USTMAN TECHNOLOGIES INC, 10KSB40, 1998-10-13

USTMAN TECHNOLOGIES INC
10KSB40, 1998-10-13
HAZARDOUS WASTE MANAGEMENT

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File Number 0-16011

USTMAN TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

CALIFORNIA 95-2873757
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)

12265 W. BAYAUD AVE #110 80228
LAKEWOOD, CO
(Address of principal (Zip Code)
executive offices)

Issuer's telephone number: (303) 986-8011

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

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO 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 Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form this 10-KSB or any amendment
thereto. [X]

State issuer's revenues for its most recent fiscal year: $5,988,000

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold on September 21, 1998 was
$17,373,163. For purposes of the foregoing calculation only, all directors and
executive officers of the registrant have been deemed affiliates.

The number of shares outstanding of the issuer's common stock, as of September
21, 1998, was 19,855,243

================================================================================

<PAGE> 2

PART I

ITEM 1. BUSINESS

(a) Business Development

USTMAN Technologies, Inc. ("USTMAN" or the "Company") was incorporated
under California law in 1947. On January 28, 1998, the shareholders changed the
previous name of the Company from Watson General Corporation ("Watson") to
USTMAN Technologies, Inc. USTMAN is engaged in statistical inventory
reconciliation leak detection for underground storage tanks and product piping.
Statistical inventory reconciliation provides owners and operators of
underground storage tank systems with compliance for monthly monitoring leak
detection requirements as well as management of fuel inventory.

Prior to May 22, 1997, Watson operated through three wholly-owned
subsidiaries in three different businesses. Watson provided statistical
inventory reconciliation leak detection through Watson Systems, Inc. Watson
provided anti-freeze recycling through Toxguard Fluid Technologies, Inc. Watson
provided removal and installation of underground storage tanks through Toxguard
Systems, Inc..

On May 22, 1997, Watson acquired all of the outstanding capital stock
of USTMAN Industries, Inc., paying NDE Environmental Corporation $5,750,000. In
connection with this acquisition, Watson obtained $7,000,000 from Sagaponack
Partners, L.P., and Sagaponack International Partners, L.P. ("Sagaponack") in
exchange for Senior Subordinated Notes issued to Sagaponack in the aggregate
principal amount of $7,000,000 which are due and payable in five years, subject
to mandatory prepayment in certain circumstances. Interest on the notes is 10%
per annum for the first year, payable quarterly, and increases by one percent
each year during the term of the notes, subject to further adjustment in
specified instances. The notes are secured by substantially all of the assets of
the Company.

Beginning with Watson's May 22, 1997, acquisition of USTMAN Industries,
Inc., Watson's statistical inventory reconciliation business was merged into the
statistical inventory reconciliation business of USTMAN Industries, Inc.

In August 1997, Toxguard Systems, Inc., filed for bankruptcy. The
bankruptcy of Toxguard Systems, Inc., did not have a material effect on the
Company.

On December 17, 1997, the Company acquired all of the outstanding
capital stock of Advanced Tank Certification, Inc. ("ATC") for an aggregate of
approximately $3.4 million in cash and stock. ATC provided leak detection,
including statistical inventory reconciliation. As part of the acquisition of
ATC, the three officers of ATC joined the Company. In connection with the
acquisition, the Company secured term and acquisition financing from BankBoston,
N.A., by which the Company obtained $3.75 million in the form of a term loan.
The ATC statistical inventory reconciliation business has been merged into the
statistical inventory reconciliation business of the Company and the assets of
ATC have been sold.

In January 1998, the Company sold Toxguard Fluid Technologies, Inc.

(b) Business of the Issuer

Principal Services and Products and their Markets. USTMAN's statistical
inventory reconciliation service is a sophisticated software program operated by
trained analysts to conduct a statistical analysis of daily liquid volumes (such
as, gasoline, diesel fuel, jet fuel) in underground storage tank systems as well
as delivery and dispensing data, among other variables, to monitor underground
storage tank systems to detect loss trends and to assist with management of fuel
inventory. In addition to providing statistical inventory reconciliation
services, the Company licenses fuel management software and sells related fuel
management products including in-tank, automatic tank gauges, wide area network
data gathering equipment and cathodic protection (a form of corrosion
protection) for underground storage tank systems.

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<PAGE> 3

USTMAN markets an automatic tank gauge system that (i) minimizes the
human element in gathering tank volume data, and (ii) further automates the
analytical process to improve data processing efficiency. This automatic tank
gauge system is marketed as Extreme Fuel Management(TM) and has the Company's
statistical inventory reconciliation service and on-line capabilities.

In addition to Extreme Fuel Management(TM), the Company markets its
regulatory compliance software, Extreme(TM). Extreme(TM) is installed at the
customer's home office and automatically gathers data and generates custom
reports for each underground storage tank system in the Extreme(TM) system.
Extreme(TM) acts as an extension of an inventory control system, transparently
interpreting and analyzing underground storage tank system inventory data with
no human intervention, then transmitting data to USTMAN for review.

As of December 22, 1998, under 10 year old federal Environmental
Protection Agency ("EPA") regulations, a majority of the nation's underground
storage tank systems will require monthly leak detection. The underground
storage tank systems not currently in compliance with monthly monitoring
requirements represent the primary growth opportunity for the Company in the
United States.

The international market for underground storage tank system monitoring
presents an opportunity for growth as some foreign governments begin to follow
the lead of the United States with respect to environmental legislation. In some
foreign markets an additional driver for underground storage tank system
monitoring exists. The Company has observed an economic interest in inventory
management that is stronger internationally than in the United States. This
economic interest in having accurate inventory information regarding petroleum
inventory drives a demand for the Company's products and services because of the
Company's ability to monitor changes in petroleum inventory.

Distribution Methods. The Company employs full time "outside" regional
sales managers and "inside" sales representatives to sell its services and
products. These employees are paid salary and commission. Additionally, the
Company has commission only arrangements with trade associations and independent
sales representatives by which groups of tank owners or operators obtain the
services and products of the Company. In some of these arrangements the
associations or representatives may provide some statistical inventory
reconciliation related service, such as, collecting data from the owners or
operators of underground storage tank systems, transmitting data to USTMAN, or
printing reports of the statistical inventory reconciliation analysis.

Competition. The company competes with other providers of statistical
inventory reconciliation services as well as other leak detection technologies.
With the exception of the largest customers (which have other considerations,
such as, compliance redundancy, economies of scale, and existing legacy of
automatic tank gauges and public relations considerations), the cost
effectiveness of regulatory compliance is the primary factor influencing sales
and competition.

Customers. The Company has more than 2,400 customers and, therefore, is
not dependent on sales to any principal customer.

Trademarks. The Company is the holder of United States Trademarks,
registration numbers 1,719,061; 1,730,019; 1,731,948; 2,163,138; and 1,790,965
which relate to the names USTMAN SIR SYSTEM, USTMAN INDUSTRIES, INC., USTMAN
INDUSTRIES, INC. & Design, EXTREME & Design, and SIRAS, respectively. In
addition the Company has rights in numerous unregistered trademarks which it
uses in interstate commerce and which are subject only to common law protection.

Governmental Regulations and Environmental Laws. Compliance with
federal, state and local regulations has not had a material effect on the
capital expenditures, operations or competitive position of the Company.
However, environmental regulations relating to leak detection for underground
storage tank systems can affect the need for the Company's services and
products.

Employees. On October 5, 1998, the Company employed a total of 54
persons, 51 of whom were full time employees.

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ITEM 2. DESCRIPTION OF PROPERTY

At June 30, 1998 the Company operated out of leased office space
located at 12265 W. Bayaud Avenue Lakewood, Colorado.

ITEM 3. LEGAL PROCEEDINGS

On October 20, 1997, the Company filed a Demand for Arbitration
pursuant to the Commercial Arbitration Rules of the American Arbitration
Association with the American Arbitration Association against Southwest
Environmental Systems, Inc. (formerly doing business as Michael E. Gibson and
EnviroQuest Southwest) claiming the breach of an agreement with a predecessor of
the Company. The Company seeks damages of $110,000 or more and its attorney
fees, costs and expenses of $100,000 or more. Southwest Environmental Systems,
Inc. (formerly doing business as Michael E. Gibson and EnviroQuest Southwest)
has counterclaimed against the Company alleging breach of the same affiliate
agreement and seeks damages of $180,000 or more and its attorney fees, costs and
expenses. The matter was heard by a three member panel of the American
Arbitration Association in July 1998. The parties are awaiting the panel's
decision.

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

No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended June 30, 1998.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has been publicly-traded since February
1998, under the symbol "USTX" on The Nasdaq SmallCap Market operated by the
National Association of Securities Dealers, Inc. The Nasdaq SmallCap Market is
one of two distinct market tiers comprising the Nasdaq Stock Market, a
highly-regulated electronic securities market utilizing a sophisticated computer
and telecommunications network. Market participants including competing market
makers--independent dealers who commit capital to stocks and compete with each
other for orders. Market participants also include electronic communications
networks--trading systems recently integrated into Nasdaq which bring additional
orders into the market. The Market structure provides visibility of orders and
allows market participants to compete for order flow. Trading is supported by a
communications network linking the market participants to quotation
dissemination, trade reporting, and other order execution systems. This market
also provides specialized automation services for screen-based negotiations,
online comparison of transactions, and a range of information services which
Nasdaq intends to be tailored to the needs of the securities industry,
investors, and issuers.

The average trading prices for the Company's common stock as provided
by Nasdaq's online services are provided in the table below. These prices do not
include allowances for retail markup or markdown, commissions, or other
transaction costs and, therefore, do not represent actual transactions.

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<TABLE>
<CAPTION>
QUARTER ENDING-- 6/30/98 3/31/98 12/31/97 9/30/97

<S> <C> <C> <C> <C>
HIGH SALE PRICE $2-9/16 $2-13/16 $1-5/16 $1-15/16

LOW SALE PRICE $1-1/2 $1-1/4 $1-1/8 $0-15/16
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDING-- 6/30/97 3/31/97 12/31/96 9/30/96
<S> <C> <C> <C> <C>
HIGH SALE PRICE $2-1/8 $2-1/8 $2-5/16 $2-3/8

LOW SALE PRICE $1-5/16 $0-7/8 $0-7/8 $1-1/2
</TABLE>

As of October 9, 1998, there were approximately 400 record holders of
the Company's Common Stock. This number does not include shareholders who
maintain their security positions with their security broker in street name.

The Company has never declared a cash dividend on its Common Stock.

ITEM 6. MANAGEMENT'S DISCUSSION OF ANALYSIS OR PLAN OF OPERATION

The Company's operating results for the year ended June 30, 1998
included significant costs related to the restructuring and consolidation of the
Watson, Ustman Industries, Inc., and ATC organizations and the financing related
to those transactions.

The Company reported a net loss of $5,944,000 for the twelve months
ended June 30, 1998 compared to $1,979,000 for the nine months ended June 30,
1997. This increase in net loss is due partially to the cost of moving and
consolidating the operations of Watson General Corporation, Watson Systems,
Inc., and ATC, to Lakewood, Colorado. These expenses totaled $736,000 as of June
30, 1998.

The BankBoston loan which the Company used to facilitate the ATC
acquisition, to pay existing debt, and for working capital purposes bears
interest at the BankBoston Base Rate plus 2-1/2% (11% at June 30, 1998).
Repayment of the loan began March 31, 1998 and continues in quarterly
installments until December 31, 2000 when the remaining principal is due. The
bank loan is secured by substantially all of the assets of the Company. The
agreement contains financial covenants as well as restrictive covenants and
other obligations of the Company. If the Company fails to meet the covenants,
the unpaid principal and accrued interest will become immediately due. The
Company received a waiver from the bank for covenant violations at June 30,
1998. In October 1998, the Company and BankBoston agreed to amend the terms of
the agreement and reduced the covenant requirements for the upcoming three
quarters beginning on September 30, 1998. Management believes the Company's
operations for the fiscal year 1999 will be sufficient to enable the Company to
be in compliance with the amended covenants for all periods of fiscal year 1999.
The agreement with BankBoston provides that additional financing of up to $2.25
million can be made available to the Company for future acquisitions.

