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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 1996 Commission File No. 0-21042

                          MOLTEN METAL TECHNOLOGY, INC.
             (Exact name of registrant as specified in its charter)

         Delaware                                              52-1659959
(State or other jurisdiction of                               (IRS Employer 
incorporation or organization)                               Identification No.)

                             400-2 Totten Pond Road,
                                Waltham, MA               02154
               (Address of principal executive offices) (Zip Code)

                            Area Code (617) 487-9700
                         (Registrant's telephone number)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
                          Common Stock, $.01 par value

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                                   YES X NO___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
          ------

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at May 19, 1997 was approximately $118
million, based on the closing bid price of such stock on such date as reported
by the NASDAQ National Market ($7.25 per share). On May 19, 1997, 23,599,664
shares of the Registrant's Common Stock, $.01 par value, were outstanding.


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PART I

ITEM 1. BUSINESS

TECHNOLOGY OVERVIEW

      Molten Metal Technology, Inc. (including its wholly-owned subsidiaries,
"MMT" or the "Company") is an environmental technology company engaged in the
commercialization and continued development of its innovative, proprietary
processing technology known as Catalytic Extraction Processing ("CEP"). The core
of CEP is a molten metal bath operating at approximately 3,000(degree)F into
which feedstocks and selected chemicals ("reactants") can be introduced. The
catalytic and solvent effect of the molten metal bath causes feedstocks to break
down into their constituent elements and dissolve into the molten metal. The
addition of various selected chemicals to the molten metal allows feedstocks to
reform and be recovered as different materials ("Elemental Recycling(TM)") which
generally can be re-used as a raw material by the feedstock generator or can be
sold to other users. The CEP system largely consists of process, instrument and
control components currently used widely in the metallurgical and chemical
industries.

      MMT believes that a wide variety of chemical intermediates, by-products
and wastes, both organic and inorganic, can be processed by CEP. Liquids, gases
or solids can be introduced into the CEP system through either bottom or top
addition. Within the CEP system, the elemental constituents of the feedstock and
reactants separate and can be recovered from three distinct phases: (i) gases
which rise above the molten metal bath; (ii) molten ceramic products which form
a separate layer on top of the liquid metal; and (iii) metallic elements which
dissolve and collect in the liquid metal bath.

      Recovered products can be re-used as raw materials in the production
process or sold to other industrial customers. For example, it is expected that
many gaseous components can be used as fuels or chemical feedstocks; many
ceramic materials can be recovered and used as specialty chemicals, ceramic
substitutes or abrasives; and most metallic components can be removed and
granulated or cast as ingots for sale.

      The Company currently is developing various applications for its CEP(1)
technology to process particular classes of hazardous wastes and industrial
by-products. Each application uses a molten metal bath to separate waste
compounds into their elemental constituents and reconfigure the elements into
potential gaseous, ceramic, and metal products. MMT has developed
Quantum-CEP(TM) (or Q-CEP(TM)) to process radioactive wastes and "mixed wastes"
(containing both radioactive and hazardous constituents). Quantum-CEP breaks
down hazardous and toxic materials, while separating and containing radioactive
elements in a stable, self-shielding form suitable for storage or final
disposal. This can result in a substantial reduction in the volume of
radioactive materials requiring storage or disposal. In addition, certain of the
resulting non-radioactive materials have the potential to be recycled into
products or re-used in Q-CEP plant operations. Through acquisition and internal
development, the Company also is developing additional technologies that can be
used to process various types of wastes. These technologies include the methods
and equipment for handling and processing radioactive liquids and resins that
the Company acquired in December 1996 and January 1997 from Scientific Ecology
Group, Inc. and VECTRA Technologies, Inc.

MARKET OVERVIEW

      Currently, the most common methods of treatment and disposal of hazardous
and non-hazardous wastes and industrial by-products include landfilling,
deep-well injection, incineration, plasma, vitrification and other thermal
treatment methods, on-site containment (including industrial lagoons) and
release into the environment. Most of these methods have transportation,
treatment and

-------------
(1)  References to "CEP" within this document refer to both the core CEP
     technology and its various related applications.


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safety risks. In addition, certain of these treatment and disposal methods
result in production of residual waste that may require further treatment prior
to disposal. As a result, many of these methods are being met with increasing
public resistance and more stringent regulations, which may lead to an increased
cost of compliance.

      MMT believes the primary factors that create demand for CEP (other than
Q-CEP) include the need for prospective customers to comply with environmental
regulations in a cost-effective manner and the ability of CEP to process
hazardous and non-hazardous wastes and industrial by-products and generally to
recover products for re-use or sale. With respect to Quantum-CEP, MMT believes
that the primary factors that create demand include customers' regulatory
compliance concerns and the ability of Quantum-CEP to reduce the volume of
radioactive materials. Also in the case of mixed wastes, MMT believes that the
recovery of materials which can potentially be re-used or recycled creates
demand for Q-CEP in this market. In addition, compared to conventional treatment
methods, MMT believes that CEP can be utilized in a manner which minimizes or
eliminates the creation of residual waste, thereby reducing the costs and risks
associated with residual waste disposal.

MMT Target Markets

      For the initial commercialization of CEP, MMT has identified three markets
where it believes CEP offers the greatest immediate value and meets pressing
customer needs: (i) commercial low-level radioactive waste and mixed waste; (ii)
U.S. government waste; and (iii) industrial hazardous waste. In each of these
markets, MMT or M4 Environmental L.P. (the Company's joint venture with Lockheed
Martin Corporation) ("M4")) has constructed or is constructing "first-of-a-kind"
commercial CEP systems.

      In the commercial low-level radioactive waste sector, MMT estimates that
over three million cubic feet (approximately 150 million pounds) of waste is
generated annually in the United States by more than 1,300 generators, including
nuclear power plants and medical and research facilities. These generators seek
technological solutions to effectively process their waste into a weight- and
volume-reduced, stable, self-shielding form, suitable for long-term storage or
disposal. This volume reduction reduces these generators' disposal costs and
lengthens the useful life of current and future radioactive waste repositories.
The Company expects that international markets also will provide additional
opportunities for radioactive waste management. The commercial mixed waste
market in the United States is characterized by a broad range of small volume
waste streams that vary widely in composition. Most of these wastes are
generated from the operations of nuclear power plants. MMT estimates that these
nuclear utilities have stored in excess of 700,000 pounds of mixed waste, and
generate an additional 200,000 to 300,000 pounds of mixed waste annually.

      In the government market, MMT estimates that the United States Department
of Energy ("DOE") and the Department of Defense ("DoD") together spend nearly $8
billion annually on waste management and cleanup programs, making the U.S.
government the world's largest consumer of environmental goods and services.
Wastes requiring treatment at over 30 DOE sites include mixed wastes, waste from
the demilitarization of nuclear weapons, and wastes generated during the
remediation of large-scale decontamination and decommissioning projects. The
major focus of the DoD environmental restoration effort is on munitions
demilitarization, destruction of chemical weapons, and remediation of sites
contaminated with these priority wastes. Another government entity, the United
States Enrichment Corporation ("USEC"), annually produces approximately 15
million kilograms of depleted uranium hexafluoride ("DUF(6)"), a by-product
generated through the conversion of uranium isotopes into highly enriched
uranium. In addition, the DOE currently has approximately 500 million kilograms
of DUF(6) in storage.

      The industrial waste sector includes hazardous wastes as well as
non-hazardous wastes and byproducts. Based on data obtained from the United
States Environmental Protection Agency ("EPA"), MMT estimates that over 250
million tons of waste generated annually in the United States are classified as
hazardous or toxic under the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"), or the Toxic Substance Control Act ("TSCA"). Target markets
for CEP include wastes from the chemical


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and petrochemical industries, the metal processing and mining industries, wastes
currently processed by hazardous and municipal waste incinerators and
post-consumer plastics.

COMMERCIALIZATION AND SALES STRATEGY

      In order to accelerate the commercialization of CEP, MMT intends to own
and operate, by itself or through joint ventures, its initial commercial CEP
facilities. Over the longer term, MMT intends to sell plants directly to
customers, which they would operate. In addition to selling plants, the Company
intends to license its technology under arrangements which provide for any or
all of the following: (i) market rights license fees; (ii) technology transfer
fees; (iii) ongoing tolling and license fees based upon the volume of feedstocks
processed or the sale of recovered products; (iv) service fees for project
development, design, engineering, and construction management; and (v) supply of
critical or proprietary CEP components.

      The Company's strategy is to address the demand for a cost-effective
method of processing waste materials while maintaining environmental standards.
Although the CEP systems installed or being installed at each of the Company's
first two commercial facilities and at the M4 Technology Center in Oak Ridge,
Tennessee are central sites to which wastes and feedstocks are shipped for
processing, it is the Company's intent to install CEP systems on-site at
customers' industrial facilities in order to (i) integrate systems on-site to
enable existing facilities to comply with recycling exemptions applicable to
materials that are reclaimed and returned to the manufacturing process that
generated such materials ("closed-loop recycling") and (ii) reduce certain costs
and potential liabilities associated with existing treatment methods, including
transportation and off-site disposal. The Company's business strategy includes
maintaining collaborative arrangements with industry leaders to aid in the
technical development, sales, marketing, design and engineering of CEP systems.
In addition, the Company's commercialization and sales strategy includes
identifying industrial market leaders as initial customer prospects and
performing Technical Development Programs ("TDPs") to demonstrate CEP's
commercial applicability to a variety of customers and waste streams. Such
activities are intended to keep the technical development of CEP focused on
market opportunities.

      The Company believes that its commercialization and sales strategy must be
flexible to adapt to a number of factors that may change over time as the market
for CEP systems and any competing technologies evolve. These factors include,
but are not limited to, the relative attractiveness of target markets based on
the customer demand for CEP systems within each of the Company's target markets
as compared to applicable competing methods of recycling, treatment or disposal;
any changes in environmental regulations and their effect on the Company's
operations and various target markets; and the ability of the Company to
successfully permit and build CEP systems on a timely basis within its target
markets. Accordingly, the Company anticipates that its commercialization and
sales strategy may change over time.

COMMERCIAL DEVELOPMENTS

      Since 1995, the Company has made substantial progress toward constructing
and initiating commercial operations at CEP plants in its three primary
markets. As described below, (i) the Company is processing radioactive ion
exchange resins at its Quantum-CEP facility in Oak Ridge, Tennessee; (ii) MMT,
either directly or through M4, has built and tested commercial, pilot or
bench-scale CEP systems for processing a broad range of wastes, including DUF6,
chemical weapons, radioactive wastes, hazardous wastes, and mixed wastes for
the DOE, DoD, USEC and commercial customers; and (iii) in the industrial
hazardous waste market, the Company is constructing a commercial-scale system
to process chlorinated organic wastes and other hazardous wastes at a Hoechst
Celanese Corporation chemical plant in Bay City, Texas, and the Company is
constructing a demonstration-scale facility to process fly ash produced by
Japanese municipal solid waste incinerators.


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      The Company also has entered into letters of intent relating to the
development of additional CEP systems for commercial use both in the Company's
three primary markets and in other market segments. During 1997, the Company
will continue operating and developing the CEP systems described below and will
seek to enter into new agreements to develop additional CEP systems. However,
there can be no assurance as to the successful and timely development of these
CEP systems or the successful negotiation of definitive agreements based on the
existing letters of intent. The Company expects that any sales of such CEP
systems will be made after the Company has demonstrated the successful operation
of its other commercial facilities.

Commercial Radioactive Waste Market

      MMT's Q-CEP facility in Oak Ridge, Tennessee began processing radioactive
ion exchange resins in December 1996, and began commercial operations in January
1997. This facility is designed to process up to 130,000 cubic feet per year of
radioactive ion exchange resins from nuclear power plants. Prior to December
1996, the facility was jointly owned and financed by MMT and Scientific Ecology
Group, Inc. ("SEG"), previously a wholly-owned subsidiary of Westinghouse
Electric Corporation ("Westinghouse"). SEG has since been acquired by GTS
Duratek, Inc. In December 1996, MMT of Tennessee Inc., a wholly-owned subsidiary
of the Company ("MMT Tennessee"), purchased SEG's interest in the Q-CEP facility
as well as certain assets used for handling and processing radioactive liquids
and resins ("wet waste") for $31 million in cash. These assets include
contracts, equipment, services and personnel for processing radioactive wastes
at the Q-CEP facility. In connection with that transaction, the agreements that
had been signed by MMT, SEG and Westinghouse in 1994 were terminated. SEG and
GTS Duratek, Inc. continue to be obligated under noncompetition covenants which
generally provide that during the five year period ending December 2001, they
will not compete with MMT in the processing of ion exchange resins in North
America, subject to certain exceptions.

      In January 1997, MMT Tennessee acquired from VECTRA Technologies, Inc.
("VECTRA") certain contracts, equipment and personnel used for handling and
processing radioactive wet waste for $3.9 million in cash. MMT Tennessee will
continue to own and operate the Q-CEP facility and the Company's radioactive
waste services business. These services consist of managing and handling
radioactive wet waste on-site at nuclear power plants, providing equipment such
as casks for transportation and storage of radioactive waste, and processing the
waste using Q-CEP or other processing methods such as reverse osmosis,
demineralization and solidification.

      The acquisitions of SEG's and VECTRA's wet waste business have allowed MMT
Tennessee to significantly expand its radioactive waste processing services. In
conjunction with the Q-CEP facility, MMT Tennessee's wet waste business is able
to offer processing for a wide variety of radioactive liquids and resins
produced by U.S. nuclear power plants. As of March 31, 1997, MMT Tennessee had
contracts or purchase orders in place to provide radioactive processing services
to 18 nuclear utilities, including eight contracts to process radioactive ion
exchange resins.

U.S. Government Market

      PARTNERSHIP WITH LOCKHEED MARTIN CORPORATION. In August 1994, the Company
entered into a series of related agreements with Martin Marietta Corporation to
form M4 Environmental L.P. ("M4"). Martin Marietta has since merged into
Lockheed Martin Corporation ("LMC"), with LMC as the surviving entity. Pursuant
to these agreements, the Company and LMC formed M4, a Delaware limited
partnership, to commercialize CEP to service the environmental remediation,
waste management, decontamination and decommissioning needs of the DoD, the DOE,
and USEC. In April 1996, MMT and LMC expanded M4 through the acquisition by M4
of the Retech division of Lockheed Environmental Systems & Technologies Co., a
wholly-owned subsidiary of LMC. The Retech division designs and manufactures
metallurgical equipment and waste processing systems that utilize a plasma
technology. The Company and LMC, through wholly-owned subsidiaries, each holds a
49.5% limited partnership interest in M4, and a 50% interest in the corporate
general partner of M4, which holds a 1% interest in M4. In March 1997, MMT and
LMC entered into a letter of intent to restructure MMT's and LMC's


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relationship with respect to M4's market. This restructuring is described below.
During 1996, revenue from M4 accounted for approximately 87% of the Company's
total revenue. This revenue was generated as the result of sales of goods and
services to M4, as well as technology transfer and success fees. As a result of
the restructuring described below, M4 would become a wholly-owned subsidiary of
MMT and its revenues would be consolidated with MMT's. Accordingly, MMT's
revenues from M4 in 1997 primarily will be generated through M4's operations,
including the provision of processing services and funded research and
development for third parties, rather than from M4 purchasing goods and services
from MMT. The Company does not anticipate that these M4 operations will account
for a substantial portion of its revenue for 1997.

            M4 Technology Center. In February 1995, M4 began construction of its
Technology Center in Oak Ridge, Tennessee (the "M4 Technology Center"). In
October 1995, M4 began operating its first CEP system, a demonstration facility
for DUF(6), at the M4 Technology Center. In December 1995, M4 began operating 
its first commercial mixed waste CEP facility. The Company expects the second 
mixed waste system, which is substantially larger than the first system, to 
begin commercial operations during the second half of 1997.

            Hanford Tanked Waste Cleanup. In September 1996, the Company
announced that the DOE had awarded a contract to a technical team led by LMC to
employ technologies including Q-CEP for Phase 1A of the contract for the cleanup
of the tanked waste site in Hanford, Washington. The Hanford site contains
approximately 56 million gallons of highly radioactive waste stored in 177
tanks. The DOE awarded two prime contracts for Phase 1A of the cleanup. The LMC
team includes Numatec, Fluor Daniel, Duke Engineering and Services, Babcock &
Wilcox, Nukem Nuclear Technologies, Los Alamos Technical Associates, AEA
Technology, OHM Remediation Services, and M4. Phase 1A of the program covers the
first 20 months of the program and includes a $27 million award to each team to
prove the efficacy of their processes. Phase 1B covers waste processing of less
than 10% of the stockpile at Hanford over a five to seven year period. There can
be no assurances that Q-CEP will prove to be satisfactory to the DOE for
processing the Hanford waste or that, even if satisfactory, the DOE will award a
Phase 1B contract to the LMC team. There also can be no assurances that LMC will
submit a bid for Phase 1B. In addition, LMC is considering the use of other
waste processing technologies, in lieu of or in addition to Q-CEP, for all or
part of any Phase 1B contract. LMC may elect to include Q-CEP in the initial or
later portions of any Phase 1B contract if Q-CEP meets certain technical
criteria, to be established by MMT and LMC. There can be no assurances that
Q-CEP will be able to meet such criteria or that LMC will include Q-CEP in any
portion of any Phase 1B contract.

            Commercial Mixed Waste. In December 1995, MMT and M4 entered into an
agreement to expand M4's processing rights to include mixed wastes generated by
commercial customers in the United States. In March 1996, M4 entered into its
first agreement to process commercial mixed waste with Duke Power Company. Under
this agreement, M4 will process various types of mixed waste, including various
freon wastes and sludges, batteries and halogenated solvents. Since then, M4
also has entered into agreements with IES Utilities Inc., Baltimore Gas &
Electric Company and PECO Energy Company to process such companies' commercial
mixed waste. Mixed wastes from these companies are being or will be processed
using Q-CEP systems at the M4 Technology Center. These contracts have an
aggregate value of approximately $4.3 million.

            DOE Mixed Waste. In August 1996, M4 entered into an approximately
$700,000 contract with the DOE to conduct proof-of-process studies using Q-CEP
on a DOE mixed waste stream. Under the terms of the cost share contract, the DOE
will pay 67% of the cost and M4 will pay the remaining 33%. M4 completed these
tests in January 1997 and provided the results to the DOE in April 1997.

            DUF6 Market. In May 1995, M4 entered into a contract with USEC to
construct the DUF6 demonstration unit located at the M4 Technology Center. M4
provided results from the demonstration program to USEC in June 1996. As a
result of the M4 restructuring described below, MMT has assumed responsibility
for negotiations with USEC, and currently is negotiating an agreement with USEC.
The Company expects that any agreement with USEC would provide that the Company
or M4 would be primarily responsible for the design and construction of a
commercial-scale processing system, and that USEC would agree to furnish DUF(6)
for processing under a multi-year supply agreement. There can be no


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assurances that these negotiations will be completed successfully or that the
Company or M4 and USEC will enter into an agreement to construct a DUF(6)
processing plant or an agreement to supply and process DUF(6).

            Chemical Weapons Demilitarization. In 1995, CEP was one of three
commercial, non-incineration technologies selected by the United States Army
from a list of 23 competing technologies for review of their ability to destroy
bulk chemical warfare agents (i.e., VX nerve and mustard agents) stored at the
Newport Chemical Activity in Indiana and the Aberdeen Proving Ground in
Maryland. During 1996, M4 worked with MMT, Bechtel National, Inc., Fluor
Daniel, Inc., and Battelle Memorial Institute to perform bench-scale testing of
a CEP unit located at a Battelle facility. The tests demonstrated that CEP
could achieve greater than or equal to 99.9999999% destruction removal
efficiency (DRE) on VX nerve agent and greater than or equal to 99.999999% DRE
on mustard agent, which in each case exceeded the Army's DRE requirement of 
99.9999%.

      In November 1996, the Army recommended that neutralization followed by
post-treatment, a technology sponsored by the Army, be piloted. Neutralization
involves mixing bulk chemical agents with dilutive chemicals in order to
neutralize the chemical agents. The remaining material, typically comprising
more than twice the volume of original chemical agent, must then be treated and
disposed. However, $40 million of the DoD's fiscal year 1997 budget has been set
aside to demonstrate at least two alternate technologies to incineration for the
disposal of assembled chemical weapons. Under the sponsorship of M4, MMT has
begun a program to demonstrate the feasibility of utilizing CEP to process
assembled chemical munitions containing a surrogate chemical agent in
preparation for a Request for Proposal from the Army anticipated in mid-1997.
There can be no assurances that MMT or M4 will receive any of the $40 million
budgeted by the DoD for the demonstration of alternative technologies.

      In September 1996, MMT, LMC and M4 entered into an agreement which
expanded M4's CEP license to include the demilitarization of Japanese chemical
weapons. In return for the expansion of the license, MMT received a $5 million
initial payment. Under the terms of this agreement, MMT also would receive an
additional $3.5 million upon completion of a technical demonstration by MMT of
the processing of one or more munitions shells containing surrogates of Japanese
chemical weapons. Under the terms of a letter of intent with LMC for the M4
restructuring described below, the new limited liability company to be formed by
MMT and LMC would assume M4's rights and obligations under this license. Payment
of the foregoing $3.5 million would be made from the limited liability company's
revenues.

      Also during 1996, M4 and Mitsubishi Corporation entered into a memorandum
of agreement to use CEP as the principal technology for destroying bulk chemical
agents located at small burial sites in northern China. The bulk agents along
with thousands of buried agent munitions were left by the Japanese Imperial Army
in China following World War II. Mitsubishi is the leading Japanese company
being considered to spearhead the cleanup of Japanese chemical weapons left in
China. To date, no request for proposals have been issued by the Japanese
government for the cleanup of such chemical weapons, and there can be no
assurances that, if such request for proposal is issued, Mitsubishi will be
awarded a contract for such cleanup.

            Restructuring of M4. In March 1997, MMT and LMC announced that they
had executed a letter of intent to restructure their relationship with respect
to the commercialization of CEP and other technologies for the government and
other waste markets. The objective of the restructuring is to enable MMT and
LMC to access target markets more efficiently by eliminating many of the
organizational redundancies associated with the current M4 structure. LMC and
MMT believe that the contemplated restructuring also will enable them to better
leverage LMC's expertise in systems integration and MMT's ability to provide
its CEP technology to target markets. After the completion of the
restructuring, LMC and MMT each would be free to pursue projects formerly
governed by the existing joint venture agreements, subject to the requirements
established by the proposed new arrangements. The letter of intent contemplates
five principal changes in the relationship between LMC and MMT: (1) LMC would
have the exclusive right to lead and pursue contracts for the Hanford
radioactive tanked waste cleanup project described above, and MMT would provide
directly to LMC certain construction and development services with respect to
CEP, (2) MMT and LMC would form a new limited liability company to be their
exclusive vehicle to deliver processing services to customers in the chemical
demilitarization market worldwide, (3) MMT would have the exclusive right to
lead and pursue worldwide opportunities for processing DUF(6), (4) MMT would
become the sole owner of M4, which will continue to own and operate its primary
remaining asset, the M4 Technology Center, and (5) the Retech division of M4,
which provides plasma arc technology, would be transferred to LMC.

                  Hanford Project.  In connection with the proposed
replacement of M4 by MMT on the Hanford team, MMT would deliver a pilot-scale,
demonstration CEP plant to LMC in 1997 for a fixed 


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price of $5 million. In addition, if the LMC team is awarded a contract under
Phase 1B of the Hanford cleanup program and CEP is used in the Phase 1B
performance, LMC would pay MMT a fee of $15 million and order a CEP production
plant meeting agreed upon criteria at a price to be negotiated. $5 million of
this fee would be payable on award of the contract and the remaining $10 million
would be payable upon timely delivery and acceptance of the CEP production
plant. MMT also would be entitled to an on-going royalty of 3.5% of all revenues
generated from the processing of waste in equipment supplied by MMT under the
Hanford contract. Pursuant to discussions between MMT and LMC in connection with
the negotiation of definitive agreements with respect to the restructuring, it
is anticipated that LMC would fund certain development work with respect to
Q-CEP for possible application to the Hanford project.

                  Chemical Weapons Demilitarization. The limited liability
company to be formed by MMT and LMC would have worldwide rights to commercialize
CEP for the chemical weapons demilitarization market. The limited liability
company would be owned 50/50 by LMC and MMT. MMT would be entitled to success
fees of up to an aggregate of $25 million in connection with the successful
deployment of CEP systems to process chemical weapons. The limited liability
company would have an initial term of five years.

                  M4 Technology Center. As sole owner of M4, MMT would be
responsible for the future operations of the M4 Technology Center, and would be
entitled to all future revenues from such operations. Under the terms of the
letter of intent, the $38 million aggregate principal amount of bonds issued by
the Industrial Development Board of Oak Ridge relating to the M4 Technology
Center would remain outstanding, LMC's guarantee of these bonds would remain in
place, and each of LMC and MMT would be responsible for 50% of the principal,
interest and other costs relating to these bonds.

                  DUF(6). In addition to the changes described above, MMT and
LMC have agreed in the letter of intent that MMT would have the exclusive right
to lead and pursue worldwide opportunities for processing DUF(6). LMC would have
the right to participate in this market on a case-by-case basis, subject to
mutual agreement of the parties, and would agree not to pursue this market for
five years except jointly with MMT.

      LMC and MMT also would establish a strategic alliance committee,
comprising three representatives from each company, to review and monitor the
relationships created by the restructuring and to evaluate new market
opportunities within the DOE and DoD markets. Prior to pursuing any such
opportunity alone, each of LMC and MMT would be obligated to first offer such
opportunity to the other party by presenting it to the strategic alliance
committee. The committee would determine whether such opportunity would be
pursued jointly by the parties and the terms thereof. If the committee does not
elect to pursue the opportunity jointly, either party would be free to pursue it
alone.

      In connection with the proposed restructuring, LMC would forgive $15
million aggregate principal amount and all accrued interest under its line of
credit with M4, MMT would contribute $14.6 million in outstanding accounts
receivable to the capital of M4, and LMC and MMT generally would share equally
in substantially all of the costs of the restructuring.

      The restructuring described above is based on the terms set forth in a
non-binding letter of intent between MMT and LMC. Completion of the
restructuring is dependent upon a number of factors, including the negotiation
of definitive agreements and the approval of the Boards of Directors of MMT and
LMC. There can be no assurances that MMT and LMC will successfully consummate
the transactions described in the letter of intent.

      UNITED STATES DEPARTMENT OF ENERGY. In April 1997, the DOE chose the CEP
system that MMT is building at a Hoechst Celanese Corporation chemical plant in
Bay City, Texas to receive a $425,000 grant through the DOE's National
Industrial Competitiveness through Energy, Economics and Environment (NICE3)
Program. The program is designed to help innovative technologies with energy,
economic, and/or environmental benefits move into full commercialization. MMT's
proposal was one of 13 chosen by the DOE out of nearly 70 proposals in a
competitive solicitation process. An independent, third party technical team
reviewed each proposal in a three-phase process. The grant will be paid through
a cost-share contract, pursuant to which the DOE would contribute 40% up to the
$425,000 ceiling. Receipt of


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this grant is conditioned upon the negotiation of such a contract with the DOE
or the Texas Natural Resource Conservation Commission which will be
administering the grant. There can be no assurances that MMT will be able to
successfully negotiate such contract.

      In September 1992, MMT submitted a three-phased proposal under the DOE's
Planned Research and Development Announcement ("PRDA") program. On January 19,
1993, MMT received a favorable determination regarding a $1.2 million
cost-sharing contract for a portion of the proposed PRDA program. The terms of
the contract were finalized in September 1993. Under the contract, MMT has
conducted trials and related activities at its research, development, testing
and demonstration facility in Fall River, Massachusetts to demonstrate the
applicability of CEP to contaminated scrap metals. In November 1993, the DOE
requested that the Company provide a proposal to enhance certain aspects of the
existing statement of work to provide for delivery of a more comprehensive final
report of technical results. This resulted in additional DOE funding of $9
million, bringing the DOE's total contribution to $10.2 million. In February
1995, the DOE issued a unilateral change order to increase the funding for an
undetermined amount with an initial ceiling of $5 million. In June 1995, the DOE
extended its contract for demonstrating CEP and increased its funding by an
additional $10 million, to a total of $25.2 million. In February 1996, the DOE
modified the contract funding for an undetermined amount with an initial ceiling
of $2 million. Additional funding through the end of 1996 brought the total
enhancement to $8 million for that year, and increased the DOE's total
contribution to $33.2 million. Activities under this contract have been
completed. MMT has contributed a total of $22.3 million in connection with the
cost-sharing contract. During 1996, revenue from the DOE accounted for
approximately 13% of the Company's total revenue. Other than the NICE3 grant
described above, the Company does not anticipate receiving research and
development funding from the DOE in 1997.

      UNITED STATES DEPARTMENT OF DEFENSE. In September 1996, the U.S. Air Force
Center for Environmental Excellence awarded approximately $480,000 to M4 to
conduct treatability studies on a broad range of hazardous wastes. The wastes
subject to the treatability studies represent approximately 84%, by volume, of
the wastes generated in Air Force operations. In March 1997, the contract was
amended to add treatability studies for two additional hazardous waste streams.
The contract amount was increased by approximately $333,000 in connection with
this modification. The studies are expected to be completed during the contract
period, currently ending December 31, 1997. In December 1996, an additional
$100,000 award was made under this contract with respect to the processing of
oils for the U.S. Navy which are contaminated with polychlorinated biphenyls
("PCBs"). This processing work is expected be completed by the end of 1997.

      In September 1994, the U.S. Army Armament, Research, Development, and
Engineering Center at Picatinny Arsenal, New Jersey awarded the Company $420,000
to fund demonstration of CEP's applicability to conventional weapons components.
Trials under this contract demonstrated that the processing of conventional
munitions, smoke and dye agents and propellants in the CEP system resulted in
the destruction of the hazardous constituents to high environmental standards
and the partitioning of the elements into recoverable materials. Activities
under this contract were successfully completed in 1996.


      The Company's existing government contracts can generally be canceled,
delayed or modified at the sole option of the government and are generally
subject to annual funding limitations and public sector financing constraints.
The Company believes that any future government contracts will be structured
similarly. In addition, under the terms of future government contracts, if any,
the Company may be required to grant the federal government greater rights with
respect to the Company's intellectual property than the Company would grant
private parties. As a result of engaging in the government contracting business,
the Company is subject to audits and investigation by government agencies. As
described below under Item 3, the Company and M4 currently are responding to
subpoenas issued by the Office of Inspector General of the DOE. The Company also
faces the risks associated with government contracting, which could include
substantial civil and criminal fines and penalties. In addition to potential
damage to the Company's business reputation, the failure by the Company to
comply with the


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<PAGE>   10


terms of any of its government contracts could result in the Company's
suspension or debarment from future government contracts for a significant
period of time. All of the foregoing risks associated with government
contracting may also apply to M4 with respect to its government contracts.

