783               -
                                                                 ----------------------------------------------    
INCOME (LOSS) FROM DISCONTINUED OPERATIONS                                 -           32,429        (643,767)
                                                                -----------------------------------------------               
                                                                                                           
NET LOSS                                                         $(3,962,346)     $(3,365,801)    $(4,717,294)
                                                                 ==============================================      
---------------------------------------------------------------------------------------------------------------             
                                                                                                                                 
INCOME (LOSS) PER COMMON SHARE:                                                                            
  Net loss from continuing operations                            $(3,962,346)     $(3,398,230)    $(4,073,527)         
  Dividends on cumulative preferred stock                           (200,000)         (37,500)              -
                                                                 ----------------------------------------------               
  Net loss from continuing operations applicable to common                                               
   shares                                                        $(4,162,346)     $(3,435,730)    $(4,073,527)          
                                                                 ==============================================       
                                                                                                           
  Loss per common share from continuing operations               $     (0.33)     $     (0.31)         $(0.41)     
  Loss per common share from discontinued operations                       -                -           (0.06)    
                                                                 ----------------------------------------------               
NET LOSS PER COMMON SHARE                                        $     (0.33)     $     (0.31)         $(0.47)
                                                                 ==============================================       

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                        12,480,178       11,032,179      10,044,907       
                                                                 ==============================================      
---------------------------------------------------------------------------------------------------------------              
 
</TABLE>     

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

<PAGE>
 
                    VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
            FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
                                                                                                                            
                                                                                                             Foreign       Total
                              Number      Number                                Additional                   Currency  Stockholders'
                            of Common  of Preferred    Common    Preferred       Paid-in      Accumulated   Translation   Equity
                              Shares      Shares       Stock      Stock          Capital        Deficit     Adjustment (Deficiency) 
------------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>         <C>          <C>         <C>             <C>           <C>            <C>       <C>
BALANCES AT SEPTEMBER 30,   
 1993                        9,376,400           -      $46,882  $           -   $ 4,599,661   $ (3,360,751)   $(4,118) $ 1,281,674
                            --------------------------------------------------------------------------------------------------------
                                                                                                                             
  VETI private placement       404,135           -        2,021              -     1,060,422              -          -    1,062,443
  VVC private placement        391,396           -        1,957              -     1,704,170              -          -    1,706,127
  VVC warrant exercise         166,625           -          833              -       311,417              -          -      312,250
  Issuance of shares for
   acquisition of assets       325,000           -        1,625              -       248,891              -          -      250,516
  Issuance of shares for 
   services                    600,000           -        3,000              -         7,000              -          -       10,000
  Purchase of treasury shares (640,000)          -       (3,200)             -       (51,800)             -          -      (55,000)
  Foreign currency 
    translation adjustment           -           -            -              -             -              -     12,842       12,842
Net loss                             -           -            -              -             -     (4,717,294)         -   (4,717,294)
                            --------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30, 
  1994                      10,623,556           -       53,118              -     7,879,761     (8,078,045)     8,724     (136,442)
                            --------------------------------------------------------------------------------------------------------

  Private placement            500,000           -        2,500              -       997,500              -          -    1,000,000
  Private placement of 
    units                    1,000,000           -        5,000              -     2,370,000              -          -    2,375,000
  Issuance of shares for           
   services                    100,000           -          500              -       199,500              -          -      200,000
  Exercise of VVC warrants     221,210           -        1,106              -       324,554              -          -      325,660
  Issuance of compensatory                                                                                        
   stock options                     -           -            -              -        99,500              -          -       99,500
  Preferred stock:                                                                                                
     Issued for retirement               
      of debt                        -   3,000,000            -             30     2,378,445              -          -    2,378,475
     Issued for cash                 -   1,000,000            -             10     1,999,990              -          -    2,000,000
  Foreign currency                                                                                                
   translation adjustment            -           -            -              -             -              -        786          786
Net loss                             -           -            -              -             -     (3,365,801)         -   (3,365,801)
                            --------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30,   
 1995                       12,444,766   4,000,000       62,224             40    16,249,250    (11,443,846)     9,510    4,877,178
                            --------------------------------------------------------------------------------------------------------
                                                                                                                  
  Issuance of shares for        
   services                     25,000           -          125              -        24,875              -          -       25,000
  Exercise of stock options     33,500           -          167              -        33,333              -          -       33,500
  Conversion to common       4,000,000  (4,000,000)      20,000            (40)      (19,960)             -          -            -
  Shares issued in exchange
    for investment in
    affiliated company       1,532,700           -        7,664              -     1,525,036              -          -    1,532,700 
  Collection of subscription                                                                                      
    receivable                       -           -            -              -       150,000              -          -      150,000 
  Net loss                           -           -            -              -             -     (3,962,346)         -   (3,962,346)
  Dividend declared on                                                                                            
   convertible preferred 
   stock                             -           -            -              -             -       (237,500)         -     (237,500)
                            --------------------------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 30,   
 1996                       18,035,966           -      $90,180  $           -   $17,962,534   $(15,643,692)    $9,510  $ 2,418,532
                            ========================================================================================================
</TABLE>