The Company's amortization and depreciation expenses increased to
$1,149,000 in the 1998 fiscal year, up 220% from the year before. This increase
is primarily due to expensing a full year of goodwill and proprietary software
resulting from the USTMAN acquisition and deferred debt costs from the Senior
Subordinated Notes. The Company also experienced an increase in interest expense
of 1,784% due to interest incurred on the Senior Subordinated Notes for an
entire year along with approximately $1.6 million in interest expense as a
result of failure to meet specific projections provided by the Company to
investors (additional interest is payable in the form of warrants to investors)
and interest on the $3.75 million BankBoston debt incurred in December 1997.

Net sales for the twelve months ended June 30, 1998 were $5,988,000 an
increase from $2,325,000 for the nine months ended June 30, 1997. The increase
in revenues is partially attributable to the presentation of twelve months in
the current year as opposed to nine months in the prior year. Additionally, the
increase is due to the inclusion of twelve months of USTMAN revenue and six
months of ATC revenue in the current year total revenue. There were no material
price increases during the year.

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<PAGE> 6

Although the Company's gross margin decreased in the current fiscal
year, this is due to $506,000 of amortization of proprietary software being
included in cost of sales. This amortization relates to USTMAN software acquired
in May 1997. Management does not expect any extraordinary amortization in
subsequent years.

During the 1998 fiscal year, the Company issued warrants for 200,000
shares exercisable at $1.50 per share through March 1998. In March 1998, these
options were modified to extend the exercise period through March 16, 1999 and
to increase the exercise price to $1.75. As a result, the Company recognized
expense of $222,000 representing the fair market value of these options at the
time of the modification.

Selling, general and administrative expenses increased to $6,247,000 in
the fiscal year ended June 30, 1998 compared to $2,912,000 for the fiscal year
ended June 30, 1997. The increase is in large part due to the twelve month
presentation in the current year as opposed to the nine month presentation in
the prior year. Additionally, general and administrative expenses increased
because of the depreciation, amortization and option expenses discussed above.
For the 1999 fiscal year, management expects general and administrative expenses
to stabilize at a lower level than experienced in the 1998 fiscal year as a
result of streamlining operations.

The Company's sales depend in part upon decisions of customers as to
when to implement measures to meet compliance requirements and to more
aggressively attempt to manage liquid petroleum inventory.

Liquidity and Capital Resources

The Company effectively financed its net cash used in operating
activities for the fiscal year by increasing debt.

At June 30, 1998 the Company's current liabilities exceeded current
assets by $636,000 compared to a deficit of current assets over current
liabilities of $119,000 at June 30, 1997. The Company's business does not
require material ongoing capital expenditures.

The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems. The
Company has established processes for evaluating and managing the risk and costs
associated with this problem. The cost of achieving Year 2000 compliance is
estimated to be approximately $50,000 over the cost of normal software upgrades
and replacements and will be incurred through fiscal 1999. The Company
anticipates Year 2000 issues will be satisfactorily resolved by December 1999.

Except for historical information contained herein, the statements in
this report are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause actual results in future periods to differ materially from
forecasted results. These risks and uncertainties include among other things,
product demand, customers' strategies regarding the December 22, 1998 EPA
compliance requirements, and market competition.

ITEM 7. FINANCIAL STATEMENTS

The financial statements are attached as an exhibit to this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.

Not applicable

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<PAGE> 7

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

BOARD OF DIRECTORS

BARRY S. ROSENSTEIN, 39, has served as Co-Chairman of the Board since May 1997.
Mr. Rosenstein is a Managing Partner of Sagaponack Partners, L.P. and Sagaponack
International Partners, L.P. From 1991 to 1996 Mr. Rosenstein served as a
General Partner of Genesis Merchant Group Securities and served as the head of
its Investment/Merchant Banking Group. Mr. Rosenstein is currently a director of
Venture Stores, Inc., PDS Associates, and Marisa Christina, Inc.

MARC A. WEISMAN, 45, has served as Co-Chairman of the Board since May 1997. Mr.
Weisman is a Managing Partner of Sagaponack Partners, L.P. and Sagaponack
International Partners, L.P. From January 1996 to August 1996, Mr. Weisman
served as Director in the Principal Transactions Group at CS First Boston where
he ran the High Yield Real Estate Finance Division. From 1988 to 1996, Mr.
Weisman was Chief Financial Officer and Executive Vice President of the Adco
Group, a privately held real estate and financial services company. Mr. Weisman
is currently a director of the following private companies: Product Resources,
Inc., Superior Bank SFB, Tuneup Holding, Inc., and Hydrologic, Inc.

DAN R. COOK, 48, has served as a Director and the President of the Company since
May 1997.

RONALD G. CRANE, 52, has served as a Director of the Company since 1973.

DONALD W. PHILLIPS, 50, has served as a Director of the Company since May 1997.
Mr. Phillips is the President and CEO of Forstmam-Leff International, Inc., a
Refco Group, Ltd. Company. From 1990 to 1997, Mr. Phillips was Chairman of
Equity Institutional Investors. Mr. Phillips is a Director of several
manufacturing and investment companies.

EXECUTIVE OFFICERS

Dan R. Cook, 48, President, Chief Executive and Member of the Board since May
1997.

David Booth, 58, Vice President, General Counsel and Chief Financial Officer
since December 1997.

Erica Bengtson, 50, Chief Operating Officer since December 1997.

James B. Grant, 49, Vice President, Corporate Development since December 1997.

(Ms. Bengtson and Mr. Booth are married to one another.)

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation
provided to the Company's executive officers. Fiscal year 1998 was Mr. Cook's
first full year of employment with the Company. Mr. Booth, Ms. Bengtson, and Mr.
Grant did not become employed by the Company until December 1997.

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<TABLE>
<CAPTION>
NAME AND PRINCIPAL FISCAL SALARY ALL OTHER
POSITION YEAR COMPENSATION
<S> <C> <C> <C>
Dan R. Cook 1998 130,000 None
President and CEO

David Booth 1998 90,000 None
Vice President, General
Counsel and CFO

Erica Bengtson 1998 90,000 None
Chief Operating Officer

James B. Grant 1998 90,000 10,601 (Production Bonus)
</TABLE>

On May 22, 1997 the Company began paying $25,000 per quarter, a portion
of which is accrued as of June 30, 1998, to Sagaponack Management Company, Inc.,
as compensation for the Board of Director fees of Barry Rosenstein and Marc
Weisman.

On May 22, 1997 the Company began to pay Don Phillips Board of
Directors fees of $1,667, along with reasonable expenses, for physical
attendance per Board of Directors meeting, plus $5,000 annually. In addition the
Company has represented that it will issue to Don Phillips shares of common
stock of the Company equal to one tenth of one percent of the outstanding stock
of the Company at the conclusion of each year of service on the Board of
Directors.

On May 22, 1997 the Company began to pay Ronald G. Crane Board of
Directors fees of $1,667, along with reasonable expenses, for physical
attendance per Board of Directors meeting, plus $5,000 annually. In addition the
Company has represented that it will issue to Ronald G. Crane shares of common
stock of the Company equal to one tenth of one percent of the outstanding stock
of the Company at the conclusion of each year of service on the Board of
Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of September 21, 1998 of persons (other
than officers or directors of the Company) known to the Company to own more than
5% of the Company's outstanding Common Stock.

<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned Outstanding Shares
- ---- ------------------ ------------------
<S> <C> <C>
Sagaponack Partners, L.P. 7,337,853(1) 37.0%
170 Columbus Ave., 5th Floor
San Francisco, CA 94133

Charles A. Watson 1,045,000 5.3%
5166 Soledad Road
San Diego, CA 92109
</TABLE>

(1) Does not include 2,625,432 warrants to purchase shares of Common Stock which
are exercisable at the times and prices, and to the extent, that other options
and warrants of the Company are exercised after May 22, 1997 in order to
maintain Sagaponack Partners, L.P.'s proportionate ownership of the outstanding
Common Stock of the Company.

8
<PAGE> 9

The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of September 18, 1998 of (i) each
director, (ii) the chief executive officer of the Company named in the Summary
Compensation Table appearing in Item 10, and (iii) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned Outstanding Shares
- ---- ------------------ ------------------
<S> <C> <C>
Ronald G. Crane 1,121,500(1) 6%
12265 W. Bayaud Ave, #110
Lakewood, CO 80228

Dan R. Cook 600,000(2) 1%
12265 W. Bayaud Ave., #110
Lakewood, CO 80228

Barry S. Rosenstein 7,337,853(3) 37.00%
170 Columbus Ave., 5th Floor.
San Francisco, CA 94133

Marc A. Weisman 0 0.00%
645 Fifth Ave., 8th Floor
New York, NY 10022

Donald W. Phillips 0 0.00%
111 W. Jackson Blvd., Ste 1800
Chicago, IL 60604

All executive officers and directors
as a group (3 persons) 805,194(4) 4.00%
</TABLE>

(1) Includes options granted by the Company to purchase up to 700,000 shares of
common stock. The options are fully vested and expire April 3, 2002. The options
are exercisable at $1.53 per share.

(2) Includes options granted by the Company to purchase up to 600,000 shares of
common stock. The options vest as to 150,000 on each of April 30, 1998, 1999,
2000, 2001 and expire three years from vesting. All options are exercisable at
$1.00 per share.

(3) Includes 7,337,853 shares of Common Stock owned by Sagaponack Partners, L.P.
which are indirectly beneficially owned by Mr. Rosenstein as the managing member
of RSP Capital, L.L.C. which is the general partner of Sagaponack Partners, L.P.
Does not include 2,625,432 warrants to purchase shares of Common Stock which are
exercisable at the times and prices, and to the extent, that other options and
warrants of the Company are exercised after May 22, 1997 in order to maintain
Sagaponack Partners, L.P.'s 40% ownership of the outstanding Common Stock of the
Company. Mr. Rosenstein indirectly beneficially owns these warrants as the
managing member of RSP Capital, L.L.C. that is the general partner of Sagaponack
Partners, L.P.

(4) Includes options granted by the Company to purchase up to 350,000 shares of
common stock. The options are fully vested and expire April 3, 2002. The options
are exercisable at $1.53 per share.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In consideration of the purchase by Sagaponack of the Senior
Subordinated Notes, the Company issued to Sagaponack Partners, L.P., 7,304,520
shares of the Company's Common Stock, which represented in the aggregate 40% of
the issued and outstanding shares of the Company's Common Stock immediately
after

<PAGE> 10

issuance of the Common Stock. Warrants were issued to Sagaponack Partners, L.P.,
to purchase shares of Common Stock in an amount sufficient, upon the exercise of
any outstanding options and warrants, for Sagaponack Partners, L.P., to maintain
40% ownership of the outstanding Common Stock of the Company. Such warrants will
be at the same price and on the same terms as the options or warrants exercised
by third parties.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

3.1 Certificate of Amendment of Articles of Incorporation dated
February 14, 1991 is incorporated herein by reference to Form
10-K for fiscal year 1991.

3.2.1 The Articles of Incorporation and bylaws are incorporated
herein by reference to Form 10-Q for the quarter ended March
31, 1989.

3.2.2 Certificate of Amendment of Articles of Incorporation dated
February 3, 1998 is Incorporated herein by reference to
Form 10-Q for the quarter ended March 31, 1998.

10.1 The non-statutory stock option agreement between the Company
and Ronald G. Crane is an informal plan adopted by the Board
of Directors in July 1992. A description of this plan is
incorporated herein by reference to the information contained
in Item 11 of this report.

10.2 Watson General Corporation Retirement Plan is incorporated
herein by reference to the Company's Form 10-K for fiscal year
1992.

10.3 Modified stock option agreement dated January 4, 1994 between
the Company, on the one hand, and Ronald G. Crane, Joseph L.
Christoffel, and William R. Kughn on the other hand is
incorporated herein by reference to the Company's Form
10-KSB/A2 for fiscal year 1993.

10.5 Settlement agreement and release agreement dated April 5, 1996
between the Company and Frances Marencik a former shareholder
of EnviroQuest Technologies, Ltd. is incorporated herein by
reference to the Company's Current Form 8-K/A filed on April
15, 1996.

10.6 Settlement agreement and release agreement dated July 29, 1996
between the Company and John Marencik a former shareholder of
EnviroQuest Technologies, Ltd. is incorporated herein by
reference to the Company's Current Form 8-K filed on August
12, 1996.

10.7 Stock Option agreement dated April 3, 1997 between the Company
and Ronald G. Crane is incorporated herein by reference to the
Company's Form 10-K for fiscal year 1997.