Industrial Hazardous Waste Market

      Hoechst Celanese Corporation. Pursuant to agreements signed in May 1995
with Hoechst Celanese Corporation ("HCC"), one of the largest U.S. based
chemical companies, MMT is constructing a CEP facility (the "Bay City CEP
Facility") at HCC's Bay City, Texas chemical plant. This facility will be
financed, owned and operated by MMT or a wholly-owned subsidiary of MMT. The CEP
system being installed at the Bay City CEP Facility will have an initial
capacity to process up to approximately 30,000 tons of feedstocks from HCC's
Texas plants and third-party generators, although this system currently is
permitted to process only 15,000 tons per year. Any increase in the amount of
feedstocks which can be processed in this CEP system is contingent upon
sufficient commercial interest, and application for and receipt of all necessary
regulatory, community and other approvals. The project site is being designed to
support potential additional future expansion of the Bay City CEP Facility. The
facility will produce synthesis gas, an industrial feedstock to be used by HCC
in its chemical processing, and aqueous hydrochloric acid for sale to third
parties. The Company expects that commercial operation of this facility will
begin in the second half of 1997, but there can be no assurances as to the
successful or timely deployment of this facility.

      MMT has signed one agreement and three letters of intent with four other
major chemical manufacturers to process feedstocks from their existing
operations at the Bay City CEP Facility. The agreement and letters of intent
cover an aggregate of up to approximately 20,000 tons of feedstocks per year.
The Company also has entered into a ten-year contract with a major hydrochloric
acid distributor under which the distributor will purchase 85 to 100 percent of
the hydrochloric acid produced at the Bay City CEP Facility, provided that such
acid meets agreed specifications. Under the terms of their letters of intent,
two of the chemical manufacturers have agreed to purchase hydrochloric acid
produced from the processing of their feedstocks at the Bay City Facility,
provided that such acid meets agreed specifications. Pursuant to the agreements
with HCC mentioned above, HCC has agreed to purchase all of the synthesis gas
produced at the Bay City CEP Facility, provided that the gas meets agreed
specifications. There can be no assurances that the Company will enter into
binding agreements to process feedstocks based on the letters of intent or that
the Company will be able to produce hydrochloric acid or synthesis gas meeting
the required specifications.

      Nichimen Corporation and NKK Plant Engineering Corporation. In February
1996, MMT, Nichimen Corporation, one of Japan's major trading companies, and NKK
Plant Engineering Corporation, one of Japan's largest engineering providers of
municipal waste systems ("NKP"), signed a letter of intent to form a joint
venture to process fly ash produced by Japanese municipal solid waste
incinerators. A definitive agreement to form this joint venture was executed in
October 1996 by the Company, Nichimen and NKP. The agreement grants the joint
venture the exclusive right to introduce CEP to the Japanese municipal
incinerator ash market. It is anticipated that, once formed, the joint venture
will employ MMT's proprietary Cerex-CEP technology to process and recycle
incinerator ash to recover ceramic and metal products. Under the agreement, the
Company will own 49% of the joint venture, will receive a two percent royalty on
all revenues, and will receive a $12.5 million licensing fee, to be paid from
the joint venture's profits. The agreement provides that the joint venture will
purchase an initial CEP system to be delivered in the first quarter of 1998. The
parties expect that the joint venture will purchase a minimum of 29 CEP systems
from the Company over the first ten years of the joint venture's operations,
including the initial CEP system. There can be no assurances that the joint
venture will order any CEP systems from MMT or that such systems, if ordered and
delivered to Japan, will be able to successfully process and recycle incinerator
ash. In addition, the agreement is subject to final approval from the Japanese
government, and there can be no assurances that such approval will be received.

      Celanese Mexicana, S.A. de C.V.  In January 1996, MMT and Celanese
Mexicana, S.A. de C.V. ("CelMex"), Mexico's largest private sector chemical
company, signed a letter of intent to construct a CEP


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<PAGE>   11


system to process and recycle manufacturing wastes at CelMex's chemical
production facility in Veracruz, Mexico. The proposed CEP system will be
designed to process wastes produced by CelMex and other Mexican companies.
CelMex will purchase the synthesis gas produced by the CEP system as a raw
material in its chemical manufacturing processes. Under the letter of intent,
CelMex would provide the site and infrastructure for the CEP system and MMT
would construct, own and operate the facility. Development of the CEP system
pursuant to this letter of intent is subject to a number of conditions,
including the negotiation and execution of definitive agreements. There can be
no assurances that the parties will be able to negotiate mutually acceptable
agreements to develop the proposed facility. In addition, MMT may sell all or a
portion of its equity interest in this facility and intends to obtain third
party financing for the construction of this facility. If MMT is unable to sell
such equity interest or obtain such financing on acceptable terms, it may elect
not to proceed with the development of this facility.

COMMERCIAL DEVELOPMENTS -- ONGOING RELATIONSHIPS

      Since the Company's formation it has entered into several strategic
alliances with companies that have specialized expertise. The Company believes
that these relationships assist the Company in its planned commercialization of
CEP, either by assisting the Company in marketing to particular industry groups,
or by providing key services in connection with the Company's development and
application of its CEP technology, such as assistance with obtaining insurance
or project finance, or the provision of engineering and construction expertise.
The Company may enter into similar long-term relationships in the future.

      Uhde GmbH. In February 1996, MMT entered into a non-exclusive sales
representative and services agreement with Uhde GmbH. Uhde, based in Dortmund,
Germany, is one of the world's leading engineering and construction companies.
Under the agreement, MMT and Uhde will collaborate to market CEP to Uhde's
worldwide customer base. Uhde has committed to identify and sell a minimum of
nine CEP projects outside the United States over a four-year period. If Uhde
fails to meet these minimum requirements, MMT has the right to terminate the
agreement. Uhde will provide facility engineering and design site construction,
equipment installation and project management, and MMT will provide marketing
assistance, CEP system design and fabrication, operator training and ongoing
operational support, as needed, to Uhde's customers. Uhde and MMT have agreed to
focus their joint efforts on addressing a wide range of markets including
chlorinated organic chemical wastes, chemical weapons demilitarization projects,
post-consumer plastics and electronic components, municipal waste water
treatment sludges and waste incinerator ash. To date, Uhde has not sold any CEP
projects and there can be assurances that it will be able to do so in the
future.

      The Electric Power Research Institute ("EPRI"). In November 1995, MMT
entered into an agreement with EPRI to support the application of CEP. Over the
five-year term of the agreement, EPRI, in conjunction with numerous utilities
and their process industry customers, plans to develop collaborative programs
for CEP demonstrations. EPRI will fund up to $25 million in matching research
grants made to member utilities working with industrial process customers in
their service areas to demonstrate CEP. In exchange for this commitment, EPRI
received a warrant to purchase up to 100,000 shares of MMT common stock at an
initial exercise price of $23.375. The warrant will vest in increments upon the
closing of contracts for CEP plants for which EPRI has provided minimum levels
of funding and upon customer acceptance of such plants. To date, none of the
EPRI warrants have vested. The Company expects that the EPRI relationship will
assist the Company in marketing its CEP technology to utilities and process
industry customers.

      American Re-Insurance Company and Am-Re Services. In May 1993, MMT entered
into a set of related agreements with American Re-Insurance Company and its
affiliate, Am-Re Services, Inc. In addition, MMT was obligated to perform
certain services for Am-Re Services through December 31, 1993. Pursuant to these
agreements, American Re-Insurance Company purchased 438,885 shares of MMT common
stock for $5.0 million and Am-Re Services agreed to provide services to MMT
relating to obtaining environmental impairment liability insurance and project
financing for the first five commercial CEP facilities to be developed by MMT.
In exchange for these services, Am-Re Services was granted


                                       10
<PAGE>   12


warrants to purchase an aggregate of 375,000 shares of common stock at prices
ranging from $12.25 per share to $18.37 per share. To date, none of these
warrants have vested because the Company has not obtained environmental
impairment liability insurance or project financing with the assistance of Am-Re
Services. The Company expects that, as it develops additional CEP plants, Am-Re
Services will provide assistance to the Company related to obtaining
environmental impairment liability insurance and project financing for such CEP
plants.

      Fluor Daniel. Since September 1992, MMT and Fluor Daniel, Inc. or Fluor
Daniel Environmental Services, Inc. ("Fluor Daniel"), an international
engineering and construction firm, have been parties to a series of agreements
pursuant to which Fluor Daniel has provided engineering and construction
services, feasibility studies, designs, cost estimations and other services in
support of CEP plants and potential CEP applications. During 1994 and 1995,
Fluor Daniel invested $5.2 million payable by MMT for such services in MMT
common stock. Fluor Daniel and MMT previously had been parties to an agreement
which required MMT to use Fluor Daniel for engineering and construction services
for CEP plants being built by MMT. In August 1996, Fluor Daniel and MMT amended
this agreement to provide that Fluor Daniel would provide such services to MMT
on a case-by-case basis, at each party's mutual discretion. During 1996, Fluor
Daniel provided substantial engineering and construction services to MMT for the
Bay City CEP Facility and the M4 Technology Center.

TECHNOLOGICAL DEMONSTRATIONS AND TESTING OF CEP

      In order to further demonstrate CEP's Elemental Recycling capability on a
variety of prospective customer feedstocks, MMT has constructed an 86,000 square
foot research, development, testing and demonstration facility in Fall River,
Massachusetts that is equipped with several commercial-scale CEP systems (the
"Fall River Facility"). Since February 1993, through internally and
customer-funded TDPs, the Company has demonstrated CEP's ability to break down
feedstocks and recover products in laboratory, bench-scale, pilot-scale and
commercial-scale trials in its Fall River Facility. These tests and
demonstrations on feedstock samples representative of those of prospective
customers have shown the safety and reliability of CEP for a wide range of
chemical components and physical forms.

      CEP and its underlying technologies have been demonstrated in tests on
many materials from simple compounds, such as paraffins and alcohols, to complex
materials containing toxic metals, alkali metals, halides, cyanides, fluorinated
species and polyaromatic hydrocarbons (including PCBs). These demonstrations
have included wastes that are classified as hazardous or toxic under RCRA
(including chemical weapons agents), low level radioactive wastes, mixed wastes,
and surrogate hazardous wastes in the form of gases, liquids, slurries,
suspensions, pumpable sludges, and solids. MMT has successfully completed
customer-sponsored trials in which numerous customer-established success
criteria for closed-loop recycling were met or surpassed.

      The Company's technological demonstrations are complemented by additional
external research programs, some of which are conducted by members of MMT's
Technical Advisory Board.

      In addition to the operating demonstrations described above, MMT has
developed physical models and computer simulations that are used to model CEP
systems functions such as feed addition, molecular dissolution, refractory wear,
vitreous material characteristics and reactor design. Prior to running
experimental trials on particular feedstock, MMT uses such models to predict
capital and operating costs and system performance.

      To date, the testing of CEP largely has been limited to trials conducted
under controlled testing conditions. Certain commercial-scale tests of CEP have
been conducted and the Company has developed computer simulations which it uses
to model and predict various CEP system functions. The Company currently is
operating its Q-CEP facility in Oak Ridge, Tennessee and M4 has operated one
mixed waste system at the M4 Technology Center, and is conducting start-up
operations and testing on a second, larger mixed waste system. However, no
demonstration has yet been made that a commercial CEP


                                       11
<PAGE>   13


system, once installed and operated by MMT or M4 or at a customer's location,
will process feedstocks and recover commodity and specialty products of
commercial quality and in significant quantities.

      The Company is continuing its research and development efforts to further
enhance the functionality of its CEP systems, especially in areas such as
removal of ceramic product from the CEP reactor and the addition of large solid
feeds to the CEP reactor, with the goal of making CEP systems more efficient for
processing a wide range of wastes and waste forms and making CEP systems more
cost-effective. The Company expects that broad deployment of CEP into certain of
its target markets will require additional enhancements and functionalities that
are currently being further developed by MMT. MMT's ability to successfully sell
CEP systems for a wide range of waste streams and waste forms in such markets
could be materially adversely affected if the Company is unable to adequately
develop such additional enhancements and functionalities. During the fiscal
years ended December 31, 1996, 1995 and 1994, the Company spent $37.5 million,
$25.3 million and $25.2 million, respectively, on research and development, of
which $26.2 million, $11.0 million and $14.4 million, respectively, was funded
by the Company.

The Fall River Facility

      The primary use of MMT's Fall River Facility is to perform TDPs that
demonstrate CEP's Elemental Recycling capability on a variety of feedstocks,
including samples of customers' materials. MMT believes that the Fall River
Facility serves to further the development of CEP technology and MMT's
associated intellectual property estate and assists in facilitating favorable
customer and regulatory acceptance of the process. The Fall River Facility also
is used to conduct training programs for MMT employees and customers.

      The 86,000 square foot Fall River Facility contains a 48,000 square foot
recycling area which includes a materials preparation area, feedstock storage,
raw material storage, recovered material storage and a test laboratory. The Fall
River Facility houses commercial-, pilot- and bench-scale CEP units which are
used for treatability and feasibility studies, and also houses physical models
of CEP units. These models are used to analyze injection patterns and to
simulate flow dynamics and various reaction patterns within the molten metal
bath.

Recoverable Products

      Laboratory, bench-scale, pilot-scale and commercial-scale trials,
including trials conducted at the Company's Fall River Facility, have
demonstrated that CEP has the potential, through Elemental Recycling, to recover
commodity and specialty products, such as industrial gases, ceramics and metals,
from feedstocks. MMT's test results from demonstration and treatability trials
have shown that greater than 90% of the feedstocks processed in these trials was
able to be recycled into products. Based upon these test results and commercial
specifications for CEP products, the Massachusetts Department of Environmental
Protection has issued MMT recycling certifications for CEP of heterogeneous
inorganic and organic waste streams, including RCRA-listed waste streams. Based
on the elemental composition of particular feedstocks, MMT has demonstrated that
CEP systems can be customized to make specific products by adding different
reactants or by varying the composition of the molten metal bath. CEP is
designed to permit recovered products to be re-used as raw materials by the
feedstock generator in potential closed-loop applications or to be sold to other
industrial customers.

      Some materials produced using CEP may have little to no commercial value,
and may be considered wastes. Certain of such wastes may be classified as
hazardous wastes (and may need to be handled as such) under current United
States environmental regulations. Based on experimental trials with hazardous
waste streams, MMT anticipates that the volume of any such unsaleable materials
will be a small portion of the initial feedstock volume and will be
substantially less than the residual waste (including ash) generated by
alternative technologies.


                                       12
<PAGE>   14


      With respect to radioactive wastes, the Company expects that the volume of
reusable products generated from processing such wastes with Q-CEP will be lower
compared with other applications of CEP and expects that the volume of residual
waste streams will be greater. Any such residual waste which is classified as a
low-level radioactive waste will need to be handled as such under current United
States environmental regulations. Operations at MMT's Q-CEP facility in Oak
Ridge, Tennessee, as well as experimental trials have shown, however, that Q-CEP
substantially decreases the volume of such radioactive wastes and contains the
radioactive elements in a stable, self-shielding form.

INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY

      MMT has a comprehensive program for the protection of its intellectual
property. This program includes, among other things: established procedures
including notebooks and forms for documenting, evidencing and disclosing all MMT
inventions to management; an Intellectual Property/Patent Management Team which
meets regularly to discuss intellectual property issues; a system for
continuously monitoring patents issued to, and patent applications filed by,
relevant third parties; a program of seminars for employees on intellectual
property topics; a recognized intellectual property law firm on retainer; a
senior in-house patent counsel; a patent administrator and other personnel
dedicated to assisting in the preparation and prosecution of MMT's patents;
personnel policies and agreements requiring disclosure by employees of all
inventions and protection of confidential information; and agreements with all
technical and scientific employees providing for the assignment of inventions
made by such employees to MMT.

      As of December 31, 1996, MMT owned 104 United States and foreign patents,
and had pending an additional 203 United States, Japanese, European and other
foreign national patent applications relating to CEP. MMT also has many
invention disclosures describing inventions by employees, many of which could be
the basis for future patent applications.

      MMT's intellectual property estate also contains a number of sophisticated
computer models used to predict the thermodynamic, kinetic and physical
transport properties of the CEP system, including tuyere injection, multiphase
jet flow and turbulent diffusion, equilibrium partitioning and kinetic
limitations, product formation and system design. Some of such computer models
include components which are the subject of non-exclusive licenses from computer
software vendors. MMT's computer models are used to identify optimal designs and
operating conditions for specific processing applications. MMT has demonstrated
the accuracy of many of these computer models through actual experimentation.

      To protect its trade secrets and other unpatented proprietary information
in its product development activities, MMT's employees, consultants and
contractors are required to enter into agreements providing for confidentiality
and MMT's ownership of such trade secrets and other unpatented proprietary
information originated by them while in MMT's employ.

      There can be no assurance that any patents will issue on any of MMT's
patent applications or that any patents will provide meaningful protection
against infringement of the Company's technology. There also can be no assurance
that any of MMT's confidential non-disclosure agreements will provide meaningful
protection of MMT's confidential or proprietary information in the case of
unauthorized use or disclosure.

      The Company has ten service marks or trademarks registered, and several
applications to register, with the U.S. Patent and Trademark Office for terms
used in conjunction with MMT's services in material processing, hazardous and
non-hazardous waste treatment, and resource recovery. Registered marks include:
MMT(R), The Elemental Solution(R), Elemental Solution(R), MMT Catalytic
Extraction Processing(R), Molten Metal Technology (and design)(R),
Quantum-CEP(R), Q-CEP(R), and the design of certain MMT logos. Applications for
service marks or trademarks include: Hyco-CEP(TM) and Cerex-CEP(TM).


                                       13
<PAGE>   15


ENVIRONMENTAL MATTERS

Environmental Laws and Regulations Creating a Market for CEP

      Various environmental protection laws have been enacted and amended during
recent decades in response to public concern over the environment. MMT's
operations and those of its customers are subject to these evolving laws and the
implementing regulations. MMT believes that the obligations to comply with the
requirements of these laws contribute to the demand for its services.

      The environmental legislation and policy which the Company believes are
potentially applicable to CEP operations in the United States include RCRA,
TSCA, the Federal Water Pollution Control Act of 1972, the Clean Air Act of
1970, as amended, the Hazardous and Solid Waste Amendments of 1984, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, the Superfund Amendments and Reauthorization Act and the Pollution
Prevention Act of 1990, and various state analogs to these federal laws.
Additional provisions which may be applicable to Quantum-CEP technology include
the Atomic Energy Act of 1954, the Federal Facility Compliance Act of 1992, the
Low-Level Radioactive Waste Policy Amendments Act of 1985, the Department of
Energy Orders, Policy and Guidance, the Nuclear Regulatory Commission Regulatory
Policy and Guidance, and their state analogs. These provisions regulate the
management and disposal of radioactive, hazardous and non-hazardous wastes,
control the discharge of pollutants and radionuclides into the air, land and
water, provide for the investigation and remediation of contaminated land and
groundwater resources and establish a pollution prevention program. Many of
these laws have international counterparts, particularly in Europe and elsewhere
in North America.

Environmental Permitting Implications

      To maximize the market acceptance of CEP technology, MMT has chosen to
focus certain initial project efforts on the development of systems whose
feedstocks and designs are most likely to qualify for exemptions or favorable
regulatory treatment. These projects involve: (i) systems for processing
feedstocks that are not classified as hazardous wastes and are not subject to
RCRA permitting requirements; (ii) systems that handle feedstocks in a manner
that may qualify such materials for exclusions from RCRA regulation (e.g., a
closed-loop process whereby secondary materials will be returned to the original
manufacturing process in which they were generated or processing of waste
materials as feedstocks to manufacture valuable products); (iii) systems that
may qualify for an exemption from RCRA permitting requirements (e.g., systems
involving bona fide recycling of hazardous wastes); (iv) systems that provide
for significant volume reduction and stable final form for low-level radioactive
waste to allow for increased disposal capacity or a more manageable form for
storage, or both; and (v) systems that provide for volume reduction, stable
final form and recycling for mixed waste streams. MMT also would consider use of
CEP as part of the treatment train in previously permitted RCRA treatment
facilities for which MMT believes that only a permit modification would be
required.

      The permitting burden on a facility utilizing CEP will depend on the
nature of the feedstock (including whether it is classified as a solid waste or
hazardous waste), the configuration of the process at the particular facility,
the manner in which product is recovered from the waste and the type of waste
residuals created by the process.

BDAT Equivalency Determinations

      Pursuant to EPA environmental regulations, the processing of hazardous
waste that is to be disposed of on land must be accomplished using the Best
Demonstrated Available Technology ("BDAT"). In February 1996, EPA issued a BDAT
equivalency determination for CEP for all RCRA-listed waste streams which were
previously required to be incinerated. As a result, generators are permitted to
meet their BDAT requirement by using CEP for these waste streams. In connection
with a July 1995 equivalency determination for chlorinated organic wastes, the
EPA noted that dioxin, a toxic and harmful substance, was not detected at
EPA-promulgated regulatory levels in CEP demonstrations. The


                                       14
<PAGE>   16


Company believes that the EPA's BDAT equivalency determinations confirmed that
CEP is fundamentally different from incineration, and further confirms that use
of CEP supports the EPA's efforts to minimize cross-media contamination
(transfer of contaminants to air and water from solid wastes) and to reduce the
quantity of residuals for land disposal.

Research Facility License

      On February 27, 1995, the Massachusetts Department of Environmental
Protection (the "MADEP") issued a Research Facility License for recycling
activities (the "License") that regulates hazardous waste recycling research
activities at the Fall River Facility. The License became effective on March 20,
1995, and replaced the original R&D Recycling Permit for the Fall River
Facility, which was issued in September 1993. The License has a term of five
years.

      Under the terms of the License and the Demonstration Permit for solid
wastes issued in September 1993 (the "Permit"), most solid and hazardous wastes,
including RCRA-listed hazardous wastes, may be stored and processed at the Fall
River Facility, subject to limits and conditions specified in the License and
the Permit. The License requires MMT to provide a notice to the MADEP, the Fall
River Fire Department and the Fall River Board of Health at least 14 days prior
to conducting hazardous waste recycling demonstrations greater than 250
kilograms/day. This notice must contain a summary of applicable treatability
study data and other information. The Permit requires review and approval by the
MADEP prior to solid waste recycling demonstrations.

      In November 1995, the EPA granted an approval to allow the Company to
perform testing on wastes containing PCBs pursuant to the EPA's authority under
TSCA. Also, in November 1995, the MADEP modified certain of the permits for the
Fall River Facility to allow the Company to store and process PCBs. MMT operates
the Fall River Facility pursuant to all necessary permits as well as an
Agreement with the City of Fall River (the "Fall River Agreement"), which first
became effective on March 17, 1993. In April 1995, the Fall River Agreement was
modified and amended to reflect the requirements of the License. In November
1995, the Fall River Agreement was further amended to add provisions related to
the processing of PCBs.

Permits for Commercial Facilities

      With respect to the first commercial facilities constructed or under
construction by the Company, the Company and M4 have been successful in
obtaining the permits necessary to construct and operate these facilities. In
February 1996, the Texas Natural Resource Conservation Commission ("TNRCC")
determined that CEP is distinct from incineration and other combustion and
thermal treatment processes, and approved CEP as a RCRA-exempt recycling
technology. This approval means that CEP plants in Texas would not need to
obtain RCRA permits prior to the construction or operation of CEP plant. In
September 1996, the Louisiana Department of Environmental Quality provided a
regulatory determination to a prospective customer of MMT indicating that an
on-site CEP unit installed at the customer's facility would be exempt from RCRA
permitting requirements and Toxic Release Inventory (TRI) emissions reporting.

      In January 1997, MMT received approval from the TNRCC to receive a class
of secondary materials for processing at the Bay City CEP Facility as non-RCRA
regulated materials. This approval means that feedstocks fitting the
characteristics approved by TNRCC for processing will not be treated as
hazardous materials under RCRA and will be exempt from TRI emissions reporting.
This regulatory designation should streamline processing of materials at the
facility and should provide a competitive advantage to customers utilizing the
facility for management of their secondary materials.

      In the case of the Quantum-CEP facility constructed by MMT and SEG, the
Tennessee Department of Environment and Conservation ("TDEC") issued to SEG an
air permit in May 1995 (amended in October 1995) which allowed the installation
and initial operation of the CEP equipment and related air pollution control
devices at the facility. In addition, in November 1995, SEG received a


                                       15
<PAGE>   17


radioactive materials license from TDEC that allows the possession, use and
storage of radioactive materials at the Quantum-CEP facility. This license was
transferred to MMT Tennessee in December 1996 in connection with the acquisition
of SEG's interest in the Q-CEP facility.

      In September 1995, TDEC issued an air permit to M4 which allowed the
installation and initial operation of the CEP systems at the M4 Technology
Center. In addition, in November 1995, TDEC issued a radioactive materials
license to M4 that allows the possession, use and storage of radioactive
materials at the M4 Technology Center. TDEC also issued an approval in December
1996 allowing the processing and recycling of mixed waste organic liquids and
sludges in connection with the mixed waste processing activities being performed
by M4 for the DOE and commercial customers.

COMPETITION

      MMT defines the market for its CEP technology as the recycling, processing
and volume reduction of certain radioactive, hazardous and non-hazardous wastes
and industrial by-products. MMT is aware of some competition from companies
recycling hazardous wastes, but its primary competition comes from companies
that provide radioactive and hazardous waste treatment and disposal services.
The predominant waste treatment and disposal methods include landfilling,
deep-well injection, incineration, plasma, vitrification, or other thermal
treatment methods, on-site containment (including industrial lagoons), and
release into the environment. The hazardous waste treatment and disposal
industries are fragmented and characterized by a number of large and small
companies. Competition is based primarily on cost, regulatory and permit
restrictions, technical performance, dependability and environmental integrity.
The Company believes that CEP will be able to compete favorably on the basis of
these factors. Many technology developers also have begun to focus on the
government markets as new opportunities continue to evolve. Some of these
technologies may also be applied to the commercial radioactive waste and
hazardous waste markets. The government is evaluating a wide variety of
technologies, with the objective of identifying alternatives that offer benefits
over conventional methods, such as incineration. Many of MMT's competitors have
substantially greater financial and technical resources than MMT.

      For most waste streams, CEP is designed to provide recovery of products
and re-use by generators or sale of such products to other commercial and
government customers. CEP's potential cost advantage over conventional waste
treatment and disposal methods is dependent, in part, on such re-use or sale.
MMT anticipates that the price of such products will be established on the basis
of competition with other large or small producers of raw materials and recycled
products which may have greater financial resources and experience in connection
with the production and marketing of such materials and products than MMT or its
customers.

EMPLOYEES

      As of December 31, 1996, the Company had 481 full-time employees. The
Company believes that it has been successful in attracting experienced and
capable process development, engineering, operations and management personnel.
The Company's growth and expansion plans depend in large part upon its ability
to continue to attract and retain highly skilled scientific, managerial,
manufacturing, operations and marketing personnel.

      All of the Company's employees have entered into agreements with the
Company requiring them not to disclose the Company's proprietary information,
assigning to the Company all rights to inventions made during their employment
and prohibiting them from competing with the Company.

      None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.

      In May 1997, the Company announced that as part of a restructuring
designed to further MMT's transition from research and development into
commercial operations, it had eliminated 77 positions (out


                                       16
<PAGE>   18


of approximately 530), primarily at the Company's corporate headquarters in
Waltham, Massachusetts, and at the Fall River Facility. Most of the eliminations
were from MMT's design and development area. In November 1996, the Company
announced that as part of a restructuring to more efficiently pursue
opportunities in priority markets, it had eliminated 58 (out of 480) positions,
primarily at the Company's corporate headquarters in Waltham, Massachusetts.
Most of the eliminations were staff positions from finance and administration,
sales and marketing, and government and regulatory affairs. The Company intends
to continue hiring to fill positions that are critical to meeting the Company's
technology delivery schedule.

ITEM 2. PROPERTIES

      The Company currently leases approximately 77,000 square feet of office
space in Waltham, Massachusetts, that it uses as its corporate headquarters,
under a seven-year lease expiring in 2003. This lease has a five-year extension
option. The Company also has entered into a lease for an additional
approximately 77,000 square feet of office space in the same office park in
Waltham. This lease also has a seven year term with a five year extension
option. The Company currently does not intend to occupy this additional space
and is in the process of subleasing it to third parties. Currently, more than
one third of this building has been subleased at rents in excess of the rent
which the Company is required to pay, and the Company is negotiating subleases
for the remaining space. The Company also has subleased its prior corporate
headquarters in Waltham through the duration of the lease term. In addition, the
Company has smaller offices in Washington D.C., Oak Ridge, Tennessee, Houston,
Texas, Bay City, Texas and Denver, Colorado that are leased on a short-term
basis.

      The Company has a ten-year lease expiring in 2004 with the Greater Fall
River Development Corporation for the Fall River Facility located on ten acres
of land in Fall River, Massachusetts. The lease includes three ten year
extension options, exercisable at the option of the Company. The Fall River
Facility has approximately 86,000 square feet of usable space, of which
approximately 34,000 square feet is used for office and training and the
remainder for research and development operations, warehousing and laboratories.
The Company also has leased approximately 19,800 square feet of office, storage
and warehouse space near the Fall River Facility. In July 1996, the Company
purchased approximately five acres of land adjacent to the Fall River Facility.
This land could be used for potential future expansion of the Fall River
Facility.

      The Company has a lease with Hoechst Celanese Chemical Group, Inc. for the
land on which the Bay City CEP Facility is being constructed. The lease has a
term of ten years from the date that the facility begins commercial operation.
The lease will be automatically extended for as long as MMT maintains the
permits necessary to operate the facility and produces synthesis gas meeting
agreed specifications.

      In connection with the acquisition of SEG's interest in the Q-CEP facility
in Oak Ridge, Tennessee, MMT Tennessee purchased the approximately six acre
parcel upon which the facility is located. MMT Tennessee also is occupying an
office building located adjacent to the Q-CEP facility pursuant to a license
which was acquired from SEG. This license has a one year term, expiring in
January 1997, but MMT Tennessee has the right to negotiate a longer term lease
for the building. During the one year period ending in December 1997, MMT
Tennessee also has the right to occupy and use a portion of SEG's facility in
Kingston, Tennessee for the conduct of certain wet waste processing activities.
Thereafter, MMT Tennessee may move the personnel and equipment used for such
activities to the Q-CEP facility site or may attempt to negotiate an extension
to the one year occupancy period.

      As part of the acquisition of wet waste processing assets from VECTRA, MMT
Tennessee acquired a maintenance facility located on approximately 16 acres of
land in Columbia, South Carolina. MMT Tennessee will continue to operate this
facility in connection with the wet waste business.


