CONVERSION TECHNOLOGIES INTERNATIONAL INC, DEF 14A, 1998-02-26

CONVERSION TECHNOLOGIES INTERNATIONAL INC
DEF 14A, 1998-02-26
ABRASIVE, ASBESTOS & MISC NONMETALLIC MINERAL PRODS

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SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant |X|
Filed by a Party other than the Registrant | |

Check the appropriate box:
| | Preliminary Proxy Statement

| | Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))

Conversion Technologies International, Inc.
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(Name of Registrant as Specified in Its Charter)

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(Name of Person(s) Filing Proxy Statement, if Other Than Registrant)

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Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
| | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

(1) Title of each class of securities to which transaction applies:

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

(2) Aggregate number of securities to which transaction applies:

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

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):

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

(4) Proposed maximum aggregate value of transaction:

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

(5) Total fee paid:

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| | Fee paid previously with preliminary materials.

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

| | Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.

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

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement no.:

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(3) Filing Party:

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(4) Date Filed:

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<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
3452 LAKE LYNDA DRIVE
SUITE 280
ORLANDO, FLORIDA 32187

March 2, 1998

To Our Stockholders:

You are most cordially invited to attend the 1998 Annual Meeting of
Stockholders of Conversion Technologies International, Inc. at 10:00 a.m. (local
time), on Tuesday, March 31, 1998, at the offices of the Company, 3452 Lake
Lynda Drive, Suite 280, Orlando, Florida.

The Notice of Meeting and Proxy Statement on the following pages
describe the matters to be presented at the meeting.

It is important that your shares be represented at this meeting to
assure the presence of a quorum. Whether or not you plan to attend the meeting,
we hope that you will have your stock represented by signing, dating and
returning your proxy in the enclosed envelope, which requires no postage if
mailed in the United States, as soon as possible. Your stock will be voted in
-------------------
accordance with the instructions you have given in your proxy.

Thank you for your continued support.

Sincerely,

William L. Amt,
President and Chief Executive Officer

<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
3452 Lake Lynda Drive
Suite 280
Orlando, Florida 32817

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

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

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of Conversion Technologies International, Inc., a Delaware
corporation (the "Company"), will be held at the offices of the Company at 3452
Lake Lynda Drive, Suite 280, Orlando, Florida 32817 on March 31, 1998, at 10:00
a.m. (local time) for the following purposes:

1. to elect directors of the Company to serve until the next Annual
Meeting of Stockholders of the Company and until their successors are
duly elected and qualified;

2. to consider and vote upon a proposal to amend the Restated Certificate
of Incorporation of the Company, as amended, to increase the number of
authorized shares of Common Stock from 25,000,000 shares to 50,000,000
shares (see the Company's Proxy Statement for important information
concerning (i) agreements by certain shareholders to vote FOR this
proposal and (ii) consequences to the Company if this proposal is not
adopted);

3. to consider and vote upon a proposal to amend the Company's 1994 Stock
Option Plan for Non-Employee Directors (the "Plan") to increase the
maximum number of shares of Common Stock available for issuance from
100,000 to 250,000 shares;

4. to ratify the selection of Ernst & Young LLP as auditors for the
Company for the fiscal year ending June 30, 1998; and

5. to transact such other business as may properly come before the
Meeting or any adjournments thereof.

Only stockholders of record at the close of business on February 2, 1998,
are entitled to notice of and to vote at the Meeting.

By Order of the Board of Directors,
William L. Amt
President and Chief Executive Officer

Orlando, Florida
March 2, 1998

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, PLEASE READ THE
ENCLOSED PROXY STATEMENT AND COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
IN THE ENVELOPE PROVIDED.

<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
3452 Lake Lynda Drive
Suite 280
Orlando, Florida 32817

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

PROXY STATEMENT

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

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 31, 1998

This Proxy Statement is being mailed to you in connection with the
solicitation of proxies by the Board of Directors (the "Board") of Conversion
Technologies International, Inc., a Delaware corporation (the "Company"), for
use at the Annual Meeting of Stockholders (the "Meeting") of the Company, to be
held on March 31, 1998 at 10:00 a.m. (local time) at the offices of the Company
at 3452 Lake Lynda Drive, Suite 280, Orlando, Florida and at any adjournments
thereof.