10.9 Stock Option agreement dated May 22, 1997 between the Company
and Dan R. Cook is incorporated herein by reference to the
Company's Form 10-K for fiscal year 1997.

10.10 Employment agreement dated May 22, 1997 between the Company
and Dan R. Cook is incorporated herein by reference to the
Company's Form 10-K for fiscal year 1997.

10.13 Stock purchase agreement dated May 22, 1997 between the
Company and NDE Environmental Corporation for the purchase of
the common stock of USTMAN Industries is incorporated herein
by reference to the Company's Current Form 8-K filed on June
6, 1997.

10.14 Securities purchase agreement dated May 22, 1997 between the
Company and Sagaponack Partners, L.P. and Sagaponack
International Partners, L.P. is incorporated herein by
reference to the Company's Current Form 8-K filed on June 6,
1997.

10.15 Warrant agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. is incorporated herein by reference
to the Company's Current Form 8-K filed on June 6, 1997.

10
<PAGE> 11

10.16 Stock pledge agreement dated May 22, 1997 between the Company
and Sagaponack Partners, L.P. and Sagaponack International
Partners, L.P. is incorporated herein by reference to the
Company's Current Form 8-K filed on June 6, 1997.

10.17 Security agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International
Partners, L.P. is incorporated herein by reference to the
Company's Current Form 8-K filed on June 6, 1997.

10.18 Financial advisory agreement dated May 22, 1997 between the
Company and Sagaponack Management Company is incorporated
herein by reference to the Company's Current Form 8-K filed on
June 6, 1997.

10.19 Company agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. and Sagaponack International
Partners, L.P. is incorporated herein by reference to the
Company's Current Form 8-K filed on June 6, 1997.

10.20 Shareholder agreement dated May 22, 1997 between Sagaponack
Partners, L.P. ,Sagaponack International Partners, L.P. and
certain shareholders of the Company is incorporated herein by
reference to the Company's Current Form 8-K filed on June 6,
1997.

10.21 Primary Stock Purchase Agreement dated December 17, 1997
between the Company and Erica Bengtson Grant and James B.
Grant, is incorporated herein by reference to the Company's
Current Form 8-K filed on December 30, 1997.

10.22 Contingent Stock Purchase Agreement dated December 17, 1997
between the Company and Environmental Systems Corporation is
incorporated herein by reference to the Company's Current Form
8-K filed on December 30, 1997.

10.23 Term Loan and Acquisition Line Agreement dated December 16,
1997 between the Company and BankBoston, N.A. is incorporated
herein by reference to the Company's Current Form 8-K filed on
December 30, 1997.

10.24 Stock Pledge Agreement dated December 16, 1997 between the
Company and BankBoston, N.A. is incorporated herein by
reference to the Company's Current Form 8-K filed on December
30, 1997.

10.25 Security Agreement dated December 16, 1997 between the Company
and BankBoston, N.A. is incorporated herein by reference to
the Company's Current Form 8-K filed on December 30, 1997.

10.26 Intercreditor and Subordination Agreement dated December 16,
1997 between the Company and BankBoston, N.A. is incorporated
herein by reference to the Company's Current Form 8-K filed on
December 30, 1997.

10.27 Employment Agreement dated December 18, 1997 between the
Company and Erica Bengtson, including the Stock Option
Agreement, is incorporated herein by reference to the
Company's Form 10-Q for the quarter ending December 31, 1997.

10.28 Employment Agreement dated December 18, 1997 between the
Company and James B. Grant, including the Stock Option
Agreement, is incorporated herein by reference to the
Company's Form 10-Q for the quarter ending December 31, 1997.

10.29 Employment Agreement dated December 18, 1997 between the
Company and David Booth, including the Stock Option
Agreement, is incorporated herein by reference to the
Company's Form 10-Q for the quarter ending December 31, 1997.

10.30 Stock Option Agreement dated January 16, 1998.

21.0 Subsidiaries of Registrant

A-Accurate Moving, Inc. California Inactive
EnvirAlert, Inc. Delaware Inactive
Three Generations Moving, Inc. California Inactive
Watson Systems, Inc. Missouri Inactive
Watson Value Assets, LLC California Inactive
Advanced Tank Certification, Inc. Tennessee Inactive

23.0 Consent of Independent Auditors

27.0 Financial Data Schedule

(B) DURING THE REGISTRANT'S QUARTER ENDED JUNE 30, 1998, THE REGISTRANT
FILED THE FOLLOWING CURRENT REPORTS ON FORM 8-K: None.

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

USTMAN TECHNOLOGIES, INC.

By: /s/ Dan R. Cook, October 9, 1998
------------------------------------
Dan R. Cook, President, Chief Executive
Officer and Director

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

<PAGE> 12

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Barry S. Rosenstein Co-Chairman of Board of Directors, October 9, 1998
- ------------------------------------
(Barry S. Rosenstein)

/s/ Marc A. Weisman Co-Chairman of Board of Directors, October 9, 1998
- ------------------------------------
(Marc A. Weisman)

/s/ Dan R. Cook President, Chief Executive Officer,
- ------------------------------------ and Director October 9, 1998
(Dan R. Cook)

/s/ Ronald G. Crane Director October 9, 1998
- ------------------------------------
(Ronald G. Crane)

/s/ Donald W. Phillips Director October 9, 1998
- ------------------------------------
(Donald W. Phillips)

/s/ David Booth Vice President and Chief
- ------------------------------------ Financial Officer October 9, 1998
(David Booth)

/s/ Erica Bengtson Chief Operating Officer October 9, 1998
- ------------------------------------
(Erica Bengtson)
</TABLE>

12
<PAGE> 13

INDEX TO EXHIBITS

3.1 Certificate of Amendment of Articles of Incorporation dated
February 14, 1991 is incorporated herein by reference to Form
10-K for fiscal year 1991.

3.2.1 The Articles of Incorporation and bylaws are incorporated
herein by reference to Form 10-Q for the quarter ended March
31, 1989.

3.2.2 Certificate of Amendment of Articles of Incorporation dated
February 3, 1998 is Incorporated herein by reference to
Form 10-Q for the quarter ended March 31, 1998.

10.2 Watson General Corporation Retirement Plan is incorporated
herein by reference to the Company's Form 10-K for fiscal year
1992.

10.7 Stock Option agreement dated April 3, 1997 between the Company
and Ronald G. Crane.

10.9 Stock Option agreement dated May 22, 1997 between the Company
and Dan R. Cook

10.10 Employment agreement dated May 22, 1997 between the Company
and Dan R. Cook

10.15 Warrant agreement dated May 22, 1997 between the Company and
Sagaponack Partners, L.P. is incorporated herein by reference
to the Company's Current Form 8-K filed on June 6, 1997.

<PAGE> 14

10.24 Stock Pledge Agreement dated December 16, 1997 between the
Company and BankBoston, N.A. is incorporated herein by
reference to the Company's Current Form 8-K filed on December
30, 1997.

10.25 Security Agreement dated December 16, 1997 between the Company
and BankBoston, N.A. is incorporated herein by reference to
the Company's Current Form 8-K filed on December 30, 1997.

10.30 Stock Option Agreement dated January 16, 1998.

21.0 Subsidiaries of Registrant

23.0 Consent of Independent Auditors

27.0 Financial Data Schedule

<PAGE> 15
USTMAN Technologies, Inc.

Consolidated Financial Statements

Year ended June 30, 1998 and
nine months ended June 30, 1997

CONTENTS

Report of Independent Auditors...........................................1

Consolidated Financial Statements

Consolidated Balance Sheets..............................................2
Consolidated Statements of Operations....................................4
Consolidated Statements of Shareholders' Equity (Deficit)................5
Consolidated Statements of Cash Flows....................................6
Notes to Consolidated Financial Statements...............................7

<PAGE> 16

Report of Independent Auditors

Board of Directors and Shareholders
USTMAN Technologies, Inc.

We have audited the accompanying consolidated balance sheets of USTMAN
Technologies, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
year ended June 30, 1998 and the nine months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USTMAN
Technologies, Inc. at June 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for the year ended June 30, 1998 and the nine
months ended June 30, 1997, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Denver, Colorado
October 9, 1998

1
<PAGE> 17

USTMAN Technologies, Inc.

Consolidated Balance Sheets

<TABLE>
<CAPTION>
JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 366,000 $ 799,000
Accounts receivable (less allowance for doubtful
accounts of $195,000 in 1998 and $89,000 in 1997) 826,000 662,000
Inventory 112,000 188,000
Prepaid expenses and other current assets 70,000 230,000
-----------------------------------------
Total current assets 1,374,000 1,879,000

Furniture and equipment:
Machinery and equipment 76,000 686,000
Computers and equipment 783,000 749,000
Furniture and fixtures 88,000 219,000
Automobiles and trucks - 100,000
Leasehold improvements 4,000 5,000
-----------------------------------------
951,000 1,759,000
Accumulated depreciation 407,000 1,004,000
-----------------------------------------
544,000 755,000

Intangible assets (less accumulated amortization of
$1,351,000 in 1998 and $377,000 in 1997) 9,699,000 8,546,000

-----------------------------------------
Total assets $11,617,000 $11,180,000
=========================================
</TABLE>

2
<PAGE> 18
<TABLE>
<CAPTION>
JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities:
Accounts payable $ 327,000 $ 264,000
Accrued expenses:
Salaries and wages 58,000 224,000
Other 620,000 280,000
Deferred revenue 130,000 147,000
Current portion of long-term debt 875,000 1,083,000
-----------------------------------------
Total current liabilities 2,010,000 1,998,000

Long-term debt, less current portion 9,784,000 6,423,000

Deferred employee benefits 435,000 434,000

Shareholders' equity (deficit):
Common stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares - 19,855,243 in
1998 and 18,344,633 in 1997 12,810,000 10,373,000
Additional paid-in capital 2,517,000 1,947,000
Accumulated deficit (15,939,000) (9,995,000)
-----------------------------------------
Total shareholders' equity (deficit) (612,000) 2,325,000
-----------------------------------------
Total liabilities and shareholders' equity (deficit) $11,617,000 $11,180,000
=========================================
</TABLE>

See accompanying notes.

3
<PAGE> 19
USTMAN Technologies, Inc.

Consolidated Statements of Operations

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
JUNE 30 ENDED JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>

Net sales $ 5,988,000 $ 2,325,000
Cost of sales 2,464,000 836,000
-----------------------------------------
Gross profit 3,524,000 1,489,000

Selling, general and administrative expenses 6,247,000 2,912,000
Write-off of investment in Toxguard Systems, Inc. - 384,000
-----------------------------------------
(2,723,000) (1,807,000)

Other income (expense):
Interest expense (3,240,000) (172,000)
Interest income 19,000 4,000
-----------------------------------------
(3,221,000) (168,000)
-----------------------------------------

Loss before income taxes (5,944,000) (1,975,000)

Provision for income taxes - (4,000)
-----------------------------------------
Net loss $(5,944,000) $(1,979,000)
=========================================

Basic and diluted net loss per share $ (.31) $ (.17)
=========================================
</TABLE>

See accompanying notes.

4
<PAGE> 20

USTMAN Technologies, Inc.

Consolidated Statements of Shareholders' Equity (Deficit)

COMMON STOCK ADDITIONAL
----------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 10,487,401 $ 9,100,000 $ 653,000 $ (8,016,000) $1,737,000
Common stock issued in exchange
for shares of Envir-Alert, Inc.
4,379 12,000 - - 12,000
Common stock and options issued
in connection with private
placement to the Investors
7,337,853 713,000 1,294,000 - 2,007,000
Common stock issued in
connection with private
placements 465,000 455,000 - - 455,000
Common stock issued for
settlement of lawsuit 50,000 93,000 - - 93,000
Net loss - - - (1,979,000) (1,979,000)
-------------------------------------------------------------------------
Balance at June 30, 1997 18,344,633 10,373,000 1,947,000 (9,995,000) 2,325,000
Common stock issued for
settlement of employment
agreement 16,667 27,000 - - 27,000
Common stock and options issued
in connection with Advanced
Tank Certification, Inc.
acquisition 775,194 1,116,000 - - 1,116,000
Options exercised for common
stock 718,749 1,294,000 (1,294,000) - -
Options modified to extend
exercise date and increase
exercise price - - 222,000 - 222,000
Warrants to be issued under the
terms of the Senior
Subordinated Note agreement - - 1,642,000 - 1,642,000
Net loss - - - (5,944,000) (5,944,000)
-------------------------------------------------------------------------
Balance at June 30, 1998 19,855,243 $12,810,000 $2,517,000 $(15,939,000) $ (612,000)
=========================================================================
</TABLE>

See accompanying notes.