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

                                      19
<PAGE>
 
                    VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
                                                                        -------------------------------------------------------
                                                                                1996              1995               1994   
                                                                        -------------------------------------------------------  
<S>                                                                         <C>              <C>             <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:                                                                   
NET LOSS                                                                      $(3,962,346)     $(3,365,801)      $(4,717,294)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH                                                           
  USED IN OPERATING ACTIVITIES:                                                                         
 Depreciation and amortization                                                    136,089           35,022            41,971
 (Gain) loss on sale of assets                                                          -         (109,783)            2,617
 Write down of assets                                                                   -                -           758,059
 Other non-cash expense                                                            25,000          299,658            10,000
 (Increase) decrease in accounts receivable                                      (215,350)         110,334           (54,309)
 (Increase) decrease in inventories                                            (1,714,072)         140,460            58,349
 (Increase) decrease in prepaid expenses and other assets                          43,690          (74,043)          122,316  
 Increase (decrease) in accounts payable and accrued liabilities                  262,188          (36,664)          189,262
 Increase in amounts due to related parties                                     1,315,307          985,608           294,554
                                                                        -------------------------------------------------------  
   Net cash used in operating activities                                       (4,109,494)      (2,015,209)       (3,294,475)
                                                                        -------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of investment in affiliate                                              (33,250)               -                 -
 Proceeds from sale of assets                                                           -          191,709             2,000    
 Increase in restricted investments                                              (250,000)               -                 -
 Investment in and advances to affiliate                                                -                -          (508,343)
 (Increase) decrease in other assets                                               35,647                -           (55,533)
 Purchase of property and equipment                                              (668,557)         (90,710)          (95,811)
                                                                        -------------------------------------------------------  
   Net cash provided by (used in) investing activities                           (916,160)         100,999          (657,687)
                                                                        -------------------------------------------------------
                                                                                                      
CASH FLOWS FROM FINANCING ACTIVITIES:                                                           
 Issuance of common stock                                                       2,375,000        1,000,000         1,062,443
 Issuance of preferred stock                                                    2,000,000                -                 -
 Issuance of VVC common stock                                                           -          325,660         2,018,377
 Issuance of common stock for exercise of stock options                            33,500                -                 -
 Proceeds from note payable to related party                                            -                -         1,100,000
 Purchase of treasury stock                                                             -                -           (55,000)
 Increase in line of credit                                                       235,000                -                 -
                                                                        -------------------------------------------------------
   Net cash provided by financing activities                                    4,643,500        1,325,660         4,125,820
                                                                        -------------------------------------------------------
Effect of exchange rate changes on cash and cash                                         
 equivalents                                                                            -              786            12,842     
                                                                        -------------------------------------------------------   
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                             (382,154)        (587,764)          186,500

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                    459,707        1,047,471           860,971
                                                                        -------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                      $    77,553      $   459,707       $ 1,047,471
                                                                        =======================================================
CASH PAID FOR INTEREST                                                        $    41,037      $         -       $         -
                                                                        =======================================================
                                                                                                      
NONCASH INVESTING AND FINANCING ACTIVITIES:                                                           
 Issuance of common stock for subscription receivable                         $         -      $ 2,375,000       $         -
 Issuance of preferred stock for repayment                             
   of debt to related party                                                             -        2,378,475                 -
 Issuance of preferred stock for subscriptions receivable                               -        2,000,000                 -
 Issuance of common stock for services                                             25,000          200,000            10,000
 Issuance of common stock to acquire assets                                             -                -           250,516
 Issuance of common stock for investment in affiliate                           1,532,700                -                 -
 Receipt of investment in affiliate for repayment of 
  subscription receivable                                                         150,000                -                 -
 Increase in due to related party for dividends on preferred stock                237,500                -                 -
 Conversion of preferred stock to common stock                                     20,000                -                 -
------------------------------------------------------------------------------------------------------------------------------- 
</TABLE>
  The accompanying notes are an integral part of these consolidated financial
                                   statements

                                      20
<PAGE>
 
                    VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.  SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Vector Environmental Technologies, Inc. ("VETI" or the "Company") was
incorporated in Delaware on April 3, 1987. The Company operates through its 95%
owned subsidiary, Vector Venture Corp. ("VVC"), and various wholly owned
subsidiaries: Vector Venture Corp. which holds certain technologies and
licenses; Vector Manufacturing Corp. ("VMC") which provides purchasing and
manufacturing services; Vector Vietnam, Ltd., which holds and manages Vietnamese
operations; Alpine Water Purification, Inc., which markets consumer water
treatment equipment; STOX Systems, Inc., which markets hazardous materials
storage systems; CGL Technologies, Inc., which performs research and development
of water purification technologies; Vector India which was formed to develop
business in India; Vector Environmental Technologies (India) Private Limited
which was formed to hold and manage business in India; and Vector Water
Technologies which markets water purification systems in the United Arab
Emirates.

On June 19, 1995, the Company completed the acquisition of 8,670,618 shares of
VVC common stock (approximately 95%) through the issuance of the same number of
shares of Company common stock. VVC is related to the Company through the
existence of certain common officers, directors and significant stockholders.
Therefore, the investment in VVC has been accounted for as a combination of
entities under common control, which is a method similar to a pooling of
interests. The accompanying consolidated financial statements include assets and
liabilities of VVC at their historical cost and operations of VVC for all
periods presented.

On June 29, 1995, VETI issued 3,000,000 5%, cumulative, convertible, voting
preferred shares ("Preferred Shares") in exchange for approximately $2,400,000
in debts owed by VETI to Casmyn Corp. ("Casmyn"). On September 29, 1995, Casmyn
purchased an additional 1,000,000 Preferred Shares of VETI preferred stock at
$2.00 per share. VETI is related to Casmyn through the existence of certain
officers, directors and significant stockholders. Each Preferred Share was
convertible, at Casmyn's option, into one share of VETI common stock. The
provisions of the Preferred Shares gave Casmyn effective voting control of VETI
with a 56.25% voting majority. Effective September 30, 1996, Casmyn converted
these Preferred Shares into common shares thereby relinquishing voting control
over VETI. The conversion of the preferred shares into common shares resulted in
Casmyn holding a 24.3% equity interest in the Company. During the fourth quarter
of 1996, VETI issued 1,532,700 of its restricted common shares to Casmyn in
exchange for 425,750 shares of Auromar Development Corporation ("Auromar")
common stock, held as an investment by Casmyn, thereby increasing Casmyn's
percentage ownership in the Company to approximately 31.2% at September 30,
1996.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of VETI and its
wholly or majority owned subsidiaries (collectively, the "Company").  All
intercompany transactions and balances have been eliminated in consolidation.