                                       17
<PAGE>   19


ITEM 3. LEGAL PROCEEDINGS

      In February and March 1997, purchasers of the Company's common stock filed
five purported class action suits against the Company and certain of its present
and former directors and executive officers in the United States District Court
for the District of Massachusetts. The first suit, filed on February 12, 1997,
and the fifth suit, filed on March 28, 1997, name the Company and Messrs.
William M. Haney, III, Christopher J. Nagel, Benjamin T. Downs, Victor E. Gatto,
Jr., Ian C. Yates, John T. Preston and Maurice F. Strong as defendants. The
other three suits, filed on February 13, February 20, and February 27, 1997,
each name the Company and Messrs. Haney, Nagel, Preston and Strong as
defendants. The complaints variously allege that the Company and the individual
defendants made false and misleading statements concerning the development and
commercialization of CEP and the availability of research and development
funding from the DOE, and disseminated financial statements not prepared in
accordance with generally accepted accounting principles, in violation of
Section 10(b) of the Securities Exchange Act of 1934 and state law. The
complaints variously assert that the alleged false or misleading statements were
made to inflate the price of the Company's common stock in order to facilitate
its March 1996 offering of convertible subordinated notes, to reduce the number
of shares contributed to M4 to match an investment by M4's co-owner, to enhance
the value of stock or options held by the individual defendants, and to increase
the price of stock sold by the individual defendants. Each of the suits seeks
compensatory damages for alleged losses during the class periods (September 26,
1995 through October 21, 1996 in the first suit, March 28, 1995 through October
18, 1996 in three of the suits, and September 26, 1995 through October 20, 1996
in the fifth suit) as well as fees and costs. The suits are at an early
procedural stage. While the Company has not yet filed answers to the complaints,
the Company intends to deny liability. However, the ultimate outcome of the
litigation cannot be determined at present.

      In April 1997, the Company and M4 received subpoenas from the Office of
the Inspector General ("OIG") of the DOE which request various Company and M4
information and records. The OIG has not informed the Company or M4 of its
reasons for requesting such information and records.

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

   There were no matters submitted to the Company's security-holders in the
fourth quarter of fiscal 1996.

PART II

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

      The Company's Common Stock began trading on the NASDAQ National Market
System under the Symbol MLTN on February 10, 1993. The following table presents
the quarterly high and low bid as quoted by NASDAQ. These quotations reflect the
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

<TABLE>
<CAPTION>
 Fiscal Year ended December 31, 1995
                                   High        Low
                                   ----        ---
<S>                              <C>        <C>   
  First Quarter                  $19.25     $13.75
  Second Quarter                  26.25      15.75
  Third Quarter                   33.25      21.00
  Fourth Quarter                  41.25      27.50
</TABLE>

<TABLE>
<CAPTION>
 Fiscal Year ended December 31, 1996
                                   High        Low
                                   ----        ---
<S>                              <C>        <C>   
  First Quarter                  $40.25     $29.75
  Second Quarter                  36.50      28.00
  Third Quarter                   34.63      21.75
</TABLE>


                                       18
<PAGE>   20

<TABLE>
<S>                               <C>         <C> 
  Fourth Quarter                  33.25       9.25
</TABLE>

      As of May 19, 1997, there were 939 holders of record of the Common Stock.
On May 19, 1997, the closing bid price of the Company's Common Stock, as quoted
by the NASDAQ National Market, was $7.25 per share. The Company has never
declared or paid cash dividends on its Common Stock and does not anticipate
doing so in the foreseeable future.

      In May 1996, the Company issued $143,750,000 of its 5.50% Convertible
Subordinated Notes Due 2006 (the "Notes"). The Notes are convertible at the
option of the holder into shares of the Company's Common Stock at a conversion
price of $38.75 per share. The Notes were offered and sold to qualified
institutional buyers in accordance with the exemption from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
provided by Rule 144A and to a limited number of other institutional accredited
investors (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) that executed and delivered a representation letter to the Company. In
addition, certain of the Notes were sold outside the United States in accordance
with procedures intended to support the Company's reliance on the exemption from
the registration requirements of the Securities Act provided by Regulation S.
The principal underwriters for this offering were Lazard Freres & Co. LLC, Alex.
Brown & Sons Incorporated and Oppenheimer & Co., Inc. The Notes were purchased
by these underwriters at a purchase price of 100% of principal amount less an
aggregate offering discount of 3.0% of the principal amount.

      In connection with the acquisition of certain assets of the Retech
division by M4, MMT issued a total of 352,361 shares of its Common Stock to LMC
on April 30, 1996, and December 18, 1996. These shares were acquired by Lockheed
Environmental Systems & Technologies Co. ("LESAT"), an indirect wholly-owned
subsidiary of LMC, as consideration for the sale of certain assets of Retech and
were then transferred by LESAT to LMC. The assets purchased by MMT were deemed
to have a value of approximately $11.2 million. The shares were issued in
accordance with the exemption from the registration requirements of the
Securities Act provided in Section 4(2) of the Securities Act.


                                       19
<PAGE>   21


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA


The following table sets forth selected financial information of the Company for
the 5 years ended December 31, 1996.


<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                          ----------------------------------------------------------------------------------------
                                              1996               1995               1994               1993               1992
                                              ----               ----               ----               ----               ----
<S>                                       <C>                <C>                <C>                <C>                <C>         
STATEMENT OF OPERATIONS DATA
Revenue                                   $ 63,511,190       $ 44,181,398       $ 14,398,829       $  4,721,953       $  2,526,327
Operating expenses:
    Cost of revenue                         50,478,630         34,901,904         11,057,163          2,205,316          2,172,399
    Research and development                26,183,268         10,986,234         14,417,327         10,837,484          4,208,319
    Selling, general and administrative     18,708,514          2,877,371          7,132,256          5,661,953          4,133,270
                                          ------------       ------------       ------------       ------------       ------------
                                            95,370,412         48,765,509         32,606,746         18,704,753         10,513,988
Equity income from affiliate               (31,612,891)           834,294                 --                 --                 --
                                          ------------       ------------       ------------       ------------       ------------
Loss from operations                       (63,472,113)        (3,749,817)       (18,207,917)       (13,982,800)        (7,987,661)

Interest income                              8,812,303          5,559,690          4,376,403          1,861,077            400,559
Interest expense                            (6,521,654)        (1,455,084)          (737,741)          (160,233)           (15,972)
                                          ============       ============       ============       ============       ============
 Net income (loss)                        $(61,181,464)      $    354,789       $(14,569,255)      $(12,281,956)      $ (7,603,074)
                                          ============       ============       ============       ============       ============

 Net income (loss) per share              $      (2.62)      $       0.01       $      (0.67)      $      (0.69)      $      (0.59)
                                          ============       ============       ============       ============       ============

Weighted average common
    shares outstanding                      23,313,243         24,710,423         21,904,213         17,811,830         12,843,220
                                          ============       ============       ============       ============       ============

Supplementary net loss per share (1)                                                               $      (0.67)      $      (0.52)
                                                                                                   ============       ============

Supplementary weighted average
    common shares outstanding                                                                        18,293,320         14,509,887
                                                                                                   ============       ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                    ----------------------------------------------------------------------------
                                                         1996            1995            1994            1993            1992
                                                         ----            ----            ----            ----            ----
<S>                                                 <C>             <C>             <C>             <C>             <C>         
BALANCE SHEET DATA
Cash, cash equivalents and short-term
        investments                                 $ 129,067,763   $  86,276,250   $ 100,196,475   $ 104,423,037   $  2,234,110
Working capital                                       108,630,338      89,306,823      95,318,381     103,689,795        (72,876)
Total assets                                          272,745,249     153,336,001     135,541,524     123,628,053     11,523,176
Long-term liabilities, less current maturities (2)    173,597,488      26,818,466      24,549,733       3,625,427      3,538,531
Convertible preferred stock                                    --              --              --              --         72,727
Accumulated deficit                                   (97,820,411)    (36,638,947)    (36,993,736)    (22,424,481)   (10,142,525)
Stockholders' equity                                   63,511,832     109,908,656     102,135,257     116,333,308      5,264,679
</TABLE>

(1)      Supplementary net loss per share information for the years ended
         December 31, 1993 and 1992 is presented to reflect the conversion of
         preferred stock as if it occurred on the later of the first day of the
         period or the date of issuance of the preferred stock.

(2)      Includes (i) deferred revenue of $1,900,000 at December 31, 1992, (ii)
         payments due under a technology purchase agreement of $1,385,889 at
         December 31, 1996 and $1,474,586 at December 31, 1995, 1994, 1993 and
         1992, (iii) deferred income of $2,437,500 at December 31, 1996 and
         $2,459,918 at December 31, 1995 and (iv) $5,020,765 of accumulated
         losses of affiliate in excess of investment at December 31, 1996.


                                       20


<PAGE>   22


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

RESULTS OF OPERATIONS

Years Ended December 31, 1996 and 1995

Revenue was approximately $63.5 million for 1996 compared with $44.2 million for
1995. The following table compares sources of revenue for the years ended
December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                              Year ended December 31,
                                              1996               1995
<S>                                    <C>                <C>          
Engineering and construction           $ 37,796,000       $  20,242,000
R&D and consulting                       12,632,000          14,939,000
Technology transfer and success fees     13,083,000           9,000,000
                                       ------------         -----------
                                       $ 63,511,000         $44,181,000
                                       ============         ===========
</TABLE>

Engineering and construction revenue is from services provided to M4 for the
engineering, design and construction of the M4 Technology Center. The increase
in 1996 over 1995 is a result of billings to M4 during the peak period of
construction and start-up of the M4 Technology Center. Overall, the Company
expects engineering and construction revenue to decline until it enters into
definitive contracts to construct commercial CEP systems for customers that will
be financially responsible, in whole or in part, for the construction of such
systems. In March 1997, the Company and LMC entered into a Letter of Intent to
restructure their relationship currently embodied in M4. Although the Company
may earn revenue in the future pursuant to the proposed new agreements with LMC,
the Company will earn limited additional revenue from the operations of M4 in
1997. Additionally, there is uncertainty as to the amounts and timing of
revenue, if any, that may be earned by the Company in the future under the
proposed new agreements with LMC.

R&D and consulting revenue decreased in 1996 from 1995 due to a reduction in
billings under a cost sharing contract with the United States Department of
Energy (the "DOE"). During 1996, the Company recorded $8 million in revenue for
the reimbursement of R&D costs incurred under the cost sharing contract with the
DOE compared to approximately $13.2 million for 1995. The decrease is a result
of the Company reaching the funded contract value during the third quarter of
1996 and not entering into any arrangements providing for additional funding
from the DOE. The Company expects to continue with research and development
projects, some of which will be funded by third parties and some of which will
be funded from the Company's working capital. The Company anticipates that the
amount of both internally and externally funded research and development will
decrease over the next year.

Technology transfer and success fees increased in 1996 over 1995 due to $5
million of revenue recognized for the sale of a license to M4 for the Japanese
chemical weapons market. During 1996, the Company recognized the remaining $4
million of the original $14 million license fee from M4. This license fee was
being recognized over a two year period that began in August 1994. Also during
1996, the Company recognized $4 million of plant start-up fees from M4. Under
the terms of the M4 limited partnership agreement, the Company was entitled to a
fee of $2 million upon the start-up of each of the first three CEP plants
developed by M4. As of June 30, 1996, the Company had earned each of these three
success fees. Part of the Company's strategy is to license its technology under
arrangements which provide for up-front technology transfer fees, ongoing
tolling fees, license fees or royalties and the Company expects such revenues 
to increase in future periods.

As commercial operations commence at the Company's facilities in Oak Ridge,
Tennessee and Bay City, Texas, the Company expects to generate revenue from
processing and recycling wastes. The Company expects that revenue from plant
operations will be a significant portion of its total revenue in future periods.
During 1996, however, the Company did not receive any revenue from plant
operations. The existence and timing of revenues related to the Company's
commercial operations will depend on a


                                       21
<PAGE>   23


number of factors, including the ability of the Company and its affiliates to
successfully market, permit and build CEP systems on a timely and economic basis
for their target markets, customer acceptance of the technology, and competition
from other companies in the Company's target markets, and no assurances can be
made in this regard.

During 1996, revenue from M4 and DOE accounted for approximately 87% and 13% of
revenue, respectively. The Company anticipates that during 1997 it will earn
limited revenue from the operations of M4. In addition, other than the NICE(3)
grant described in Item 1 above, the Company does not anticipate receiving
research and development funding from the DOE in 1997.

Cost of revenue for 1996 increased to $50.5 from $34.9 million for 1995. The
increase is primarily attributable to an increase in engineering and
construction activities in connection with the development of CEP systems for M4
and the deferral of income related to intercompany profit on the sale of assets
to M4. The Company expects cost of revenue to increase in future periods as
commercial operations commence at its facilities in Oak Ridge, Tennessee and Bay
City, Texas.

Research and development expenses increased to $26.2 million in 1996 from $11.0
million in 1995. The increase reflects an increase in costs associated with the
continued development of CEP and internally funded CEP demonstrations. The
Company expects that R&D costs will decrease in the next year as efforts become
more concentrated on commercial operations. SG&A expenses for 1996 increased to
$18.7 million from $2.9 million in 1995. The increase reflects the hiring of
additional personnel, the expansion of corporate infrastructure and a lower
absorption of SG&A expenses into cost of revenue due to a reduction in cost
reimbursement contracts. The Company is making efforts to decrease SG&A expenses
in future periods. The classification of expenses between cost of revenue, R&D
and SG&A will depend in part on the number and amount of future cost
reimbursement contracts and the related absorption of R&D and SG&A expenses into
cost of revenue.

The Company accounts for its investment in M4 using the equity method and
recorded an equity loss of $31.6 million in 1996 compared to equity income of
$834,000 in 1995. Under the M4 limited partnership agreement, the Company and
LMC share equally in M4's revenues and other income and all expenses are
allocated to LMC until the capital accounts of the Company and LMC are equal.
Thereafter, as long as the capital accounts of the Company and LMC are equal,
the Company and LMC share the profits and losses of M4 equally. During 1995, the
Company's and LMC's capital accounts were not equal and the Company recorded its
share of revenues and other income from M4 without recognizing any expenses from
M4. This resulted in the Company having equity income from M4 in 1995. In the
fourth quarter of 1996, the Company's and LMC's capital accounts became equal
and the Company began to share in the recognition of expenses from M4. Because
of substantial losses at M4 in the fourth quarter of 1996, the Company recorded
$40.9 million in expenses from M4, resulting in a net equity loss from its
investment in M4 of $31.6 million in 1996. A substantial portion of the losses
at M4 are the result of impairment charges totaling approximately $60.9 million
primarily relating to the M4 Technology Center. The Company expects to continue
to incur equity losses from M4 until the ongoing restructuring is completed,
which is expected during the second quarter of 1997.

Interest income for 1996 increased to $8.8 million from $5.6 million in 1995.
The increase is due to interest earned on the net proceeds from the issuance of
convertible debt in May 1996. The Company expects interest income to decline in
the coming year as cash and short-term investments are used to fund initial
commercial operations and continued investment activities, including
expenditures for fixed assets. Interest expense for 1996 increased to $6.5
million from $1.5 million in 1995. The increase is due to interest on the
convertible debt issued in May 1996. Interest expense is expected to increase in
1997 due to a full year of interest on the convertible debt issued in May 1996
and other potential debt financing. Inflation is not expected to have a material
effect on future results of operations.

The Company's results of operations have varied significantly in the past and
may continue to vary significantly in the future. The Company's results of
operations in the past have been dependent largely on revenue from M4 and DOE
and the Company's future profitability is dependent upon its ability to


                                       22
<PAGE>   24

commercialize successfully its CEP technology and to find alternative sources of
revenue. There can be no assurance that the Company will generate sufficient
revenue to achieve profitability.

In February 1997, Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128") was issued by the Financial Accounting Standards Board. FAS 128
specifies modifications to the calculation of earnings per share from that
currently used by the Company. Under FAS 128, "basic earnings per share" will be
calculated based upon the weighted average number of common shares actually
outstanding, and "diluted earnings per share" will be calculated based upon the
weighted average number of common shares outstanding and other potential common
shares (stock options, warrants and convertible debt) if they are dilutive. FAS
128 is effective for the Company's fourth quarter of 1997 and will be adopted at
that time. Had the Company determined earnings per share in accordance with FAS
128, basic earnings (loss) per share and diluted earnings (loss) per share for
1996, 1995 and 1994 would not have been materially different from the net income
(loss) per share reported by the Company.

In April 1997, the Company's Board of Directors appointed a committee of three
outside directors to review matters concerning the Company's financial
statements for the year ended December 31, 1996 and the allegations in the
securities class actions described in Item 3 above. The committee has completed
its review of matters affecting the presentation of the Company's financial
statements, including the restatement discussed in Note 17 to the financial
statements.

Years Ended December 31, 1995 and 1994

      Revenue was approximately $44.2 million for 1995 compared with $14.4
million for 1994. The increase is primarily attributable to an increase in
engineering and construction activities in connection with the development of
CEP systems for M4, an increase in license fees from M4 and an increase in
customer-funded activities under TDPs. The increase in 1995 TDP revenue over
1994 is a result of revenue earned under a cost-sharing contract with the U.S.
government.

      During 1995, revenue from M4 and the DOE accounted for approximately 69%
and 30% of revenue, respectively.

      Cost of revenue was approximately $34.9 million for 1995 compared with
$11.1 million for 1994. The increase is primarily attributable to an increase in
engineering and construction activities in connection with the development of
CEP systems for M4 and an increase in costs related to cost-sharing contracts
with the U.S. government.

      Research and development expenses decreased to $11.0 million for 1995 from
$14.4 million for 1994. The decrease is a result of increased customer funding
resulting in an increase in research and development expenses being included in
cost of revenue. Selling, general and administrative expenses decreased to $2.9
million for 1995 from $7.1 million for 1994. The decrease is a result of
increased customer funding resulting in an increase in selling, general and
administrative expenses being included in cost of revenue.

      Interest income increased to $5.6 million in 1995 from $4.4 million in
1995, reflecting a full year of interest earned on the net proceeds from debt
financings in 1994. Interest expense increased to $1.5 million for 1995 from $.7
million for 1994, reflecting a full year of interest expense on a $21 million
tax-exempt bond financing received during 1994. Equity income from affiliate
increased to $.8 million in 1995 from $0 in 1994 reflecting the Company's share
of revenue and other income earned by M4. Inflation is not expected to have a 
material effect on future results of operations.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company had cash, cash equivalents and short-term
investments totaling $129.1 million compared to $86.3 million at December 31,
1995. The increase was primarily a result of the net proceeds from the issuance
of the Company's 5 -1/2% Convertible Subordinated Notes Due 2006. The increase
was offset by cash used in operations and for the acquisition of fixed assets.
During 1997, the Company expects to incur significant additional expenditures
related to the engineering, construction and start-up of commercial CEP systems
owned by itself and through joint ventures. The Company expects that its total
capital expenditures for 1997 will be approximately $83 million.


                                       23
<PAGE>   25


During December 1996, MMT Tennessee signed a series of agreements to become the
full owner of the Q-CEP facility it had jointly owned with SEG in Oak Ridge,
Tennessee and to acquire certain assets used for handling and processing
radioactive "wet waste." SEG was a wholly-owned subsidiary of Westinghouse
Electric Corporation ("Westinghouse"). The Q-CEP facility is designed to process
radioactive ion exchange resins from nuclear power plants. Pursuant to those
agreements, MMT Tennessee acquired SEG's interest in the Q-CEP facility and
certain assets of SEG and Westinghouse used in the "wet waste" business. These
assets include contracts, equipment, services and personnel for processing
radioactive waste streams at the Q-CEP facility. The purchase price for these
assets was $31 million in cash, which was based on the parties' mutual agreement
as to the fair market value of the assets being acquired. In connection with the
asset purchase, MMT Tennessee obtained a non-compete agreement with SEG and
Westinghouse which was valued based upon its estimated economic benefit to MMT
Tennessee and is being amortized on a straight-line basis over the 5 year life
of the agreement. The excess cost over the net assets acquired is being
amortized on a straight-line basis over a period of ten years.

In March 1997, the Company and LMC announced that they had executed a letter of
intent to restructure their relationship with respect to commercialization of
CEP for the government waste market. The objective of the restructuring is to
enable MMT and LMC to access target markets more efficiently by eliminating many
of the organizational redundancies associated with the current M4 structure. LMC
and MMT believe that the contemplated restructuring also will enable them to
better leverage LMC's expertise in systems integration and MMT's ability to
provide its CEP technology to target markets. After the completion of the
restructuring, LMC and MMT each would be free to pursue projects formerly
governed by the existing joint venture agreements, subject to the requirements
established by the proposed new arrangements. The letter of intent contemplates
five principal changes in the companies' relationship: (1) LMC would have the

exclusive right to lead and pursue contracts for the Hanford radioactive tanked
waste cleanup project described above, and MMT would provide directly to LMC
certain construction and development services with respect to CEP, (2) the
Company and LMC would form a new limited liability company to be their exclusive
vehicle to deliver processing services to customers in the chemical
demilitarization market worldwide, (3) MMT would have the exclusive right to
lead and pursue worldwide opportunities for processing DUF(6), (4) the Company
would become the sole owner of M4, which will continue to own and operate its
primary remaining asset, the M4 Technology Center, and (5) the Retech division
of M4, which provides plasma arc technology, would be transferred to LMC.
In connection with the proposed replacement of M4 by the Company on the Hanford
team, the Company would deliver a pilot-scale, demonstration CEP plant to LMC
in 1997 for a fixed price of $5 million. In addition, if the LMC team is
awarded a contract under Phase 1B of the Hanford cleanup program and CEP is
used in the Phase 1B performance, LMC would pay the Company a fee of $15
million and order a CEP production plant meeting agreed upon criteria at a
price to be negotiated. $5 million of this fee would be payable on award of the
contract and the remaining $10 million would be payable upon timely delivery
and acceptance of the CEP production plant. The Company also would be entitled
to an on-going royalty of 3.5% of all revenues generated from the processing of
waste in equipment supplied by the Company under the Hanford contract.

The limited liability company to be formed by the Company and LMC would have
worldwide rights to commercialize CEP for the chemical weapons demilitarization
market. The limited liability company would be owned 50/50 by LMC and the
Company. The Company would be entitled to success fees of up to an aggregate of
$25 million in connection with the successful deployment of CEP systems to
process chemical weapons. The limited liability company would have an initial
term of five years.

As sole owner of M4, the Company would be responsible for the future operations
of the M4 Technology Center, and would be entitled to all future revenues from
such operations. Under the terms of the letter of intent, the $38 million
aggregate principal amount of bonds issued by the Industrial Development Board
of Oak Ridge relating to the M4 Technology Center would remain outstanding,
LMC's guarantee of these bonds would remain in place, and each of LMC and the
Company would be jointly responsible for the principal, interest and other costs
relating to these bonds.

In addition to the changes described above, the Company and LMC have agreed in
the letter of intent that the Company would have the exclusive right to lead and
pursue worldwide opportunities for processing DUF6. LMC would have the right to
participate in this market on a case-by-case basis, subject to mutual agreement
of the parties, and would agree not to pursue this market for five years except
jointly with the Company. 

LMC and the Company also would establish a strategic alliance committee,
comprising three 


                                       24
<PAGE>   26


representatives from each company, to review and monitor the relationships
created by the restructuring and to evaluate new market opportunities within the
DOE and DoD markets.

In connection with the proposed restructuring, LMC would forgive $15 million
aggregate principal amount and all accrued interest under its line of credit
with M4, and the Company would contribute outstanding accounts receivable of
$14.6 million to M4's capital. LMC and the Company will generally share equally
in substantially all of the costs of the restructuring.

The restructuring described above is based on the terms set forth in a
non-binding letter of intent between the Company and LMC. Completion of the
restructuring is dependent upon a number of factors, including the negotiation
of definitive agreements and the approval of the Boards of Directors of the
Company and LMC. There can be no assurances that the Company and LMC will
successfully consummate the transactions described in the letter of intent.

On January 29, 1997, MMT Tennessee acquired certain low-level radioactive waste
processing assets of VECTRA, a spent nuclear fuel and radioactive waste services
company located in San Ramon, California. MMT Tennessee paid $3.9 million in
cash for the VECTRA waste-handling assets, which include machinery, equipment,
spare parts, intellectual property and customer contracts

The Company is currently constructing the Bay City CEP Facility in Bay City,
Texas. During 1996, the Company spent approximately $12.6 million for the
engineering, construction and permitting of this facility.

As of December 31, 1996, accounts receivable from affiliate (billed and
unbilled, in the aggregate) decreased by approximately $9.1 million from
December 31, 1995 as a result of the reclassification of certain amounts due
from M4 to accumulated losses of affiliate in excess of investment in light of
the proposed treatment of these receivables in connection with the M4
restructuring.

As of December 31, 1996, other assets increased by approximately $5 million
from December 31, 1995 due to costs incurred for issuance of the Company's 5
-1/2% Convertible Subordinated Notes Due 2006. As of December 31, 1996, prepaid
expenses increased by approximately $4.0 million from December 31, 1995 due to
increases in prepayments to suppliers, accrued interest receivable and spare
parts. Restricted cash decreased by approximately $4.8 million from 1995 to
1996 due to expenditures of funds reserved for qualified spending relating to a
tax-exempt bond financing for the Fall River Facility The Company's investment
in M4 decreased by approximately $5.9 million from December 31, 1995, resulting
in accumulated losses of affiliate in excess of investment of approximately
$5.0 million, primarily due to the recognition of the Company's share of M4's
expenses, including the effect of a reduction in the carrying value of M4's
long-lived assets.

As of December 31, 1996, deferred revenue from affiliate decreased by
approximately $4 million from December 31, 1995 due the recognition of
technology transfer fees from M4 as revenue in 1996.

In May 1996, the Company issued $143,750,000 of Convertible Subordinated Notes
Due 2006 (the "Notes"). The Notes have a term of ten years and are payable in
full on May 1, 2006. The Notes bear interest at the rate of 5.50% per year
payable semi-annually. The Notes are convertible, at the option of the holder,
into shares of the Company's common stock at an initial conversion price of
$38.75 per share. Beginning in May 1999, the Notes become redeemable at the
option of the Company at an initial redemption price of 102.75% of the
principal amount plus any accrued interest. Upon a change of control (as
defined in the Indenture relating to the Notes) or in the event the Company's
common stock is neither listed on a U.S. national securities exchange nor
approved for trading on an established automated over-the-counter U.S. trading
market, each holder of the Notes will have the right to require the Company to
repurchase all or a portion of such holder's Notes at price equal to 100% of
the principal amount plus any accrued interest. The Notes are subordinated in
right of payment to the Company's other existing debt.

In 1994, the Company completed a tax-exempt bond financing in connection with
the Fall River Facility. Pursuant to the financing, the Company entered into a
loan agreement with the Massachusetts Industrial Finance Agency, which issued
$21 million aggregate principal amount of Solid Waste Disposal Facility 


                                       25
<PAGE>   27


Revenue Bonds. The bonds are payable in annual sinking fund installments
beginning in 1998 and ending in 2014 and bear interest at 8.25% per annum
payable semi-annually.

During 1996, the Company earned revenue from M4 relating to services provided
for the engineering and construction of CEP systems and from technology transfer
and success fees. For revenue amounts that are capitalized by M4, the portion of
the related gross profit that is allocable to the Company's ownership interest
in M4 has been deferred, and will be recognized over the period that the related
assets are depreciated by M4. As of December 31, 1996, the related deferred
income increased by $4,435,000 from December 31, 1995 due to billings under
license agreements and construction contracts with M4.

In October 1996, the Board of Directors authorized the Company to repurchase up
to 2,000,000 shares of its common stock. Under this authorization, 40,000 shares
were repurchased by the Company in 1996 for $483,000, and 70,400 shares were
repurchased by the Company in 1997 for $769,000. The Company does not anticipate
repurchasing additional shares in the foreseeable future.

In March 1996, the Company entered into a new lease for the Company's corporate
headquarters. In September 1996, the Company entered into a new lease for
additional space in the same office park as the Company's corporate
headquarters. Each of these leases is for seven years, and future minimum lease
payments of approximately $22.8 million in the aggregate are due on a monthly
basis throughout the seven-year term. The Company does not currently intend to
occupy the second building and is in the process of negotiating subleases for
such space. The Company has accrued $1.3 million for anticipated losses relating
to this lease net of expected sub-lease income.

The Company incurred a substantial net loss for the quarter ended March 31,
1997. The Company's current business plan indicates that the Company will
require additional financing to be used for the completion of its planned
capital expenditures through the end of 1997, including the completion of the
Bay City CEP Facility, and to continue its research, development and other
efforts necessary to commercialize its CEP technology. Accordingly, the Company
intends to raise additional financing during 1997, and has retained several
investment banking firms to assist it in these efforts. These sources of
financing could include a tax-exempt bond financing for MMT Tennessee, which
owns and operates the Q-CEP facility in Oak Ridge, Tennessee and the wet waste
assets acquired from SEG and VECTRA. If the Company does not obtain additional
financing during 1997, it would have a materially adverse effect on the
Company's operations. The amount, timing and effect on liquidity of capital
expenditures, including equity contributions to joint ventures, to be made by
the Company in connection with the development of commercial CEP systems will
depend on a number of factors, including the number of systems to be developed,
the timing of the development of such CEP systems, the terms of the development
arrangements with the Company's customers and partners and the extent to which
the Company is able to obtain financing for such CEP systems.

The Company has provided a full valuation allowance for deferred tax assets
because the realization of the future benefits from these deferred tax assets
cannot be reasonably assured. The amount of the deferred tax assets considered
realizable is subject to change based on estimates of taxable income during
future periods. If the Company achieves sustained profitability, these deferred
tax assets would be available to offset future income taxes, subject to
potential limitations relating to ownership changes.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

      Certain statements contained in this Form 10-K regarding future events or
the future financial performance of the Company are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements include
statements concerning the Company's growth strategies, anticipated trends in the
Company's business, receipt of research and development funding, anticipated
capital expenditures, anticipated revenues from license fees and commercial
operations, continued operations and start-up of operations at the Company's and
M4's CEP facilities, construction and operation of the Bay City CEP Facility,
expected sales of CEP systems by the Company and its partners, regulatory
acceptance of the 


                                       26
<PAGE>   28


Company's CEP technology, the Company's plans to obtain additional financing,
and expectations regarding the future performance of the Company's relationship
with LMC. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, many of
which are beyond the Company's control. Accordingly, actual results could differ
materially from those contemplated by these forward-looking statements. Among
the risks and uncertainties which could affect actual results are:

      Customer Acceptance of CEP - CEP is a new and developing technology for
which there is no established market. The Company may be unable to sell CEP
systems if potential customers do not view CEP as an economically and
environmentally acceptable means of disposing of wastes and by-products.