5
<PAGE> 21
USTMAN Technologies, Inc.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,944,000) $(1,979,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 285,000 166,000
Amortization of intangible assets 864,000 193,000
Amortization included in interest expense 555,000 29,000
Warrants to be issued under Senior Subordinated Note
agreement 1,642,000 -
Gain on sale of property held for sale - (363,000)
Write-off of net investment in Toxguard Systems, Inc.
- 293,000
Write-off of proprietary software, net 656,000 -
Issuance of common stock and stock options 249,000 -
Interest converted to long-term debt 741,000 76,000
Issuance of common stock to settle lawsuit - 93,000
Gain on sale of Toxguard Fluid Technologies, Inc. (28,000) -
Loss on sale of equipment 260,000 6,000
Net changes in operating assets and liabilities 526,000 238,000
-----------------------------------------
Net cash used in operating activities (194,000) (1,248,000)

INVESTING ACTIVITIES
Purchases of furniture and equipment (286,000) (27,000)
Proceeds from sale of equipment 101,000 -
Proceeds from sale of property held for sale - 315,000
Acquisition of USTMAN Industries, Inc., net of cash acquired - (5,247,000)
Acquisition of Advanced Tank Certification, Inc., net of cash
acquired (2,311,000) -
Sale of Toxguard Fluid Technologies, Inc., net of
cash sold 123,000 -
-----------------------------------------
Net cash used in investing activities (2,373,000) (4,959,000)

FINANCING ACTIVITIES
Proceeds from issuance of common stock - 455,000
Proceeds from issuance of long-term debt, net 3,683,000 6,724,000
Principal payments on long-term debt (1,549,000) (413,000)
-----------------------------------------
Net cash provided by financing activities 2,134,000 6,766,000
-----------------------------------------

Increase (decrease) in cash and cash equivalents (433,000) 559,000
Cash and cash equivalents at beginning of period 799,000 240,000
-----------------------------------------
Cash and cash equivalents at end of period $ 366,000 $ 799,000
=========================================
</TABLE>

See accompanying notes.

6
<PAGE> 22
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements

June 30, 1998

1. ORGANIZATION

USTMAN Technologies, Inc. and subsidiaries (the "Company"), formerly Watson
General Corporation ("Watson General"), provides environmental services to
owners and operators of underground storage tanks in the United States and
abroad. These products and services include statistical inventory reconciliation
and other monitoring methods accepted by various regulatory authorities.

The Company's consolidated operations for the year ended June 30, 1998 and the
nine months ended June 30, 1997 were concentrated in a single business
segment--the environmental services industry. There were no customers greater
than 10% of sales for the year ended June 30, 1998 or the nine months ended June
30, 1997. Sales to customers outside the United States were immaterial during
1998 and 1997 but are anticipated by management to increase in the upcoming
year.

In fiscal 1997, the Company was a holding company which provided a variety of
environmental services to owners of underground storage tanks through its
subsidiaries, USTMAN Industries, Inc. ("USTMAN Industries"), Watson Systems,
Inc. ("Watson Systems"), Toxguard Fluid Technologies, Inc. ("TFT"), EnvirAlert,
Inc. ("EnvirAlert") and Toxguard Systems, Inc. ("Toxguard Systems"). The
Company's services included leak detection, removal and installation of
underground storage tanks and antifreeze recycling. The Company owned 87% of the
outstanding preferred stock and 96% of the outstanding common stock of Toxguard
Systems. The remaining subsidiaries were wholly owned by the Company.

On August 27, 1997, Toxguard Systems voluntarily filed under Chapter 7 of the
Bankruptcy Code. As of June 30, 1997, the Company wrote off its net investment
and net goodwill in Toxguard Systems of $293,000 and $91,000, respectively, as a
result of the bankruptcy filing (see Note 6).

During 1998, the Company consolidated the operations of USTMAN Industries,
Envir-Alert, and Watson Systems and sold TFT. The Company no longer provides
underground storage tank removal and installation and antifreeze recycling and
has focused its efforts primarily on providing statistical inventory
reconciliation procedures and underground storage tank monitoring services to
its customers. During December 1997, the Company acquired 100% of the common
stock of Advanced Tank Certification, Inc. ("ATC"), which operated in a similar
line of business (see Note 3).

7
<PAGE> 23

USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Effective July 1, 1997, the Company elected to change its fiscal year to a
period beginning July 1 and ending June 30. Accordingly, the accompanying
consolidated financial statements present the transition period from the prior
fiscal year end of September 30, 1996 to June 30, 1997.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company incurred net losses of
$5,944,000 and $1,979,000 for the year ended June 30, 1998 and the nine months
ended June 30, 1997, respectively. Additionally, the Company's operations have
resulted in negative cash flows of $194,000 and $1,248,000 for the year ended
June 30, 1998 and the nine months ended June 30, 1997, respectively. Management
believes the Company will generate sufficient cash flows to enable it to fund
operations and satisfy all capital requirements over the next twelve months.

REVENUE RECOGNITION

The Company primarily generates income through the testing of underground
storage tanks and related software services. Sales are recognized when services
are performed. Prepaid contracts are recorded as deferred revenue and recognized
as the contract is completed.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

RECLASSIFICATIONS

Certain amounts for the prior period have been reclassified to conform to the
current year presentation.

8
<PAGE> 24
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FURNITURE AND EQUIPMENT

Furniture and equipment are carried at cost and are depreciated under the
straight-line method over their estimated useful lives of five years.

INVENTORY

Inventory consists of tank gauge equipment and is accounted for using the
weighted-average method.

ASSET IMPAIRMENT

The Company recognizes impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. In such circumstances, those assets are written down to estimated fair
value. Long-lived assets include furniture and equipment, identifiable
intangible assets and goodwill. Long-lived assets held for sale are valued at
amortized cost.

GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

<TABLE>
<CAPTION>
JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
Goodwill $ 5,946,000 $2,999,000
Technology 3,300,000 4,200,000
Deferred debt issuance costs 1,803,000 1,722,000
Copyrights and organization costs 1,000 2,000
-----------------------------------------
11,050,000 8,923,000
Less accumulated amortization (1,351,000) (377,000)
-----------------------------------------
$ 9,699,000 $8,546,000
=========================================
</TABLE>

9
<PAGE> 25
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Goodwill related to the USTMAN Industries and Watson Systems, Inc. acquisitions
is amortized over 15 years and goodwill relating to the ATC acquisition is
amortized over 10 years. Other goodwill (net carrying value of $87,000 at June
30,1998) is amortized over 20 years. Acquired technology is amortized over eight
years, and capitalized copyrights and organization costs are amortized on a
straight-line basis over five years. During 1998, the Company discontinued the
use of certain proprietary software due to the development of a more
advantageous product and wrote off the remaining unamortized balance of
$656,000.

In connection with the private placement of its Senior Subordinated Notes of
$7,000,000 and 7,304,520 shares of its common stock (see Notes 5 and 7), the
Company incurred costs of $2,010,000. The Company allocated the costs of
$1,722,000 and $288,000 to intangible assets and common stock, respectively. The
deferred debt issuance costs included in intangible assets are being amortized
over the term of the Senior Subordinated Notes using the straight-line method
which approximates the interest method.

Amortization expense amounted to $1,419,000 and $222,000 for the year ended June
30, 1998 and the nine months ended June 30, 1997, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of the Company's cash and cash equivalents, accounts receivable
and accounts payable approximated their carrying amounts due to the relatively
short maturity of these items. The fair values of the Company's long-term debt
approximated its carrying amount at June 30, 1998, based on rates currently
available to the Company for debt with similar terms and remaining maturities.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

ADVERTISING

Advertising costs are expensed as incurred and include trade shows, direct
mailings, and trade publications. Advertising expenses were $300,000 and $83,000
for the year ended June 30, 1998 and the nine months ended June 30, 1997,
respectively.

10
<PAGE> 26
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, is effective for the Company's 1998 fiscal year. As permitted by
the standard, the Company has chosen to continue to account for stock-based
compensation to employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the options' exercise price.
Compensation cost for performance shares issued to nonemployees is recorded over
the vesting period from the date the underlying stock options are exercised
based on the fair market value of the Company's stock on the option exercise
date.

PER SHARE INFORMATION

Effective June 30, 1998, the Company adopted FASB Statement No. 128, Earnings
Per Share, which replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of the shares issuable upon the
exercise of stock options under the treasury stock method. Net loss per share
amounts for both periods have been presented, and where appropriate, restated to
conform to the SFAS No. 128 requirements. Per share information is based on the
weighted average number of common shares outstanding. Weighed average shares for
computing loss per share were 19,117,186 and 11,727,000 for the year ended June
30, 1998 and the nine months ended June 30, 1997, respectively. Due to the
Company's loss position, diluted net loss per share is the same basic earnings
per share as the result would be antidilutive.

INCOME TAXES

Deferred income taxes are provided based on the estimated future tax effects of
differences between financial statement carrying amounts and the tax bases of
existing assets and liabilities using statutory tax rates expected to be in
effect in the period in which the deferred tax item is expected to be settled.
Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some portion or all of
the deferred tax asset may not be realized.

11
<PAGE> 27
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STATEMENT OF CASH FLOWS

The Company considers highly liquid debt instruments purchased with original
maturities of three months or less to be cash equivalents.

Changes in operating assets and liabilities as shown in the consolidated
statements of cash flows, net of acquired assets and liabilities, are as
follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997
-----------------------------------------
<S> <C> <C>
Accounts receivable, net $ (93,000) $315,000
Inventory 76,000 (188,000)
Prepaid expenses and other current assets 169,000 112,000
Accounts payable 93,000 (26,000)
Accrued expenses 298,000 123,000
Deferred revenue (17,000) 15,000
Note payable - (105,000)
Other long-term liabilities - (8,000)
-----------------------------------------
$526,000 $238,000
=========================================
</TABLE>

The Company paid no federal or state income taxes for the year ended June 30,
1998 and paid $5,000 for the nine months ended June 30, 1997. The Company paid
interest of $247,713 and $90,000 for the year ended June 30, 1998 and the nine
months ended June 30, 1997, respectively.

12
<PAGE> 28
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In connection with the acquisition of ATC and USTMAN Industries in December 1997
and May 1997, respectively, (see Note 3), the Company funded the acquisition as
follows:

<TABLE>
<CAPTION>
ATC USTMAN
------------------ ------------------
<S> <C> <C>
Fair value of assets acquired $3,539,000 $6,126,000
Less:
Cash acquired (112,000) (3,000)
Purchase price adjustment liability (see Note 3) - (376,000)
Notes payable issued - (500,000)
Common stock issued (1,116,000) -
------------------ ------------------
Cash paid $2,311,000 $5,247,000
================== ==================
</TABLE>

Noncash investing and financing activities during fiscal 1998 consist of the
reduction of the purchase price adjustment liability and related goodwill of
$76,000 in connection with the USTMAN acquisition (see Note 3).

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Issues
requiring significant assumptions include estimates of future cash flows used in
the evaluation of the recoverability of goodwill, and estimates made in
establishing the allowance for doubtful accounts and obsolete inventory.

3. ACQUISITIONS

Pursuant to the Primary Stock Purchase Agreement and Contingent Stock Purchase
Agreement, on December 17, 1997, the Company acquired all of the outstanding
capital stock of ATC, a Tennessee corporation, for an aggregate of approximately
$3.4 million in cash and stock. In connection with the acquisition, the Company
secured a term loan of $3.75 million from BankBoston, N.A. (see Note 7).

13
<PAGE> 29
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

3. ACQUISITIONS (CONTINUED)

ATC provided services to owners and operators of underground storage tanks
including statistical inventory reconciliation, tightness testing and cathodic
protection. ATC operations have been consolidated at the Company's Lakewood,
Colorado headquarters in order to eliminate duplication and increase
efficiencies.

The acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on their estimated fair value at the date of
acquisition. ATC's purchase price in excess of the net assets of the purchased
company was assigned to goodwill. The Company allocated $3,058,000 to goodwill.
The Company is amortizing the goodwill on a straight-line basis over ten years.

On May 22, 1997, the Company acquired all of the outstanding capital stock of
USTMAN Industries, a subsidiary of NDE Environmental Corporation ("NDE"),
pursuant to a Stock Purchase Agreement between the Company and NDE (the "USTMAN
Acquisition"). The purchase price was $5.25 million in cash and a $500,000
promissory note. As of June 30, 1998, the promissory note had been paid in full.

Immediately prior to the closing, all cash and cash equivalents of USTMAN
Industries at the close of business on May 21, 1997 were transferred to NDE. In
addition, the Stock Purchase Agreement provided for an adjustment to the
purchase price within 60 days after the closing to reflect the difference, if
any, between the working capital balance of USTMAN Industries at the closing
(after taking into account the transfer of cash and cash equivalents to NDE on
May 21) and $424,271 (representing the working capital balance of USTMAN
Industries as of December 31, 1996.) In fiscal year 1997, the Company accrued an
estimated purchase price adjustment of $376,000. During the 1998 fiscal year,
the Company and NDE agreed to reduce the adjustment to $300,000 and as a result
the Company reduced the goodwill recorded on the USTMAN acquisition by $76,000.

The acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair value at the date of
acquisition. The Company's purchase price in excess of the net assets of USTMAN
Industries was assigned to goodwill and software based upon the estimated future
cash flows of its operations. The Company allocated $1,622,000 to goodwill and
$3,300,000 to software. The Company is amortizing the goodwill and software
assets on a straight-line basis over 15 and 8 years, respectively.

14
<PAGE> 30
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

3. ACQUISITIONS (CONTINUED)

The Company obtained $7,000,000 of financing for the USTMAN acquisition and for
working capital from Sagaponack Partners, L.P. ("Sagaponack"), a private
investment firm based in San Francisco and New York, and its foreign affiliate,
Sagaponack International Partners, L.P. (collectively, the Investors), pursuant
to a Securities Purchase Agreement dated May 22, 1997 (see Note 5). As of June
30, 1998, two partners of the investors serve as directors of the Company.

During fiscal year 1998, USTMAN Industries, Watson Systems and Watson General
were merged resulting in the remaining entity, USTMAN Technologies, Inc. In
connection with the merger and the ATC acquisition, the Company recorded a
charge to general and administrative expenses of $736,000 for direct and other
transition costs consisting primarily of fees for relocating offices, severance
of terminated employees, exit costs, attorneys' fees, and accounting fees.

USTMAN Industries' and ATC's results of operations have been included in the
consolidated results of operations since May 23, 1997 and December 18, 1997,
respectively. Proforma unaudited consolidated operating results of the Company
USTMAN Industries and ATC for the year ended June 30, 1998 and the nine months
ended June 30, 1997 assuming the acquisitions had been as of the beginning of
each period are as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------------- --------------------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $6,802,000 $6,592,000
Net loss (5,991,000) (3,293,657)
Net loss per share $(.30) $(.17)
</TABLE>

4. SALE OF PROPERTY HELD FOR SALE

In December 1994, the Company purchased a secured adjustable rate loan dated
March 29, 1989 with a face value of $1,400,000 from a major bank. The loan was
secured with a Commercial Deed of Trust, Assignment of Rents, and Security
Agreement for a 12,215 square foot strip shopping mall located in El Cajon,
California. The bank sold the loan to the Company for $300,000. Professional
environmental assessments of the property securing the loan, made on behalf of
the bank, revealed there was hydrocarbon contamination present.

15
<PAGE> 31
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

4. SALE OF PROPERTY HELD FOR SALE (CONTINUED)

In March 1995, the Company completed foreclosure proceedings and took possession
of the property and a Receiver's account totaling $147,000.

The Company completed its own environmental assessment of the property which
indicated that the level of hydrocarbon contamination was significantly less
than previously detected. On January 4, 1996, the Company's management received
a "no further action" letter from the San Diego Department of Environmental
Health which cleared the title to the property from any restrictions on
transferability.

On October 1, 1996, the Company formed a wholly owned limited liability company
(LLC), Watson Value Assets LLC ("WVA") into which the property and building for
sale, with a net book value of $337,000, was transferred for liability purposes.

In December 1996, WVA sold the property for $700,000. The Company recorded a
gain on the sale of the property of $363,000 for the nine months ended June 30,
1997.

5. SALE OF TOXGUARD FLUID TECHNOLOGIES, INC.

On January 20, 1998, the Company sold all of the outstanding capital stock of
TFT for $92,000 in cash. At the date of sale, the Company's investment in TFT
was valued at a negative $336,000. Additionally, the Company wrote off
approximately $400,000 in advances to TFT. The sale resulted in a net gain of
approximately $28,000.

6. TOXGUARD SYSTEMS BANKRUPTCY

As a result of Toxguard Systems filing under Chapter 7 of the Bankruptcy Code
(see Note 1) in August 1997, the Company has written off its net investment in
Toxguard Systems at June 30, 1997. Toxguard Systems owed $356,000 to its
creditors at the time of filing for bankruptcy. The bankruptcy proceedings for
Toxguard Systems have not yet been approved and settled by the U.S. Bankruptcy
Court and, accordingly, there is uncertainty as to the ultimate resolution of
creditors' claims. In management's opinion, the ultimate resolution of the
bankruptcy proceedings will not have a material effect on the consolidated
financial statements of the Company and its subsidiaries.

16
<PAGE> 32
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

7. NOTES PAYABLE AND LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
JUNE 30
1998 1997
------------------------------------
<S> <C> <C>
Senior Subordinated Notes Payable to the Investors, net of original
issue discount of $783,000 and $907,000, respectively $ 7,034,000 $6,093,000

BankBoston Term Loan, principal due in quarterly installments through December
31, 2000, interest payable quarterly at the BankBoston Base
Rate plus 2.5%. (11% at June 30, 1998) 3,625,000 -

Note payable to NDE, all principal due on June 1, 1998, interest payable
quarterly at 8.5%, guaranteed by USTMAN, Watson Systems, Inc. and
EnvirAlert, Inc., maturing June 1998 - 500,000

Purchase price adjustment payable to NDE, due upon settlement of
disputed purchase price - 376,000

Note payable to a lending institution in monthly installments of $3,143
including interest at 9.12%, maturing January 1999 - 55,000

Service fleet vehicle loans and other amounts owed, due in monthly installments
through 1999 at rates ranging from 8.75% to 15.9%,
collateralized by the related asset - 32,000

Note payable to bank in monthly installments of $10,750 including interest at
1.5% over the corporate base rate adjusted quarterly, with any remaining
unpaid principal due November 2000, collateralized by a security interest in
accounts receivable and certain property
and equipment of the Company - 381,000

Guarantor of note payable to bank in monthly installments of $3,259 including
interest at 10.5%, with any remaining principal due
November 1997 - 28,000

Unsecured notes payable to former employees and officers of an acquired
subsidiary. The notes are non-interest bearing with various
maturities through January 30, 1998 - 35,000

Unsecured note payable to a former officer and shareholder in monthly
installments of $226, including interest at 6.5%, maturing December
2000 - 6,000
------------------------------------
10,659,000 7,506,000
Less current portion 875,000 1,083,000
------------------------------------
Long-term portion $ 9,784,000 $6,423,000
====================================
</TABLE>

17
<PAGE> 33
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

On December 17, 1997, the Company secured term and acquisition financing from
BankBoston, N.A. Pursuant to the agreement, the Company obtained $3.75 million
in the form of a term loan bearing interest at the BankBoston Base Rate plus 2
1/2% (11% at June 30, 1998). Repayment of the loan began March 31, 1998 and
continues in quarterly installments, including accrued interest, until December
31, 2000 when the remaining principal is due. The agreement also requires the
Company to pay additional interest totaling the greater of $150,000 or 5% of the
average consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") during fiscal 1998, 1999 and 2000. This amount is
payable in September 2000 and is being accrued over the life of the note using
the effective interest method. The debt is secured by the assets of the Company.
The Company used this financing to facilitate the ATC acquisition, to pay
existing debt, and for working capital purposes. The agreement with BankBoston
provides that additional financing of up to $2.25 million can be made available
to the Company for approved future acquisitions. As of June 30, 1998, the
Company had not used any of this additional acquisition financing.

The BankBoston agreement contains financial and restrictive covenants. These
covenants include minimum levels of EBITDA and consolidated net worth, maximum
levels of capital expenditures and ratios of funded debt to EBITDA, EBITDA to
interest charges, and operating cash flows to debt service. If the Company fails
to meet the covenants, the unpaid principal and accrued interest will become
immediately due. Due to the lower than expected performance in fiscal 1998, the
Company failed to meet the requirements of all the covenants with the exception
of the capital expenditure limitations. The Company received a waiver from the
bank for these covenant violations at June 30, 1998. On October 9, 1998, the
Company and BankBoston agreed to amend the terms of the agreement and reduced
the covenant requirements for the upcoming three quarters beginning on September
30, 1998. Management believes the Company's operations for fiscal year 1999 will
be sufficient to enable the Company to be in compliance with the amended
covenants for all periods of fiscal year 1999. Accordingly, amounts payable
under the term loan agreement are classified as long term in the accompanying
balance sheets with the exception of scheduled principal payments.

On May 22, 1997, the Company completed the private placement of its Senior
Subordinated Notes with an aggregate principal amount of $7,000,000 and
7,304,520 shares of its common stock (see Note 9) to the Investors, and used
most of the proceeds therefrom to acquire all of the outstanding capital stock
of USTMAN Industries. The notes are due and payable in five years, subject to
mandatory prepayment in

18
<PAGE> 34
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

certain circumstances. The notes are secured by the assets of the Company,
including the stock of certain of its subsidiaries, and by the assets of the
principal subsidiaries of the Company, including USTMAN Industries and Watson
Systems. The notes are subject to mandatory prepayment in the event that the
Company completes a public offering of newly-issued shares of common stock (a
Stock Offering), or in the event that one or more persons (other than the
Investors or their transferees) acquire at least 50% of the outstanding common
stock or of the operating assets of the Company (a Company Sale). In addition,
the Company must apply toward reduction of principal at least 50% of any excess
cash.

Interest on the Senior Subordinated Notes is 10% per annum for the first year,
payable quarterly, and increases by one percent each year during the term of the
Notes. At the option of the Company, interest payments due can be converted to
debt under the same terms as the original principal. During the year ended June
30, 1998, the Company converted interest due of $741,000 to long term debt. In
addition, if on the earlier of (i) the third anniversary of the date of the
Securities Purchase Agreement or such other date thereafter designated by the
Investors, (ii) the date of a stock offering or (iii) a sale of the Company (the
"Adjustment Date"), the Company's cumulative adjusted earnings before taxes,
depreciation and amortization ("EBTDA") fail to meet specific projections
provided by the Company to the Investors, additional interest is payable in the
form of warrants to the Investors. The additional interest is determined by
comparing a ratio of fully diluted EBTDA per share to the projected fully
diluted EBTDA. If the resulting actual percentage of EBTDA per share is less
than 70% of the projected amount, an adjustment to interest expense is
calculated and warrants are issued in an amount equal to the additional interest
expense divided by the fair market value of the common stock on the Adjustment
Date. The adjusted interest rate cannot exceed 29.76%. Due to the lower than
expected performance in fiscal 1998, the Company did not meet the projected
EBTDA per share and believes it is unlikely to meet these projections in the
future. Accordingly, the Company has recorded interest expense on the Senior
Subordinated Notes at a rate of 29.76% and reflected the additional 18.76%
expense as warrants to be issued. This amount totaled $1,642,000.

During the time that the Senior Subordinated Notes remain outstanding, the
Company is subject to a number of negative covenants, as set forth in the
Securities Purchase Agreement. Upon the occurrence of an Event of Default, as
defined in the Securities Purchase Agreement, the Senior Subordinated Notes can
become immediately due and payable. As of June 30, 1998, the Company was in
violation of one of its covenants due to the violation on the BankBoston
agreement noted above. The Company obtained a

19
<PAGE> 35
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

7. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)

waiver for this violation as of June 30, 1998 and for the upcoming fiscal year
and accordingly, all amounts due under the Senior Subordinated Notes are
reflected as long term.