DISCONTINUED OPERATIONS

In 1995, VMC discontinued its metal fabrication business segment. The results of
the metal fabrication segment have been reported separately as discontinued
operations in the accompanying consolidated statements of operations for the 
years ended September 30, 1995 and 1994. Sales for the metal fabrication segment
were $12,379 and $519,167 for the

                                      21
<PAGE>
 
years ended September 30, 1995 and 1994, respectively. After discontinuing its
metal fabrication segment, the Company has operated principally in one business
segment, the development and sale of environmental technologies, principally
water purification.
 
CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company considers
all short-term investments with a maturity of three months or less at the date
of purchase to be cash equivalents. As of September 30, 1996 and 1995, bank
balances held in excess of Federally insured limits were $99,217 and $267,895,
respectively.

RESTRICTED INVESTMENTS

At September 30, 1996, the Company had $250,000 of cash invested in short term
money market funds that represents collateral for outstanding borrowings under a
line of credit (see Note 5). The investments are stated at cost which
approximates market.

PROPERTY AND EQUIPMENT    

Property and equipment are recorded at cost and are depreciated or amortized on
a straight-line basis over their estimated useful lives of three to seven years.

INVESTMENT IN AFFILIATES

The investment in affiliates consists principally of the Company's investment in
the common stock of Casmyn Corp. Such common shares were acquired when the
Auromar shares owned by the Company were exchanged for Casmyn common shares in
the merger between Auromar and Casmyn. Other shares were obtained from
collection of a $150,000 stock subscription receivable.

REVENUE RECOGNITION

Revenues from sale of water purification equipment are recognized when goods are
shipped to customers.

INCOME (LOSS) PER SHARE

Income (loss) per common share is computed on the basis of the weighted average
number of shares outstanding and common stock equivalents when dilutive.

INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is determined using
the first-in, first-out method.  Cost includes material, labor and manufacturing
overhead costs. Inventories at September 30, were composed of the 
following:
<TABLE> 
<CAPTION> 
                                1996        1995
                             ---------    --------
            <S>             <C>         <C>   
             Raw materials   $1,081,054   $ 77,989
             Finished Goods     945,087    234,080
                             ----------   --------
               Total         $2,026,141   $312,069
                             ==========   ========
</TABLE>

FOREIGN CURRENCY TRANSLATION

                                      22
<PAGE>
 
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the accumulated foreign currency translation adjustments account in
stockholders' equity.

USE OF 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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS

Certain amounts in the 1995 and 1994 consolidated financial statements and notes
have been reclassified to conform with the 1996 presentation.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company believes, based upon current information, that the carrying value of
the Company's cash and cash equivalents, restricted investments, accounts
receivable and accounts payable approximates fair value due to the short
maturity of those instruments. The fair value of amounts due to related parties
is not determinable because of the related party nature of the amounts. The
Company estimates the fair value of its line of credit approximates its carrying
value because interest rates on the line of credit approximate market rates.

RECENTLY ISSUED ACCOUNTING STANDARDS

The Financial Accounting Standards Board ("FASB") issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" in March 1995.  This statement, effective for the Company's
fiscal year ending September 30, 1997, requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Management believes the
adoption of SFAS No. 121 will not have a significant effect on the financial
position or results of operations of the Company.

The FASB issued SFAS No. 123 "Accounting for Awards of Stock-Based Compensation
to Employees" in October, 1995. This statement, effective for the Company's
fiscal year ending September 30, 1997, establishes financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions where equity securities are issued for goods and services. This
Statement defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees." Management's
current intention is to continue to follow APB Opinion No. 25 and therefore
believes that if SFAS No. 123 had been adopted at September 30, 1996, it would
not have had a significant effect on the financial position or results of
operations of the Company.

                                      23
 
<PAGE>
 
2.   BUSINESS SEGMENTS

The Company operates in one business segment, the development and sale of
environmental technologies, principally water purification systems. The Company
has operations based in North America, Asia and the Middle East. The table below
presents information as to the Company's operations by geographic region.
<TABLE>
<CAPTION>
                                                  Year ended         Year ended            Year ended      
                                                 September 30,      September 30,         September 30,  
                                                     1996               1995                  1994
                                                 ------------       -------------         -------------  
<S>                                               <C>                 <C>                   <C>          
SALES                                                                                                    
  North America                                   $   198,565         $   236,533           $   566,331  
  Asia                                                602,942             145,625                     -  
  Middle East                                         215,564                   -                     -  
                                                  -----------         -----------           -----------  
     Total                                        $ 1,017,071         $   382,158           $   566,331  
                                                  ===========         ===========           ===========  
LOSS FROM OPERATIONS                                                                                     
  North America                                   $(2,897,854)        $(3,147,141)          $(4,043,123) 
  Asia                                             (1,151,063)           (122,284)              (58,926)
  Middle East                                         (42,800)                  -                     -  
                                                  -----------         -----------           -----------  
     Total                                        $ 4,091,717         $(3,269,425)          $(4,102,049)
                                                  ===========         ===========           ===========  
IDENTIFIABLE ASSETS                                                                                      
  North America                                   $ 3,062,382         $ 5,182,077           $ 1,891,853  
  Asia                                              1,783,994             304,382                10,359  
  Middle East                                         231,432                   -                     -  
                                                  -----------         -----------           -----------  
     Total                                        $ 5,077,808         $ 5,486,459           $ 1,902,212  
                                                  ===========         ===========           ===========  
</TABLE> 
 
3.  PROPERTY AND EQUIPMENT 
 
Property and equipment consist of the following at September 30, 1996:
 