SOLICITATION OF PROXIES

All shares represented by duly executed proxies in the form enclosed
herewith that are received by the Company prior to the Meeting will be voted at
the Meeting as instructed in such proxies. There are boxes on the proxy card to
vote for or to withhold authority to vote for the director nominees, and there
are boxes to vote for or against or to abstain on each proposal described in
this Proxy Statement. If no instructions are given, the shares represented by
the proxies will be voted (i) FOR the eight nominees named herein as directors
of the Company, (ii) FOR the proposal to amend the Restated Certificate of
Incorporation of the Company, as amended, to increase the number of authorized
shares of Common Stock from 25,000,000 shares to 50,000,000, (iii) FOR the
proposal to amend the Company's 1994 Stock Option Plan for Non-Employee
Directors (the "Stock Option Plan for Non-Employee Directors") to increase the
maximum number of shares of Common Stock available for issuance from 100,000 to
250,000 shares, (iv) FOR the ratification of the appointment of Ernst & Young
LLP as auditors for the fiscal year ending June 30, 1998 and (v) at the
discretion of the proxy holders on any other matter that may properly come
before the meeting or any adjournment thereof.

A stockholder may revoke a previously executed proxy at any time prior to
its exercise by (i) delivering a later-dated proxy, (ii) giving written notice
of revocation to the Secretary of the Company at the address set forth above at
any time before such proxy is voted or (iii) voting in person at the Meeting. No
proxy will be voted if the stockholder attends the Meeting and elects to vote in
person. If a stockholder does not intend to attend the Meeting, any proxy or
notice should be returned to the Company for receipt by the Company not later
than the close of business on March 26, 1998.

<PAGE>

Enclosed herewith is a copy of the Company's Annual Report on Form 10-KSB
containing financial statements for the fiscal year ended June 30, 1997
(sometimes referred to herein as "Fiscal Year 1997"), as amended. This Proxy
Statement and the form of proxy enclosed herewith were first mailed to
stockholders on or about March 2, 1998. The mailing address of the Company's
principal executive offices is 3452 Lake Lynda Drive, Suite 280, Orlando,
Florida 32817.

The Board does not know of any matter other than as set forth herein that
is expected to be presented for consideration at the Meeting. If other matters
properly come before the Meeting, however, the persons named in the accompanying
proxy (each of whom is an officer of the Company) intend to vote thereon in
accordance with their judgment.

RECORD DATE, OUTSTANDING VOTING
SECURITIES AND VOTES REQUIRED

The record date for determining the holders of Common Stock entitled to
vote on the actions to be taken at the Meeting is the close of business on
February 2, 1998 (the "Record Date"). The Company has two classes of voting
securities outstanding: Common Stock, $0.00025 par value (the "Common Stock"),
and Series A Convertible Preferred Stock, par value $0.001, stated value $10.00
(sometimes referred to herein as the "Convertible Preferred Stock" or "Preferred
Stock"). Each holder of the Common Stock on the Record Date is entitled to cast
one vote per share held at the Meeting. The holders of the Convertible Preferred
Stock are entitled to vote together with the holders of the Common Stock and are
entitled to the number of votes equal to the number of shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock as of the Record
Date. At the Record Date, each share of Convertible Preferred Stock was
convertible into ten shares of Common Stock. As of the Record Date, 5,539,745
shares of Common Stock were outstanding and 553,000 shares of Convertible
Preferred Stock were outstanding. Accordingly, the holders of the shares of
Common Stock and Preferred Stock on the Record Date will be entitled to cast a
total of 11,069,745 votes. There are no cumulative voting rights.

Holders of a majority of the shares entitled to vote must be present at the
Meeting, in person or by proxy, so that a quorum may be present for the
transaction of business. The affirmative vote of the holders of a majority of
the shares entitled to vote and be present at the Meeting, in person or by
proxy, is necessary for the election of directors of the Company and for the
approval of each proposal described in this Proxy Statement. Broker non-votes
will not be counted as present at the Meeting. Abstentions are included in the
shares present at the Meeting for purposes of determining whether a quorum is
present, and will have the effect of a vote against each proposal to be voted
upon at the Meeting.