      Development Risk - The Company has limited experience developing and
constructing commercial CEP plants. In addition, the Company's "first of a kind"
CEP plants have required larger capital expenditures and a longer period to
develop and construct than originally anticipated by the Company. If the Company
is not able to develop and construct CEP plants, particularly "second of a kind"
plants, on time and under budget, this would have a material adverse effect on
the Company's ability to successfully sell CEP plants to customers and to obtain
financing for the development and construction of CEP plants.

      Lack of Sustained Commercial Operations - The Company has limited
experience operating commercial CEP plants. There can be no assurance that the
Company will be able to operate CEP systems on a sustained basis in
commercial-scale use, that such systems can be operated profitably, or that such
systems will successfully process feedstocks and recover commercially usable or
saleable materials.

      Compliance with Regulatory Requirements - The Company and its customers
and potential customers must operate in compliance with federal, state and local
environmental laws and regulations. Failure to obtain required permits or
failure of CEP to meet environmental standards would have a material adverse
affect on the Company's ability to sell, site and operate CEP plants. In
addition, the stringency and level of enforcement of environmental laws and
regulations will have a material effect on demand for the Company's technology.

      Obtaining Required Funding - The Company will require substantial funds to
construct the initial commercial CEP systems that it anticipates it will own and
operate, and to continue its development activities. The Company's future
capital requirements could vary significantly and will depend on certain
factors, many of which are not within the Company's control, including
customers' decisions to finance, own and operate their CEP systems; the terms of
any collaborative arrangements entered into by the Company; the progress of the
Company's development of CEP; the nature and timing of permits required for CEP
systems; and the availability and terms of alternative sources of financing.
Failure to obtain necessary financing could have a materially adverse impact on
the Company's ability to own and operate certain initial CEP facilities and to
continue its development activities.

      Dependence on Disposal Facilities - Some materials produced using CEP may
have little to no commercial value, and may be considered wastes. Such waste may
be classified as a hazardous or low-level radioactive waste (and may need to be
handled as such) under current United States environmental regulations. In
addition, such waste may need to be disposed of at specially permitted disposal
facilities. In order to utilize such facilities, any waste produced by CEP must
meet the acceptance criteria of the particular facility. Fees for disposal of
wastes at such facilities, and the methods for calculating such fees, are
subject to change. The Company's ability to operate its CEP systems profitably
may be adversely affected by increases in such fees or changes in the methods of
calculating such fees. The Company expects that the volume of residual waste
streams produced from the processing of radioactive wastes with Q-CEP will be
greater than those produced from other applications of CEP.

      Significant Customers - The Company has historically been dependent on two
customers, M4 and the DOE, for a substantial portion of its revenues. The
Company does not expect to be receiving substantial revenues from M4 or the
Department of Energy in 1997. The Company's future profitability is 


                                       27
<PAGE>   29


dependent upon, among other things, its ability to find alternative sources of
revenue. There can be no assurance that the Company will generate sufficient
revenue to achieve profitability.

      Operating History - The Company's quarterly revenues and operating results
have varied significantly in the past and may continue to vary significantly in
the future as a result of the factors listed above. In addition, because the
purchase of a CEP plant involves a substantial capital commitment, the Company's
sales cycle can be lengthy and subject to risks and uncertainties over which the
Company has little or no control. These include budgetary constraints,
regulatory requirements, changes in technology, and competition. Variations in
the timing of recognition of particular revenues due to changes in project scope
or timing may adversely and disproportionately affect the Company's operating
results. The Company's future profitability is dependent upon, among other
things, its ability to successfully commercialize its CEP technology. There can
be no assurance that the Company will generate sufficient revenue to achieve
continued profitability.

      Competition - The Company's competitors, many of which have substantially
greater financial resources than the Company, may develop technologies superior
to those of the Company. To the extent these competitors offer comparable
services or products at lower prices or of higher quality, or more
cost-effective waste disposal alternatives, the Company's ability to compete
effectively could be adversely affected.

      Additional factors which may cause actual results to differ are described
in Exhibit 99.1 to this Form 10-K, as well as the Company's other filings with
the Securities and Exchange Commission and are incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The financial statements and schedules data listed in Item 14 are filed as
part of this report on pages F-1 through F-42.

      The filing of this report and the release of the Consolidated Financial
Statements for the year ended December 31, 1996 were delayed by the events
described in Item 9 hereof and by the need to complete assessments of the
recoverability of the long-lived assets of the Company and M4 in accordance with
the requirements of Financial Accounting Standards No. 121.

      Also, in April 1997, the Company's Board of Directors appointed a
committee of three outside directors to review matters concerning the Company's
financial statements for the year ended December 31, 1996 and the allegations in
the securities class actions described in Item 3 above. The committee has
completed its review of matters affecting the presentation of the Company's
financial statements, including the restatement discussed in Note 17 to the
financial statements.

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

      On March 27, 1997, M4 engaged Price Waterhouse LLP ("Price Waterhouse") to
audit M4's financial statements for the fiscal year ended December 31, 1996.
Price Waterhouse was engaged by M4 after Coopers & Lybrand L.L.P., the previous
accountants for M4, resigned as M4's accountants on March 6, 1997. Coopers &
Lybrand advised M4 that it had resigned as M4's accountants mainly because Price
Waterhouse proposed to refer to Coopers & Lybrand's report on M4's financial
statements in Price Waterhouse's audit of the Company's financial statements,
and Coopers & Lybrand did not want to consent to such association. In its
capacity as the Company's independent accountants, Price Waterhouse has not
expressed reliance on any audit report of Coopers & Lybrand relating to M4.
Coopers & Lybrand's audit reports for M4 for the period from inception (August
1994) through the date of resignation did not contain any adverse opinions or
disclaimer of opinions or qualifications or modifications as to uncertainty,
audit scope or accounting principles, and there were no disagreements or
reportable events (within the meaning of Item 304 of Regulation S-K) between M4
and Coopers &

                                       28
<PAGE>   30


Lybrand during such period. Prior to the engagement of Price Waterhouse, M4 had
not consulted with Price Waterhouse regarding the application of accounting
principles to a specified transaction or the type of audit opinion that might be
rendered on M4's financial statements. The Company has consulted with Price
Waterhouse, in Price Waterhouse's capacity as the Company's independent
accountants, on various occasions with respect to transactions between the
Company and M4.

PART III

ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

      There is shown below for each director and executive officer, as reported
to the Company, the name, age and family relationship, if any, with any other
director or officer; the principal occupation and employment over at least the
last five years; the position, if any, with the Company; the period of service
as a director or officer of the Company; and certain other directorships held.
The Board of Directors is currently set at seven members, each of whom is
elected to hold office until the next annual meeting of stockholders, or special
meeting in lieu thereof, and until their respective successors are duly elected
and qualified.

<TABLE>
<CAPTION>
                                                                    Director/Officer
Name                       Age                Office Held                Since
----                       ---                -----------                -----
<S>                        <C>      <C>                              <C> 
William M. Haney, III       35      Chairman of the Board of             1989
                                    Directors, President and
                                    Chief Executive Officer

Christopher J. Nagel,       39      Vice President of Process            1989
Sc.D.                               Fundamentals/ Founding
                                    Scientist and Director

James B. Anderson (1)       47                 Director                  1990

Peter A. Lewis (2)          66                 Director                  1993

John T. Preston (1)(2)      47                 Director                  1989

Maurice F. Strong           68                 Director                  1992

Robert A. Swanson           49                 Director                  1992

Eugene Berman               55      Vice President of Government         1992
                                    and External Affairs

Benjamin T. Downs           34      Executive Vice President of          1990
                                    Finance and Administration and
                                    Chief Financial Officer

William J. Garner           58      Vice President of Design and         1996
                                    Development

Victor E. Gatto, Jr.        50      Vice President, Government and       1993
                                    Nuclear Sales

Ethan E. Jacks              43      Vice President and General           1991
                                    Counsel

G. Earl McConchie           46      Vice President of Sales and          1996
                                    Marketing
</TABLE>


                                       29


<PAGE>   31


<TABLE>
<S>                        <C>      <C>                              <C> 
Katharyn F. Santoro         43      Vice President of Human              1994
                                    Resources
Charles W. Shaver           38      Chief Operating Officer              1996
</TABLE>

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

(1)   Currently a member of the Audit Committee.
(2)   Currently a member of the Compensation Committee.


      WILLIAM M. HANEY, III, has served as a Director of the Company since
December 1989 and as its Chairman of the Board, President and Chief Executive
Officer since June 1990. In 1989, Mr. Haney founded Energy BioSystems
Corporation, a developer of microbial systems for desulfurizing hydrocarbons,
and served as a member of its Board of Directors from 1989 to 1993. Mr. Haney
serves or has served as a member of the President's Circle of the National
Academy of Sciences, on boards for the United States Department of Commerce, the
Environmental Protection Agency, Harvard University and the World Resources
Institute relating to technology innovation and environmental issues, and on the
board of WGBH-Boston. Mr. Haney holds an A.B. degree from Harvard University.

      CHRISTOPHER J. NAGEL, SC.D.,  has served as a Director of the Company
since November 1989 and as Vice President of Process Fundamentals/Founding
Scientist since October 1996.  From August 1994 until October 1996, Dr. Nagel
served as Executive Vice President of Science and Technology, and from 1990
until August 1994, Dr. Nagel served as Senior Vice President of Science and
Technology.  From 1986 until 1991, Dr. Nagel was a doctoral student in the
School of Chemical Engineering at Massachusetts Institute of Technology
("M.I.T.").  Dr. Nagel holds a Sc.D. in Chemical Engineering from M.I.T. and
a B.S. in Chemical Engineering from Michigan Technological University.

      JAMES B. ANDERSON, PH.D., has served as a Director of the Company since
December 1990.  Dr. Anderson is the Second Vice President responsible for the
venture capital portfolio of The Travelers Companies where he has been
employed since 1987.  Prior to joining Travelers, Dr. Anderson was employed
as the Vice President of Research for Technology Assessment for Advest, Inc.
from 1983 to 1987.  Dr. Anderson holds a Ph.D. in Materials Science from the
University of Connecticut and a B.S. in Physics from Worcester Polytechnic
Institute.  Dr. Anderson also serves on the Board of Directors of Biofield,
Inc. and Voxel, Inc., as well as a number of other private companies.

      PETER A. LEWIS has served as a Director of the Company since June
1993.  Mr. Lewis was a general partner of Lazard FrEres & Co. from 1969 until
January 1993, concentrating primarily in the area of domestic and
international mergers and acquisitions.  Since January 1993, Mr. Lewis has
been a limited partner of Lazard FrEres & Co. and has served as a limited
managing director since 1995.  From 1966 to 1969, Mr. Lewis served as Deputy
Assistant Secretary in the United States Department of Housing and Urban
Affairs and Assistant Director of the United States Bureau of the Budget.
Mr. Lewis is also a director of Breed Technologies, Inc., a manufacturer of
automobile components, and certain privately held companies.  Mr. Lewis holds
an M.B.A. from the Harvard Graduate School of Business, an M.A. from the
Harvard Asian Studies Program and an A.B. from Harvard College.

      JOHN T. PRESTON has served as a Director of the Company since December
1989.  Mr. Preston has been the President of Quantum Energy Technologies
Corporation, a technology-based startup company working on products to
improve energy efficiency in lighting, combustion and other areas, since
January 1996.  Prior to that, Mr. Preston was the Director of Technology
Development at M.I.T. from 1992 to the end of 1995, and the Director of the
M.I.T. Technology Licensing Office from 1986 to 1992.  Mr. Preston has been a
member of the Board of Directors of Energy BioSystems Corporation since 1991
and is a member of the Board of Directors of Clean Harbors, Inc., as well as
several privately held companies.  Previously, Mr. Preston was a founder of
Visual Communication Network and Associate Director of the M.I.T. Industrial
Liaison Program.  Mr. Preston holds an M.B.A. from Northwestern University
and a B.S. in Physics from the University of Wisconsin.


                                       30
<PAGE>   32


      MAURICE F. STRONG has served as a Director of the Company since 1989
except during the period of May 1990 to September 1992.  Mr. Strong currently
is the Executive Coordinator for U.N. Reform, and has been the Chairman of
Strovest Holdings, Inc. since 1983.  From December 1992 to December 1996, Mr.
Strong was Chairman of Ontario Hydro, a major Canadian utility, and was its
Chief Executive Officer from December 1992 to November 1995.  From March 1990
to August 1992, Mr. Strong was Under Secretary General of the United Nations,
Secretary-General of the 1992 U.N. Conference on Environment and Development,
and Chairman of the Earth Summit.  Mr. Strong is currently Senior Adviser to
the President of the World Bank, Chairman of Quantum Energy Technologies
Corporation, and a member of the Board of Directors of several other
companies.  Mr. Strong also is Chairman of the Earth Council Institute and
the World Resources Institute and is affiliated with numerous environmental,
humanitarian and development organizations.

      ROBERT A. SWANSON has served as a Director of the Company since March
1992.  Mr. Swanson, a founder of Genentech and its Chief Executive Officer
from 1976 to 1990, was its Chairman of the Board from 1990 to 1996.
Currently, Mr. Swanson is the Chairman of K&E Management, Ltd., a private
investment management company.  Prior to forming Genentech, Mr. Swanson was a
partner with Kleiner & Perkins, a venture capital partnership, and from 1970
to 1974 he was an investment officer with Citicorp Venture Capital Ltd.  Mr.
Swanson serves on the Board of Fellows of the Faculty of Medicine at Harvard
University, and is a member of the Biology Visiting Committee of, and has
served as a Trustee for, M.I.T.  Mr. Swanson is a member of the Royal Swedish
Academy of Engineering Sciences.  Mr. Swanson holds an S.M. from M.I.T.'s
Sloan School of Management and a B.S. in Chemistry from M.I.T.

      EUGENE BERMAN joined the company as Vice President of Regulatory and
Community Affairs of the Company in May 1992, and now serves as Vice President
of Government and External Affairs. Prior to joining the Company, Mr. Berman was
a contract partner responsible for environmental matters, with particular
emphasis on permitting and environmental compliance, in the law firm of Gaston &
Snow from May 1989 to September 1991 and a partner in the law firm of Mintz,
Levin, Cohn, Ferris, Glovsky & Popeo from October 1991 to April 1992. Mr. Berman
holds a J.D. from Georgetown University Law Center and holds a B.S. in Chemical
Engineering from the University of Pennsylvania.

      BENJAMIN T. DOWNS joined the Company in June 1990 and served as Vice
President of Finance and Administration and Treasurer of the Company from
August 1990 until May 1995.  Since May 1995, Mr. Downs has served as
Executive Vice President of Finance and Administration and Treasurer.  Mr.
Downs was the Vice President of Finance and Administration of Energy
BioSystems Corporation, a developer of microbial systems for desulfurizing
hydrocarbons, from December 1989 until December 1991.  Mr. Downs was a
founder of Nexus Development in 1989, a communications software development
firm that was sold to Microcom in 1989.  Prior to founding Nexus in 1989, Mr.
Downs was employed by Intel Corporation from 1984 to 1989 where his
responsibilities included financial accounting, budgeting and the development
of the corporate financial forecasting system.  Mr. Downs holds an A.B. from
Harvard University.

      WILLIAM J. GARNER joined the Company in August 1996 as Vice President
of Design and Development. Mr. Garner was the Director, Process Research and
Development, of the Polyolefins Division of Union Carbide Corporation from
September 1990 to August 1996.  He held a number of management positions at
Union Carbide from 1975, all associated with the development, design,
commercialization and licensing of Union Carbide's leading UNIPOL(R) polymers
technology.  During Mr. Garner's tenure at Union Carbide, this technology was
extended to over 110 reactors worldwide and 12 million tons of annual
capacity.  Mr. Garner holds a B.S. and M.S. in Chemical Engineering from
Texas A&M University and an M.S. in Industrial Hygiene from the University of
Pittsburgh.

      VICTOR E. GATTO, JR., ED.D., joined the Company as Director of
Government Affairs in February 1992, served as Vice President of Government
and Nuclear Business from September 1993 to March 1997, and currently serves
as Vice President of Government and Nuclear Sales.  From 1991 to February
1992, Dr. Gatto was an independent consultant assisting start-up companies
with innovative technologies in the 


                                       31
<PAGE>   33


areas of government, political and regulatory affairs at the state and federal
level. From 1990 to 1991, Dr. Gatto was Finance Director of the Massachusetts
Republican Party. From 1987 to 1990, Dr. Gatto was employed by Davidson College.
Dr. Gatto holds an Ed.D., an Ed.M. and an A.B. from Harvard University.

      ETHAN E. JACKS has served as Vice President and General Counsel since
November 1991 and as Secretary or Assistant Secretary of the Company since
August 1990.  From 1990 to 1991, Mr. Jacks was a partner in the Corporate and
Finance Department of the law firm of McDermott, Will & Emery.  Prior to
joining McDermott, Will & Emery, he was a partner in the Corporate and
Finance Department of Fine & Ambrogne from 1987 to 1990.  Mr. Jacks holds a
J.D. from Georgetown University Law Center, an S.M. from the Sloan School of
Management at M.I.T. and a B.S. from M.I.T.

      G. EARL MCCONCHIE joined the Company as Vice President of Chemicals and
Plastics Business in April 1996, and currently serves as Vice President of
Sales and Marketing.  Since 1972, Mr. McConchie has held a number of
management positions at the Dow Chemical Company ("Dow"), one of the largest
U.S. based chemical companies.  From 1992 to April 1996, Mr. McConchie served
as the Global Business Director and Global R&D Director of Dow's RCl, HCl and
Incineration Business, where he was responsible for business management and
technology development and implementation, involving 12 major manufacturing
sites and global business.  Mr. McConchie holds a B.S. in Chemical
Engineering from Virginia Tech.

      KATHARYN F. SANTORO joined the Company as Vice President of Human
Resources in January 1994.  Ms. Santoro had previously been employed by
Thinking Machines Corporation, a supercomputer manufacturer, as Director of
Human Resources since 1989 and prior to that was Director of Human Resources
for Lotus Development Corporation, a software company.  Ms. Santoro holds a
B.A. in Psychology from the University of California, Santa Barbara and an
M.Ed. in Counseling Psychology from Boston College.

      CHARLES SHAVER joined the Company as Vice President of Manufacturing in
August 1996, and is currently the Chief Operating Officer.  Mr. Shaver
jointed MMT after a most recent assignment as leader for the Epoxy Products
Business Unit at Dow Chemical.  The Epoxy Products Business Unit of Dow
represented $1.5 billion in sales and over 20 manufacturing sites around the
world, employing over 1200 people.   Mr. Shaver had been in a number of
management and engineering leadership roles across a wide variety of business
and technologies within Dow Chemical from 1980 to 1996.  Mr. Shaver hold a
B.S. in Chemical Engineering from Texas A&M University.  

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Under the securities laws of the United States, the Company's directors
and executive officers and any persons holding more than 10% of the Common Stock
are required to report their ownership of the Common Stock and any changes in
that ownership to the Securities and Exchange Commission (the "SEC"). Specific
due dates for these reports have been established and the Company is required to
report in this Annual Report on Form 10-K any failure to file by these due dates
during 1996. Based on a review of the forms filed by the above persons, the
Company believes that all of these filing requirements were timely satisfied by
its directors, executive officers and 10% holders, with the exception of Mr.
Haney, who on one occasion was late in filing the appropriate form documenting
one open market purchase transaction, and Ian C. Yates, a former Vice President
of the Company, who on two occasions after departing from the Company was late
in reporting a total of five option exercise transactions. In making this
statement, the Company has relied upon the written representations of its
directors, officers and ten percent holders and copies of the reports that have
been filed with the Commission.


                                       32
<PAGE>   34


ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

      Summary Compensation Table. The table below sets forth certain summary
compensation information for the three years ended December 31, 1996 with
respect to the Company's Chief Executive Officer and the four other most highly
compensated officers of the Company.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                ANNUAL COMPENSATION                      LONG TERM COMPENSATION
                          ---------------------------------        ---------------------------------
                                                                   RESTRICED  SECURITIES
                                                                      STOCK   UNDERLYING      LTIP            ALL OTHER
NAME AND PRINCIPAL        YEAR       SALARY(1)        BONUS           AWARDS    OPTIONS      PAYOUTS         COMPENSATION
------------------        ----       ---------        -----           ------    -------      -------         ------------
      POSITION             
      --------             
<S>                       <C>        <C>            <C>           <C>            <C>         <C>            <C>        
William M. Haney,         1996       $344,167       $     --            --        30,100         --          $ 18,140(2)
  III                     1995       $289,167             (3)           --        14,826         --          $ 26,777(4)
  Chairman, Chief         1994       $280,000             --            --       108,000         --          $ 17,119(5)
  Executive                                                                                                        
  Officer and
  President

Christopher J             1996       $201,333       $ 11,250            --        39,000         --          $ 69,022(6)
  Nagel, Sc.D             1995       $192,000       $ 21,600            --           100         --          $ 24,724(7)
  Vice President          1994       $182,801       $    310            --        54,000         --          $ 45,897(8)
  of Fundamentals
  and Founding
  Scientist

Benjamin T. Downs         1996       $190,833       $     --            --        35,250         --          $    146(9)
  Executive Vice          1995       $135,993         19,125            --         7,600         --          $    146(10)
  President of            1994       $143,310         32,448            --        43,400         --          $    100(11)
  Finance and                                                                                                
  Administration
  and Chief
  Financial Officer

G. Earl McConchie(12)     1996       $163,457       $  7,031        40,000        50,000         --          $ 68,587(13)
  Vice President
  of Sales and
  Marketing

Victor E. Gatto,          1996       $174,646       $  6,750            --        45,250         --          $    949(14)
  Jr                      1995       $151,000       $ 55,000            --           100         --          $    569(15)
  Vice President          1994       $143,906       $ 15,310            --        72,175         --          $    348(16)
  of Government
  and Nuclear Sales
</TABLE>

--------------
(1)   Salary includes amounts deferred pursuant to the Company's 401(k) Plan.

(2)   Represents a payment of $17,876 to Mr. Haney to reimburse him for the cost
      of a personal life insurance policy maintained by him and $264 in term
      life insurance premiums on a group policy maintained by the Company.

(3)   Mr. Haney directed that his bonus for 1995, $100,800, be paid by the
      Company to a charitable foundation designated by Mr. Haney.

(4)   Represents a payment of $26,561 to Mr. Haney to reimburse him for the cost
      of a personal life insurance policy maintained by him and $216 in term
      life insurance premiums on a group policy maintained by the Company.

(5)   Represents a payment of $16,903 to Mr. Haney to reimburse him for the cost
      of a personal life insurance policy maintained by him and $216 in term
      life insurance premiums on a group policy maintained by the Company.

(6)   Represents a payment of $24,475 to Dr. Nagel to reimburse him for the cost
      of a personal life insurance policy maintained by him, $198 in term life
      insurance premiums on a group policy maintained by the Company and a
      payment of $44,349 pursuant to a Technical Assignment Agreement between
      the Company and Dr. Nagel dated May 31, 1990.


                                       33
<PAGE>   35


(7)   Represents a payment of $24,526 to Dr. Nagel to reimburse him for the cost
      of a personal life insurance policy maintained by him, and $198 in term
      life insurance premiums on a group policy maintained by the Company.

(8)   Represents a payment of $24,547 to Dr. Nagel to reimburse him for the cost
      of a personal life insurance policy maintained by him, $187 in term life
      insurance premiums on a group policy maintained by the Company and $21,163
      in interest forgiven by the Company on a $400,000 note, which was paid in
      full in December 1994.

(9)   Represents $146 in term life insurance premiums on a group policy
      maintained by the Company.

(10)  Represents $146 in term life insurance premiums on a group policy
      maintained by the Company.

(11)  Represents $100 in term life insurance premiums on a group policy
      maintained by the Company.

(12)  Mr. McConchie became an employee of the Company in April 1996.

(13)  Represents $68,067 for reimbursement of relocation expenses, and $522 in
      term life insurance premiums on a group policy maintained by the Company.

(14)  Represents $749 in term life insurance premiums on a group policy
      maintained by the Company, and $200 payment of a life-cycle account
      maintained by the Company.

(15)  Represents $369 in term life insurance premiums on a group policy
      maintained by the Company, and $200 payment of a life-cycle account
      maintained by the Company.

(16)  Represents $348 in term life insurance premiums on a group policy
      maintained by the Company.


      Option Grants in Last Fiscal Year. The following table sets forth
information as to stock options granted for the year ended December 31, 1996 to
each of the individuals listed in the Summary Compensation Table.

                        OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                      Individual Grants                               Potential Realizable
                                   ------------------------------------------------------                Value of Assumed     
                                   Number of     % of Total                                            Annual Rates of Stock 
                                   Securities      Options                                            Price Appreciation for
                                  Underlying      Granted to     Exercise                                  Option Term (3)
                                    Options       Employees in      Price        Expiration             --------------------
      Name                          Granted       Fiscal Year    ($/Share)(1)     Date (2)              5%               10%
      ----                          -------       -----------    ------------     --------              --               ---
<S>                                 <C>               <C>         <C>          <C>               <C>              <C>       
  William M. Haney, III                100(4)         0.01%       $   37.25    January 25,2006       $    2,343       $    5,937
                                    60,000(5)         6.44%       $   31.75    May 7, 2006           $1,198,044       $3,036,079
                                                                 
  Christopher J. Nagel,                100(4)         0.01%       $   37.25    January 25,2006       $    2,343       $    5,937
     Sc.D                            8,900(6)         0.95%       $   35.75    March 1, 2006         $  200,099       $  507,089
                                    30,000(5)         3.22%       $   31.75    May 7, 2006           $  599,022       $1,518,040
                                                                 
  Benjamin T. Downs                    100(4)         0.01%       $   37.25    January 25,2006       $    2,343       $    5,937
                                     5,150(6)         0.55%       $   35.75    March 1, 2006         $  115,787       $  293,428
                                    30,000(5)         3.22%       $   31.75    May 7, 2006           $  599,022       $1,518,040
                                                                 
  G. Earl McConchie                 50,000(7)         5.37%       $   34.75    April 15,2006         $1,092,704       $2,769,128
                                                                 
  Victor E. Gatto, Jr                  100(4)         0.01%       $   37.25    January 25,2006       $    2,343       $    5,937
                                    15,150(6)         1.62%       $   35.75    March 1, 2006         $  340,617       $  863,191
                                    30,000(5)         3.22%       $   31.75    May 7, 2006           $  599,055       $1,518,040
</TABLE>                                                      

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

      (1)   The exercise price may be paid in cash or in shares of Common Stock
            valued at fair market value on the exercise date.

      (2)   The term of each option may not exceed 10 years (except that with
            respect to any optionee who owns more than 10% of the total combined
            voting power of all classes of stock of the Company, the term may
            not exceed five years if such option is an "incentive stock
            option").


                                       34
<PAGE>   36


      (3)   There is no assurance provided to any officer or any other holder of
            the Company's securities that the actual stock price appreciation
            over the 10-year term will be at the assumed 5% and 10% levels or at
            any other defined level. Unless the market price of the Common Stock
            does in fact appreciate over the option term, no value will be
            realized from the option grants made to the officers.

      (4)   These stock options, granted in January 1996, were granted to each
            employee of the Company and were vested at time of grant.

      (5)   These stock options, granted in May 1996, vest over a 4 year period,
            with 10% vesting in May 1997, 15% vesting in May 1998, 25% vesting
            in May 1999, and 50% vesting in May 2000.

      (6)   These stock options, granted in March 1996, vest over a 5 year
            period with 20% vesting in each November 1997, November 1998,
            November 1999, November 2000 and November 2001.

      (7)   These stock options, granted in April 1996, vest over a 5 year
            period with 20% vesting in each April 1997, April 1998, April 1999,
            April 2000 and April 2001.

      Option Exercises in Last Fiscal Year. The following table sets forth
information as to options exercised during the year ended December 31, 1996 and
as to unexercised options held at the end of such fiscal year by the individuals
listed in the Summary Compensation Table.

   AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
                                     VALUES

<TABLE>
<CAPTION>
                                                                 Number of Securities                                     
                                                                Underlying Unexercised            Value of Unexercised    
                                                                        Options                   In-the-Money Options    
                                   Shares                          at Fiscal Year End              at Fiscal Year End(1)  
                                 Acquired on       Value        --------------------------     ----------------------------
    Name                          Exercise       Realized       Exercisable   Unexercisable    Exercisable    Unexercisable
    ----                          --------       --------       -----------   -------------    -----------    -------------
<S>                               <C>           <C>             <C>            <C>             <C>            <C>     
William M. Haney, III              86,000       $2,977,400         671,811        91,781       $ 6,474,424       $     --
Christopher J. Nagel, Sc.D             --       $       --       2,040,126        60,900       $20,206,349       $     --
Benjamin T. Downs                 105,000       $2,243,100         198,348        98,842       $ 1,988,031       $317,322
G. Earl McConchie                      --       $       --              --        50,000       $        --       $     --
Victor E. Gatto, Jr                 2,800       $   92,470          46,827       101,923       $    40,794       $ 95,200
</TABLE>

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


      (1)   Calculated on the basis of the closing price of the Common Stock on
            December 31, 1996 of $11.75 per share, as reported by the Nasdaq
            National Market, minus the exercise price.


COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      No member of the Compensation Committee is a former or current officer or
employee of the Company or any of its subsidiaries. To the Company's knowledge,
there were no other relationships involving members of the Committee or other
directors of the Company requiring disclosure in this proxy statement.

      The Company's Compensation Committee currently consists of Peter A.
Lewis and John T. Preston.


                                       35
<PAGE>   37


EXECUTIVE EMPLOYMENT AGREEMENTS

      William M. Haney, III, is employed under an Employment Agreement with the
Company effective as of June 30, 1990. Under the terms of the Employment
Agreement as amended to date, which includes confidentiality and non-competition
provisions, Mr. Haney currently receives an annual salary of $266,000, and is
eligible to receive an annual performance bonus. Mr. Haney also received 8,000
vested stock options in lieu of 20% of his base salary for 1997. The agreement
also provides for (i) a non-qualified stock option for the purchase of 666,666
shares of Common Stock at an exercise price of $.60 per share which was granted
to Mr. Haney in October 1991, (ii) payments towards a personal life insurance
policy and (iii) a severance payment, payable in the event Mr. Haney's
employment with the Company is terminated without cause or is constructively
terminated, equal to the present value of the amount of compensation Mr. Haney
would have otherwise received from the Company during the three-year period
following such termination. In addition, the agreement provides for certain
registration rights in respect of the shares of Common Stock owned by Mr. Haney.

      G. Earl McConchie, the Company's Vice President of Sales and Marketing,
and the Company are parties to an Employment Agreement effective as of April
1996. The Employment Agreement, which includes confidentiality and
non-competition provisions, provides that if Mr. McConchie's employment with the
Company is terminated without cause, the Company will be required to pay him
severance at his then current salary until the earlier of (i) Mr. McConchie
finding alternative employment with compensation equal to at least 50% of his
base salary or (ii) five years from the date of termination.