<TABLE> 
<CAPTION> 
                                                                   1996             1995
                                                                 --------         --------
<S>                                                              <C>              <C>
                 Equipment                                       $797,694         $119,237
                 Leasehold improvements                            10,812           10,812
                                                                 --------         -------- 
                           Total                                  808,506          130,049
                 Accumulated depreciation and amortization       (134,349)         (40,817)
                                                                 --------         --------
                           Net property and equipment             674,157           89,232
                 Construction in progress                               -           52,457
                                                                 --------         -------- 
                 Total Property and Equipment                    $674,157         $141,689
                                                                 ========         ========
</TABLE>

4.  RELATED PARTY TRANSACTIONS

The Company conducts business with various companies that are related through
the existence of certain common officers, directors and significant
stockholders. These related parties include Casmyn, Dahya Holdings, Inc. and
Casmyn Research and Engineering, Ltd. ("CRE").

The Company utilizes research, technical and management services provided by
Casmyn to develop commercial applications for water purification technologies.
Casmyn bills the Company for these services at rates 

                                      24
<PAGE>
 
approximating cost recovery. Casmyn billed the Company $285,730, $223,677 and
$930,093 for these services for the years ended September 30, 1996, 1995 and
1994.

The Company incurred interest expense to Casmyn of $39,536, $131,629 and $32,907
for the years ended September 30, 1996, 1995 and 1994 respectively.
 
As a result of these related party transactions, cash advances from and to the
Company and other transactions, the Company had a net amount due to related
parties at September 30, 1996 of $1,772,852, including $1,712,421 at September
30, 1996, due to Casmyn which bears interest at 9% per annum and is due one year
from the date of the advance.

5.  LINE OF CREDIT

In June 1996, the Company entered into a $250,000 revolving credit agreement
with a bank. Under the terms of the agreement, the interest rate on funds
borrowed is determined based upon an index that varies with the bank's prime
lending rate, 8.25% at September 30, 1996. Borrowings under the line of credit
are collateralized by the Company's money market funds (restricted investments)
which are invested with the banking institution. The amounts borrowed are due
upon demand by the financial institution and require monthly payment of accrued
interest.

6.  STOCKHOLDERS' EQUITY

COMMON STOCK

In October 1993, VVC issued 165,000 shares of its common stock for 100% of the 
issued and outstanding shares of P.E.R.M. Pelican Inc. ("PERM" see Note 8).

In January 1994, in connection with the private placement of 404,135 shares of 
common stock, the Company's Chief Executive Officer ("CEO") agreed with certain 
private investors to decrease his ownership of the Company's common stock. 
Accordingly, as an inducement for private investment in the Company, the Company
acquired 640,000 shares of common stock from the CEO for $55,000, the price paid
by the CEO.

On June 6, 1994, the Company exchanged 160,000 shares of its common stock for 
all the issued and outstanding capital stock of Alpine Water Purification, Inc. 
("Alpine") in a transaction accounted for as a purchase. Alpine is involved 
in the design, development and marketing of technologically advanced household 
water purification systems internationally and holds a patent pending on a water
disinfection device.

During the year ended September 30, 1995, the Company completed a private
placement for 500,000 shares of common stock for net proceeds of $1,000,000.
VVC issued 221,210 shares of common stock for the exercise of warrants for net
proceeds of $325,660.

On September 29, 1995, the Company completed a private placement of 1,000,000
units for net proceeds of $2,375,000. Each unit consists of one common share of
the Company plus one warrant; two warrants plus $3.00 will entitle the holder to
purchase one share of the Company's common stock. All warrants expire on October
1, 1997. At September 30, 1995 these amounts were included in stock subscription
receivable. The subscription receivable were collected subsequent to September
30, 1995.

During the fourth quarter of 1996, VETI issued 1,532,700 of its restricted
common shares to Casmyn in exchange for 425,750 shares of Auromar Development
Corporation ("Auromar") common stock. The Company recorded these shares at a
value of $1,532,700 or $1.00 per share. This value reflects a discount from the
price at which 

                                      25
<PAGE>
 
VETI common shares were trading on the NASD Bulletin Board on the date of the
transaction. This transaction along with the conversion by Casmyn of preferred
stock (see below) resulted in Casmyn increasing its percentage ownership of the
Company to approximately 31.2% at September 30, 1996.

PREFERRED STOCK

The Company's Series A preferred stock may be converted at the option of the
holder to common stock on a one-for-one basis (subject to adjustment pursuant to
certain common stock transactions), has a $.05 per share cumulative dividend
rate, and has a liquidation preference equal to $1.00 per share plus all unpaid
dividends. Holders of a share of Series A preferred stock are entitled to the
equivalent of four (4) common share votes.

On June 29, 1995, the Company sold a voting controlling interest to Casmyn, a
company related through certain common officers, directors and significant
stockholders through the issuance of 3,000,000 Series A preferred shares of the
Company, in exchange for $2,378,475 in debts owed by the Company. On September
29, 1995, the Company sold Casmyn an additional 1,000,000 Series A preferred
shares at $2.00 per share for net proceeds of $2,000,000. At September 30, 1995
the $2,000,000 was included in subscriptions receivable and was collected
subsequent to September 30, 1995. At September 30, 1995, Casmyn had effective
voting control of the Company with a 56.25% voting interest.

Pursuant to the terms of the preferred stock, effective September 30, 1996,
Casmyn converted 4,000,000 shares of preferred stock into common stock of the
Company. Upon conversion of preferred stock to common stock, preferred stock
dividends in arrears payable to Casmyn were $237,500. The Company recorded the
dividend and increased the amounts payable to Casmyn by $237,500 (see Note 4).