The Senior Subordinated Notes also specify that the Company pay Sagaponack an
annual management fee totaling $100,000 through the fifth anniversary of the
agreement.

Principal payments on long-term debt are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30 AMOUNT
---------------------
<S> <C>
1999 $ 875,000
2000 1,250,000
2001 1,500,000
2002 7,034,000
---------------------
$10,659,000
=====================
</TABLE>

8. INCOME TAXES

A reconciliation of taxes computed at the statutory federal income tax rate to
income tax expense is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 NINE MONTHS ENDED
1998 JUNE 30 1997
-----------------------------------------
<S> <C> <C>
Benefit from loss before provision for income taxes computed
at statutory rate $1,919,000 $673,000
Nondeductible expense (136,000) (137,000)
Losses without tax benefit (1,783,000) (536,000)
California franchise tax - (4,000)
-----------------------------------------
$ - $ (4,000)
=========================================
</TABLE>

At June 30, 1998, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $11.4 million which begin to expire in
fiscal year 2007.

20
<PAGE> 36
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

8. INCOME TAXES (CONTINUED)

Pursuant to the Tax Reform Act of 1986, use of the Company's net operating loss
carryforwards may be substantially limited if a cumulative change in ownership
of more than 50% occurs within a three-year period.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of June 30, 1998 and 1997
are as follows:

<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $4,401,000 $3,015,000
Accrued expenses 30,000 54,000
Book depreciation over tax 50,000 56,000
Other 161,000 28,000
--------------------------------------
Total deferred tax assets 4,642,000 3,153,000

Valuation allowance (3,518,000) (1,415,000)
--------------------------------------
1,124,000 1,738,000

Deferred tax liabilities:
Amortization of purchased technology (1,103,000) (1,738,000)
Other (21,000) -
--------------------------------------
Net deferred tax assets $ - $ -
======================================
</TABLE>

A valuation reserve of $3,518,000 and $1,415,000 has been established as of June
30, 1998 and 1997, respectively, due to uncertainty as to the realizability of
the Company's net deferred tax assets and liabilities. The change in the
valuation allowance for the year ended June 30, 1998 and the nine months ended
June 30, 1997 is approximately $2,103,000 and $1,117,000, respectively.

21
<PAGE> 37
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

9. SHAREHOLDERS' EQUITY

SENIOR SUBORDINATED NOTES

On May 22, 1997, the Company completed the private placement of $7 million
principal amount of its 10% Senior Subordinated Notes due 2002 and 7,304,520
shares of its common stock to the Investors and used most of the proceeds
therefrom to acquire all of the outstanding capital stock of USTMAN Industries.

If, on the Adjustment Date, the Company's cumulative adjusted EBTDA per share is
not greater than 90% of the amount calculated for such date on certain
projections provided to the Investors, then the Company will be obligated to
issue additional shares of common stock to the Investors in an amount sufficient
to increase the percentage of the Company's common stock issued to the Investors
from 40% to the Adjusted Base Ownership Percentage, as defined. However, in no
event shall the Adjusted Base Ownership Percentage be greater than 49.999%. If
the Company pays all principal of and interest on the Senior Subordinated Notes
prior to October 30, 1998 (other than where such repayment is required as a
result of a Stock Offering, Company Sale or acceleration of the indebtedness
pursuant to the Securities Purchase Agreement), then no adjustment pursuant to
the foregoing shall be required.

In connection with the private placement of its Senior Subordinated Notes of $7
million and 7,304,520 shares of its common stock, the Company recorded an
original issue discount of $1,000,000 to estimate the value of the 7,304,520
shares of common stock issued in May 1997. The original issue discount is being
amortized over the term of the Senior Subordinated Notes using the straight-line
method which approximates the interest method.

During fiscal 1997, the Company completed four private placement offerings in
which a total of 465,000 shares of common stock were issued to investors in
exchange for $455,000. The shares issued have not been registered under the
Securities Act of 1933, as amended (the "Act"), as they are exempt under
Regulation D of the Act.

22
<PAGE> 38
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

9. SHAREHOLDERS' EQUITY (CONTINUED)

WARRANTS

Pursuant to the Securities Purchase Agreement, the Investors were issued
7,304,520 shares of the Company's common stock, representing 40% of the total
number of shares of common stock outstanding immediately after such issuance,
and warrants ("the Sagaponack warrants") to purchase shares of common stock in
an amount sufficient, upon the exercise of any outstanding options and warrants,
for the Investors to maintain their 40% ownership of the outstanding common
stock of the Company. Such warrants will be at the same price and term as the
options or warrants exercised by third parties.

In June 1997, the Investors exercised warrants for a noncash purchase of 33,333
shares of the Company's common stock in order to maintain their 40% ownership of
the outstanding common stock of the Company.

In connection with a fiscal 1995 private placement, the Company issued warrants
to the selling agent for the purchase of 50,000 units, at $3.50 per unit. As of
June 30, 1998, all 50,000 warrants have expired. On August 6, 1996, 35,000
additional warrants were issued at the same price per unit which were
exercisable immediately and expire on February 6, 2001. All 35,000 warrants
issued remain outstanding at June 30, 1998.

The Company issued warrants for 100,000 shares exercisable at $1.62 per share
through August 1999 in connection with the fiscal 1996 private placements of the
Company's common stock. All of these warrants remain outstanding at June 30,
1998.

During 1997, the Company issued warrants for 200,000 shares exercisable at $1.50
per share through March 1998. In March 1998, these options were modified to
extend the exercise period through March 16, 1999 and increase the exercise
price to $1.75. As a result, the Company recognized expense of $222,000,
representing the fair market value of these options at the time of the
modification.

In connection with the 1997 private placement, the Company issued warrants for
718,749 shares at $.01 per unit. The warrants were exercisable immediately and
expire on May 22, 2000. In January 1998, all warrants were exercised.

23
<PAGE> 39
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

9. SHAREHOLDERS' EQUITY (CONTINUED)

STOCK OPTIONS

On September 1, 1992, the Company granted to a key employee nonstatutory options
to purchase 400,000 shares of common stock at an exercise price of $1.50 per
share. These options were exercisable immediately and expire on September 30,
1998. On April 3, 1997, these options were replaced with an equal amount of
options at an exercise price of $1.53. The new options were exercisable
immediately and expire on April 3, 2002.

On January 4, 1994, certain key employees were issued options to purchase
1,000,000 shares at an exercise price of $2.63 in exchange for certain rights to
an antifreeze recycling process. These options vested over two years and expire
five years after the vesting date. On April 3, 1997, 650,000 of these options
were replaced with 650,000 options at an exercise price of $1.53. The new
options are exercisable immediately and expire on April 3, 2002. As of June 30,
1998, 50,000 of the remaining 350,000 options had expired.

In connection with the USTMAN Industries acquisition on May 22, 1997, the
Company issued options to purchase 600,000 shares to a key employee. The options
become exercisable, subject to continued employment, over four years at a rate
of 25% per year beginning one year from the grant date. The options expire three
years from the vesting date. The exercise price is $1.00. As of June 30, 1998,
none of these options had been exercised.

Also during the 1997 fiscal year, the Company issued a total of 251,518
nonqualified options to several employees at an exercise price of $1.63. Of this
total, 201,518 are immediately exercisable and the remaining 50,000 vest over
two years. The options expire on various dates through April 10, 2002. As of
June 30, 1998, 50,000 of these options have expired. The remaining options have
not been exercised.

In connection with the ATC acquisition in December 1997, the Company issued
options to purchase 90,000 shares to key employees. The options become
exercisable subject to continued employment, at a rate of 33% per year beginning
on the grant date and expire at a rate of 33% each year beginning five years
after the grant date. The exercise price is $1.47. As of June 30, 1998, none of
these options had been exercised.

During the 1998 fiscal year, the Company adopted a stock option plan authorizing
the issuance of options for 2,000,000 shares of common stock to selected
employees. Under the terms of the plan, the options may be either incentive or
nonqualified. The exercise

24
<PAGE> 40
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

9. SHAREHOLDERS' EQUITY (CONTINUED)

price per share, determined by a committee of the Board of Directors, may not be
less than the fair market value on the grant date.

On January 30, 1998, the Company granted 195,000 options with an exercise price
of $1.50. The options become exercisable, subject to continued employment, at
the rate of 33% per year beginning on the grant date. The options have a term of
ten years.

The following table summarizes stock option activity for the year ended June 30,
1998 and the nine months ended June 30, 1997:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
--------------------------------------
<S> <C> <C>
Outstanding on September 30, 1996 1,996,233 $2.25
Granted 1,954,518 $1.57
Exercised - -
Expired or forfeited (1,513,233) $2.16
--------------------------------------
Outstanding on June 30, 1997 2,437,518 $1.64
Granted 310,000 $1.50
Exercised - -
Expired or forfeited (147,666) $2.54
--------------------------------------
Outstanding on June 30, 1998 2,599,852 $1.58
======================================
Exercisable 1,944,852 $1.71
======================================
</TABLE>

Exercise prices for the majority of the options outstanding as of June 30, 1998
ranged from $.50 to $2.50. Approximately 2,000 options outstanding at June 30,
1998 have an exercise price of $4.50.

In calculating pro forma information regarding net income and earnings per
share, as required by Statement No. 123, the fair value was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's common stock:
risk-free interest rate of 5.25%; a dividend yield of 0%; volatility of the
expected market price of the Company's common stock of .75 and .78 for the year
ended June 30, 1998 and the period ended June 30, 1997, respectively; and a
weighted-average expected life of the option of 4.9 and 4.6 years for the year
ended June 30, 1998 and the period ended June 30, 1997, respectively.

25
<PAGE> 41
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

9. SHAREHOLDERS' EQUITY (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the year ended June 30, 1998 and the nine months ended
June 30, 1997 is summarized below:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 NINE MONTHS ENDED
1998 JUNE 30 1997
-----------------------------------------
<S> <C> <C>
Pro forma net loss $6,092,000 $3,322,000
Pro forma net loss per share $(.32) $(.28)
</TABLE>

10. COMMITMENTS AND CONTINGENCIES

DEFERRED EMPLOYEE BENEFIT AGREEMENT

In July 1991, the Company entered into a deferred compensation agreement with
the Company's former president. The benefits as defined under the agreement
require the Company to pay $2,700 per month with such payments continuing
throughout the president's lifetime with a minimum ten year guaranteed payment.
Upon his death, benefits may continue to his beneficiaries as defined under the
agreement. Monthly payments will be adjusted on an annual basis based on the
Department of Labor Consumer Price Index. As of the effective date of the
agreement, the benefits are fully vested, but not funded.

LEASES

The Company leases its facilities and certain equipment under noncancelable
operating leases with future minimum payments as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30
----------------------------
<S> <C>
1999 $105,000
2000 111,000
2001 116,000
2002 60,000
-------------------
$392,000
===================
</TABLE>

<PAGE> 42
USTMAN Technologies, Inc.

Notes to Consolidated Financial Statements (continued)

10. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Rent expense totaled $101,000 and $80,000 for the year ended June 30, 1998 and
the nine months ended June 30, 1997, respectively.

LITIGATION

The Company is involved in various claims and lawsuits arising in the ordinary
course of business. Included in accrued expenses is approximately $100,000 of
reserve for potential losses resulting from this litigation. Management believes
this reserve is adequate to cover all pending litigation as of June 30,1998.

11. EMPLOYEE BENEFIT PLAN

The Company sponsors employee savings plans under Section 401(k) of the Internal
Revenue Code. Under the plan, all employees are eligible to participate after
six months of service. Employees may defer up to 15% of their salary subject to
limits set annually by the Internal Revenue Service and, at the Company's
discretion, it can match annually. No expense for matching contributions was
recorded in 1997 or 1998.

<PAGE> 1

USTMAN TECHNOLOGIES, INC.
1998 STOCK OPTION PLAN

1. Purpose; Restrictions on Amount Available Under the Plan.
The USTMAN Technologies, Inc. 1998 Stock Option Plan (the "Plan") is intended to
encourage stock ownership by employees, consultants and directors of USTMAN
Technologies, Inc. (the "Corporation"), its divisions and Subsidiary
Corporations, so that they may acquire or increase their proprietary interest
in the Corporation, and to encourage such employees, directors, and consultants
to remain in the employ of or associated with the Corporation and to put forth
maximum efforts for the success of the Corporation and its business. It is
further intended that options granted by the Committee pursuant to Section 6 of
this Plan shall constitute "incentive stock options" ("Incentive Stock
Options") within the meaning of Section 422 of the Internal Revenue Code, and
the regulations issued thereunder, and options granted by the Committee
pursuant to Section 7 of this Plan shall constitute "non-qualified stock
options" ("Non-qualified Stock Options").