ELECTION OF DIRECTORS

At the Meeting, eight persons will be elected to serve as directors until
the Company's next Annual Meeting of Stockholders and until their successors
have been duly elected and

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<PAGE>

qualified as provided in the Company's Restated Certificate of Incorporation and
By-Laws. The following persons have been nominated and, if elected, have
consented to serve as directors of the Company. All nominees are presently
members of the Board. Information about each such nominee is set forth below.

WILLIAM L. AMT, 56, joined the Company in August 1997 as President and
Chief Executive Officer and was appointed to the Board in September 1997. Prior
to joining the Company, Mr. Amt was the President and Chief Executive Officer of
Octagon, Inc. ("Octagon"), a publicly-held company providing radiological
control and operations and maintenance services to utilities and governmental
agencies. From 1991 until joining Octagon in November 1993, Mr. Amt was both the
Vice President International and the Vice President of the Chemicals Business
Unit for Ford Bacon & Davis, Incorporated, a multinational engineering and
consulting firm serving the chemical and hydrocarbon industry. From 1988 to
1991, Mr. Amt was Director of Marketing and Business Development Manager for
Simons Eastern Consultants, Inc., a major international design and engineering
firm. Mr. Amt is a registered professional engineer and holds a B.S. Degree from
Purdue University.

ECKARDT C. BECK, 54, has been a director of the Company since February
1995, Chairman of the Board since February 1997, and served as Acting President
and Chief Executive Officer from June to August 1997. Mr. Beck served as the
Chairman and Chief Executive Officer of Air & Water Technologies Corporation
from October 1987 through June 1994 and as a director from June 1990 through
November 1994. Mr. Beck has served as Chairman and Chief Executive Officer of
other environmental technologies companies prior to 1987. Mr. Beck also served
as the Assistant Administrator of the United States Environmental Protection
Agency in charge of the national water and waste programs and as the Regional
Administrator of EPA Region 2. Except with respect to Mr. Beck's involvement
with the Company as set forth above, from December 1994 through the present, Mr.
Beck has not had any employment or material consulting relationships with any
entity.

DOUGLAS M. COSTLE, 58, was appointed to the Company's Board of Directors in
October 1997. Mr. Costle has been a director of Niagara Mohawk Power
Corporation, a publicly held utility company, from January 1991 through present.
Mr. Costle is currently a director of several privately held technology
companies and is an Independent Trustee of John Hancock Mutual Funds. Retired
since 1992, Mr. Costle served as Dean of Vermont Law School from 1987 to 1992
and is a former Administrator of the U.S. Environmental Protection Agency.

STEPHEN D. FISH, 51, was appointed to the Company's Board of Directors in
October 1997. Mr. Fish has been President of Fish Enterprises, a privately held
real estate development and management company, from 1970 through present. Mr.
Fish also serves on the Advisory Board of Fleet Bank of Connecticut.

PETER H. GARDNER, 31, has been a director of the Company since October
1995. Since January 1998, Mr. Gardner has been an independent consultant to
Media Technology Ventures, a privately held venture capital firm. From July 1994
through December 1997, Mr. Gardner was an Investment Officer at Technology
Funding Inc., the Managing General Partner of two

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<PAGE>

investment funds which are stockholders of and consultants to the Company. See
"Security Ownership of Certain Beneficial Owners, Directors and Management" and
"Certain Relationships and Related Transactions." Mr. Gardner held the position
of Project Leader and Project Scientist at Roy F. Weston, Inc., an environmental
engineering firm, from June 1990 through August 1993. Mr. Gardner was pursuing a
graduate degree in business administration between September 1993 and June 1994.

ALEXANDER P. HAIG, 45, has been a director of the Company since May 1996.
Since February 1996, Mr. Haig has been President and Chief Operating Officer of
Sky Station International Inc., a privately-held telecommunications company. Mr.
Haig has served since 1988 as a principal and legal counsel to Worldwide
Associates, Inc., a privately-held business adviser to both U.S. and foreign
countries for marketing and sales activities. Prior to 1988, Mr. Haig was an
attorney in private practice.