STOCK OPTIONS

During 1995, the Company adopted a qualified Incentive Stock Option Plan (ISOP)
which provides that a maximum of 700,000 options to purchase the Company's
common stock may be granted to officers, employees and advisors of the Company.
Options granted under the ISOP are intended to qualify as incentive stock
options under the Economic Recovery Tax Act of 1981 (the "1981 Act") as amended
by the Tax Reform Act of 1986.

In 1995, options to purchase 606,000 shares of common stock were granted under
the ISOP with an exercise price of $1.00 per share which represents the market
price per share on the date of grant. In 1996, options to purchase 10,000 shares
of common stock were granted under the ISOP with an exercise price of $1.00
per share which represents the market price per share on the date of the grant.
All options granted are exercisable for a period of ten (10) years and vest over
a three year period.
 
The Company also adopted a non-qualified Stock Option Plan (SOP), which grants
options to purchase a maximum of 875,000 shares of the Company's common stock to
officers, key employees and advisors of the Company.  Options granted under the
SOP are not intended to qualify as incentive stock options under the 1981 Act.

In 1995, options to purchase 480,000 shares of common stock at a price of $.01
to $3.00 per share were granted under the SOP. In 1996, options to purchase
25,000 shares of common stock at prices ranging from $1.00 to $2.00 per share
were granted under the SOP. With the exception of 150,000 options that
completely vested on the date of grant, the options vest on varying terms of
periods up to three years. Certain of these options are compensatory in nature
and resulted in total compensation expense of $99,500 during the year ended
September 30, 1995. During the year ended September 30, 1996, 267,000 options
were canceled.

                                      26
<PAGE>
 
Prior to September 30, 1994, the Company had granted options to purchase up to a
total of 1,350,000 shares of its common stock.  These options are not intended
to qualify as incentive stock options under the 1981 Act.  Included in these
options are options to purchase up to 1,000,000 shares at $1.00 granted to the
Chief Executive Officer of the Company, under an employment agreement.  This
agreement provides that 25% of such options were vested immediately with the
remaining 75% to vest based on the achievement of defined sales goals.

A summary of stock option activity under Company plans follows:
<TABLE>
<CAPTION>
                                           Number           Option Price 
                                          of Shares          Per Share     
                                          ---------         -------------
<S>                                       <C>               <C>
      Outstanding at September 30, 1994   1,350,000                 $1.00
      Granted (vested and non-vested)     1,086,000         $.01 to $3.00
      Canceled                                    0                     0
      Exercised                                   0                     0
                                          ---------         -------------   
      Outstanding at September 30, 1995   2,436,000         $.01 to $3.00
      Granted (vested and non-vested)        35,000        $1.00 to $2.00
      Canceled                             (267,000)                $1.00
      Exercised                             (33,500)                $1.00
                                          ---------         -------------   
      Balance at September 30, 1996       2,170,500         $.01 to $3.00
                                          =========         =============
      Exercisable at September 30, 1996   1,162,420         $.01 to $3.00
                                          =========         =============
</TABLE>

7.  INCOME TAXES

The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," ("FAS 109") during its fiscal year ended
September 30, 1994. The statement requires that deferred income taxes reflect
the tax consequences on future years of differences between the tax bases of
assets and liabilities and their bases for financial reporting purposes. In
addition, FAS 109 requires the recognition of future tax benefits, such as net
operating loss carryforwards, to the extent that realization of such benefits
are more likely than not. There was no cumulative effect of this accounting
change at the time of adoption.

A reconciliation of the income tax benefit (provision) with amounts determined
by applying the statutory U.S. Federal income tax rate to the consolidated
income (loss) before income taxes is as follows for the year ended September 30:
<TABLE>
<CAPTION>
                                                                 1996                      1995                    1994  
                                                              -----------               -----------            -----------
<S>                                                           <C>                       <C>                     <C>
     Tax benefit at U.S. statutory rate                       $ 1,390,000               $ 1,180,000            $ 1,650,000
     Operating losses with no current tax benefit              (1,390,000)               (1,180,000)            (1,650,000)
                                                              -----------               -----------            -----------       
     Total                                                    $         -               $         -            $         -
                                                              ===========               ===========            =========== 
</TABLE>

The Company's deferred tax items as of September 30 are as follows:

<TABLE>
<CAPTION>
                                                                   1996                    1995                 
                                                                ----------              -----------            
<S>                                                              <C>                   <C>                     
DEFERRED TAX ASSETS:                                                                                           
Net operating loss carryforwards                                $ 3,051,000             $ 2,140,000

Other                                                                28,000                  10,000            
                                                                -----------             -----------             
Total deferred tax assets                                         3,079,000               2,150,000            
Deferred tax liabilities                                                  -                       -            
Valuation allowance                                              (3,079,000)             (2,150,000)           
                                                                -----------             -----------             
Net deferred tax assets                                         $         -             $         -            
                                                                ===========             ===========            
</TABLE>

                                      27
<PAGE>
 
As of September 30, 1996 the Company has net domestic operating loss
carryfowards for income tax purposes of approximately $8,700,000 expiring in
years through 2011. These losses may not qualify for use under the current
Internal Revenue Code due to tax rules concerning ownership changes. Because the
future benefits of these loss carryforwards are not considered to be more likely
than not, such benefits are fully offset by a valuation allowance.

8.  OPERATING LEASES

The Company has obligations under operating leases for offices and facilities. 
Minimum annual lease payments are as follows:

<TABLE> 
     <S>              <C> 
     1997             $ 170,458
     1998                85,842
     1999                 6,900
     2000                 6,900
     2001                 6,900
     Thereafter          89,700
</TABLE> 

Related rental expense was $156,857, $60,685 and $62,906 for the years ended 
September 30, 1996, 1995 and 1994, respectively.