COMPENSATION OF DIRECTORS

      Except for the option grants described below, Directors do not receive
compensation for services on the Board of Directors or any committee thereof.
The Company reimburses Directors for expenses incurred in connection with
attendance at meetings of the Board of Directors or committees thereof.

      In September 1993, March 1994 and March 1996, the Board of Directors of
the Company amended the Company's Amended and Restated 1989 Long Term Incentive
Compensation Plan (the "1989 Plan") to provide for the automatic grant of stock
options (the "Formula Grants") to directors who are not officers or employees of
the Company ("Non-Employee Directors"). These amendments were approved by the
stockholders of the Company at the 1994 Annual Meeting of Stockholders and at
the 1996 Annual Meeting of Stockholders. A Formula Grant will be granted to any
Non-Employee Director who is elected to the Board of Directors, will be for
25,000 shares of Common Stock, will vest over 20 quarters and will be
exercisable at the fair market value as of the date of the Formula Grant. Each
Non-Employee Director will be eligible to receive an additional Formula Grant
upon his or her reelection to the Board of Directors each time the previous
Formula Grant has fully vested.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth certain information as of May 19, 1997 with
respect to the beneficial ownership of the Common Stock by (i) each person known
to the Company to be the beneficial owner of more than 5% of the issued and
outstanding Common Stock as of May 19, 1997, one of whom is the Chief Executive
Officer of the Company, (ii) those persons who were, at December 31, 1996, the
other four most highly compensated officers of the Company, (iii) each director
of the Company, and (iv) all present executive officers and directors of the
Company as a group. As of May 19, 1997, 23,599,664 shares of Common Stock were
outstanding.


                                       36
<PAGE>   38

<TABLE>
<CAPTION>
                                      Amount and Nature of          Percentage of
Name and Address                      Beneficial Ownership       Outstanding Shares of
of Beneficial Owner                    of Common Stock(1)        Common Stock Owned (1)
-------------------                    ------------------        ----------------------
<S>                                    <C>                       <C>   
William M. Haney, III(2)                     5,346,786                 22.01%
400-2 Totten Pond Road                                           
Waltham, MA 02154                                                
                                                                 
John T. Preston(3)                           2,290,507                  9.70%
238 Main Street                                                  
Cambridge, MA 02141                                              
                                                                 
The Travelers Companies(4)                   1,913,917                  8.11%
One Tower Square                                                 
Hartford, CT 06183                                               
                                                                 
Christopher J. Nagel, Sc.D.(5)               2,075,965                  8.10%
400-2 Totten Pond Road                                           
Waltham, MA 02154                                                
                                                                 
Benjamin T. Downs(6)                           367,092                  1.54%
400-2 Totten Pond Road                                           
Waltham, MA 02154                                                
                                                                 
Robert A. Swanson(7)                           267,915                  1.12%
                                                                 
                                                                 
Peter A. Lewis(8)                              114,697                     *
                                                                 
                                                                 
Victor E. Gatto, Jr.(9)                         65,779                     *
                                                                 
                                                                 
Maurice F. Strong(10)                           54,916                     *
                                                                 
                                                                 
G. Earl McConchie(11)                           53,599                     *
                                                                 
                                                                 
James B. Anderson, Ph.D.(12)                    17,500                     *
                                                                 
                                                                 
                                                                 
All officers and directors as a group       10,918,716                 40.20%
(14 persons) (2)-(4), (6)-(13)                                   
</TABLE>

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

      *     Less than 1%.

      (1)   The shares owned, and the shares included in the total number of
            shares outstanding, have been adjusted, and the percentage owned has
            been computed, in accordance with Rule 13d-3(d)(1) under the
            Securities Exchange Act of 1934, as amended. Includes options with
            respect to shares of Common Stock that can be exercised as of May
            19, 1997 (or within 60 days after such date). Except as set forth 


                                       37
<PAGE>   39


            in these footnotes, such shares are beneficially owned with sole
            investment and sole voting power.

      (2)   Includes 697,811 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).

      (3)   Includes 6,250 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date). Also includes 500 shares held of record by
            Mr. Preston's children. Mr. Preston disclaims beneficial ownership
            of such shares.

      (4)   Represents shares owned by The Travelers Insurance Company; The
            Travelers Insurance Group, Inc.; PFS Services, Inc.; Associated
            Madison Companies, Inc.; and the Travelers Group, Inc. Information
            is based upon a joint Schedule 13G dated January 28, 1997 furnished
            to the Company by such beneficial owners.

      (5)   Includes 2,045,346 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).

      (6)   Includes 210,878 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).

      (7)   Includes 227,915 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date). Also includes 40,000 shares of Common Stock
            held of record by the Swanson Family Fund, L. P., of which Mr.
            Swanson is a general partner and a limited partner.

      (8)   Includes 20,000 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date). Also includes 25,000 shares of Common Stock
            held of record by Mr. Lewis' wife. Mr. Lewis disclaims beneficial
            ownership of such shares.

      (9)   Includes 61,690 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).

      (10)  Represents 54,916 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date). Excludes 12,000 shares owned by Strovest
            Holdings, Inc., of which Mr. Strong is Chairman, and 209,000 shares
            owned by Environmental Capital Corporation, a subsidiary of Strovest
            Holdings, Inc. Mr. Strong disclaims beneficial ownership of such
            shares.

      (11)  Includes 12,446 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).

      (12)  Represents 17,500 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).

      (13)  Includes 3,559,399 shares of Common Stock issuable upon exercise of
            outstanding options exercisable as of May 19, 1997 (or within 60
            days after such date).


                                       38
<PAGE>   40


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      In October 1996, the Company and Maurice F. Strong, a director of the
Company, entered into a Consulting Agreement pursuant to which Mr. Strong will
provide advice on the design and implementation of international sales and
marketing strategy for the Company's products and technology, and will assist in
negotiating transactions with international customers. Pursuant to the
Consulting Agreement, the Company granted to Mr. Strong a non-qualified option
to purchase 10,000 shares of Common Stock at an exercise price of $34.75 per
share, which was the closing price of the Common Stock on the date of grant. The
stock option vests in five annual installments of 2,000 shares, provided that
Mr. Strong is then being retained by the Company under the Consulting Agreement.
In addition, the Company will pay Mr. Strong a retainer of $5,000 per month. The
Agreement has a one year term, and renews automatically for successive one year
terms unless terminated by either party.

      The Company and John T. Preston, a director of the Company, are parties to
a Consulting Agreement pursuant to which Mr. Preston will provide advice on
technology implementation, business planning, networking with potential
customers, and other projects assigned from time to time by senior management of
the Company. Pursuant to the Consulting Agreement, the Company pays Mr. Preston
a retainer of $3,334 per month. The Agreement has a one year term, and renews
automatically for successive one year terms unless terminated by either party.

      In August 1996, December 1996 and January 1997, the Company loaned G. Earl
McConchie, an officer of the Company, a total of $60,000, bearing interest at
8.25% per year, payable on the earlier of (a) the sale of Mr. McConchie's
previous house, or (b) 30 days after Mr. McConchie's termination of employment
with the Company.

      The Company may make loans to affiliates in the future, subject to
approval by the Company's Board of Directors.

      During 1996, the Company granted Mr. McConchie 40,000 shares of restricted
Common Stock as part of his employment agreement. 30,000 of these shares will be
restricted for a period of five years. Restrictions on the remaining 10,000
shares will lapse at a rate of 25% per quarter beginning March 31, 1997.

      During 1996, the Company granted Mr. William Garner 10,000 shares of
restricted Common Stock as part of his employment agreement. The restrictions on
these shares will lapse at a rate of 25% per quarter beginning March 31, 1997.
In addition, the Company provided Mr. Garner with a $100,000 signing bonus as an
incentive to join the Company and adjust to a higher cost of living in
Massachusetts. Should Mr. Garner terminate his employment with the Company
during his first year, he would be required to refund the entire amount of the
bonus.

      In 1990, the Company purchased the rights to certain patents related to
CEP from Christopher J. Nagel, an officer and a director of the Company, and a
member of the Company's Technology Advisory Board for $1,500,000. Each of Dr.
Nagel and the Technology Advisory Board Member are entitled to one-half of the
aggregate purchase price. The purchase price is payable in annual payments of
25% of the Company's pretax profits, as defined in the purchase agreement;
however, the Company may elect to accelerate the payments. As of December 31, 
1996, a total of $57,055 had been paid to Dr. Nagel pursuant to this agreement.

                                       39
<PAGE>   41
PART IV

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

(a)   The documents set forth in the list below are filed as part of this report
      on pages F-1 through F-26.

      (1)   Financial Statements

        Report of Independent Accountants
        Consolidated Balance Sheet at December 31, 1996 and 1995 Consolidated
        Statement of Operations for the years ended December 31,
           1996, 1995 and 1994
        Consolidated Statement of Changes in Stockholders' Equity for the years
           ended December 31, 1996, 1995 and 1994
        Consolidated Statement of Cash Flows for the years ended December 31,
           1996, 1995 and 1994
        Notes to Consolidated Financial Statements

      (2)   Financial Statement Schedules

           For the three years ended December 31, 1996:

           II - Valuation and Qualifying Accounts

(b)   Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.

(c)   Exhibits

   3.1  -  Amended and Restated Certificate of Incorporation of the
           Registrant.  *4* (3.1).
   3.2  -  Amended and Restated By-Laws of Registrant.  *4* (3.2)
   4.1  -  Specimen Certificate for Shares of the Registrant's Common Stock,
           $.01 par value.  *1* (4.1)
t 10.1  -  Pilot Plant Agreement dated as of October 25, 1991 between the
           Registrant and E.I. du Pont de Nemours and Company, as amended by
           the Pilot Plant Funding Agreement Addendum dated as of February
           10, 1992.  *1* (10.2)
  10.2  -  Agreement dated as of December 20, 1991 between the Registrant and
           L'Air Liquide S.A.  *1* (10.4)
  10.3  -  Lease dated as of July, 1993 for Two University Office Park,
           Waltham, Massachusetts.  #2# (10.8)
  10.4  -  Lease dated as of June 29, 1992 between the Greater Fall River
           Development Corporation and the Registrant for the property located
           at 421 Current Road, Fall River, Massachusetts. *1* (10.6)
  10.5  -  Strategic Alliance and Investment Agreement dated as of May 3,
           1993 between the Registrant and Am-Re Services, Inc.  #1# (19(a))
  10.6  -  Environmental Impairment Insurance Common Stock Warrant issued by
           the Registrant to Am-Re Services, Inc.  #1# (19(b))
  10.7  -  Project Financing Common Stock Warrant issued by the Registrant to
           Am-Re Services, Inc.  #1# (19(c))
  10.8  -  Registration Rights Agreement dated as of May 3, 1993 among the
           Registrant, Am-Re Services, Inc. and American Reinsurance
           Company.  #1# (19(d))
t 10.9  -  Asset Purchase Agreement dated as of July 7, 1992 between the
           Registrant and IPS Interproject Service AB and IPS Interproject
           Processteknik AB.  *2* (10.8)
  10.10 -  Technology Assignment Agreement dated as of May 31, 1990 between
           the Registrant and Christopher J. Nagel and Robert D. Bach, as
           clarified by the Clarification Agreement dated as of May 31, 1990
           and as amended by the Amendment to Technology Assignment Agreement
           dated as of October 12, 1990.  *1* (10.9)



                                       40
<PAGE>   42
+ 10.11 -  Employment Agreement dated as of June 30, 1990 between the
           Registrant and William M. Haney, III.  *1* (10.11)
+ 10.12 -  Letter Agreement dated as of October 1, 1991 from the Registrant
           to William M. Haney, III regarding employment.  *1* (10.12)
+ 10.13 -  Employment Agreement dated as of May, 1993 between the Registrant
           and Eugene Berman.  *4* (10.16)
*+10.14 -  Employment Agreement dated as of April 1, 1996 between the
           Registrant and G. Earl McConchie.
*+10.15 -  Registrant's Amended and Restated 1989 Long Term Incentive
           Compensation Plan, as amended effective March 27, 1996.
+ 10.16 -  Registrant's 1993 Employee Stock Purchase Plan.  *3* (28.2)
+ 10.17 -  Registrant's 1992 Restricted Common Stock Award Plan.  *1* (10.14)
  10.18 -  Form of Employee Non-Disclosure, Development and Non-Competition
           Agreement of the Registrant.  *1* (10.16)
  10.19 -  Loan Agreement dated February 4, 1993 between the Registrant and    
           Jobs for Fall River, Inc.  *1* (10.18)                               
  10.20 -  $1,800,000 Promissory Note, dated February 4, 1993, made by the      
           Registrant in favor of Jobs for Fall River, Inc.  *1* (10.19)        
  10.21 -  $50,000 Promissory Note, dated February 4, 1993, made by the         
           Registrant in favor of Jobs for Fall River, Inc.  *1* (10.20)        
  10.22 -  $150,000 Promissory Note, dated February 4, 1993, made by the        
           Registrant in favor of Jobs for Fall River, Inc.  *1* (10.21)        
  10.23 -  Security Agreement dated February 4, 1993 between the Registrant     
           and Jobs for Fall River, Inc.  *1* (10.22)                           
  10.24 -  Letter Agreement dated February 4, 1993 between the Registrant and   
           Jobs for Fall River, Inc. regarding security for loan made by Jobs   
           for Fall River, Inc. to the Registrant.  *1* (10.23)                 
  10.25 -  Contract No. DE-AC21-9MC30171 dated September 30, 1993 between the   
           Registrant and the United States Department of Energy, Morgantown    
           Energy Technology Center.  *4* (10.31)                               
  10.26 -  Modification to Contract No. DE-AC21-9MC30171 dated March 24,        
           1994  between the Registrant and the United States Department of     
           Energy, Morgantown Energy Technology Center.  #3# (10.32)            
  10.27 -  First Amendment to Lease, dated September 21, 1994, between the      
           Registrant and Connecticut General Life Insurance Company.  #5#      
           (10.1)                                                               
  10.28 -  Lease dated as of July 1, 1994 by and between the Registrant and     
           the Greater Fall River Development Corporation.  #5# (10.2)          
  10.29 -  Master Agreement For Government Market Development and               
           Commercialization of CEP Technology, dated as of August 9, 1994,     
           between the Registrant and Martin Marietta Corporation.  #5# (10.3)  
  10.30 -  Loan Agreement, dated as of August 1, 1994, between the              
           Registrant and the Massachusetts Industrial Finance Agency.  #5#     
           (10.4)                                                               
  10.31 -  Underwriting Agreement dated as of August 26, 1994, between          
           the Massachusetts Industrial Finance Agency and CS First Boston      
           Corporation, and approved by the Registrant.  #5# (10.5)             
  10.32 -  Letter of representation dated as of August 26, 1994 from Molten     
           Metal Technology, Inc. to the Massachusetts Industrial Finance       
           Agency and CS First Boston Corporation.  #5# (10.6)                  
  10.33 -  Development Agreement dated as of May 3, 1995 between the            
           Registrant and Hoechst Celanese Chemical Group, Inc. ("HCC").  #7#   
           (10.1)                                                               
  10.34 -  Feedstock Supply Agreement dated as of May 3, 1995 between the       
           Registrant and HCC.  #7# (10.2)                                      
  10.35 -  Synthesis Gas Purchase and Sale Agreement dated as of May 3, 1995    
           between the Registrant and HCC.  #7# (10.3)                          
  10.36 -  Sales Representative and Master Services Agreement dated as of       
           February 29, 1996 between the Registrant and Uhde.  #8#(10.1)       '
                                                                                

                                       41
<PAGE>   43
 x10.37 -  Partnership Restructuring Agreement dated as of March 15, 1996
           between the Registrant, LMC and M4.  #8#(10.2)
  10.38 -  Indenture dated May 1, 1996 between the Registrant and The Bank of
           New York, as Trustee.  #8#(10.3)
  10.39 -  Purchase Agreement dated April 25, 1996 between the Registrant and
           Lazard FrEres & Co. LLC.  #8#(10.4)
 y10.40 -  Commercial Mixed Waste Processing Agreement dated as of
           December 12, 1995 between the Registrant and M4 Environmental L.P.
           #9#(10.38)
  10.41 -  Lease dated as of March 4, 1996 for 400-2 Totten Pond Road,
           Waltham, Massachusetts.  #9#(10.3)
  10.42 -  Agreement for Expansion of License (Japanese Chemical Weapons)
           dated as of September 26, 1996 between the Registrant and M4.
           #10#(10.1)
  10.43 -  Lease dated as of September 16, 1996 for 400-1 Totten Pond Road,
           Waltham, Massachusetts.  #10#(10.2)
  10.44 -  Asset Purchase Agreement dated as of December 10, 1996 between the
           Registrant, MMT of Tennessee Inc., Westinghouse Electric
           Corporation and The Scientific Ecology Group, Inc.  #11#(10.1)
  10.45 -  Asset Purchase Agreement dated as of January 29, 1997 between MMT
           of Tennessee Inc. and VECTRA Technologies, Inc.  #12#(10.1)
z*10.46 -  Joint Venture Master Agreement dated as of October 30, 1996
           between Nichimen Corporation, NKK Plant Engineering Corporation.
* 11    -  Computation of Primary, Fully Diluted and Supplementary Net Income
           (Loss) Per Share.
  16    -  Letter re:  Change of Accountants.  #13#(A)
* 21    -  Subsidiaries of the Registrant.
* 23.1  -  Consent of Price Waterhouse LLP.
* 27    -  Financial Data Schedule.
* 99.1  -  Cautionary Statements for the Purposes of the "Safe Harbor"
           Provisions of the Private Securities Litigation Reform Act of 1995.

----------

*     Filed herewith.

+     Management contract or compensatory plan filed pursuant to item 14(c)
      of Form 10-K.
t     An unexpired order granting confidential treatment to deleted portions of
      Exhibits 10.1 and 10.9 was issued on February 9, 1993.
u     An unexpired order granting confidential treatment to deleted portions of
      Exhibit 10.26 was issued on May 11, 1994.
v     An unexpired order granting confidential treatment to deleted portions of
      Exhibit 10.29 was issued on January 6, 1995.
w     An unexpired order granting confidential treatment to deleted portions of
      Exhibits 10.33, 10.34 and 10.35 was issued on October 20, 1995.
x     An unexpired order granting confidential treatment to deleted portions of
      Exhibits 10.36 and 10.37 was issued on October 20, 1995.
y     An unexpired order granting confidential treatment to deleted portions of
      Exhibit 10.40 was issued on July 30, 1996.
z     Confidential treatment has been requested for deleted portions of
      Exhibit 10.46.

*1*   Incorporated by reference to the designated exhibit to the Registration
      Statement on Form S-1 of the Registrant (Registration No. 33-56392)
      filed on December 24, 1992.
*2*   Incorporated by reference to the designated exhibit to Amendment No. 3
      to the Registration Statement on Form S-1 of the Registrant
      (Registration No. 33-56392) filed on February 8, 1993.
*3*   Incorporated by reference to the designated exhibit to the Registration
      Statement on Form S-8 of the Registrant (Registration No. 33-65688)
      filed on July 6, 1993.



                                       42
<PAGE>   44
*4*   Incorporated by reference to the designated exhibit to Amendment No. 1
      to the Registration Statement on Form S-1 of the Registrant
      (Registration No. 33-70210) filed on November 30, 1993.
#1#   Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
#2#   Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 1993.
#3#   Incorporated by reference to the designated exhibit to the Registrant's
      Annual Report on Form 10-K for the year ended December 31, 1993.
#4#   Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
#5#   Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
#6#   Incorporated by reference to the designated exhibit to the Registrant's
      Annual Report on Form 10-K for the year ended December 31, 1994.
#7#   Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
#8#   Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
#9#   Incorporated by reference to the designated exhibit to the Registrant's
      Annual Report on Form 10-K for the year ended December 31, 1995.
#10#  Incorporated by reference to the designated exhibit to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
#11#  Incorporated by reference to the designated exhibit to the Registrant's
      Current Report on Form 8-K filed on January 3, 1997.
#12#  Incorporated by reference to the designated exhibit to the Registrant's
      Current Report on Form 8-K filed on February 13, 1997.
#13#  Incorporated by reference to the designated exhibit to the Registrant's
      Current Report on Form 8-K filed on April 3, 1997.

(d)   Financial Statements of M4

      The financial statements of M4 Environmental L.P. set forth in the list
      below are filed as part of this report on pages F-27 through F-42.

        Report of Independent Accountants
        Balance Sheet at December 31, 1996 and 1995
        Statement of Operations for the years ended December 31, 1996 and 1995
           and the period from inception (August 8, 1994) through December 31,
           1994 (unaudited)
        Statement of Changes in Partners' Capital (Deficit) for the period from
           inception (August 8, 1994) through December 31, 1996
        Statements of Cash Flows for the years ended December 31, 1996 and 1995
           and the period from inception (August 8, 1994) through December 31,
           1994 (unaudited)
        Notes to Financial Statements


                                       43
<PAGE>   45


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
behalf of the Registrant and in the capacities indicated.

                          MOLTEN METAL TECHNOLOGY, INC.


                     By:  /s/ William M. Haney, III
                        -------------------------------------
                        William M. Haney, III
                        President and Chief Executive Officer


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


/s/ William M. Haney, III                            May 27, 1997
---------------------------------
William M. Haney, III
Chairman of the Board of
Directors;
President; and Chief Executive
Officer (principal executive
officer)

/s/ Christopher J. Nagel                             May 27, 1997
---------------------------------
Christopher J. Nagel, Sc.D.
Vice President, Process Fundamentals/
Founding Scientist; and Director

/s/ Benjamin T. Downs                                May 27, 1997
---------------------------------
Benjamin T. Downs
Executive Vice President of
Finance and Administration;
Treasurer; and Chief Financial
Officer (principal financial and
accounting officer)

/s/ James B. Anderson                                May 27, 1997
---------------------------------
James B. Anderson, Director

/s/ Peter A. Lewis                                   May 27, 1997
---------------------------------
Peter A. Lewis, Director

/s/ John T. Preston                                  May 27, 1997
---------------------------------
John T. Preston, Director

/s/ Maurice F. Strong                                May 27, 1997
---------------------------------
Maurice F. Strong, Director

/s/ Robert A. Swanson                                May 27, 1997
---------------------------------
Robert A. Swanson, Director


                                       44
<PAGE>   46
                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Molten Metal Technology, Inc.



In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) and (2) on page 40 present fairly, in all
material respects, the financial position of Molten Metal Technology, Inc. and
its subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.




Price Waterhouse LLP
Boston, Massachusetts
May 23, 1997




                                      F-1

<PAGE>   47
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                     -----------------------------------
                                                                                          1996                  1995
                                                                                     -------------         -------------
<S>                                                                                  <C>                   <C>          
ASSETS

Current assets:
  Cash and cash equivalents                                                          $  19,679,104         $   6,644,856
  Short-term investments                                                               109,388,659            79,631,394
  Accounts receivable                                                                    2,573,306             1,282,915
  Unbilled accounts receivable                                                                  --               634,943
  Accounts receivable from affiliate                                                     5,525,491             7,846,987
  Unbilled accounts receivable from affiliate                                              798,980             7,565,209
  Prepaid expenses and other current assets                                              6,300,727             2,309,398
                                                                                     -------------         -------------
          Total current assets                                                         144,266,267           105,915,702

Restricted cash                                                                          2,592,925             7,432,817
Fixed assets, net                                                                      103,553,945            34,679,390
Intangible assets, net                                                                  16,363,201             3,501,680
Investment in affiliate                                                                         --               834,794
Other assets                                                                             5,968,911               971,618
                                                                                     -------------         -------------
                                                                                     $ 272,745,249         $ 153,336,001
                                                                                     =============         =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt                                                  $   1,884,486         $     195,043
  Accounts payable                                                                      19,273,058             9,827,490
  Accrued expenses                                                                       6,082,746             1,713,557
  Accrued interest                                                                       2,161,297               789,455
  Deferred revenue                                                                       1,647,472                    --
  Deferred income from affiliate                                                         4,586,870                    --
  Deferred revenue from affiliate                                                               --             4,083,334
                                                                                     -------------         -------------
          Total current liabilities                                                     35,635,929            16,608,879
                                                                                     -------------         -------------

Long-term debt                                                                         164,753,334            22,883,962
                                                                                     -------------         -------------
Due to related parties                                                                   1,385,889             1,474,586
                                                                                     -------------         -------------
Deferred income from affiliate                                                           2,437,500             2,459,918
                                                                                     -------------         -------------
Accumulated losses of affiliate in excess of investment                                  5,020,765                    --
                                                                                     -------------         -------------

Stockholders' equity:
  Preferred stock, $.01 par value, 3,000 shares authorized, no shares
     issued or outstanding                                                                      --                    --
  Common stock, $.01 par value, 100,000,000 shares authorized;
     23,643,707 shares issued and 23,603,707 outstanding at December 31, 1996
     and 22,746,854 shares issued and outstanding at December 31, 1995                     236,437               227,469
  Additional paid-in capital                                                           163,124,587           146,641,721
  Valuation allowance for short-term investments                                           (86,653)             (311,163)
  Accumulated deficit                                                                  (97,820,411)          (36,638,947)
                                                                                     -------------         -------------
                                                                                        65,453,960           109,919,080
  Less: Treasury stock, 40,000 shares at cost                                             (482,504)                   --
  Less: Deferred compensation                                                           (1,459,624)              (10,424)
                                                                                     -------------         -------------
          Total stockholders' equity                                                    63,511,832           109,908,656
                                                                                     -------------         -------------
                                                                                     $ 272,745,249         $ 153,336,001
                                                                                     =============         =============
</TABLE>



                 See notes to consolidated financial statements


                                      F-2
<PAGE>   48
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                               ------------------------------------------------------
                                                                    1996                 1995                  1994
                                                               ------------         -------------        ------------
<S>                                                            <C>                  <C>                  <C>         
Revenue:
    Research and development ("R&D")                           $  8,307,140         $ 13,613,416         $ 11,263,197
    Construction, R&D and consulting from affiliate              42,120,717           21,567,982              218,965
    Technology transfer and success fees from affiliate          13,083,333            9,000,000            2,916,667
                                                               ------------         ------------         ------------
                                                                 63,511,190           44,181,398           14,398,829
                                                               ------------         ------------         ------------
Operating expenses:
    Cost of revenue - R&D                                         8,247,081           13,699,110           10,838,198
    Cost of revenue - construction, R&D, consulting,
    technology transfer and success fees from affiliate          42,231,549           21,202,794              218,965
    R&D                                                          26,183,268           10,986,234           14,417,327
    Selling, general and administrative ("SG&A")                 18,708,514            2,877,371            7,132,256
                                                               ------------         ------------         ------------
                                                                 95,370,412           48,765,509           32,606,746
Equity income (loss) from affiliate                             (31,612,891)             834,294                   --
                                                               ------------         ------------         ------------
Loss from operations                                            (63,472,113)          (3,749,817)         (18,207,917)

Other income (expense):
    Interest income                                               8,812,303            5,559,690            4,376,403
    Interest expense                                             (6,521,654)          (1,455,084)            (737,741)
                                                               ------------         ------------         ------------
Net income (loss)                                              $(61,181,464)        $    354,789         $(14,569,255)
                                                               ============         ============         ============


Net income (loss) per share                                    $      (2.62)        $       0.01         $      (0.67)
                                                               ============         ============         ============

Weighted average common and common equivalent
 shares outstanding                                              23,313,243           24,710,423           21,904,213
                                                               ============         ============         ============
</TABLE>


                 See notes to consolidated financial statements


                                      F-3
<PAGE>   49
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                                                                 
                                                                COMMON STOCK                                                     
                                                    ---------------------------------           ADDITIONAL                       
                                                       NUMBER OF                                 PAID-IN            VALUATION    
                                                        SHARES               AMOUNT              CAPITAL            ALLOWANCE    
                                                        ------               ------              -------            ---------    
<S>                                                   <C>                <C>                  <C>                 <C>            
Balance at December 31, 1993                          21,740,927              217,409          138,679,471                  --   

Issuance of common stock                                 148,719                1,488            1,998,067                       
Issuance of stock pursuant to
    exercise of options                                  276,317                2,763              631,499                       
Compensation expense related to
    common stock option                                                                                                          
Valuation allowance for
    short-term investments                                                                                          (2,328,784)  
Net loss                                                                                                                         
                                                      ----------         ------------         ------------        ------------   
Balance at December 31, 1994                          22,165,963              221,660          141,309,037          (2,328,784)  
                                                                                                                                 
Issuance of common stock                                 139,098                1,391            3,199,056                       
Issuance of stock pursuant to
    exercise of options                                  424,793                4,248            1,785,843                       
Issuance of stock pursuant to
    employee stock purchase plan                          17,000                  170              306,850                       
Compensation expense related to
    common stock options                                                                            40,935                       
Valuation allowance for
    short-term investments                                                                                           2,017,621   
Net income                                                                                                                       
                                                      ----------         ------------         ------------        ------------   
Balance at December 31, 1995                          22,746,854              227,469          146,641,721            (311,163)  
                                                                                                                                 

Issuance of common stock in exchange
     for investment in affiliate                         352,361                3,524           11,183,938                       
Issuance of stock pursuant to
    exercise of options                                  526,630                5,266            2,951,157                       
Issuance of stock pursuant to
    employee stock purchase plan                          17,862                  178              341,521                       
Deferred compensation related to
    issuance of restricted stock                                                                 2,006,250                       
Compensation expense related to
    restricted stock and common stock options                                                                                    
Purchase of treasury stock                                                                                                       
Valuation allowance for
    short-term investments                                                                                             224,510   
Net loss                                                                                                                         
                                                      ----------         ------------         ------------        ------------   
Balance at December 31, 1996                          23,643,707         $    236,437         $163,124,587        $    (86,653)  
                                                      ==========         ============         ============        ============   
</TABLE>
                                                    
                                                    
<TABLE>
<CAPTION>
                                                                                                                     TOTAL
                                                        ACCUMULATED         TREASURY            DEFERRED          STOCKHOLDERS'
                                                          DEFICIT             STOCK           COMPENSATION           EQUITY
                                                          -------             -----           ------------           ------
<S>                                                    <C>                  <C>               <C>                 <C>         
Balance at December 31, 1993                            (22,424,481)                              (139,091)        116,333,308

Issuance of common stock                                                                                             1,999,555
Issuance of stock pursuant to
    exercise of options                                                                                                634,262
Compensation expense related to
    common stock option                                                                              66,171             66,171
Valuation allowance for
    short-term investments                                                                                          (2,328,784)
Net loss                                                (14,569,255)                                               (14,569,255)
                                                       ------------         ---------         -------------       ------------
Balance at December 31, 1994                            (36,993,736)               --               (72,920)       102,135,257