IRWIN M. ROSENTHAL, 68, was appointed as a director of the Company in May
1996. Mr. Rosenthal is an attorney and since 1960 has specialized in securities
law. He is currently a senior partner at Rubin Baum Levin Constant & Friedman.
From January 1990 to November 1991, Mr. Rosenthal was a senior partner at Baer,
Marks and Upham and prior thereto he was an attorney at various other law firms.
Mr. Rosenthal serves as Secretary and as a director of Magar Inc., a private
investment firm, of which he is a principal stockholder. He is also a director
of Magna-Lab, Inc., a publicly-traded medical technology company, Symbollon
Corporation, a publicly-traded chemical and medical technology company, Life
Medical Sciences, Inc., a publicly-traded medical technology company, and
Echocath, Inc., a publicly-traded medical technology company, and is a general
partner of Alliance which is a partnership which invests in companies and may
take on a management role in such companies.

DAVID R. WALNER, 30, has been an Associate Director of Paramount Capital,
Inc. ("Paramount"), a biotechnology and biopharmaceutical investment banking
firm, and an Associate Director and Secretary of Paramount Capital Asset
Management, Inc. ("PCAM"), a money management firm specializing in the life
sciences industry, since May 1996. Mr. Walner currently serves on the Board of
Directors of several privately held biotechnology companies and as Secretary of
Pacific Pharmaceuticals, Inc. and Genta Incorporated, both of which are publicly
traded biotechnology companies. Prior to joining Paramount, Mr. Walner was an
attorney at the law firm of Skadden, Arps, Slate, Meagher & Flom from September
1992 to May 1996. Mr. Walner received a J.D. from the University of Michigan Law
School and attended the Scholars Program in Medicine at Washington University in
St. Louis where he received a B.A. degree.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE
NOMINEES FOR BOARD OF DIRECTORS.

MEETINGS OF THE BOARD AND COMMITTEES

During the Fiscal Year 1997, the Board met nine times and acted by written
consent in lieu of a meeting one time. Of the incumbent directors of the Board,
Alexander P. Haig and Irwin M. Rosenthal each attended less than 75% of the
meetings of the Board held during Fiscal Year 1997. The Board of Directors has
established four committees -- the Audit Committee, the

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<PAGE>

Compensation Committee, the Fairness Committee and the Nominating Committee. The
Executive Committee, which ceased to exist by Board action as of September 29,
1997, formerly had all of the powers of the Board, subject to limitations
provided by the Delaware General Corporation Law, and was comprised of Harvey
Goldman, the Company's former Vice-Chairman, President and Chief Executive
Officer, Scott A. Katzmann, a former director, and, after August 1996, Eckardt
C. Beck and Peter H. Gardner. The Audit Committee was comprised of Mr. Gardner
and Mr. Katzmann during Fiscal Year 1997. The Audit Committee oversees the
activities of the Company's independent auditors and reviews the Company's
internal accounting procedures and controls. The Compensation Committee was
comprised of Mr. Gardner and Mr. Katzmann during Fiscal Year 1997. The
Compensation Committee makes recommendations to the Board with respect to
general compensation and benefit levels, determines the compensation and
benefits for the Company's executive officers and administers the Company's
stock option and incentive plans. The Nominating Committee makes recommendations
to the Board with respect to candidates to fill vacancies on the Board,
recommends an appropriate slate of candidates for election each year, and
reviews senior officer candidates. Stockholders wishing to nominate director
candidates for consideration may do so by writing to the Nominating Committee at
the Company at 3452 Lake Lynda Drive, Suite 280, Orlando, Florida 32817. The
Fairness Committee makes recommendations to the Board with respect to
transactions involving related parties, oversees trading and SEC compliance
procedures and addresses corporate governance issues.

During Fiscal Year 1997, the Compensation Committee did not meet, but acted
by written consent four times; the Executive Committee met twice and acted once
by written consent; and the Audit Committee met twice. The Fairness Committee
and the Nominating Committee were not formed until after Fiscal Year 1997. The
current members of these Committees are: Audit Committee - Irwin M. Rosenthal
and Douglas M. Costle; Compensation Committee - Peter H. Gardner and Douglas M.
Costle; Fairness Committee - Alexander P. Haig and Stephen D. Fish; and
Nominating Committee - Peter H. Gardner and Douglas M. Costle.