2. Definitions. As used in this Plan, the following words and
phrases shall have the meanings indicated:

(a) "Disability" shall mean an Optionee's inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or that has lasted or can be expected to last for a continuous period of
not less than 12 months.

(b) "Employer Corporation" is the entity which employs
the person granted options under this Plan.

(c) "Fair Market Value" per share as of a particular date
shall mean the last sale price of the Corporation's Common Stock as reported on
a national securities exchange or the NASDAQ National Market System or, if last
sale reporting quotation is not available for the Corporation's Common Stock,
the average of the bid and asked prices of the Corporation's Common Stock as
reported by NASDAQ or on the OTC Bulletin Board, or if none, National Quotation
Bureau, Inc.'s "Pink Sheets" or, if such quotations are unavailable, the value
determined by the Committee (as hereinafter defined) in accordance with their
discretion in making a bona fide, good faith determination of fair market
value. Fair Market Value shall be determined without regard to any restriction
other than a restriction which, by its terms, will never lapse.

(d) "Internal Revenue Code" shall mean the United States
Internal Revenue Code of 1986, as amended from time to time (codified at Title
26 of the United States Code), and any successor legislation.

(e) "Parent Corporation" shall mean any corporation
(other than the Employer Corporation) in an unbroken chain of corporations
ending with the Employer Corporation if, at the time of granting an Option,
each of the corporations other than the Employer Corporation owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

(f) "Subsidiary Corporation" shall mean any corporation
(other than the Employer Corporation) in an unbroken chain of corporations
beginning with the Employer Corporation if, at the time of granting an Option,
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.

3. Administration.

(a) The Plan shall be administered by the Compensation
Committee (the "Committee"), consisting of not less than two members of the
Board of Directors of the Corporation (the "Board") or alternatively, in the
absence of a designated and qualified committee, the entire Board shall serve
as the Committee.

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 1
<PAGE> 2
(b) The Committee shall have the authority in its
discretion, subject to and not inconsistent with the express provisions of the
Plan, to administer the Plan and to exercise all the powers and authorities
either specifically granted to it under the Plan or necessary or advisable in
the administration of the Plan, including (without limitation): the authority
to grant Options; to determine which Options shall constitute Incentive Stock
Options and which Options shall constitute Non-qualified Stock Options; to
determine the purchase price of the shares of Common Stock covered by each
Option (the "Option Price"); to determine the persons to whom, and the time or
times at which, Options shall be granted; to determine the number of shares to
be covered by each Option; to determine Fair Market Value per share; to
interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the Option
Agreements (which need not be identical) entered into in connection with
Options granted under the Plan; and to make all other determinations deemed
necessary or advisable for the administration of the Plan. The Committee may
delegate to one or more of its members or to one or more agents such
administrative duties as it may deem advisable, and the Committee or any person
to whom it has delegated duties as aforesaid may employ one or more persons to
render advice with respect to any responsibility the Committee or such person
may have under the Plan.

(c) The Board shall fill all vacancies, however caused, in
the Committee. The Board may from time to time appoint additional members to
the Committee, and may at any time remove one or more Committee members and
substitute others. One member of the Committee shall be selected by the Board
as chairman. The Committee shall hold its meetings at such times and places as
it shall deem advisable. All determinations of the Committee shall be made by
not less than a majority of its members either present in person or
participating by conference telephone at a meeting or by written consent. The
Committee may appoint a secretary and make such rules and regulations for the
conduct of its business as it shall deem advisable, and shall keep minutes of
its meetings. The secretary need not be a member of the Committee or a member
of the Board.

(d) No member of the Board or Committee shall be liable for
any action taken or determination made in good faith with respect to the Plan
or any Option granted hereunder.

4. Eligibility.

(a) Subject to certain limitations hereinafter set forth,
Options may be granted to employees of (including officers), and consultants to
and directors of (whether or not they are employees) the Corporation or its
present or future divisions and Subsidiary Corporations, provided such persons
meet minimum requirements, if any, as may be established by the Committee, in
its discretion. In determining the persons to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the duties of the respective persons, their present and potential
contributions to the success of the Corporation and such other factors as the
Committee shall deem relevant in connection with accomplishing the purpose of
the Plan. A person to whom an Option has been granted hereunder is sometimes
referred to herein as an "Optionee."

(b) An Optionee shall be eligible to receive more than one
grant of an Option during the term of the Plan, but only on the terms and
subject to the restrictions hereinafter set forth.

5. Stock.

(a) The stock subject to Options hereunder shall be shares of
the Corporation's common stock, $0 par value per share ("Common Stock"). Such
shares may, in whole or in part, be authorized but unissued shares or shares
that shall have been or that may be reacquired by the Corporation. The
aggregate number of shares of Common Stock as to which Options may be granted
from time to time under the Plan shall not exceed 2,000,000. The limitations
established by the preceding sentences shall be subject to adjustment as
provided in Section 8(i) hereof.

(b) In the event that any outstanding Option under the Plan
for any reason expires or is terminated without having been exercised in full
the shares of Common Stock allocable to the unexercised portion of such Option
(unless the Plan shall have been terminated) shall become available for
subsequent grants of options under the Plan.

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 2
<PAGE> 3
6. Incentive Stock Options.

(a) Options granted pursuant to this Section 6 are intended
to constitute Incentive Stock Options and shall be subject to the following
special terms and conditions, in addition to the general terms and conditions
specified in Section 8 hereof. Consultants and directors who are not employees
of the Corporation shall not be entitled to receive Incentive Stock Options.

(b) The aggregate Fair Market Value (determined as of the
date the Incentive Stock Option is granted) of the shares of Common Stock with
respect to which Incentive Stock Options granted under this and any other plan
of the Corporation or any Parent Corporation or Subsidiary Corporation are
exercisable for the first time by an Optionee during any calendar year may not
exceed the amount set forth in Section 422(d) of the Internal Revenue Code.

(c) Incentive Stock Options granted under this Plan are
intended to satisfy all requirements for incentive stock options under the
Internal Revenue Code and the Treasury Regulations thereunder and,
notwithstanding any other provision of this Plan, the Plan and all Incentive
Stock Options granted under it shall be so construed, and all contrary
provisions shall be so limited in scope and effect and, to the extent they
cannot be so limited, they shall be void.

7. Non-qualified Stock Options. Options granted pursuant to this
Section 7 are intended to constitute Non-qualified Stock Options and shall be
subject only to the general terms and conditions specified in Section 8 hereof.

8. Terms and Conditions of Options. Each Option granted pursuant
to the Plan shall be evidenced by a written Option Agreement between the
Corporation and the Optionee, which agreement shall comply with and be subject
to the following terms and conditions:

(a) Number of Shares. Each Option Agreement shall state
the number of shares of Common Stock to which the Option relates.

(b) Type of Option. Each Option Agreement shall
specifically identify the portion, if any, of the Option which constitutes an
Incentive Stock Option and the portion, if any, which constitutes a
Non-qualified Stock Option.

(c) Option Price. (i) Each Option Agreement shall state
the Option Price, which (except as otherwise set forth in paragraphs 8(c)(ii)
hereof) shall be not less than 100% of the Fair Market Value per share on the
date of grant of the Option.

(ii) Any Incentive Stock Option granted under the
Plan to a person owning more than ten percent of the total combined voting
power of the Common Stock shall be at a price of not less than 110% of the Fair
Market Value per share on the date of grant of the Option.

(iii) The Option Price shall be subject to
adjustment as provided in Section 8(i) hereof.

(iv) The date on which the Committee adopts a
resolution expressly granting an Option shall be considered the day on which
such Option is granted.

(d) Term of Options. Options shall be exercisable over
the exercise period as and at the times the Committee, in its sole discretion,
may determine, as reflected in the Option Agreement; provided, however:

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 3
<PAGE> 4
(i) The exercise period shall not exceed ten years
from the date of grant of the Option.

(ii) Incentive Stock Options granted to a person
owning more than ten percent of the total combined voting power of the Common
Stock of the Corporation shall be for no more than five years;

(iii) The Committee shall have the authority to
accelerate the exercisability of any outstanding Option at such time and under
such circumstances as it, in its sole discretion, deems appropriate.

(iv) The exercise period shall be subject to earlier
termination as provided in Sections 8(f) and 8(g) hereof, and furthermore shall
be terminated upon surrender of the option by the holder thereof if such
surrender has been authorized in advance by the Committee.

(e) Method of Exercise and Medium and Time of Payment.

(i) An Option may be exercised, as to any or all
full shares of Common Stock as to which the Option has become exercisable;
provided, however, that an Option may not be exercised at any one time as to
fewer than 100 shares (or such number of shares as to which the Option is then
exercisable if such number of shares is less than 100).

(ii) Each exercise of an Option granted hereunder,
whether in whole or in part, shall be by written notice to the Secretary of the
Corporation designating the number of shares as to which the Option is
exercised, and shall be accompanied by payment in full of the Option Price (in
cash or shares) for the number of shares so designated, together with any
written statements or investment letter required by any applicable securities
laws.

(iii) The Option Price shall be paid in cash, in
shares of Common Stock having a Fair Market Value as determined by the Board of
Directors equal to such Option Price or in a combination of cash and shares of
the Common Stock, and (subject to approval of the Board of Directors) may be
effected in whole or in part (A) with monies received from the Corporation at
the time of exercise as a compensatory cash payment, or (B) with monies
borrowed from the Corporation pursuant to repayment terms and conditions as
shall be determined from time to time by the Committee, in its discretion,
separately with respect to each exercise of Options and each Optionee;
provided, however, that each such method and time for payment and each such
borrowing and terms and conditions of repayment shall be permitted by and be in
compliance with applicable law.

(iv) The Board of Directors shall have the sole and
absolute discretion to determine whether or not property other than cash or
shares of Common Stock may be used to purchase the shares of Common Stock
hereunder and, if so, to determine the value of the property received.

(f) Termination. Except as provided in this Section 8(f)
and in Section 8(g) hereof, an Option may not be exercised unless the Optionee
is then an employee or director of or consultant to the Corporation or a
division or Subsidiary Corporation thereof (or a corporation or a Parent or
Subsidiary Corporation of such corporation issuing or assuming the option in a
transaction to which Section 424(a) of the Internal Revenue Code applies), and
unless the Optionee has remained continuously as an employee or director of or
consultant to the Corporation since the date of grant of the Option.

(i) If the Optionee ceases to be an employee or
director of or consultant to the Corporation (other than by reason of death,
Disability or retirement), all Options of such Optionee that are exercisable at
the time of such cessation may, unless earlier terminated in accordance with
their terms, be exercised within three months after such cessation; provided,
however, that if the employment or consulting relationship of an Optionee shall
terminate, or if a director shall be removed, for cause, all Options
theretofore granted to such Optionee shall, to the extent not theretofore
exercised, terminate immediately upon such termination or removal.

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 4
<PAGE> 5
(ii) Nothing in the Plan or in any Option granted
pursuant hereto shall confer upon an individual any right to continue in the
employ of the Corporation or any of its divisions or Subsidiary Corporations or
interfere in any way with the right of the Corporation or its shareholders or
any such division or Subsidiary Corporation to terminate such employment or
other relationship between the individual and the Corporation or any of its
divisions and subsidiary corporations.

(g) Death, Disability or Retirement of Optionee. If an
Optionee shall die while a director of, or employed by, or a consultant to, the
Corporation or a Subsidiary Corporation thereof, or within three months after
the termination of such Optionee's employment or directorship or consulting
relationship, other than termination for cause, or if the Optionee's employment
or directorship or consulting relationship, shall terminate by reason of
Disability or retirement, all Options theretofore granted to such Optionee
(whether or not otherwise exercisable) may, unless earlier terminated in
accordance with their terms, be exercised by the Optionee or by the Optionee's
estate or by a person who acquired the right to exercise such Option by bequest
or inheritance or otherwise by reason of the death or Disability of the
Optionee, at any time within one year after the date of death, Disability or
retirement of the Optionee.