Issuance of common stock                                                                                             3,200,447
Issuance of stock pursuant to
    exercise of options                                                                                              1,790,091
Issuance of stock pursuant to
    employee stock purchase plan                                                                                       307,020
Compensation expense related to
    common stock options                                                                             62,496            103,431
Valuation allowance for
    short-term investments                                                                                           2,017,621
Net income                                                  354,789                                                    354,789
                                                       ------------         ---------         -------------       ------------
Balance at December 31, 1995                            (36,638,947)               --               (10,424)       109,908,656

Issuance of common stock in exchange
     for investment in affiliate                                                                                    11,187,462
Issuance of stock pursuant to
    exercise of options                                                                                              2,956,423
Issuance of stock pursuant to
    employee stock purchase plan                                                                                       341,699
Deferred compensation related to
    issuance of restricted stock                                                                 (2,006,250)                --
Compensation expense related to
    restricted stock and common stock options                                                       557,050            557,050
Purchase of treasury stock                                                   (482,504)                                (482,504)
Valuation allowance for
    short-term investments                                                                                             224,510
Net loss                                                (61,181,464)                                               (61,181,464)
                                                       ------------         ---------         -------------       ------------
Balance at December 31, 1996                           $(97,820,411)        $(482,504)        $  (1,459,624)      $ 63,511,832
                                                       ============         =========         =============       ============
</TABLE>


                 See notes to consolidated financial statements


                                      F-4
<PAGE>   50
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                   -----------------------------------------------
                                                                                         1996              1995            1994
                                                                                         ----              ----            ----
<S>                                                                                <C>               <C>              <C>          
Cash flows from operating activities:
 Net income (loss)                                                                 $ (61,181,464)    $    354,789     $(14,569,255)
 Adjustments to reconcile net income (loss) to net cash provided by (used in)
   operating activities (net of assets acquired from SEG):
   Depreciation and amortization                                                       6,745,580        4,874,191        3,694,839
   Equity loss (income) from affiliate                                                31,612,891         (834,294)              --
   Compensation expense related to restricted stock and common stock options             557,050          103,431           66,171
   Decrease (increase) in accounts receivable                                           (655,448)          20,339         (220,818)
   Increase in accounts receivable from affiliate                                     (5,482,145)     (15,193,231)        (218,965)
   Increase in prepaid expenses and other current assets                              (4,011,329)        (611,613)        (602,581)
   Decrease (increase) in other assets                                                  (860,409)          74,009          399,500
   Increase in accounts payable                                                        9,445,568       11,371,244          426,519
   Increase in accrued expenses                                                        4,369,189          383,112          774,900
   Increase (decrease) in accrued interest                                             1,371,842          (16,383)         733,259
   Increase (decrease) in deferred revenue from affiliate                             (4,083,334)        (499,999)       4,583,333
   Decrease in due to related parties                                                    (88,697)              --               --
   Increase in deferred income from affiliate                                          4,564,452        2,459,918               --
                                                                                   -------------     ------------     ------------
       Net cash provided by (used in) operating activities                           (17,696,254)       2,485,513       (4,933,098)
                                                                                   -------------     ------------     ------------

Cash flows from investing activities:
  Expenditures for fixed assets                                                      (55,125,535)     (21,114,446)      (7,518,420)
  Purchase of intangible assets                                                       (1,904,752)      (1,368,290)        (644,630)
  Cash paid for acquisition of SEG assets, net of cash received                      (29,434,528)              --               --
  Redemption (purchase) of short-term investments, net                               (29,532,755)      10,518,819      (18,574,339)
  Decrease (increase) in restricted cash and investments                               4,839,892        2,438,633       (9,285,850)
                                                                                   -------------     ------------     ------------
      Net cash used in investing activities                                         (111,157,678)      (9,525,284)     (36,023,239)
                                                                                   -------------     ------------     ------------

Cash flows from financing activities:
  Proceeds from issuances of common stock, net                                         3,298,122        2,097,111          634,262
  Purchase of treasury stock                                                            (482,504)              --               --
  Proceeds from issuance of long-term debt                                           143,750,000               --       21,000,000
  Debt issuance costs                                                                 (4,486,253)              --         (977,371)
  Principal repayments of long-term debt                                                (191,185)        (476,367)        (172,671)
                                                                                   -------------     ------------     ------------
      Net cash provided by financing activities                                      141,888,180        1,620,744       20,484,220
                                                                                   -------------     ------------     ------------
Increase (decrease) in cash and cash equivalents                                      13,034,248       (5,419,027)     (20,472,117)
Cash and cash equivalents at beginning of year                                         6,644,856       12,063,883       32,536,000
                                                                                   -------------     ------------     ------------
Cash and cash equivalents at end of year                                           $  19,679,104     $  6,644,856     $ 12,063,883
                                                                                   =============     ============     ============

Additional disclosure of non-cash investing and financing activities:
  Purchase of fixed assets under capital leases                                    $          --     $         --     $    453,555
                                                                                   =============     ============     ============
  Issuance of common stock in exchange for engineering services                    $          --     $  3,200,447     $  1,999,555
                                                                                   =============     ============     ============
  Issuance of common stock in exchange for investment in affiliate                 $  11,187,462     $         --     $         --
                                                                                   =============     ============     ============
  Reclass of accounts receivable from affiliate to accumulated losses
    of affiliate in excess of investment                                           $  14,569,870     $         --     $         --
                                                                                   =============     ============     ============
  In 1996, the Company acquired certain assets from The Scientific Ecology
   Group, Inc. for approximately $31 million. In conjuction with the acquisition,
    liabilities were assumed as follows:
          Fair value of assets acquired                                            $  32,927,472
          Cash paid for assets                                                       (31,280,000)
                                                                                   -------------
          Liabilities assumed                                                      $   1,647,472
                                                                                   =============

Supplemental disclosure of cash flow information:
  Interest paid                                                                    $   5,874,922     $  1,759,770     $    182,544
                                                                                   =============     ============     ============
</TABLE>


                 See notes to consolidated financial statements

                                       F-5
<PAGE>   51

                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--NATURE OF OPERATIONS AND RISKS AND UNCERTAINTIES

Molten Metal Technology, Inc. (the "Company") is an environmental technology
company engaged in the commercialization and continued development of its
proprietary processing technology, Catalytic Extraction Processing ("CEP"). The
core of CEP is a molten metal bath into which feedstocks and selected chemicals
can be introduced. The catalytic and solvent effects of the molten metal bath
causes feedstocks to break down into their constituent elements and dissolve in
the molten metal. The addition of various selected chemicals to the molten metal
bath allows feedstocks to reform and be recovered as different materials which
generally can be re-used as a raw material by the feedstock generator or can be
sold to other users.

The Company is subject to certain risks and uncertainties because of the nature
and status of its operations, including uncertainty of market acceptance and
sustained commercial operations of CEP technology, limited revenue from
unaffiliated third parties, and uncertainty of future profitability.

During the years ended December 31, 1996, 1995 and 1994, revenue from M4
Environmental L.P. ("M4") accounted for approximately 87%, 69% and 22%,
respectively, of the Company's total revenue. M4 is a joint venture between the
Company and Lockheed Martin Corporation ("LMC"). As described in Note 13, in
March 1997, the Company and LMC entered into a Letter of Intent to restructure
their relationship currently embodied in M4. Although the Company may earn
revenue in the future pursuant to the proposed new agreements with LMC, no
assurances as to the amount and timing of such revenue, if any, can be made.

The Company's results of operations have varied significantly in the past and
may continue to vary significantly in the future. The Company's results of
operations in the past have been dependent largely on revenue from M4 and the
Department of Energy ("DOE"). During 1996, the Company's cost-share contract
with the DOE reached its funding limit and no additional amounts were authorized
by the DOE. The Company's future profitability is dependent upon its ability to
commercialize successfully its CEP technology and to find alternative sources of
revenue. There can be no assurance that the Company will generate sufficient
revenue to achieve profitability.

The Company has made substantial investments in fixed and intangible assets
(Notes 4, 5 and 6). While the Company has begun initial operations at
Company-owned and operated facilities, the Company has not yet demonstrated that
a commercial CEP system, once installed and operated at a customer's location,
will process customer's feedstocks and recover commodity and specialty products
of commercial quality and in significant quantities. If the Company is unable to
operate CEP systems profitably on a sustained basis in commercial scale use, the
Company will not be able to recover its investments in such fixed and intangible
assets.

In 1996, the Company incurred a net loss of $61 million and at December 31,
1996, had an accumulated deficit of $98 million. In addition, the Company
incurred a substantial net loss for the quarter ended March 31, 1997. The
Company's current business plan indicates that the Company will require
additional financing to be used for completion of its planned capital
expenditures through the end of 1997 and to continue its research, development
and other efforts necessary to commercialize its CEP technology. Accordingly,
the Company intends to raise additional financing during 1997, and has retained
several investment banking firms to assist it in these efforts. If the Company
does not obtain additional financing during 1997, it would have a materially
adverse effect on the Company's operations.


                                      F-6
<PAGE>   52
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made for consistent presentation.

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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
more significant estimates made by management include future cash flows
associated with long-lived assets (Note 4), useful lives for depreciation and
amortization (Notes 5 and 6) and estimated losses on lease commitments (Note
16). Actual results could differ from these estimates.

Concentrations

During the year ended December 31, 1996, revenue from M4 and the DOE totaled
approximately $55,204,000 and $8,000,000, or approximately 87% and 13% of
revenue, respectively. During the year ended December 31, 1995, revenue from M4
and the DOE totaled approximately $30,568,000 and $13,162,000, or approximately
69% and 30% of revenue, respectively. During the year ended December 31, 1994,
revenue from M4 and the DOE totaled approximately $3,136,000 and $10,838,000, or
approximately 22% and 75% of revenue, respectively.

Cash Equivalents and Short-term Investments

The Company considers all investments purchased with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist of
investments in money market funds, U.S. treasury bills and high grade commercial
paper. Accordingly, these investments are subject to minimal credit and market
risk. At December 31, 1996 and 1995, all of the Company's cash equivalents are
classified as held to maturity and all costs approximate fair value.

Short-term investments consist of high grade commercial paper, U.S. government
securities and commercial bonds with original maturities of greater than three
months and mutual funds that invest in government securities. At December 31,
1996 and 1995, all of the Company's short-term investments are classified as
available-for-sale. Securities under this classification are recorded at fair
market value and unrealized gains and losses are recorded as a separate
component of stockholders' equity. The following table summarizes short-term
investments as of December 31, 1996:

<TABLE>
<CAPTION>
                                            Amortized Cost   Unrealized Gains(Losses)    Market Value
                                            --------------   ------------------------    ------------
<S>                                         <C>              <C>                        <C>         
U.S. government securities
(Maturities less than 3 years)              $  40,557,324         $    (131,571)        $ 40,425,753
Commercial paper and corporate bonds
(Maturities less than 3 years)                 68,917,988                44,918           68,962,906
                                            -------------         -------------         ------------
                                            $ 109,475,312         $     (86,653)        $109,388,659
                                            =============         =============         ============
</TABLE>


                                      F-7
<PAGE>   53
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes short-term investments as of December 31, 1995:

<TABLE>
<CAPTION>
                                           Amortized Cost     Unrealized Losses       Market Value
                                           --------------     -----------------       ------------
<S>                                        <C>                <C>                     <C>        
U.S. government securities
(Maturities less than 3 years)              $ 37,735,706         $   (214,553)        $37,521,153
Commercial paper and corporate bonds
(Maturities less than 3 years)                42,206,851              (96,610)         42,110,241
                                            ------------         ------------         -----------
                                            $ 79,942,557         $   (311,163)        $79,631,394
                                            ============         ============         ===========
</TABLE>

The proceeds from sales of available-for-sale securities during the years ended 
December 31, 1996, 1995 and 1994 were approximately $41 million, $23 million and
$2 million, respectively. Gross realized gains or losses on these sales were
immaterial.

Restricted Cash

Restricted cash includes certificates of deposit and investments in money market
funds. At December 31, 1996 and 1995, the Company's restricted cash is
classified as held-to-maturity and is recorded at cost which approximates fair
value. At December 31, 1996 and 1995, the balances in restricted cash consist of
$807,325 and $6,847,217, respectively, held in trust funds required in
connection with the issuance of tax-exempt bonds (Note 7) and $1,785,600 and
$585,600, respectively, required as security for letters of credit (Notes 6 and
7).

Revenue Recognition

Revenue to date consists of fees charged for the following; licenses,
engineering and construction of CEP systems, research and development contracts
and cost-sharing contracts with the U.S. government.

Revenue from research and development contracts and engineering and construction
services is recognized as services are rendered. Revenue earned on cost-plus
contracts is recognized as the work is performed. Revenue from license fees is
recognized when the Company becomes contractually entitled to receipt of the
fees and upon fulfillment of any significant obligations. Revenue under
cost-sharing contracts with the U.S. government is recorded as costs are
incurred and fees are earned. Payments received in excess of amounts recognized
as revenue are recorded as deferred revenue.

Accounts Receivable

Accounts receivable (other than from affiliates) consist of amounts due to the
Company under commercial and government contracts. At December 31, 1996 and
1995, the balances include $2,548,188 and $1,628,227, respectively, due from
cost-sharing arrangements with the U.S. government.

Fixed Assets

Fixed assets are stated at cost. Depreciation and amortization are provided
using the straight-line method based on estimated useful lives or, in the case
of leasehold improvements, over the lesser of the useful lives or the remaining
lease terms. Maintenance and repair expenditures are charged to expense as
incurred.


                                      F-8
<PAGE>   54
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Intangible Assets

Intangible assets include the excess of costs over acquired assets and costs
associated with obtaining patents, trademarks, licenses, permits and engineering
drawings. These costs are amortized using the straight-line method over the
estimated useful lives of the related assets or, in the case of patents,
trademarks, licenses and permits, over the shorter of the legal terms or the
estimated economic lives.

Impairment of Long-Lived Assets

The Company periodically assesses whether any events or changes in circumstances
have occurred that would indicate that the carrying amount of a long-lived asset
may not be recoverable. When such an event or change in circumstance occurs, the
Company evaluates whether the carrying amount of such asset is recoverable by
comparing the net book value of the asset to estimated future undiscounted cash
flows, excluding interest charges, attributable to such asset. If it is
determined that the carrying amount is not recoverable, the Company recognizes
an impairment loss equal to the excess of the carrying amount of the asset over
the estimated fair value of such asset.

Accounting for Stock-based Compensation

Employee stock awards under the Company's compensation plans are accounted for
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. In January 1996, the
Company adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation".

Net Income (Loss) Per Share

Net income (loss) per share is determined by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during the period. Common share equivalents consist of common stock which may be
issuable upon exercise of outstanding stock options and warrants (Notes 10, 11
and 14). Common share equivalents have been excluded from weighted average
number of common shares in loss periods since their effect is anti-dilutive. The
effect of the assumed conversion of the convertible debt (Note 7) was
anti-dilutive for the periods presented.

In February 1997, Financial Accounting Standards No. 128 "Earnings Per Share"
("FAS 128") was issued by the Financial Accounting Standards Board. FAS 128
specifies modifications to the calculation of earnings per share from that
currently used by the Company. Under FAS 128, "basic earnings per share" will be
calculated based upon the weighted average number of common shares actually
outstanding, and "diluted earnings per share" will be calculated based upon the
weighted average number of common shares outstanding and other potential common
shares (stock options, warrants and convertible debt) if they are dilutive. FAS
128 is effective for the Company's fourth quarter of 1997 and will be adopted at
that time. Had the Company determined earnings per share in accordance with FAS
128, basic earnings (loss) per share and diluted earnings (loss) per share for
1996, 1995 and 1994 would not have been materially different from the net income
(loss) per share reported by the Company.

Reclassifications

Certain reclassifications have been made to prior year balances to conform to 
the current year presentation.  The reclassifications have no effect on prior 
year operating results.


                                      F-9
<PAGE>   55
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 -- ACQUISITIONS

During December 1996, MMT of Tennessee Inc., a wholly-owned subsidiary of the
Company ("MMT Tennessee") signed a series of agreements to become the full owner
of the Quantum Catalytic Extraction Processing ("Q-CEP(TM)") facility it had
jointly owned with The Scientific Ecology Group, Inc. ("SEG") in Oak Ridge,
Tennessee (the "Q-CEP Facility") and to acquire certain assets used for handling
and processing radioactive "wet waste." SEG was a wholly-owned subsidiary of
Westinghouse Electric Corporation ("Westinghouse"). The Q-CEP Facility is
designed to process radioactive ion exchange resins from nuclear power plants.
Pursuant to those agreements, on December 10, 1996, MMT Tennessee acquired SEG's
interest in the Q-CEP Facility and certain assets of SEG and Westinghouse used
in the "wet waste" business. These assets include contracts, equipment, services
and personnel for processing radioactive waste streams at the Q-CEP Facility.

The cost to the Company of the acquisition of these assets was the purchase
price of $31 million in cash plus acquisition related costs of $280,000. The
acquisition was accounted for as a purchase and, accordingly, operating results
of this business subsequent to the date of acquisition were included in the
Company's consolidated financial statements. The excess of cost over the fair
value of the net assets acquired was allocated to goodwill and is being
amortized on a straight-line basis over a period of ten years.

The following unaudited pro forma summary combines the consolidated results of
operations of the Company and the wet waste business as if the acquisition had
occurred at the beginning of 1996 and 1995, after giving effect to certain
adjustments, including amortization of intangible assets, additional
depreciation resulting from increased basis of property and equipment acquired
and reduction in interest income resulting from the payment of the purchase
price and acquisition costs. The pro forma summary does not necessarily reflect
the results of operations as they would have been if the Company and the wet
waste business had constituted a single entity during such periods.

<TABLE>
<CAPTION>
                                       Year ended
                                       December 31,
                                       (unaudited)
                          ---------------------------------
                              1996                 1995
                          ---------------------------------
<S>                       <C>                  <C>         
Revenue                   $ 73,778,000         $ 53,228,000
Net loss                  $(62,986,000)        $ (2,382,000)
Net loss per share        $      (2.70)        $      (0.10)
</TABLE>


On January 29, 1997, MMT Tennessee acquired certain low-level radioactive waste
processing assets of VECTRA Technologies, Inc., a spent nuclear fuel and
radioactive waste services company located in San Ramon, California. MMT
Tennessee paid $3.9 million in cash for the VECTRA waste-handling assets, which
include machinery, equipment, spare parts, intellectual property and customer
contracts. The acquisition will be accounted for as a purchase. In accordance
with APB Opinion No. 16, the purchase price will be allocated to the net assets
acquired based upon their estimated fair values.

NOTE 4 -- IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with FAS 121, the Company reviews long-lived assets for potential
impairment when events or changes in circumstances indicate that an asset's
carrying value may not be recoverable.


                                      F-10
<PAGE>   56
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In October 1996, the Company announced that government funded research and
development revenues would not meet the Company's expectations and, as a result,
fourth quarter revenue and earnings would be adversely affected. In the fourth
quarter of 1996, management reassessed the focus of the Company's development
and commercialization efforts. As a result of this evaluation, the Company
implemented a restructuring to pursue opportunities in priority markets more
efficiently, to focus the Company's efforts on certain core initiatives, and to
delay certain development projects. In addition, in the fourth quarter of 1996,
the Company and LMC commenced negotiations to restructure their joint venture
relationship. These negotiations culminated in the execution of a letter of
intent, the significant terms of which are described in Note 13. As a result of
these changes in the Company's business and the significant loss for the quarter
ended December 31, 1996, management performed an assessment of the
recoverability of all of the Company's long-lived assets (including fixed assets
and intangible assets) as of December 31, 1996.

In connection with the assessment, management prepared forecasts of the expected
future cash flows related to these assets on an undiscounted basis and without
interest charges. For purposes of these forecasts, assets were grouped at the
lowest level for which there are expected to be identifiable cash flows that are
largely independent of expected cash flows related to other groups of assets.
The Company retained independent valuation experts to assist with this process.
These forecasts were developed based on assumptions developed by management
using management's best estimates of future trends and events. The Company
commenced commercial processing using CEP at its first plant in January 1997 and
has not yet demonstrated sustained commercial operations. Accordingly,
management's estimates of future cash flows are based largely on expected future
trends and events, rather than historical experience. In estimating future cash
flows, management considered a range of the amount and timing of future cash
flows and the likelihood of possible outcomes. The range and likelihood of
possible outcomes considered by management were based on assumptions regarding
various factors, including the likelihood of the CEP plants operating at the
levels required to produce such cash flows, the ranges of prices the Company is
likely to be able to charge for its services, the percentage of the market that
the Company is likely to capture, the likelihood of an emergence of a competing
technology, anticipated capital improvements, and the regulatory environment.
Considering the above assumptions, management assigned a probability percentage
to each of the estimated cash flow scenarios within the range of estimates and
computed a weighted average estimated cash flow for each grouping of assets.

For each grouping of long-lived assets, the sum of the weighted average
forecasted cash flows from management's models exceeded the carrying amount of
the Company's long-lived assets. Accordingly, the Company has not recorded any
adjustments to the carrying amount of these assets. Management's estimates of
forecasted cash flows required an evaluation of various risks and uncertainties,
including those described in Note 1. Although management has made its best
estimate of these factors based on current conditions and expected trends and
events, it is reasonably possible that changes could occur in the near term
which could adversely affect management's estimates of forecasted cash flows. If
such changes occur, asset impairment write-downs could be required in the future
and such write-downs could be material to the Company's financial statements.


                                      F-11

<PAGE>   57
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5--FIXED ASSETS

Fixed assets consist of the following:
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                 Estimated useful              ------------
                                                                  life (years)           1996                 1995
                                                                  ------------           ----                 ----
<S>                                                             <C>                <C>                   <C>        
Land and improvements                                                   --         $     460,295         $        --
Buildings                                                               30            10,210,069                  --
CEP  units                                                             5-7            21,387,294          13,834,177
Leasehold improvements                                                3-10             6,280,349           5,366,501
Furniture and equipment                                                  5            10,289,769           5,385,923
Furniture and equipment held under capital leases                        5               453,555             453,555
Machinery and equipment                                                  5             4,750,179           1,336,442
Construction in progress                                                --            64,855,097          17,769,631
                                                                                   -------------         -----------
                                                                                     118,686,607          44,146,229
Less -- Accumulated depreciation and amortization                                    (15,132,662)         (9,466,839)
                                                                                   -------------         -----------
                                                                                   $ 103,553,945         $34,679,390
                                                                                   =============         ===========
</TABLE>

Costs of the construction of certain long-term assets include capitalized
interest which is amortized over the estimated useful life of the related asset.
The Company capitalized interest costs of $701,945 and $482,149 in 1996 and
1995, respectively.

Depreciation and amortization expense for the years ended December 31, 1996,
1995 and 1994 was approximately $5,850,000, $4,555,000 and $3,362,000,
respectively. Depreciation expense relating to furniture and equipment held
under capital leases for the years ended December 31, 1996, 1995 and 1994 was
approximately $91,000, $91,000 and $45,000, respectively.

NOTE 6--INTANGIBLE ASSETS

Intangible assets consist of the following:
                                             
<TABLE>
<CAPTION>
                                               Estimated                December 31,
                                              useful life               ------------
                                                (years)             1996               1995
                                                -------             ----               ----
<S>                                           <C>              <C>                  <C>       
Patents and trademarks                           10-17         $  3,617,151         $2,480,603
Engineering drawings                               1-2              567,000             69,178
Licenses and permits                              1-10            3,873,799          1,455,589
Non-compete agreement                                5            2,768,000                 --
Goodwill                                            10            6,517,748                 --
                                                               ------------         ----------
                                                                 17,343,698          4,005,370
Less -- Accumulated amortization                                   (980,497)          (503,690)
                                                               ------------         ----------
                                                               $ 16,363,201         $3,501,680
                                                               ============         ==========
</TABLE>

During 1993, the Company was granted a recycling permit for its research,
development, testing and demonstration facility in Fall River, Massachusetts
(the "Fall River Facility"). In conjunction with obtaining this permit, the
Company obtained a $100,000 letter of credit to cover potential environmental
liability, if any, incurred upon the closure of the Fall River Facility.

During 1996, MMT Tennessee acquired a radiological license for the Q-CEP
facility in Oak Ridge, Tennessee. In conjunction with obtaining this license,
MMT Tennessee obtained a $1,400,000 letter of credit to cover the estimated
costs related to the decommissioning of the Q-CEP facility upon its closure.



                                      F-12

                                     
<PAGE>   58
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7--LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 ------------
                                                             1996             1995
                                                             ----             ----
<S>                                                     <C>               <C>          
Convertible debt                                        $ 143,750,000     $         -- 
Tax-exempt bonds                                           21,000,000       21,000,000
Loan agreements                                             1,787,334        1,827,333
Capital lease obligations, including current portion
  of $100,486 in 1996 and $155,043 in 1995 (Note 16)          100,486          251,672
                                                        -------------     ------------
                                                          166,637,820       23,079,005
Less -- Current portion                                    (1,884,486)        (195,043)
                                                        -------------     ------------
                                                        $ 164,753,334     $ 22,883,962
                                                        =============     ============
</TABLE>

Convertible Debt

In May 1996, the Company issued $143,750,000 of Convertible Subordinated Notes
Due 2006 (the "Notes"). The Notes have a term of ten years and are payable in
full on May 1, 2006. The Notes bear interest at the rate of 5.50% per year
payable semi-annually. The Notes are convertible, at the option of the holder,
into shares of the Company's common stock at an initial conversion price of
$38.75 per share. Beginning in May 1999, the Notes become redeemable at the
option of the Company at an initial redemption price of 102.75% of the
principal amount plus any accrued interest. Upon a change of control (as
defined in the indenture under which the Notes were issued) or in the event the
Company's common stock is neither listed on a U.S. national securities exchange
nor approved for trading on an established automated over-the-counter U.S.
trading market, each holder of the Notes will have the right to require the
Company to repurchase all or a portion of such holder's Notes at a price equal
to 100% of the principal amount plus any accrued interest. The Notes are
subordinated in right of payment to the Company's other existing debt.

Tax-Exempt Bonds

In 1994, the Company completed a tax-exempt bond financing in connection with
its Fall River Facility. Pursuant to the financing, the Company entered into a
loan agreement with the Massachusetts Industrial Finance Agency which issued
$21,000,000 aggregate principal amount of its Solid Waste Disposal Facility
Revenue Bonds. The bonds are payable in annual sinking fund installments
beginning in 1998 and ending in 2014 and bear interest at 8.25% per annum
payable semi-annually. The loan agreement requires compliance with certain
covenants, which include restrictions on future indebtedness and consolidations
or mergers. As of December 31, 1996, the Company had received the entire $21
million in cash for qualified expenditures.

Loan Agreements

In 1993, the Company borrowed $1,944,000 from the Town of Fall River,
Massachusetts pursuant to certain loan agreements. The loans bear interest at an
effective annual rate of 8.5%, payable in monthly or semi-annual installments.
The loans are due in August 1997 and are secured by certain equipment and a
letter of credit in the amount of $210,000.

Debt Issuance Costs

Unamortized debt issuance costs were $5,043,000 and $906,000 at December 31,
1996 and 1995, respectively. These costs are being amortized over the term of
the debt using the effective interest 


                                      F-13
<PAGE>   59
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



method.

Maturities of Long-Term Debt

The amount of long-term debt, including sinking fund installment requirements
and excluding capital lease obligations, maturing in the next five years is as
follows:

<TABLE>
<CAPTION>
<S>                         <C>       
1997                        $1,784,000
1998                           603,333
1999                           700,000
2000                           700,000
2001                           800,000
</TABLE>

Line of Credit

In 1994, the Company entered into a revolving line of credit agreement with a
bank. The agreement provides for a maximum of $1.5 million to be borrowed and
repaid upon demand. Interest accrues at the bank's prime rate plus .50% and is
payable monthly. As of December 31, 1996, the Company had not borrowed against
the line of credit.

NOTE 8--RELATED PARTY TRANSACTIONS

Technology Purchase Agreement

During 1990, the Company purchased the rights to patented technologies related
to CEP from an employee and a member of the Company's Technical Advisory Board
for $1,500,000. The purchased technology was expensed as research and
development in process and the Company recorded a corresponding liability for
$1,500,000. The amount is payable in annual payments of 25% of the Company's
pre-tax profits, as defined; however, the Company may elect to accelerate the
payments. As of December 31, 1996, $114,111 has been paid related to this
agreement.

NOTE 9--RETIREMENT SAVINGS PLAN

The Company has a retirement savings plan under Section 401(k) of the Internal
Revenue Code. This plan covers substantially all employees who meet minimum age
and service requirements and allows participants to defer a portion of their
annual compensation on a pre-tax basis. In addition, Company contributions to
the plan may be made at the discretion of the Board of Directors. No Company
contributions were authorized during the years ended December 31, 1996, 1995 and
1994.

NOTE 10--PREFERRED STOCK

Preferred stock may be issued at the discretion of the Board of Directors of the
Company (without stockholder approval) with such designations, rights and
preferences as the Board of Directors may determine from time to time. The
preferred stock may have dividend, liquidation, conversion, voting or other
rights which may be more expansive than the rights of the holders of the common
stock.

In connection with the issuance of preferred stock in 1993, the Company issued a
warrant to the placement agent to purchase up to 129,317 shares of Series C
convertible preferred stock at $3.52 per share. This warrant converted into a
warrant to purchase up to 43,105 shares of common stock at $10.56 per share upon
completion of the Company's initial public offering. This warrant expires in
January 1998.


                                      F-14
<PAGE>   60
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 -- COMMON STOCK

1989 Long Term Incentive Plan

The Company's 1989 Long Term Incentive Plan (the "1989 Plan") provides for the
granting of incentive stock options, nonqualified stock options, restricted
stock and stock appreciation rights to employees, directors and consultants of
the Company. The Plan allows for the issuance of up to 8,299,383 shares of
common stock through November 1999. The Board of Directors determines the term
of each option, the option price, the number of shares for which each option is
granted and the rate at which each option is exercisable. The exercise price of
incentive stock options shall not be less than 100% of the fair market value of
the common stock at the date of grant (110% for options granted to holders of
more than 10% of the voting stock of the Company).

In 1993 and 1996, the Board of Directors of the Company amended the Plan to
provide for the automatic grant of stock options (the "Automatic Grants") to
directors who are not officers or employees of the Company ("Non-Employee
Directors"). The Plan provides that each Automatic Grant will be made to any
Non-Employee Director who is elected or reelected to the Board of Directors,
will be for 25,000 shares of common stock, will vest over 20 quarters and will
be exercisable at the fair market value as of the date of the Automatic Grant.
Each Non-Employee Director will be eligible to receive additional Automatic
Grants upon his or her reelection to the Board of Directors once their previous
Automatic Grant has fully vested.