EXECUTIVE OFFICERS

The following table sets forth the current executive officers of the
Company. See "Election of Directors" for a description of the business
experience of Mr. Amt.

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>

William L. Amt 56 President and Chief Executive Officer
William Gary Jellum 48 Vice President - Administration
John G. Murchie 60 Controller and Acting Chief Financial Officer
</TABLE>

WILLIAM GARY JELLUM joined the Company in October 1997 and has been Vice
President - Administration since January 1998. From December 1995 to October
1997, Mr. Jellum was Vice President - Human Resources at Octagon. From February
1991 to December 1995, Mr. Jellum was Senior Vice President at Trans Global
Associates, a privately-held human resource

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<PAGE>

consulting firm. Mr. Jellum received a B.A. in Economics and Psychology from
Brock University in Catharine, Ontario.

JOHN G. MURCHIE has been the Acting Chief Financial Officer of the Company
since January 1998, and Controller since September 1997. From February 1995 to
September 1997, Mr. Murchie was the Controller and Chief Administrative Officer
of Dunkirk International Glass & Ceramics Corporation ("Dunkirk"), a
wholly-owned subsidiary of the Company. From February 1994 to February 1995, Mr.
Murchie worked on a full time basis for Dunkirk as a consultant and was not
otherwise employed. From November 1985 to February 1994, Mr. Murchie was
employed by Rich Products Corporation, a privately-held food products company,
in various financial positions. Mr. Murchie received a B.S. in Business
Administration from Miami University of Ohio.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS, DIRECTORS AND MANAGEMENT

The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Series A Convertible Preferred Stock
(the "Convertible Preferred Stock") as of February 20, 1998 by (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock or Convertible Preferred Stock of the Company, (ii) each of the Company's
directors and director nominees, (iii) each of the Company's Named Executive
Officers (defined herein), and (iv) all directors and executive officers of the
Company as a group. Holders of the Convertible Preferred Stock are entitled to
the number of votes equal to the number of shares of Common Stock into which
such shares of Convertible Preferred Stock are convertible, and are entitled to
vote together with the holders of the Common Stock. Accordingly, the information
in the table below reflects ownership by the above individuals of each of the
Company's Common Stock (assuming the conversion of all outstanding shares of the
Convertible Preferred Stock) and the Convertible Preferred Stock separately.
Each share of Convertible Preferred Stock is currently convertible into ten
shares of Common Stock.
<TABLE>
<CAPTION>

Number of Percentage of
Shares Percentage of Convertible
Beneficially Voting Preferred
Name of Beneficial Owner (1) Owned(2) Power (3) Stock(4)
- ---------------------------- ------------ ------------- -------------
<S> <C> <C> <C>

Eckardt C. Beck (5).................. 185,171 1.7 1.8
William L. Amt (6)................... 60,000 * --
Peter H. Gardner (7)................. 25,338 * 5.7
Alexander P. Haig (8)................ 14,992 * --
Douglas M. Costle (9)................ 10,000 * --
Stephen D. Fish (10)................. 210,000 1.9 3.6
Irwin M. Rosenthal (11).............. 10,121 * --
David R. Walner ..................... -- -- --
John G. Murchie (12)................. 1,730 * --

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<PAGE>

William Gary Jellum (13)............. -- -- --
All officers and directors as a group
(10 persons) (14).................. 502,014 4.5 5.4
Harvey Goldman (15).................. 185,964 1.7 --
c/o Vestcom International, Inc.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071
Perry A. Pappas (16)................. 66,923 * --
c/o Buchanan Ingersoll
500 College Road East
Princeton, New Jersey 08540
Technology Funding Venture Partners V, 832,535 7.4 5.7
An Aggressive Growth Fund, L.P.(17)
The Aries Fund, a Cayman
Islands Trust (18)................. 835,050 7.4 11.9
787 7th Avenue, 48th Floor
New York, New York 10019
Aries Domestic Fund, L.P. (19)....... 540,057 4.8 6.1
787 7th Avenue, 48th Floor
New York, New York 10019
Porter Partners, L.P. (20)........... 400,000 3.6 7.2
100 Shoreline, Suite 211B
Mill Valley, CA 94941
P.A.W. Offshore Fund, Ltd. (21)...... 500,000 4.5 9.0
90 Mees Pierson
904 East Bay Street
P.O. Box 55-6233
Nassau, Bahamas
J.F. Shea Co., Inc. (22)............. 300,000 2.7 5.4
655 Brea Canyon Road
Walnut, California 91789

- -----------
<FN>

* Less than one percent.