9.  WRITE DOWN OF ASSETS 

The Company through its subsidiary, VVC, sought to acquire PERM Pelican, Inc.
("PERM") under an agreement dated March 10, 1993, however VVC's relationship
with the seller of PERM deteriorated to the point where VVC was unable to
complete the acquisition. Consequently, on August 25, 1994 VVC commenced legal
proceedings against PERM, the seller and certain principals of PERM. Due to the
uncertainty regarding the ability of the Company to recover its investment in
and advances to PERM, VETI wrote off $758,059 in the fiscal year ended September
30, 1994.

                                      28
<PAGE>
 
ITEM 8.  CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
         DISCLOSURE

The Company's independent accountant is Deloitte & Touche LLP, who has been the
Company's independent public accountant since December 23, 1994. Effective
December 23, 1994, the Company dismissed its prior certifying accountants,
Albright, Persing & Associates, Ltd. The decision to change accountants was
approved by the Company's Board of Directors.

None of the "reportable events" described in Item 304(a)(1)(ii) or (iv)
occurred with respect to the Company within the last two fiscal years, or the
subsequent interim period to date hereof.

                                      29
<PAGE>
 
                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
         REGISTRANT

Certain information about the directors and executive officers of the Company is
contained in the following table:
<TABLE>
<CAPTION>
Name                     Age                 Position                                            
----                     ---                 --------                                            
<S>                      <C>                 <C>                                                 
Amyn S. Dahya             40                 Chief Executive Officer and Chairman of the Board   
                                                                                                 
Sandro Kunzle             42                 Director                                            
                                                                                                 
Mehdi C. Nimjee           48                 Director                                            
                                                                                                 
Douglas C. Washburn       51                 Vice President, Treasurer and Secretary             
                                                                                                 
Dennis E. Welling         50                 Controller                                           
</TABLE>

          All directors hold office until the next annual meeting of the
shareholders of the Company or until their successors have been elected and
qualified.  Officers serve at the discretion of the Board of Directors.

AMYN S. DAHYA. Mr. Dahya has extensive international experience in project
development, engineering, joint ventures, and finance. Prior to joining the
Company in 1993, he held senior positions with Davy McKee, an international
engineering firm and in 1987 he founded Casmyn Group of Companies specializing
in mineral and environmental engineering, which he has developed for the last
nine (9) years. Mr. Dahya serves on the Board of Directors of several companies,
including Casmyn Corp. Diamond Fontein International, Vector Venture Corp., and
VETI where he also holds executive management positions.

SANDRO KUNZLE.  Mr. Kunzle has over 23 years of international banking and
finance experience. During his career, Mr. Kunzle has held senior positions with
several Swiss banks and financial institutions. He currently holds the position
of Managing Director of Witra Inc., an investment firm based in Switzerland. His
expertise in international finance and venture capital adds significant
experience to the Company's international business development efforts.

MEHDI C. NIMJEE.  Mr. Nimjee brings to the Company twenty-one years of project
management experience in the field of analytical chemistry and its applications
to exploration, mining, agriculture, hazardous materials handling and the
environment.  He has also had experience in designing and setting up project
specific laboratories internationally.

DOUGLAS C. WASHBURN.  Mr. Washburn holds a MBA/CPA and brings twenty-four (24)
years of financial management experience to the Company.  Prior to joining the
Company in 1993 he was a principal at Washburn Partners, a Financial Consulting
firm, from 1990 to 1993.  Between 1980 and 1990, he was Vice President and
Controller of Armco Financial Corporation, a $1 billion multinational merchant
bank and its successor Glenfed Financial Corporation.  Through his 

                                       30
<PAGE>
 
background he brings to the Company expertise in areas of international finance,
planning, taxation, accounting and management information systems.

DENNIS E. WELLING.  Mr. Welling, a CPA, currently serves as Controller.  He has
twenty-four (24) years internal and external audit and controlling experience,
including positions with Deloitte & Touche, Armco Steel Corporation and Glenfed
Financial Corporation. He has significant management information systems
experience in the mining, manufacturing and financial services sectors.


                                       31
<PAGE>
 
ITEM 10.  EXECUTIVE COMPENSATION

The following table sets forth the annual remuneration during the fiscal year
ended September 30, 1996, which was paid to or accrued for the account of each
of the most highly compensated Executive Officers or directors of the Company
whose total cash and cash equivalent remuneration exceeded $100,000. No
compensation is currently paid to non-employee directors. The following includes
compensation information relating to the Company.


                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
 
                                          Annual Compensation   Long Term Compensation
                                                                      VETI
                                                                   Securities
                                                                   Underlying
Name /                                                              Options              Other
Position                                   Year    Salary ($)         (#)                Comp.
-------------------------------------------------------------------------------------------------------
<S>                                      <C>      <C>             <C>                   <C>     
Amyn Dahya                                 1996    $150,000        1,000,000              -0-
 President, CEO and                        1995    $150,000        1,000,000              -0-
  Chairman of                              1994    $150,000        1,000,000              -0-
  the Board 
</TABLE>
No compensation is currently paid to non-employee directors.

All other executive officers of the Company listed above received a combined
annual cash compensation of $100,000 for the fiscal year ended September 30,
1996. In addition, the Company pays a portion of each employee's health
insurance premium.

The Company has entered in to a ten (10) year employment contract with Amyn
Dahya. Pursuant to the terms of this agreement, Mr. Dahya will earn an annual
base salary of $150,000, which increases by no less than 10% per year if such an
increase is approved by the Board of Directors. Under this contract, Mr. Dahya
receives reimbursement for business expenses and normal group benefits available
to other of the Company's executives. This contract will also provide Mr. Dahya
with the grant of 5 year non-qualified stock options to purchase shares of the
Company's common stock at an exercise price of $1.00 per share pursuant to the 
following schedule:

<TABLE>
<CAPTION>
                                                                                     
      No. of Shares      Time of Vesting                                             
      -------------      ---------------                                             
      <S>                <C>                                                         
        250,000           Immediately upon execution of the Employment Agreement 

        250,000           When gross sales of the Company reach $2,500,000             
                                                                                     
        250,000           When gross sales of the Company reach $5,000,000             
                                                                                     
        250,000           When gross sales of the Company reach $7,500,000              
 
</TABLE>

With the exception of Amyn Dahya, there are no employment contracts, proposed
termination of employment or change-in-control arrangements between Company and
any of its directors or executive officers.