(h) Nontransferability. (i) Options granted under the
Plan shall not be transferable other than by will or by the laws of descent,
and Options may be exercised, during the lifetime of the Optionee, only by the
Optionee and thereafter only by his legal representative.

(ii) Any attempted sale, pledge, assignment,
hypothecation or other transfer of an option contrary to the provisions hereof
and the levy of any execution, attachment or similar process upon an Option
shall be null and void and without force or effect and shall result in
automatic termination of the Option.

(iii) (A) As a condition to the transfer of any
shares of Common Stock issued upon exercise of an Option granted under this
Plan, the Corporation may require an opinion of counsel, satisfactory to the
Corporation, to the effect that such transfer will not be in violation of the
Securities Act of 1933 or any other applicable securities laws or that such
transfer has been registered under federal and all applicable state securities
laws. (B) Further, the Corporation shall be authorized to refrain from
delivering or transferring shares of Common Stock issued under this Plan until
the Board of Directors determines that such delivery or transfer will not
violate applicable securities laws and the Optionee has tendered to the
Corporation any federal, state or local tax owed by the Optionee as a result of
exercising the Option, or disposing of any Common Stock, when the Corporation
has a legal liability to satisfy such tax. (C) The Corporation shall not be
liable for damages due to delay in the delivery or issuance of any stock
certificate for any reason whatsoever, including, but not limited to, a delay
caused by listing requirements of any securities exchange or any registration
requirements under the Securities Act of 1933, the Securities Exchange Act of
1934, or under any other state or federal law, rule or regulation. (D) The
Corporation is under no obligation to take any action or incur any expense in
order to register or qualify the delivery or transfer of shares of Common Stock
under applicable securities laws or to perfect any exemption from such
registration or qualification. (E) Furthermore, the Corporation will have no
liability to any Optionee for refusing to deliver or transfer shares of Common
Stock if such refusal is based upon the foregoing provisions of this Paragraph.

(i) Effect of Certain Changes.

(i) If there is any change in the number of
shares of Common Stock through the declaration of stock dividends, or through
recapitalization resulting in stock splits, or combinations or exchanges of
such shares, the number of shares of Common Stock available for Options, the
number of such shares covered by outstanding Options, and the price per share
of such Options, shall be proportionately adjusted by the Committee to reflect
any increase or decrease in the number of issued shares of Common Stock;
provided, however, that any fractional shares resulting from such adjustment
shall be eliminated.

(ii) In the event of the proposed dissolution or
liquidation of the Corporation, in the event of any corporate separation or
division, including, but not limited to, split-up, split-off or spin-off, or in
the event

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 5
<PAGE> 6
of a merger or consolidation of the Corporation with another corporation, the
Committee may (but is not obligated to) provide that the holder of each Option
then exercisable shall have the right to exercise such Option (at its then
Option Price) solely for the kind and amount of shares of stock and other
securities, property, cash or any combination thereof receivable upon such
dissolution, liquidation, or corporate separation or division, or merger or
consolidation by a holder of the number of shares of Common Stock for which
such Option might have been exercised immediately prior to such dissolution,
liquidation, or corporate separation or division, merger or consolidation; or
the Committee may provide, in the alternative, that each Option granted under
the Plan shall terminate as of a date to be fixed by the Committee; provided,
however, that not less than 30 days' written notice of the date so fixed shall
be given to each Optionee, who shall have the right, during the period of 30
days preceding such termination, to exercise the Options as to all or any part
of the shares of Common Stock covered thereby. In such case the Committee may
(but is not obligated to) provide that Options not otherwise exercisable may be
exercised in such circumstances.

(iii) Paragraph (ii) of this Section 8(i) shall not
apply to a merger or consolidation in which the Corporation is the surviving
corporation and shares of Common Stock are not converted into or exchanged for
stock, securities of any other corporation, cash or any other thing of value.
Notwithstanding the preceding sentence, in case of any consolidation or merger
of another corporation into the Corporation in which the Corporation is the
surviving corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from par value to
no par value, or as a result of a subdivision or combination, but including any
change in such shares into two or more classes or series of shares), the
Committee may provide that the holder of each Option then exercisable shall
have the right to exercise such Option solely for the kind and amount of shares
of stock and other securities (including those of any new direct or indirect
parent of the Corporation), property, cash or any combination thereof
receivable upon such reclassification, change, consolidation or merger by the
holder of the number of shares of Common Stock for which such Option might have
been exercised.

(iv) In the event of a change in the Common Stock of
the Corporation as presently constituted, which is limited to a change of all
of its authorized shares with par value into the same number of shares with a
different par value or without par value, the shares resulting from any such
change shall be deemed to be the Common Stock within the meaning of the Plan.

(v) To the extent that the foregoing adjustments
relate to stock or securities of the Corporation, such adjustments shall be
made by the Committee, whose determination in that respect shall be final,
binding and conclusive, provided that each Incentive Stock Option granted
pursuant to this Plan shall not be adjusted in a manner that causes such option
to fail to continue to qualify as an Incentive Stock Option within the meaning
of Section 422 of the Internal Revenue Code.

(vi) Except as hereinbefore expressly provided in
this Section 8(i), this Optionee shall have no rights by reason of any
subdivision or consolidation of shares of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class or by reason of any dissolution, liquidation, merger, or
consolidation or spin-off of assets or stock of another corporation; and any
issue by the Corporation of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to the Option. The grant of an Option
pursuant to the Plan shall not affect in any way the right or power of the
Corporation to make adjustments, reclassifications, reorganizations or changes
of its capital or business structures or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or part of its business or assets.

(j) Rights as Shareholder - Non-Distributive Intent.

(i) Neither a person to whom an Option is granted,
nor such person's legal representative, heir, legatee or distributee, shall be
deemed to be the holder of, or to have any rights of a holder with respect to,
any shares subject to such Option, until after the Option is exercised and the
shares are issued to the person exercising such Options.

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 6
<PAGE> 7
(ii) Upon exercise of an Option at a time when there
is no registration statement in effect under the Securities Act of 1933
relating to the shares issuable upon exercise and available for delivery of a
prospectus meeting the requirements of Section 10(a)(3) of said Act, shares may
be issued to the Optionee only if the Optionee represents and warrants in
writing to the Corporation that the shares purchased are being acquired for
investment and not with a view to the distribution thereof.

(iii) No shares shall be issued upon the exercise of
an Option unless and until there shall have been compliance with any then
applicable requirements of the Securities and Exchange Commission, or any other
regulatory agencies having jurisdiction over the Corporation.

(iv) No adjustment shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distribution or other rights for which the record date is prior to the date
such stock certificate is issued, except as provided in Section 8(i) hereof.

(k) Other Provisions. The Option Agreements authorized
under the Plan shall contain such other provisions, including, without
limitation, (i) the imposition of restrictions upon the exercise of an Option,
and (ii) in the case of an Incentive Stock Option, the inclusion of any
condition not inconsistent with such Option qualifying as an Incentive Stock
Option, as the Committee shall deem advisable.

(l) Leave of Absence. The Committee shall be entitled to
make such rules, regulations, and determinations as it deems appropriate under
the Plan in respect of any leave of absence taken by the recipient of any
Option awarded hereunder. Without limiting the generality of the foregoing,
the Committee shall be entitled to determine: (i) whether or not any such leave
of absence shall constitute a termination of employment within the meaning of
the Plan; and (ii) the impact, if any, of any such leave of absence on awards
under the Plan theretofore made to any recipient who takes such leave of
absence.

(m) Non-Uniform Determinations. The Committee's
determinations under the Plan (including, without limitation, determination of
the persons to receive awards, the form, amount and timing of such awards, the
terms and provisions of such awards, and the agreements evidencing same) need
not be uniform and may be made by it selectively among persons who receive, or
who are eligible to receive, awards under the Plan, whether or not such persons
are similarly situated.

9. Agreement by Optionee Regarding Withholding Taxes. If the
Committee shall so require, as a condition of exercise, each Optionee shall
agree that:

(a) No later than the date of exercise of any Option
granted hereunder, the Optionee will pay to the Corporation or make
arrangements satisfactory to the Committee regarding payment of any federal,
state or local taxes of any kind required by law to be withheld upon the
exercise of such Option; and

(b) The Corporation shall, to the extent permitted or
required by law, have the right to deduct federal, state and local taxes of any
kind required by law to be withheld upon the exercise of such Option from any
payment of any kind otherwise due to the Optionee. For withholding tax
purposes, the shares of Common Stock shall be valued on the date the
withholding obligation is incurred.

(c) The Corporation shall not be obligated to advise any
Optionee of the existence of any such tax or the amount which the Corporation
will be so required to withhold.

10. Agreement by Optionee With Respect to Section 16. If the
Optionee is subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, the grant of this option shall not
be effective until such person complies with the reporting requirements of
Section 16(a).

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 7
<PAGE> 8
11. Term of Plan. Options may be granted pursuant to the Plan
from time to time within a period of ten years from the date the Plan is
adopted by the Board, or the date the Plan is approved by the shareholders of
the Corporation, whichever is earlier.

12. Amendment and Termination of the Plan.

(a) (i) The Board at any time and from time to time may
suspend, terminate, modify or amend the Plan;

(ii) provided, however, that any amendment that
would: (A) materially increase the benefits accruing to participants under
the Plan, or (B) increase the number of shares of Common Stock as to which
Options may be granted under the Plan or (C) materially modify the
requirements as to eligibility for participation in the Plan, shall be subject
to the approval of the holders of a majority of the shares of Common Stock of
the Corporation presented or represented, and entitled to vote at a duly
constituted and held meeting of shareholders;

(iii) provided further that any such increase or
modification that may result from adjustments authorized by Section 8(i) hereof
shall not require such approval.

(b) Except as provided in Section 8 hereof, no suspension,
termination, modification or amendment of the Plan may adversely affect any
Option previously granted, unless the written consent of the Optionee is
obtained.

13. Approval of Shareholders. The Plan shall take effect upon its
adoption by the Board but shall be subject to the approval of the holders of a
the shares of Common Stock of the Corporation present or represented and
entitled to vote at a duly constituted and held meeting of shareholders, which
approval must occur within 12 months after the date the Plan is adopted by the
Board.

14. Assumption. The terms and conditions of any outstanding
Options granted pursuant to this Plan shall be assumed by, be binding upon and
inure to the benefit of any successor corporation to the Corporation and shall
continue to be governed by, to the extent applicable, the terms and conditions
of this Plan. Such successor corporation shall not otherwise be obligated to
assume this Plan.

15. Termination of Right of Action. Every right of action arising
out of or in connection with the Plan by or on behalf of the Corporation or of
any Subsidiary, or by any shareholder of the Corporation or of any Subsidiary
against any past, present or future member of the Board, or against any
employee, or by an employee (past, present or future) against the Corporation
or any Subsidiary, will, irrespective of the place where an action may be
brought and irrespective of the place of residence of any such shareholder,
director or employee, cease and be barred by the expiration of three years from
the date of the act or omission in respect of which such right of action is
alleged to have risen.

16. Tax Litigation. The Corporation shall have the right, but not
the obligation, to contest, at its expense, any tax ruling or decision,
administrative or judicial, on any issue which is related to the Plan and which
the Board believes to be important to holders of Options issued under the Plan
and to conduct any such contest or any litigation arising therefrom to a final
decision.

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 8
<PAGE> 9
17. Adoption.

(a) This Plan was approved by the Board of Directors of the
Corporation at a meeting on January 16, 1998.

(b) This Plan was approved by the shareholders of the
Corporation at a meeting on _______________, 199__.

USTMAN Technologies, Inc.

ATTEST: By: /s/ Dan R. Cook
------------------------------
President

/s/ David Booth
- -------------------------
Secretary

USTMAN TECHNOLOGIES, INC. 1998 STOCK OPTION PLAN PAGE 9

<PAGE> 1
EXHIBIT 23.0

Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement
(Forms S-3 No. 33-64310) and related Prospectus of USTMAN Technologies, Inc. of
our report dated October 9, 1998, with respect to the consolidated financial
statements of USTMAN Technologies, Inc. included in its Annual Report on Form
10-KSB for the year ended June 30, 1998, filed with the Securities and Exchange
Commission.

/s/ ERNST & YOUNG LLP

Denver, Colorado
October 13, 1998

<ARTICLE> 5

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<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
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<SECURITIES> 0
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