During 1996, the Company issued 60,000 shares of restricted common stock under
the 1989 Plan to certain of its employees These shares vest at various times
over the five year period following the grant date. Unvested shares are
restricted as to disposition and subject to forfeiture under certain
circumstances. Upon issuance of the restricted shares, unearned compensation was
charged for the market value of the shares (which totaled approximately
$2,006,000) and is being amortized ratably over the vesting period. The amount
of compensation expense recognized in 1996 was $546,626. The weighted average
grant date fair value of the shares was equal to the market price per share at
the date of grant of $33.44.

A summary of stock option activity under the Company's stock option plans for
the three years ended December 31, 1996 is as follows:

<TABLE>
<CAPTION>
                                                                       WEIGHTED AVERAGE
                                                        SHARES          EXERCISE PRICE
<S>                                                    <C>             <C>      
Outstanding, December 31, 1993                         5,338,385          $    3.17

Granted                                                  923,169              20.81
Exercised                                               (254,499)             22.39
Canceled                                                (101,162)             18.09
                                                       ---------
Outstanding,  December 31, 1994                        5,905,893               5.75

Granted                                                  591,311              25.11
Exercised                                               (424,792)             28.30
Canceled                                                (179,193)             10.08
                                                       ---------
Outstanding, December 31, 1995                         5,893,219               7.67

Granted                                                  930,664              30.37
</TABLE>


                                      F-15


<PAGE>   61
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
<S>                                                     <C>             <C>  
Exercised                                               (526,630)          31.24
Canceled                                                (252,369)          20.65
                                                       ---------
Outstanding,  December 31, 1996                        6,044,884          $10.80
                                                       =========
Exercisable,  December 31, 1996                        4,158,900          $ 5.48

Available for future grant, December 31, 1996          1,059,907
</TABLE>


The following table summarizes information about stock options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
                           Options  Outstanding                                Options  Exercisable
                                       Weighted                                            Weighted
                        Number          average          Weighted           Number          average
Range of exercise   outstanding at     remaining          average       exercisable at   exercise price
prices                 12/31/96     contractual life   exercise price      12/31/96
<S>                 <C>              <C>               <C>              <C>              <C>      
$  .03 - $  .60       1,935,519        3.8 years           $  .28          1,932,019       $     .28
$ 2.10 - $ 3.00       1,625,164        3.9 years             3.00          1,340,095            3.00
$ 6.90 - $10.58         158,602        5.2 years             9.15            119,687            8.95
$12.00 - $18.00         442,269        7.3 years            15.40            147,384           15.59
$18.25 - $27.25         954,426        6.9 years            21.82            510,043           21.50
$27.75 - $38.50         928,904        8.8 years            33.17            109,672           35.43
                      ---------                                            ---------       
                      6,044,884                                            4,158,900       
</TABLE>

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                1996           1995
                                             --------------------------
<S>                                          <C>             <C>
Expected dividend yield                              0%              0%
Expected stock price volatility                  72.99%          65.29%
Risk-free interest rate                      5.36-6.69%      5.51-7.76%
Expected option term                           5 years         5 years
</TABLE>

The weighted average fair value of options granted was $19.82 and $15.17 for
1996 and 1995, respectively.

1993 Employee Stock Purchase Plan

In 1993, the Company adopted the 1993 Employee Stock Purchase Plan (the "1993
Plan"). Under the 1993 Plan, 500,000 shares of common stock are reserved for
issuance to eligible employees at a purchase price of 85% of the lower of the
closing price at the beginning or end of the six month option period. Payment
for the shares to be purchased is made through payroll deductions, which may not
exceed 15% of an employee's base compensation. In addition, no employee may
purchase shares in any one year having a market value (determined at the
beginning of the one year option period) greater than $25,000. Pursuant to the
1993 Plan, 17,862, 17,000 and 21,818 shares were purchased during 1996, 1995 and
1994, respectively, at prices of $19.13, $18.06 and $14.45, respectively.


                                      F-16


<PAGE>   62
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The fair value of each stock purchase right under the 1993 Plan was estimated
using the Black-Scholes option pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                    1996             1995
                                                  ------------------------
<S>                                               <C>               <C>
Expected dividend yield                                  0%              0%
Expected stock price volatility                      118.8%           61.0%
Risk-free interest rate                                5.5%            5.7%
Expected option term                              6 months          1 year
</TABLE>

The weighted average fair value of the stock purchase rights granted in 1996 and
1995 was $19.06 and $9.59, respectively.

Fair Value Disclosures

Had compensation cost for the 1989 Plan and the 1993 Plan been determined in
accordance with FAS 123, the Company's net income (loss) and net income (loss)
per share would have been as follows:

<TABLE>
<CAPTION>
                                              Year ended
                                             December 31,
                                      1996                  1995
                                   ----------            ----------
<S>                               <C>                  <C>         
Net income (loss)
   As reported                    $ (61,181,000)       $    355,000
   Pro forma                      $ (66,206,000)       $ (2,188,000)

Net income (loss) per share
  As reported                     $       (2.62)       $       0.01
  Pro forma                       $       (2.84)       $      (0.10)
</TABLE>

The provisions of FAS 123 do not apply to options granted prior to January 1,
1995. Since options vest over several years and additional option grants are
expected to be made in future years, the above pro forma disclosures are not
necessarily representative of the pro forma effects of reported income for
future years.

Stock Repurchase Program

In October 1996, the Board of Directors authorized the Company to repurchase up
to 2,000,000 shares of its common stock. Under this authorization, 40,000 shares
were repurchased by the Company in 1996.

Reserved Shares

At December 31, 1996, the Company had reserved 11,835,893 shares of its common
stock for issuance under the 1989 Plan, under the 1993 Plan, upon conversion of
the Notes and upon exercise of outstanding warrants.


                                      F-17
<PAGE>   63
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 12--INCOME TAXES

Components of deferred taxes consist of the following:

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                     1996                   1995
                                                                     ----                   ----
<S>                                                              <C>                    <C>         
Assets:
Net operating loss and tax credit carryforwards                  $ 33,704,000           $ 18,235,000
Accumulated losses of affiliate in excess of investment            14,174,000                     --
Accrued expenses                                                      768,000                405,000
Deferred compensation                                                 344,000                121,000
Deferred revenue                                                    2,810,000              2,617,000
Due to related parties                                                554,000                590,000
                                                                 ------------           ------------
    Gross deferred tax asset                                       52,354,000             21,968,000
Deferred tax asset valuation allowance                            (51,517,000)           (20,972,000)
                                                                 ------------           ------------
                                                                      837,000                996,000
Liabilities:
Depreciation and amortization                                        (837,000)              (996,000)
                                                                 ------------           ------------
                                                                           --                     --
                                                                 ============           ============
</TABLE>


The Company has provided a full valuation allowance for deferred tax assets
since the realization of these future benefits cannot be reasonably assured as
of the end of each related year. The amount of the deferred tax asset considered
realizable is subject to change based on estimates of future taxable income
during the carryforward period. If the Company achieves sustained profitability,
these deferred tax assets would be available to offset future income taxes,
subject to potential limitation relating to ownership changes as discussed
below. The Company will assess the need for the valuation allowance at each
balance sheet date based on all available evidence.

At December 31, 1996, the Company had net operating loss carryforwards available
to reduce taxable income, and research and development tax credit carryforwards
available to reduce future tax liabilities, which expire as follows:

<TABLE>
<CAPTION>
                                                       Research and
     Year of               Net operating              development tax
    expiration          loss carryforwards          credit carryforwards
    ----------          ------------------          --------------------
<S>                     <C>                         <C>       
       2005                 $   349,000                 $    4,000
       2006                     103,000                     20,000
       2007                   6,288,000                    150,000
       2008                  16,569,000                    355,000
       2009                  15,123,000                    396,000
       2010                   4,275,000                    314,000
       2011                  37,906,000                    220,000
                            -----------                 ----------
                            $80,613,000                 $1,459,000
                            ===========                 ==========
</TABLE>                                 

A portion of the net operating loss carryforward totaling approximately
$24,440,000, relating to deductions for incentive stock option disqualifying
dispositions and exercises of non-qualified stock options, would be credited to
additional paid-in capital upon realization. Ownership changes, as defined in
the Internal Revenue Code, resulting from the issuances of stock may limit the
amount of net operating loss and tax credit carryforwards that can be utilized
annually to offset future taxable income or tax liability. The amount of the
annual limitation is determined based upon the Company's value 


                                      F-18
<PAGE>   64
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




immediately prior to the ownership change. Subsequent significant ownership
changes could further limit the utilization of these carryforwards in future
years.

NOTE 13 -- INVESTMENT IN JOINT VENTURE

In August 1994, the Company entered into a series of related agreements with
Martin Marietta Corporation ("MMC") to form M4 Environmental L.P. ("M4"). MMC
has since merged into Lockheed Martin Corporation ("LMC"), with LMC as the
surviving corporation. M4 was formed to commercialize CEP to service the
environmental remediation, waste management, decontamination, and
decommissioning needs of the U.S. Department of Defense and U.S. Department of
Energy (the "Market"). In December 1994, the Company and M4 entered into an
agreement to include the United States Enrichment Corporation in the Market. In
March 1996, MMT and LMC executed an agreement to expand M4 through the
acquisition by M4 of the Retech division of a subsidiary of LMC. Under the terms
of this expansion, LMC contributed certain of the assets of the Retech division
to M4. The Company purchased substantially all of the remaining assets in
exchange for 352,361 shares of its common stock, and then immediately
contributed these assets to M4.

The Company and LMC, through wholly-owned subsidiaries, each own a 49.5%
designated interest in M4 and a 50% interest in the corporation acting as the 1%
general partner. Pursuant to the agreements with LMC, as amended in March 1996,
LMC has agreed to fund M4's operations through August 1, 1999, including license
fees payable to the Company and any equity required in order to obtain project
financing for a CEP plant. However, this funding obligation is limited to $20
million in any fiscal year and $75 million over the life of M4. Also, in
connection with the agreements executed in March 1996, LMC agreed to provide M4
with a $15 million working capital line of credit.

Pursuant to the agreements with LMC, the Company granted M4 an exclusive
license, subject to certain exceptions, to use the CEP technology for the Market
and to sublicense the CEP technology to qualified third parties for use in the
Market for a period of 25 years. In 1995 and 1994, M4 paid the Company $6.5
million and $7.5 million, respectively, in license fees. Due to obligations of
the Company pursuant to the agreements with LMC, the Company recognized revenue
and income on the license fees over the two year period beginning in August
1994, the period over which those obligations were fulfilled. During 1996, 1995
and 1994, the Company recognized $4,083,000, $7,000,000 and $2,917,000,
respectively, in revenue relating to the license fees. In September 1996, the
Company, LMC and M4 entered into an agreement which expanded M4's license to
include the demilitarization of Japanese chemical weapons. In return for the
expansion of the license, the Company received a $5,000,000 license fee.
Additionally, M4 was obligated to pay the Company a $2,000,000 success fee upon
the start-up of each of the first three CEP plants developed by M4. During 1996
and 1995, the Company recognized $4,000,000 and $2,000,000, respectively, of
revenue attributable to such fees.

The Company also has agreed to provide research and development and certain
other technical services to M4 and its sublicensees and to sell certain CEP
systems and components. During 1996, 1995 and 1994, the Company recognized
revenue of approximately $42,121,000 , $21,568,000 and $219,000, respectively,
related to such services and sales, which consist of the following:

<TABLE>
<CAPTION>
                                                  1996                 1995                1994
                                                  ----                 ----                ----
<S>                                            <C>                  <C>                  <C>     
Engineering and construction services          $37,768,000          $20,265,000          $     --
Research, development and 
consulting services                              4,353,000            1,303,000           219,000
                                               -----------          -----------          --------
                                               $42,121,000          $21,568,000          $219,000
                                               ===========          ===========          ========
</TABLE>


                                      F-19
<PAGE>   65


                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




During 1996, 1995 and 1994, the Company recognized cost of revenue of
approximately $42,232,000, $21,203,000 and $219,000, relating to such services
and sales, which consists of the following:

<TABLE>
<CAPTION>
                                                           1996                1995                1994
                                                           ----                ----                ----
<S>                                                    <C>                  <C>                  <C>     
Engineering and construction services                  $38,725,000          $19,873,000          $     --
Research, development and consulting services            3,507,000            1,330,000           219,000
                                                       -----------          -----------          --------
                                                       $42,232,000          $21,203,000          $219,000
                                                       ===========          ===========          ========
</TABLE>

For items that are capitalized by M4, the portion of the gross profit
representing the Company's designated ownership interest related to such sales
has been deferred and included in cost of revenue from affiliate. The Company
will recognize the deferred income over the period the related assets are
depreciated or amortized by M4. At December 31, 1996 and 1995, approximately
$7,024,000 and $2,460,000, respectively, are recorded as deferred income
relating to such sales.

The Company accounts for its investment in M4 and the corporation acting as the
general partner using the equity method. Under the M4 limited partnership
agreement, the Company and LMC share equally in M4's revenues and other income
and all expenses are allocated to LMC until the capital accounts of the Company
and LMC are equal. Thereafter, as long as the capital accounts of the Company
and LMC are equal, the Company and LMC share equally in the profits or losses of
M4. The capital accounts became equal in the fourth quarter of 1996. Condensed
financial information of M4 at December 31, 1996 and 1995 and for the years then
ended is summarized below:

<TABLE>
<CAPTION>
                                                      1996                    1995
                                                      ----                    ----
<S>                                              <C>                     <C>         
Current assets                                   $  16,059,000           $  5,879,000
Non-current assets                                  41,740,000             41,009,000
Total liabilities                                   92,397,000             20,694,000
Partners' capital (deficit)                        (34,597,000)            26,194,000
Revenue                                             19,158,000              1,510,000
Impairment charge for long-lived assets            (60,851,000)                    --
Net loss                                          (107,049,000)           (11,993,000)
</TABLE>

Proposed Restructuring of M4

In March 1997, the Company and LMC executed a letter of intent to restructure
their relationship currently embodied in M4. The letter of intent contemplates
the following: (1) LMC would have the exclusive right to lead and pursue
contracts for the clean up of the DOE's tanked waste site in Hanford,
Washington, and the Company would provide directly to LMC certain
construction and development services with respect to CEP. (2) The Company
would have the exclusive right to lead and pursue the worldwide opportunities
for processing UF6 and LMC would have the right to participate in this market
on a case-by-case basis, subject to mutual agreement of the parties. (3) The
Company and LMC would form a new limited liability company to pursue the
processing of chemical weapons worldwide. (4) Retech would be transferred to
LMC. (5) The Company would become the sole owner of M4. After giving effect to
the restructuring, M4's principal asset would be the Technology Center in Oak
Ridge, Tennessee (the "M4 Technology Center"). The Company would be responsible
for the operation of the M4 Technology Center and would be entitled all future
revenue from such operations. The Company and LMC have agreed to share equally
the debt service of the $38 million of bonds issued by the Industrial 


                                      F-20
<PAGE>   66
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Development Board of Oak Ridge relating to the M4 Technology Center. (6) LMC
would forgive $15 million outstanding on M4's line of credit, and the Company
would contribute outstanding accounts receivable of $14.6 million to M4's
capital. This amount is included in accumulated losses of affiliate in excess of
investment at December 31, 1996. (7) LMC and the Company generally would share
equally in substantially all of the costs of the restructuring. (8) All existing
agreements between the Company, LMC and M4 would be terminated, including the
CEP license to M4. (9) LMC and the Company would establish a first offer process
pursuant to which they will jointly discuss new market opportunities within the
Market prior to pursuing them individually.

NOTE 14--COLLABORATIVE AGREEMENTS

Agreement with the Electric Power Research Institute, Inc.

In 1995, the Company entered into an agreement with the Electric Power Research
Institute, Inc. ("EPRI"), a nonprofit organization dedicated to fostering
research and development of technologies that support the electric power
industry. Pursuant to the agreement, EPRI agreed to fund certain research and
development programs and to provide marketing and financing support for future
CEP projects. In exchange for the marketing and financing support, EPRI received
a warrant to purchase up to 100,000 shares of the Company's common stock at an
exercise price of $23.375 per share. The warrant will vest in increments if, as
a result of the agreement with EPRI, the Company closes a contract for a CEP
plant for which EPRI has provided minimum levels of funding and upon customer
acceptance of such plants. The warrant expires on July 7, 2015.

Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
57 Topic 5-K, an expense is to be recorded by the Company in the amount equal to
the aggregate difference between the exercise price of the warrant and the
market price of the common stock as of the dates the warrant vests. This
expense, if any, will be recognized as the warrant vests. The Company has not
recorded any expense related to these warrants through December 31, 1996.

Collaborative Relationship with Rollins Environmental Services, Inc.

In 1991, the Company entered into a joint development and commercialization
agreement with Rollins Environmental Services, Inc. ("Rollins"). The agreement
provides that the Company will analyze the application of CEP to specific
Rollins waste streams for fees based on the hours worked by the Company.

In 1992, the agreement was superseded. Under the revised terms, Rollins agreed
to pay the Company $50,000 per month for two years beginning September 1, 1992.
In consideration for these payments, the Company provided research and
development and other services to Rollins and Rollins obtained an option to
license the Company's technology for CEP systems at any of Rollins' three waste
processing facilities existing on September 1, 1992. If Rollins decides to
license a CEP system at any of these existing facilities, Rollins will be
entitled to set off against payments due to the Company all amounts paid under
the original and amended agreements, provided that in any year, no reduction
shall exceed 25% of the amounts payable by Rollins to the Company. Such right of
set off is conditioned on the commercialization and licensing of a CEP system at
one of Rollins' three facilities existing on September 1, 1992. Revenue of
$400,000 was recognized under the revised agreement during 1994.

Development Services Agreement with Fluor Daniel Environmental Services, Inc.

In 1992, the Company entered into a Development Services Agreement with Fluor
Daniel Environmental 


                                      F-21


<PAGE>   67
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Services, Inc. ("Fluor Daniel"), an affiliate of Fluor Daniel, Inc., an
international engineering and construction firm. Under the terms of the
agreement, Fluor Daniel provided $1.2 million in feasibility studies, designs,
cost estimation and other services in support of commercial plant evaluations,
designs, front-end engineering and other services for potential CEP applications
during 1992 and 1993. During 1994, Fluor Daniel exercised its option to invest
the $1.2 million in shares of common stock, par value $.01 ("Common Stock") of
the Company at an agreed upon price of $10.56 per share. Also during 1994, Fluor
Daniel and the Company extended the agreement for up to five years. Pursuant to
this agreement, Fluor Daniel provided an additional $4 million in services to
the Company during 1994 and 1995. In consideration for such services, Fluor
Daniel received additional Common Stock of the Company at a price equal to the
average market price of the stock in the 10 trading days prior to the end of
each calendar quarter during which the services were provided. In addition,
during the term of the agreement, Fluor Daniel shall be the primary provider of
engineering, procurement, construction and implementation services for CEP
plants owned and operated by the Company and shall be entitled to receive
project fees based upon the cost of such services for specific CEP facilities
managed by Fluor Daniel. The Company will be obligated to pay Fluor Daniel 2% of
certain licensing fees and royalty payments received by the Company during the
term of the agreement as a result of the licensing of CEP technology.

During the years ended December 31, 1995 and 1994, Fluor Daniel provided
$2,542,000 and $1,158,000 respectively, in services to the Company under this
agreement. During the years ended December 31, 1995 and 1994, Fluor Daniel
received 139,098 and 148,719 shares of Common Stock of the Company,
respectively, for payment of services performed under the agreement. During
1996, all services provided by Fluor Daniel were paid for in cash by the 
Company.

Sales Representative Agreement with Am-Re Services, Inc.

Am-Re Services, Inc. ("Am-Re") has agreed to provide services to the Company
relating to obtaining environmental impairment liability insurance and project
financing for the first five commercial CEP facilities to be developed by the
Company. In exchange for providing these services, and subject to certain
vesting requirements, Am-Re Services was granted a warrant (the "Insurance
Warrant") to purchase up to 125,000 shares of common stock at $12.25 per share
and a second warrant (the "Project Finance Warrant") to purchase up to 250,000
shares of common stock (of which 200,000 shares may be purchased at $12.25 per
share and 50,000 shares at $18.37 per share). The Insurance Warrant vests
according to a schedule based upon the Company obtaining acceptable
environmental impairment insurance for the first five CEP facilities developed
by the Company. The Project Finance Warrant vests according to a schedule based
upon the Company obtaining acceptable project financing by or through Am-Re
Services for the first five CEP plants which are developed by the Company and
require project financing. The Insurance Warrant and the Project Finance Warrant
expire in 2013.

Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
57 Topic 5-K, an expense is to be recorded by the Company in the amount equal to
the aggregate difference between the exercise price of the warrants and the
market price of the common stock as of the dates the warrants vest. This
expense, if any, will be recognized over the term of the environmental
impairment insurance or project financing that causes vesting of the applicable
warrant. The Company has not recorded any expense related to these warrants
through December 31, 1996.

Collaborative Relationship with E.I. Du Pont de Nemours and Company

Pursuant to an agreement dated October 25, 1991, E.I. Du Pont de Nemours and
Company ("Du Pont") agreed to provide $1,500,000 to the Company for the design
and development of the Fall River Facility.


                                      F-22


<PAGE>   68
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




In consideration for the funding provided, Du Pont has received a right for
priority usage of the facility for the five-year period beginning in September
1993. The Company will receive consideration from Du Pont at market rates for
such priority usage. Subject to the terms of the agreement, if the Company gains
or has gained a commercial installation for a specified waste stream with a
right to receive royalties, tolling income or their equivalent by December 31,
1997, the Company will be obligated to repay the $1,500,000.

The obligation of the Company to repay Du Pont is conditioned on the
commercialization and sale of CEP systems for specified waste streams. In the
event that such CEP systems are not commercialized, the Company shall have no
obligation to repay Du Pont.

NOTE 15 - FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE

The following summary disclosures are made in accordance with the provisions of
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("FAS 107"), which requires the disclosure of
fair value information about financial instruments when it is practicable to
estimate the value.

<TABLE>
<CAPTION>
                                   December   31, 1996                December   31, 1995
                                   -------------------                -------------------
                               Carrying          Estimated          Carrying         Estimated
                                Amount           Fair Value          Amount          Fair Value
                                ------           ----------          ------          ----------
<S>                          <C>                <C>                <C>               <C>        
Assets:
Cash and cash
equivalents                  $ 19,679,104       $ 19,679,104       $ 6,644,856       $ 6,644,856
Short-term 
investments                   109,388,659        109,388,659        79,631,394        79,631,394

Liabilities:
Convertible debt              143,750,000        100,860,000                --                --
Other long-term 
debt                           22,887,820         24,032,210        23,079,005        23,079,005
</TABLE>

The following methods and assumptions were used in estimating the fair values of
financial instruments:

Cash and cash equivalents - The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their estimated fair values.

Short-term investments and convertible debt - The fair values of short-term
investments and convertible debt are based on quoted market prices.

Other long-term debt - The fair value of the remaining long-term-debt, including
current portion, approximates the carrying value at December 31, 1996 and 1995.
Rates currently available to the Company for debt with similar terms are used to
estimate fair value of existing debt.


                                      F-23


<PAGE>   69
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 16 -- COMMITMENTS AND CONTINGENCIES

Leases

The Company leases equipment and office space under noncancelable operating
leases which expire on various dates through 2005. The Company also leases
certain fixed assets under noncancelable capital leases which expire on various
dates through 1997. Future minimum payments under these leases are as follows:

<TABLE>
<CAPTION>
                                                   Operating            Capital
Year                                                 Leases             Leases
----                                                 ------             ------
<S>                                              <C>                    <C>     
1997                                             $  4,934,000           $118,000
1998                                                5,044,000                 --
1999                                                4,582,000                 --
2000                                                4,071,000                 --
2001                                                4,049,000                 --
Thereafter                                          7,267,000                 --
                                                 ------------           --------
Total minimum lease payments                     $ 29,947,000            118,000
                                                 ============
Less--Amount representing interest                                       (18,000)
                                                                        --------
Present value of minimum lease payments                                 $100,000
                                                                        ========
</TABLE>

Total rent expense under noncancelable operating leases was $2,206,000,
$1,389,000, and $1,022,000 during the years ended December 31, 1996, 1995 and
1994, respectively. In September 1996, the Company entered into a seven year
lease for additional office space in Waltham, Massachusetts that will be used
for future growth, if necessary. The lease term begins March 1, 1997 and amounts
representing future minimum payments under the lease are included above. The
Company intends to sublease this space until it is needed. Based on information
currently available to the Company, $1,300,000 was accrued as of December 31,
1996 for the excess of lease payments due during the term of the lease over
estimated sublease income. However, there are no assurances that the Company
will be able to locate subtenants for this space or enter into satisfactory
subleases under the terms assumed for purposes of estimating this accrual. It is
reasonably possible that the estimates made by management of anticipated
sublease income will change significantly in the near term and the result of any
such change could be material to future results of operations.

Litigation

In February and March 1997, purchasers of the Company's common stock filed five
purported class action suits against the Company and certain of its present and
former directors and executive officers in the United States District Court for
the District of Massachusetts. The complaints variously allege that defendants
made false and misleading statements and disseminated financial statements not
prepared in accordance with generally accepted accounting principles, in
violation of federal securities laws and state law, in order to enhance the
value of the Company's common stock and to enable the Company to issue
securities and the individual defendants to sell shares of the Company's common
stock at inflated prices. Each of the suits seeks compensatory damages for
unspecified alleged losses during the class periods, the longest of which
extends from September 26, 1995 through October 21, 1996. These actions are at
an early procedural stage. While the Company has not yet filed answers to the
complaints, the Company intends to deny liability with respect to these actions.
However, the ultimate outcome cannot be determined at present. As such, no
provision for liability from these suits has been made in the financial
statements as of December 31, 1996.


                                      F-24


<PAGE>   70
                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The Company has certain contingent liabilities resulting from other litigation
and claims incident to the ordinary course of business. Management believes that
the probable resolution of such contingencies will not materially affect the
financial condition or results of operations of the Company.

Contingent Payment Related to Purchase of Intangible Assets

Pursuant to an agreement to purchase certain intangible assets (Note 6), if the
Company constructs and operates, or licenses to a third party to construct and
operate, a coal gasification system that uses a molten metal bath as the
reaction medium, then after the first year of profitable commercial operation of
such system, the Company will pay $500,000 to the seller of the intangible
assets. Such payment will be required only if the plant is completed prior to
December 31, 1998.

NOTE 17--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Certain billings by the Company to M4 for engineering and construction, research
and development and consulting services were disputed by M4 and were not paid by
M4. The Company has investigated the circumstances of these disputes and has
determined that the Company's quarterly results of operations should be restated
for the periods ended June 30, 1996 and September 30, 1996. Revenue of $2.593
million has been reversed in the quarter ended June 30, 1996 because of a
dispute regarding the obligation underlying billings in that amount for that
quarter. Revenue of $481,000 has been reversed and a charge to bad debt expense
in the amount of $1.484 million has been recorded in the quarter ended September
30, 1996 to reflect the doubtful collection, because of an additional dispute
arising prior to the close of the Company's third quarter accounts, of billings
for $1.965 million for the third and prior quarters. The Company is not pursuing
collection of these disputed amounts. The Company intends to amend its prior
filings on Form 10-Q for the quarters ended June 30, 1996 and September 30, 1996
to reflect these adjustments. In the opinion of management, all adjustments
necessary to revise the quarterly financial statements have been recorded.
Following is a summary of the unaudited quarterly results of operations for
these quarters:

<TABLE>
<CAPTION>
                                                 Quarter Ended
As Previously Reported:               June 30, 1996      September 30, 1996
                                      -------------      ------------------
<S>                                   <C>                <C>         
Revenue                                $20,447,000          $ 15,557,000
Income (loss) from operations            1,529,000            (3,886,000)
Net income (loss)                        2,084,000            (3,308,000)
Net income (loss) per share            $      0.08          $      (0.14)
</TABLE>


<TABLE>
<CAPTION>
                                                 Quarter Ended
As Restated:                          June 30, 1996      September 30, 1996
                                      -------------      ------------------
<S>                                   <C>                <C>         
Revenue                                $ 17,854,000         $ 15,076,000
Loss from operations                     (1,064,000)          (5,851,000)
Net loss                                   (509,000)          (5,273,000)
Net loss per share                     $      (0.02)        $      (0.22)
</TABLE>



                                      F-25
<PAGE>   71
                                                                     SCHEDULE II


                 MOLTEN METAL TECHNOLOGY, INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                     BALANCE AT
                                                    BEGINNING OF                                           BALANCE AT
DESCRIPTION                                            PERIOD              ADDITIONS       DEDUCTIONS      END OF YEAR
-----------                                            ------              ---------       ----------      -----------
<S>                                                 <C>                   <C>              <C>             <C>        
December 31, 1996:
 Valuation allowance for deferred tax asset          $20,972,000          $30,545,000          $-          $51,517,000

December 31, 1995:
Valuation allowance for deferred tax asset            17,986,000            2,986,000           -           20,972,000

December 31, 1994:
Valuation allowance for deferred tax asset             9,568,000            8,418,000           -           17,986,000
</TABLE>


                                      F-26
<PAGE>   72
M4 ENVIRONMENTAL L.P.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>   73
                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners of 
M4 Environmental L.P.

In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in partners' capital (deficit) and of cash flows present
fairly, in all material respects, the financial position of M4 Environmental
L.P. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As described in Note 1, in March 1997, the Partners executed a letter of intent
to restructure their relationship currently embodied in the Partnership.
Pursuant to the terms of the letter of intent, the Partnership's Retech division
would be transferred to Lockheed Martin Corporation, and the Partnership would
become solely owned by Molten Metal Technology, Inc. After giving effect to the
restructuring, the Partnership's principal asset would be the Technology Center
(Note 4).