                                       32
<PAGE>
 
            AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                       FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
                                                                                            Value of Unexercised In-
                                                            Number of Securities               the-Money options
                                                           Underlying Unexercised              at Sept. 30, 1996
                                 Shares     Value        options at Sept. 30, 1996          Exercisable / Unexercisable
Name                            Acquired   Realized      Exercisable / Unexercisable               ($000's) 
========================================================================================================================
<S>                             <C>        <C>           <C>                                     <C>
Amyn S. Dahya                     0           0               250,000/750,000                      $125/$375
========================================================================================================================
</TABLE>

During 1995 the Company adopted a qualified Incentive Stock Option Plan (ISOP)
which provides that a maximum of 700,000 options to purchase the Company's
common stock may be granted to officers and employees and advisors of the
Company. Options granted under the ISOP are intended to qualify as incentive
stock options under the Economic Recovery Tax Act of 1981 (the "1981 Act") as 
amended by the Tax Reform Act of 1986.

The ISOP is administered by the Board of Directors through a committee presently
consisting of two members of the Board (Committee). The Committee determines
which persons receive options, the number of shares that may be purchased under
each option, vesting provisions, option terms and exercise price. Options
granted under the ISOP are require to have an exercise price equal to or greater
than the market price of the Company's common shares at the grant date. In the
event an optionee voluntarily terminates his relationship with the Company, he
has the right to exercise his accrued options within 3 months of such
termination. However, the Company may redeem any accrued options held by an
optionee by paying the difference between the option price and the then fair
market value. If an optionee's relationship is involuntarily terminated, other
than because of death, he also has the right to exercise the accrued options
within thirty (30) days of such termination. Upon death, his estate or heirs
have one year to exercise his accrued options. 

Options granted under the ISOP are not transferable other than by will or by the
laws of descent and distribution. The ISOP provides that the number of shares
and the option price will be adjusted on a pro-rata basis for stock splits and
stock dividends.

In 1995, options to purchase 606,000 shares of common stock were granted under
the ISOP with an exercise price of $1.00 per share which represents the market
price per share on the date of grant. In 1996, options to purchase 10,000 shares
of common stock were granted under the ISOP with an exercise price of $1.00 per
share which represents the market price per share on the date of the grant. All
options granted are exercisable for a period of ten (10) years and vest over a
three year period.

The Company also adopted a non-qualified Stock Option Plan (SOP), which grants
options to purchase a maximum of 875,000 shares of the Company's common stock to
officers, key employees and advisors of the Company. Options granted under the
Plan are not intended to qualify as incentive stock options under the 1981 Act.

                                       33
<PAGE>
 
The SOP is administered by the Board of Directors through a committee presently
consisting of all three members of the Board which determines which persons
receive options under the SOP, the number of shares that may be purchased under
each option and the vesting period. The term of all options is five (5) years
and all options must be granted within five (5) years from the effective date of
the SOP.

Options granted under the SOP are not transferable other than by will or by the
laws of descent and distribution. The SOP provides that the number of shares and
the option price will be adjusted on a pro-rata basis for stock splits and stock
dividends.

In 1995, options to purchase 480,000 shares of VETI's common stock at a price of
$.01 to $3.00 per share were granted under the SOP. In 1996, options to purchase
25,000 shares of common stock at prices ranging from $1.00 to $2.00 per share 
were granted under the SOP. These options vest on varying terms of periods up to
three years. Certain of these options are compensatory in nature and resulted in
total compensation expense of $99,500 during the year ended September 30, 1995. 
During the year ended September 30, 1996, 267,000 options were canceled.

Prior to September 30, 1994, the Company had granted options to purchase a total
of up to 1,350,000 shares of its common stock. These options are not-intended to
qualify as incentive stock options under the 1981 Act. Included in these options
are options to purchase up to 1,000,000 shares at $1.00 granted to the Chief
Executive Officer of the Company under an employment agreement. This agreement
provides that 25% of such options were vested immediately with the remaining 75%
to vest based on the achievement of defined sales goals.

                                       34
<PAGE>
 
The only other benefit plan offered at the present or during 1996 involves a
major medical plan which is made available to all employees on a non-
discriminatory basis, the Company currently maintains no other stock option
plans, no plan which would termed a "Long-Term Incentive Plan" as explained in
Item 402 (a)(6)(iii) of the U.S. Securities and Exchange Act, nor any benefit
plan which would give rise to "Long Term Compensation" as defined in Item
402(b)(iv) of the U.S. Securities and Exchange Act, except as described above.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------------------------------------

Based solely on a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and certain written
presentations, no person who was a director, officer, or beneficial owner of
more than 10% of the Company's common stock failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year.

                                       35
<PAGE>
 
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following information table sets forth certain information regarding the 
Company's common stock owned on January 21, 1997 by (1) any person (including 
any "group") who is known by the Company to own beneficially more than 5% of its
outstanding common stock, (2) each director and officer, and (3) all officers 
and directors as a group.