Price Waterhouse LLP

Boston Massachusetts
May 23, 1997
<PAGE>   74
M4 ENVIRONMENTAL L.P.
BALANCE SHEET
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                         1996             1995
<S>                                                  <C>              <C>
ASSETS
Current assets:
   Cash and cash equivalents                         $    154,542     $  5,610,000
   Accounts receivable, net of allowance for
     doubtful accounts of $95,000 in 1996               8,016,756               --
   Accounts receivable from LMC                         1,221,303               --
   Costs and earnings in excess of billings             3,447,755               --
   Inventories                                          2,165,286               --
   Prepaid expenses and other current assets              673,387          225,147
   Due from INC                                           379,884           43,887
                                                     ------------     ------------

      Total current assets                             16,058,913        5,879,034

Property, plant and equipment, net                     25,751,932       28,894,764
Technology and market rights, net                      10,083,700       12,114,286
Other intangible assets, net                            5,626,874               --
Other assets                                              277,742               --
                                                     ------------     ------------

                                                     $ 57,799,161     $ 46,888,084
                                                     ============     ============

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
   Accounts payable                                  $  7,136,598     $  4,291,224
   Accrued expenses and other current liabilities       9,589,988        1,299,146
   Due to MMT                                          21,527,000       15,103,621
   Billings in excess of costs and earnings             2,943,410               --
   Reserve for loss contracts                           1,028,154               --
   Line of credit - LMC                                10,000,000               --
                                                     ------------     ------------

      Total current liabilities                        52,225,150       20,693,991

Long-term debt                                         38,000,000               --
Due to related party                                    1,983,334               --
Other long-term liabilities                               188,095               --
                                                     ------------     ------------

                                                       92,396,579       20,693,991
                                                     ------------     ------------

Commitments and contingencies (Note 12)
                                                     ------------     ------------

Partners' capital (deficit)                           (34,597,418)      26,194,093
                                                     ------------     ------------


                                                     $ 57,799,161     $ 46,888,084
                                                     ============     ============
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements.
<PAGE>   75
M4 ENVIRONMENTAL L.P.
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   (UNAUDITED)
                                                                                   PERIOD FROM
                                                                                    INCEPTION
                                                                                    (AUGUST 8,
                                                                                      1994)
                                                        YEAR ENDED                   THROUGH
                                                        DECEMBER 31,               DECEMBER 31,
                                                   1996              1995             1994
<S>                                           <C>               <C>               <C>
Revenue                                       $  19,157,905     $   1,510,000     $          --
Cost of revenue                                  30,146,314         1,510,000                --
                                              -------------     -------------     -------------

                                                (10,988,409)               --                --
                                              -------------     -------------     -------------
Operating expenses:
   Selling, general and administrative           18,340,642         6,116,959         1,327,449
   Research and development                      12,153,077         4,346,169                --
   Depreciation and amortization                  4,733,543         1,696,341           492,172
   Impairment charge for long-lived assets       60,851,167                --                --
                                              -------------     -------------     -------------

     Loss from operations                      (107,066,838)      (12,159,469)       (1,819,621)

Interest income                                     748,052           166,426             6,757
Interest expense                                   (730,000)               --                --
                                              -------------     -------------     -------------

     Net loss                                 $(107,048,786)    $ (11,993,043)    $  (1,812,864)
                                              =============     =============     ============= 
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements.
<PAGE>   76
M4 ENVIRONMENTAL L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                 GENERAL           LIMITED
                                                 PARTNER           PARTNERS           TOTAL
<S>                                           <C>               <C>               <C>
Capital contributions (unaudited)             $      76,500     $   8,923,500     $   9,000,000

Net loss (unaudited)                                (18,129)       (1,794,735)       (1,812,864)
                                              -------------     -------------     -------------


Balance at December 31, 1994                         58,371         7,128,765         7,187,136

Capital contributions                                    --        31,000,000        31,000,000

Net loss                                           (119,930)      (11,873,113)      (11,993,043)
                                              -------------     -------------     -------------


Balance at December 31, 1995                        (61,559)       26,255,652        26,194,093

Capital contributions                                    --        30,000,000        30,000,000

Contribution of Retech net assets (Note 1)               --        16,257,275        16,257,275

Net loss                                         (1,070,488)     (105,978,298)     (107,048,786)
                                              -------------     -------------     -------------


Balance at December 31, 1996                  $  (1,132,047)    $ (33,465,371)    $ (34,597,418)
                                              =============     =============     ============= 
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements.
<PAGE>   77
M4 ENVIRONMENTAL L.P.
STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                (UNAUDITED)
                                                                                                                PERIOD FROM
                                                                                                                 INCEPTION
                                                                                                              (AUGUST 8, 1994)
                                                                                     YEAR ENDED                   THROUGH
                                                                                     DECEMBER 31,               DECEMBER 31,
                                                                                1996              1995              1994
<S>                                                                        <C>               <C>               <C>
Cash flows from operating activities:
   Net loss                                                                $(107,048,786)    $ (11,993,043)    $  (1,812,864)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation and amortization                                             4,733,543         1,696,341           492,172
     Impairment charge for long-lived assets                                  60,851,167                --                --
     Changes in assets and liabilities (net of contribution of Retech):
       Accounts receivable                                                    (3,322,815)               --                --
       Accounts receivable from LMC                                           (1,217,359)               --                --
       Costs and earnings in excess of billings                                2,702,271                --                --
       Inventories                                                              (130,225)               --                --
       Prepaid expenses and other current assets                                (425,845)         (211,444)          (13,703)
       Due from INC                                                             (331,647)          205,860          (249,747)
       Accounts payable                                                        1,989,779         4,039,661           251,563
       Accrued expenses and other current liabilities                          3,778,147         1,199,274            99,871
       Due to MMT                                                              2,877,912          (218,965)          218,965
       Billings in excess of costs and earnings                                1,161,394                --                --
       Reserve for loss contracts                                                888,810                --                --
       Other long-term liabilities                                              (188,035)               --                --
                                                                           -------------     -------------     -------------


         Net cash used in operating activities                               (33,681,689)       (5,282,316)       (1,013,743)
                                                                           -------------     -------------     -------------


Cash flows from investing activities:
   Acquisition of property, plant and equipment                              (44,172,653)      (13,639,284)         (454,657)
   Purchase of technology and market rights                                   (5,000,000)       (6,500,000)       (7,500,000)
   Payments to related party                                                    (296,093)               --                --
                                                                           -------------     -------------     -------------


         Net cash used in investing activities                               (49,468,746)      (20,139,284)       (7,954,657)
                                                                           -------------     -------------     -------------


Cash flows from financing activities:
   Proceeds from line of credit - LMC                                         10,000,000                --                --
   Proceeds from long-term debt                                               38,000,000                --                --
   Debt issuance costs                                                          (308,602)               --                --
   Proceeds from capital contributions                                        30,000,000        31,000,000         9,000,000
   Cash acquired in Retech contribution                                            3,579
                                                                           -------------     -------------     -------------


         Net cash provided by financing activities                            77,694,977        31,000,000         9,000,000
                                                                           -------------     -------------     -------------


Net increase (decrease) in cash and cash equivalents                          (5,455,458)        5,578,400            31,600

Cash and cash equivalents, beginning of period                                 5,610,000            31,600                --
                                                                           -------------     -------------     -------------


Cash and cash equivalents, end of period                                   $     154,542     $   5,610,000     $      31,600
                                                                           =============     =============     =============
</TABLE>

                     The accompanying notes are an integral
                       part of these financial statements.
<PAGE>   78
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


1.    ORGANIZATION AND NATURE OF BUSINESS

      M4 Environmental L.P. (the "Partnership"), a Delaware limited partnership,
      was formed on August 8, 1994. Lockheed Martin Corporation ("LMC") and
      Molten Metal Technology, Inc. ("MMT"), through their respective
      wholly-owned subsidiaries, each own a designated 49.5% limited partnership
      interest in the Partnership and a 50% interest in M4 Environmental
      Management Inc. ("INC"), the 1% general partner of the Partnership.
      Pursuant to the terms of the partnership agreement, the Partnership will
      terminate on July 1, 2019. The Partnership may be terminated by LMC or MMT
      in 1998 or in the event certain technological or commercial goals are not
      met, or by mutual consent of LMC and MMT.

      The Partnership was formed to commercialize catalytic extraction
      processing ("CEP") to service the environmental remediation,
      waste-management, decontamination, and decommissioning needs of the U.S.
      Department of Defense and the U.S. Department of Energy (the "Market"). In
      December 1994, the Partnership and MMT entered into an agreement to
      include feedstocks from the United States Enrichment Corporation ("USEC")
      in the Market. In September 1996, the Partnership, MMT and LMC entered
      into an agreement which expanded the Partnership's license to include the
      demilitarization of Japanese chemical weapons (Note 3). In March 1996, MMT
      and LMC executed an agreement to expand the Partnership through the
      acquisition by the Partnership of the Retech division of a subsidiary of
      LMC. Under the terms of this expansion, LMC contributed certain of the net
      assets of the Retech division to the Partnership. MMT purchased
      substantially all of the remaining assets of Retech from LMC for 352,361
      shares of its common stock, and then immediately contributed the assets to
      the Partnership.

      The core of CEP is a molten metal bath into which waste feedstocks and
      selected chemicals can be injected. The catalytic and solvent effect of
      the molten metal bath causes the waste feedstocks to break down into their
      constituent elements and dissolve in the molten metal bath. The addition
      of various selected chemicals to the molten metal bath enables the
      reconfiguration of the elements into useful raw materials. The Retech
      division designs and manufactures metallurgical equipment and waste
      processing systems that utilize a plasma technology.

      In March 1997, MMT and LMC executed a letter of intent to restructure
      their relationship currently embodied in the Partnership. The letter of
      intent contemplates the following: (1) LMC would control and pursue the
      clean up of the tanked waste site in Hanford, Washington, and MMT would
      provide directly to LMC certain construction and development services with
      respect to CEP. (2) MMT would have the exclusive right to lead and pursue
      the worldwide opportunities for processing UF6 and LMC would have the
      right to participate in this market on a case-by-case basis, subject to
      mutual agreement of the parties. (3) MMT and LMC would form a new limited
      liability company to pursue the processing of chemical weapons worldwide.
      (4) Retech would be transferred to LMC. (5) MMT would become the sole
      owner of the Partnership. After giving effect to the restructuring, the
      Partnership's principal asset would be the Technology Center (Note 4). MMT
      would be responsible for the operation of the Technology Center and would
      be entitled to all future revenue from such operations. MMT and LMC have
      agreed to share equally the debt service of the $38 million
<PAGE>   79
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


      of bonds issued by the Industrial Development Board of Oak Ridge,
      Tennessee relating to the Technology Center (Note 8). (6) LMC would
      forgive $15 million outstanding under the Partnership's line of credit,
      and MMT would contribute outstanding accounts receivable from the
      Partnership of $14,569,870 to the Partnership's capital. (7) LMC and MMT
      generally would share equally in substantially all of the costs of
      completing the restructuring. (8) All existing agreements between MMT, LMC
      and the Partnership would be terminated, including the Partnership's CEP
      license from MMT. (9) LMC and MMT would establish a first offer process
      pursuant to which they will jointly discuss new market opportunities
      within the Market prior to pursuing them individually.


2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      MANAGEMENT ESTIMATES
      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosures of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. The more significant estimates made by
      management include estimates of the costs to complete long-term contracts,
      future cash flows associated with long-lived assets (Note 4), and useful
      lives for depreciation and amortization (Notes 5 and 6). Actual results
      could differ from those estimates.

      CASH AND CASH EQUIVALENTS
      The Partnership considers all highly liquid investments that are readily
      convertible to cash or that have an original maturity of three months or
      less when purchased to be cash equivalents. Such equivalents consist
      principally of overnight repurchase agreements. The Partnership does not
      require collateral on the excess of its cash deposits or repurchase
      agreements over federal depository insurance coverage. At December 31,
      1995, the Partnership has classified its cash equivalents totaling
      $5,610,000 as available-for-sale. These investments are carried at cost
      which approximates fair value.

      REVENUE RECOGNITION, ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
      Revenue in 1995 consisted of contractual services performed primarily for
      one customer, USEC. The contract related to the demonstration by the
      Partnership of the feasibility of using CEP to treat certain of USEC's
      radioactive waste stockpiles.

      The Partnership's revenue during 1996 was primarily from the operations of
      Retech under fixed price long-term contracts. During the year ended
      December 31, 1996, revenues from two customers were $3,973,490 and
      $2,858,295, or 21% and 15% of total revenue, respectively. At December 31,
      1996, accounts receivable and costs and earnings in excess of billings due
      from these customers totaled $1,994,367 and $1,426,761, respectively.
      Accounts receivable from a third customer totaled $1,285,716 at December
      31, 1996.


                                        2
<PAGE>   80
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


      During the year ended December 31, 1996, revenue from North America,
      Europe, and Asia totaled approximately $12,589,000 (66%), $3,355,000
      (17%), and $3,214,000 (17%) of total revenue, respectively.

      Fixed price contract revenue is recognized using the
      percentage-of-completion method based on the ratio that costs incurred to
      date bear to estimated total costs at completion. Adjustments to contract
      cost estimates are made in the period in which the facts which require the
      revisions become known. When the revised estimate indicates a loss, such
      loss is provided for in its entirety currently. Costs and earnings in
      excess of billings represent costs incurred and profit to date in excess
      of amounts billed. Billings in excess of costs and earnings represent
      amounts billed in excess of revenue recognized. Revenue from other
      contracts is recognized as services are provided and billed.

      The Partnership has numerous contracts in various stages of completion.
      Such contracts require estimates to determine the appropriate cost and
      revenue recognition. Although management believes that its estimates of
      progress toward completion, contract revenue and contract costs are
      appropriate, it is reasonably possible that changes could occur in the
      near term which could materially affect management's estimates of such
      amounts.

      The Partnership sells its products and services to various governmental
      and commercial entities. Ongoing credit evaluations of customer's
      financial condition are performed and collateral is not required. The
      Partnership maintains reserves for potential credit losses and such
      losses, in the aggregate, have not exceeded management's expectations.

      INVENTORIES
      Inventories, which consist primarily of purchased components, are stated
      at the lower of cost or market, cost being determined using the first-in,
      first-out method.

      PROPERTY, PLANT AND EQUIPMENT
      Property, plant and equipment are stated at cost. For assets written down
      to estimated fair value due to impairment (Note 4), the reduced carrying
      amount becomes the new cost basis. Depreciation is calculated using the
      straight-line method over the estimated useful lives of the assets, which
      range from five to seven years. Leasehold improvements are amortized over
      the shorter of the useful life or the remaining term of the lease.
      Maintenance and repairs are charged to expense as incurred. During 1996,
      the Partnership capitalized interest of $1,578,269 related to the
      construction of a facility in Oak Ridge, Tennessee. No such amounts were
      capitalized during 1995 or 1994.

      TECHNOLOGY AND MARKET RIGHTS
      Technology and market rights relate to license fees paid to MMT and are
      recorded at cost less accumulated amortization (Note 3). For assets
      written down to estimated fair value due to impairment (Note 4), the
      reduced carrying amount becomes the new cost basis. Such rights are being
      amortized using the straight-line method over the estimated useful life of
      the rights (ten years). Such useful life is an estimate and is subject to
      change based on, among other factors, the existence or emergence of
      competing technologies and the degree of acceptance of the technology by
      the Partnership's targeted customer markets.


                                        3
<PAGE>   81
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


      INTANGIBLE ASSETS
      Intangible assets, which include intellectual property rights, a
      noncompete agreement and goodwill related to Retech, are carried at cost
      less accumulated amortization. These costs are being amortized using the
      straight-line method over the estimated useful lives of the related
      assets. Such useful life is an estimate and is subject to change based on,
      among other things, the existence or emergence of competing technologies
      and, with regard to the noncompete agreement, management's ongoing
      evaluation of the level of protection provided to the Partnership by the
      noncompete covenant.

      IMPAIRMENT OF LONG-LIVED ASSETS
      Effective January 1, 1996, the Partnership adopted Statement of Financial
      Accounting Standards No. 121 ("FAS 121"), Impairment of Long-lived Assets.
      In accordance with FAS 121, management periodically assesses whether any
      events or changes in circumstances have occurred that would indicate that
      the carrying amount of a long-lived asset may not be recoverable. When
      such an event or change in circumstance occurs, management evaluates
      whether the carrying amount of such asset is recoverable by comparing the
      net book value of the asset to estimated future undiscounted cash flows,
      excluding interest charges, attributable to such asset. If it is
      determined that the carrying amount is not recoverable, an impairment loss
      equal to the excess of the carrying amount of the asset over the estimated
      fair value of such asset is recognized.

      INCOME TAXES
      The partners are required to report their respective shares of the
      Partnership's taxable income or loss in their income tax returns and are
      liable for any related taxes thereon. Accordingly, no provision for income
      taxes is made in the financial statements of the Partnership.

      STATEMENT OF CASH FLOW INFORMATION
      Non-cash investing and financing activities include the acquisition of
      technology and market rights and property, plant and equipment from MMT,
      payable at December 31 as follows:

<TABLE>
<CAPTION>
                                                 1996           1995           1994
                                                                           (UNAUDITED)
<S>                                          <C>            <C>            <C>        
      Technology and market rights           $        --    $        --    $ 6,500,000
      Property, plant and equipment            3,545,467     15,103,621             --
</TABLE>

      Additionally, as a result of the contribution of Retech by LMC and MMT,
      the Partnership obtained assets of $22,168,044 and assumed liabilities of
      $5,910,769.

      During 1996, the Partnership paid interest of approximately $1,457,370.

      1994 FINANCIAL INFORMATION
      The 1994 financial information is unaudited; however, in the opinion of
      management, this information includes all adjustments necessary for a fair
      presentation of the results of operations for the period from inception
      (August 8, 1994) through December 31, 1994.


                                        4
<PAGE>   82
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


      RECLASSIFICATIONS
      Certain reclassifications were made to the 1995 balances in order to
      conform to the current year presentation. These reclassifications had no
      effect on the 1995 operating results.


3.    PARTNERSHIP AND RELATED AGREEMENTS

      Pursuant to the agreements between LMC and MMT, LMC agreed to fund the
      Partnership's operations through August 1, 1999, including license fees
      payable to MMT and any equity required in order to obtain project
      financing for a CEP plant. However, this funding obligation is limited to
      $20,000,000 in any fiscal year (unless otherwise agreed to by the
      Partners) and $75,000,000 over the life of the Partnership. In connection
      with the agreement executed in March 1996 to expand the Partnership, LMC
      agreed to provide the Partnership with a line of credit under which it can
      borrow up to $15 million through the earlier of April 30, 2006 or the date
      the Partnership enters into a credit facility with a third party (other
      than a project financing). Borrowings under the agreement bear interest at
      the higher of the prime rate of a bank plus 2% (10.25% at December 31,
      1996) or 2.5% above the Federal Funds Rate. At December 31, 1996,
      $10,000,000 was outstanding under the line of credit. During 1996, the
      Partnership paid LMC interest of $99,419. At December 31, 1996, accrued
      interest and other current liabilities included $86,816 of interest due to
      LMC.

      MMT has granted the Partnership an exclusive license, subject to certain
      exceptions, to use the CEP technology for the Market and to sublicense the
      CEP technology, under certain conditions, to qualified third parties for
      use in the Market. The Partnership paid MMT $14,000,000 for this license
      ($7,500,000 in 1994 and $6,500,000 in 1995). In September 1996, the
      Partnership, MMT and LMC entered into an agreement which expanded the
      Partnership's license to include the demilitarization of Japanese chemical
      weapons. In return for the expansion of the license, the Partnership paid
      a $5,000,000 license fee to MMT. At December 31, 1996 and 1995, technology
      and market rights, after the impairment charge described in Note 4,
      include $13,507,833 (less accumulated amortization of $3,424,133) and
      $14,000,000 (less accumulated amortization of $1,885,714), respectively,
      related to license payments to MMT. Additionally, the Partnership was
      obligated to pay MMT a $2,000,000 success fee upon the start-up of each of
      the first three CEP plants. During 1996 and 1995, the Partnership paid MMT
      $4,000,000 and $2,000,000, respectively, of such fees. In addition, the
      Partnership will pay MMT an ongoing royalty of 2% or 3.5% (depending on
      the market) of the Partnership's revenues from activities related to CEP,
      with the amount paid in any year not to exceed 50% of the Partnership's
      cash flow.


                                        5
<PAGE>   83
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


      All of the Partnership's obligations for the aforementioned license fees
      were guaranteed by LMC. LMC has also agreed to provide guaranties of any
      project or third party financing obtained for the development of CEP
      plants by the Partnership. In return for the guaranties, the Partnership
      will pay LMC a fee of 2% of the average amount of guaranteed debt
      outstanding. If LMC withdraws its guaranties under certain circumstances,
      as allowed by the Partnership agreement, MMT has the right to terminate
      the Partnership. At December 31, 1996, accrued expenses and other current
      liabilities includes approximately $728,000 due to LMC for guarantee fees
      related to the Industrial Development Board bonds (Notes 7 and 8).

      MMT provides, under certain conditions, research and development and
      certain other technical services to the Partnership. Amounts incurred for
      such services were approximately $42,121,000, $21,568,000 and $219,000 in
      the periods ended December 31, 1996, 1995 and 1994, respectively, and
      consist of the following:

<TABLE>
<CAPTION>
                                                                             (UNAUDITED)
                                                   1996           1995           1994
<S>                                            <C>            <C>            <C>        
      Engineering and construction services    $37,768,000    $20,265,000    $        --
      Research, development and consulting
        services                                 4,353,000      1,303,000        219,000
                                               -----------    -----------    -----------

                                               $42,121,000    $21,568,000    $   219,000
                                               ===========    ===========    ===========
</TABLE>


      Amounts incurred for research, development and consulting services are
      expensed as incurred. Amounts related to engineering and construction
      services are generally capitalized as plant and equipment.

      As described in Note 1, the net assets of the Retech division of LMC were
      contributed to the Partnership effective April 30, 1996. The net assets of
      Retech were recorded by the Partnership at their historical cost of
      $16,257,275. The results of operations of Retech are included in the
      statement of operations commencing April 30, 1996.


4.    IMPAIRMENT OF LONG-LIVED ASSETS

      In accordance with FAS 121, the Partnership reviews for impairment of
      long-lived assets when events or changes in circumstances indicate that an
      asset's carrying value may not be recoverable. Pursuant to the proposed
      restructuring of the Partnership described in Note 1, the Partnership (the
      principal asset of which would be the Technology Center - primarily CEP
      units - after giving effect to the restructuring) would become solely
      owned by MMT, and MMT would be entitled to all future revenue from the
      operations of the Technology Center. Additionally, the Partnership's CEP
      license would terminate upon the consummation of the proposed
      restructuring. As a result of these circumstances, management performed an


                                        6
<PAGE>   84
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


      assessment of the recoverability of the net book value of the assets
      related to the Partnership's Technology Center and of the technology and
      market rights related to the CEP license as of December 31, 1996 and
      determined that these assets were impaired.

      The Partnership obtained an independent appraisal to determine the
      estimated fair value of these assets. Estimated fair value of the
      Technology Center assets was determined utilizing a discounted cash flow
      technique. Estimated fair value of the technology and market rights was
      determined based on an analysis of the price paid for the rights adjusted
      by technology and market related factors to reflect changes in these items
      from the date of payment. An impairment charge of $60,851,167 was
      recognized in the 1996 statement of operations.


5.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
                                                ESTIMATED
                                               USEFUL LIFE          DECEMBER 31,
                                                 IN YEARS       1996           1995
<S>                                          <C>           <C>            <C>
      Office furnishings and equipment             5-7      $ 2,163,049    $   780,646
      Computer equipment and software                5        3,399,019      1,514,729
      CEP units                                      7        7,070,955      4,865,880
      Leasehold improvements                       5-7        3,886,740        521,161
      Construction in progress                      --       13,167,120     21,515,147
                                                            -----------    -----------
  
                                                             29,686,883     29,197,563

      Less - Accumulated depreciation                         3,934,951        302,799
                                                            -----------    -----------

                                                            $25,751,932    $28,894,764
                                                            ===========    ===========
</TABLE>

      Depreciation and amortization expense for the periods ended December 31,
      1996, 1995 and 1994 were $2,743,352, $219,228 and $25,069 (unaudited),
      respectively.


                                        7
<PAGE>   85
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


6.    INTANGIBLE ASSETS

      Intangible assets (excluding technology and market rights) consist of the
      following:

<TABLE>
<CAPTION>
                                                  ESTIMATED
                                                 USEFUL LIFE    DECEMBER 31,
                                                   IN YEARS        1996
<S>                                                   <C>       <C>
      Goodwill                                        15        $3,720,667
      Intellectual property rights                    15         1,866,667
      Noncompete agreement                             4         1,000,000
                                                                ----------

                                                                 6,587,334

      Less - Accumulated amortization                              960,460
                                                                ----------

                                                                $5,626,874
                                                                ==========
</TABLE>


7.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

      Accrued expenses and other current liabilities consist of the following:

<TABLE>
                                                                        DECEMBER 31,
                                                                   1996              1995
<S>                                                             <C>               <C>       
      Employee compensation and benefits                        $3,348,643        $1,235,140
      Due to LMC - debt guarantee fees                             728,333                --
      Other accrued expenses                                     5,513,012            64,006
                                                                ----------        ----------
                                                      
                                                                $9,589,988        $1,299,146
                                                                ==========        ==========
</TABLE>
                                                   

                                        8
<PAGE>   86
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


8.    LONG-TERM DEBT

      In January 1996, the Partnership completed a tax-exempt bond offering to
      finance 1995 and 1996 construction expenditures. Pursuant to this
      financing, the Partnership entered into a loan agreement with the
      Industrial Development Board of the City of Oak Ridge, Tennessee, which
      issued revenue bonds of $38,000,000 for the purpose of financing the
      Partnership's acquisition, construction, and equipping of a CEP facility
      in Oak Ridge, Tennessee. Borrowings are required to be repaid in 2006,
      with interest payments at variable rates due monthly beginning in February
      1996. The interest rate in effect at December 31, 1996 was 3.2%. The bonds
      are secured by a letter of credit with a bank. As of December 31, 1996, no
      drawings had been made against the letter of credit. Unamortized debt
      issuance costs were $277,742 at December 31, 1996. These costs are being
      amortized over the term of the debt using the effective interest method.


9.    RELATED PARTY TRANSACTIONS

      The corporate purpose of INC is to manage the business of the Partnership
      and, as such, to pay all liabilities on behalf of the Partnership. The
      Partnership reimburses INC for all payments made on behalf of the
      Partnership. Amounts reimbursed to INC were approximately $26,614,000,
      $19,535,000 and $1,450,000 (unaudited) in 1996, 1995, and 1994,
      respectively.

      Advance payments of $379,884 and $31,160 in 1996 and 1995, respectively,
      were made by the Partnership to INC and are included in due from INC.
      Accounts payable and accrued expenses in the accompanying balance sheet
      represent amounts payable to third party vendors, but for which the actual
      payment to such vendors will be made on behalf of the Partnership through
      INC.

      Retech leases certain facilities and office space from an employee and
      former owner under non-cancelable operating lease agreements which expire
      on September 30, 2010. Rental payments of $498,264 were made to this
      individual in 1996. In addition, an aggregate of $2,367,667 was due to
      this individual under certain non-compete and intellectual property right
      agreements at December 31, 1996 (see Note 6), of which $383,333 was
      included in accrued expenses and other current liabilities.

      Retech is engaged in certain contracts with subsidiaries of LMC. Revenue
      recognized and cost of revenue incurred under these agreements during the
      year ended December 31, 1996 was $1,262,054 and $4,380,014, respectively.
      At December 31, 1996, the balance sheet includes accounts receivable,
      costs and earnings in excess of billings, and deferred revenue related to
      these contracts of $1,221,303, $142,250, and $367,332, respectively. In
      addition, at December 31, 1996, the Partnership maintained a reserve of
      $980,043 for additional losses expected to be incurred under these
      contracts.


                                        9
<PAGE>   87
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------


10.   401(k) AND EQUITY APPRECIATION PLANS

      The Partnership and INC provide a 401(k) defined contribution retirement
      plan for substantially all full-time employees who meet minimum age and
      service requirements. Contributions, if any, are at management's
      discretion.

      In 1995, INC and the Partnership established an Equity Appreciation Plan
      (the "Plan") whereby participants are compensated for the increase in the
      fair value of a partnership unit over a specified base amount. Fair value
      is determined annually by a compensation committee designated by the
      executive committee of INC. The Plan awards units to participants which
      vest ratably over a five year period from the date of grant. All outside
      directors and employees of the Partnership, INC and any affiliate are
      eligible to participate in the Plan. The maximum number of units to be
      granted under the Plan is 600,000. A total of 202,800 units (with a base
      amount of $5.60) and 221,950 units (with a base amount of $7.50) were
      granted during 1996 and 1995, respectively. Compensation expense of
      approximately $180,000 was recognized related to this plan in 1996. No
      such expense was recognized during 1995.


11.   FINANCIAL INSTRUMENTS FAIR VALUE DISCLOSURE

      The following disclosures are made in accordance with the provisions of
      Statement of Financial Accounting Standards No. 107, "Disclosures About
      Fair Value of Financial Instruments" ("FAS 107"), which requires the
      disclosure of fair value information about financial instruments when it
      is practicable to estimate the value.

<TABLE>
<CAPTION>
                                           DECEMBER 31, 1996            DECEMBER 31, 1995
                                      --------------------------    --------------------------
                                        CARRYING      ESTIMATED       CARRYING      ESTIMATED
                                         AMOUNT       FAIR VALUE       AMOUNT       FAIR VALUE
                                      -----------    -----------    -----------    -----------
<S>                                   <C>            <C>            <C>            <C>
      Assets:
         Cash and cash equivalents    $   154,542    $   154,542    $ 5,610,000    $ 5,610,000

      Liabilities:
         Line of credit-LMC            10,000,000     10,000,000             --             --
         Long-term debt                38,000,000     38,000,000             --             --
</TABLE>

      The following methods and assumptions are used in estimating fair values
      of financial instruments:

      Cash and cash equivalents - The carrying amounts reported in the balance
      sheet for cash and cash equivalents approximate their estimated fair
      values.

      Line of credit - LMC and long-term debt - The fair value of these
      financial instruments approximates the carrying value at December 31,
      1996. Rates currently available to the Partnership for debt with similar
      terms are used to estimate the fair value of existing debt.


                                       10
<PAGE>   88
M4 ENVIRONMENTAL L.P.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AND DATA RELATING TO 1994 IS UNAUDITED)
--------------------------------------------------------------------------------

12.   COMMITMENTS AND CONTINGENCIES

      LEASES
      The Partnership and INC have noncancelable operating leases for the
      Technology Center (the site of the CEP plant), office space, and office
      equipment. Rent expense under these operating leases was $1,880,117,
      $772,167 and $84,486 (unaudited) in 1996, 1995 and 1994, respectively.
      Commitments under noncancelable operating leases with original terms in
      excess of one year are as follows:

<TABLE>
<S>                                                                  <C>        
      1997                                                           $ 1,763,997
      1998                                                             1,794,329
      1999                                                             1,757,460
      2000                                                             1,738,128
      2001                                                             1,733,358
      Thereafter                                                       7,167,059
                                                                     -----------

                                                                     $15,954,331
                                                                     ===========
</TABLE>

      LETTER OF CREDIT
      At December 31, 1996, the Partnership had outstanding to a customer an
      irrevocable letter of credit in the amount of $309,306. This letter of
      credit expired unused on April 30, 1997.

      LITIGATION
      The Partnership has certain contingent liabilities resulting from
      litigation and claims incident to the ordinary course of business.
      Management believes that the probable resolution of such contingencies
      will not materially affect the financial position or results of operations
      of the Partnership.


                                       11