<TABLE> 
<CAPTION> 

Name and Address of Beneficial          Shares of Common         Percent of Common
Owner                                   Stock Owned              Stock Outstanding**
------------------------------          ----------------         -------------------
<S>                                     <C>                      <C> 
Dahya Holdings
1335 Greg St. #104                         2,798,698(1)                15.3%
Sparks, NV 89431
------------------------------------------------------------------------------------
Sandro Kunzle
Tenuta Via Vecchia                            16,750(2)                 nil
58029 Sassofortino (GR)
Italy
------------------------------------------------------------------------------------
Mehdi C. Nimjee
1800-1500 West Georgia St.                    33,500(2)                 nil
Vancouver, British Columbia
Canada V6G 2Z6
------------------------------------------------------------------------------------
Casmyn Corp.
1335 Greg St. #104                         5,634,756                   31.2%
Sparks, NV 89431
------------------------------------------------------------------------------------
Societe Generale
17 Cours Valny
La Defense                                 1,500,000(3)                 8.1%
Cedex
Paris, France
------------------------------------------------------------------------------------
All Officers and Directors of the
Company as a Group (5 persons)             2,974,548                   16.1%
------------------------------------------------------------------------------------

</TABLE> 
** Based upon 18,035,966 common shares outstanding at January 21, 1997.

(1) At December 31, 1996, Dahya Holdings, Inc., a foreign corporation, of which 
Mr. Amyn Dahya is an officer and director, held 2,548,698 common shares of the 
Company. Mr. Mansoor Dahya, an uncle to Mr. Amyn Dahya, is the majority 
shareholder of Dahya Holdings, Inc. and holds 91% of the outstanding voting 
stock of Dahya Holdings, Inc. As indirect shareholders, Messrs, Amyn Dahya and 
Mansoor Dahya have shared voting and investment power in and to these shares. 
Also at December 31, 1996, Mr. Dahya had a total of 250,000 exercisable options 
to purchase common stock of the Company at $1.00 per share.

(2) Represents exercisable options to purchase common stock of the Company at 
$1.00 per share.

(3) Represents 1,000,000 common shares of the Company and 500,000 exercisable 
warrants to purchase common stock of the Company at $3.00 per share.

                                       36
<PAGE>
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Casmyn Corp. and Subsidiaries
-----------------------------

The Company utilizes certain facilities and employees and officers of Casmyn in 
conducting its business activities.  Casmyn employs several qualified 
scientists, technologists and engineers experienced in the fields of 
environmental protection, water purification, treatment of effluents from 
mineral processing operations, and pollution control of water.  The Company is 
utilizing Casmyn's infrastructure in order to develop commercial applications 
for water purification technologies developed by Casmyn.  Casmyn provides 
research and development services to the Company as required.  In addition, 
Casmyn provides technical staff to the Company as required.  Casmyn bills the 
Company for the services of its technical staff at a rate which approximates 
cost recovery.

As of 1/31/97 Casmyn owns approximately 31.2% of the outstanding common stock of
the Company.  At September 30, 1996, the Company owned Casmyn $1,712,421. This 
amount is due within one year and bears interest at 9% per annum.  

During the fourth quarter of 1996, the Company issued 1,532,700 of its 
restricted common shares to Casmyn in exchange for 425,750 shares of Auromar 
Development Corporation ("Auromar") common stock.  These shares were 
subsequently exchanged for 163,750 common shares of Casmyn resulting from the 
merger of Casmyn and Auromar.

                                       37
<PAGE>
 
                                    PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)     3. Exhibits
           --------

          3.1 Company's amended and restated articles of incorporation*
          3.2 Company's By-Laws*

       10. Material Contracts
           ------------------

          10.1 Stock Subscription Offer for Vector Environmental Technologies,
               Inc.**
          10.2 Preferences and rights of Series A Preferred Stock - VETI**
          10.3 Vector Environmental Technologies, Inc. 1995 Incentive Stock
               option Plan**
          10.4 Societe Generale $2.5 million Subscription Agreement VETI**
          10.5 Employment Agreement with Amyn Dahya ***
          10.6 Distribution Agreement with Bristol WorldSource, Inc.

       11  Statement re: computation of per share earnings (computation can be
           determined from the material contained in this report)

       21  Subsidiaries of the Company (see Item 1 - Description of Business)

       27  Financial Data Schedule
________________________________________________________________________________
*     Previously filed with the Commission on Form 10-K for fiscal year
      ended September 30, 1994

**    Previously filed with the Commission on Form 10-KSB for the fiscal year
      ended September 30, 1995

***   Previously filed with the Commission on Form 10

(b)  Reports on Form 8-K
     -------------------

       None

                                       38
<PAGE>
 
       SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.

VECTOR ENVIRONMENTAL TECHNOLOGIES, INC.

       /s/ Amyn S. Dahya                             1/31/97
By:  _________________________________        ____________________
     Amyn S. Dahya, Chairman 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 Company and in
the capacities on the date indicated.
<TABLE>
<CAPTION>
 
Signature                                             Title                            Date   
<S>                                       <C>                                         <C>     
                                                                                              
       /s/ Amyn S. Dahya                                                                      
_____________________________             Chairman of the Board and                    1/31/97 
Amyn S. Dahya                             Chief Executive Officer                   _______________  
                                          (Principal Executive Officer)                       
                                                                                              
       /s/ Sandro Kunzle                                                               1/31/97 
_____________________________             Director                                  _______________   
Sandro Kunzle
                                                                                              
       /s/ Mehdi C. Nimjee                                                             1/31/97                      
_____________________________             Director                                  _______________   
Mehdi C. Nimjee                                                                               
                                                                                              
       /s/ Douglas C. Washburn                                                         1/31/97 
_____________________________             Vice President & Treasurer                _______________   
Douglas C. Washburn                       (Principal Financial Officer)                       
                                                                                              
       /s/ Dennis E. Welling                                                           1/31/97                      
_____________________________             Director                                  _______________   
Dennis E. Welling                         (Principal Accounting Officer)
</TABLE>

                                       39