(1) Unless otherwise indicated and subject to applicable community property
laws, each stockholder has sole voting and investment power with respect to
all shares of Common Stock beneficially owned by such stockholder. Unless
otherwise indicated, the address of each stockholder is c/o Conversion
Technologies International, Inc., 3452 Lake Lynda Drive, Suite 280,
Orlando, Florida 32817.

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<PAGE>

subject to options or warrants that are presently exercisable or
exercisable within 60 days of January 28, 1998.

(3) Applicable percentage of voting power is based on the 11,069,745 shares of
Common Stock entitled to vote at the Meeting. That number is comprised of
5,539,745 outstanding shares of Common Stock and 5,530,000 shares of Common
Stock issuable upon conversion of 553,000 outstanding shares of Convertible
Preferred Stock. Shares of Common Stock subject to options that are
presently exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other
person.

(4) Applicable percentage of ownership is based on 5,530,000 shares of Common
Stock issuable upon conversion of the 553,000 shares of Convertible
Preferred Stock outstanding as of January 28, 1998.

(5) Includes currently exercisable options to purchase 61,338 shares of Common
Stock. Also includes options to purchase 10,000 shares of Common Stock
which are exercisable within 60 days. Excludes options to purchase 240,000
shares of Common Stock which are not exercisable within 60 days. The
address of such stockholder is 6345 NW 26th Terrace, Boca Raton, Florida
33496.

(6) Includes currently exercisable options to purchase 60,000 shares of Common
Stock. Excludes options to purchase 240,000 shares of Common Stock which
are not exercisable within 60 days.

(7) Includes currently exercisable options to purchase 25,338 shares of Common
Stock. Excludes options to purchase 31,000 shares of Common Stock which are
not exercisable within 60 days. Mr. Gardner was formerly an Investment
Officer at Technology Funding, Inc. ("TFI"), the Managing General Partner
of Technology Funding Partners III, L.P. ("TFP III") and Technology Funding
Partners V, an Aggressive Growth Fund, L.P. ("TFVP V"). Mr. Gardner
disclaims beneficial ownership of all securities of the Company owned by
TFP III and TFVP V.

(8) Includes currently exercisable options to purchase 10,121 shares of Common
Stock. Excludes options to purchase 15,000 shares of Common Stock which are
not exercisable within 60 days.

(9) Includes currently exercisable options to purchase 10,000 shares of Common
Stock. Excludes options to purchase 15,000 shares of Common Stock which are
not exercisable within 60 days.

(10) Includes currently exercisable options to purchase 10,000 shares of Common
Stock. Excludes options to purchase 15,000 shares of Common Stock which are
not exercisable within 60 days.

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<PAGE>

(11) Includes currently exercisable options to purchase 10,121 shares of Common
Stock. Excludes options to purchase 15,000 shares of Common Stock which are
not exercisable within 60 days.

(12) Includes currently exercisable options to purchase 1,730 shares of Common
Stock. Excludes options to purchase 102,000 shares of Common Stock which
are not exercisable within 60 days.

(13) Excludes options to purchase 100,000 shares of Common Stock which are not
exercisable within 60 days.

(14) Calculation does not include securities held by Mr. Goldman or Mr. Pappas
who are no longer directors or officers of the Company.

(15) Includes currently exercisable warrants to purchase 5,239 shares of Common
Stock. Mr. Goldman is no longer an officer or director of the Company. See
"Certain Relationships and Related Transactions Consulting Agreements".

(16) Includes currently exercisable options to purchase 56,923 shares of Common
Stock. Mr. Pappas is no longer an officer of the Company.

(17) Includes (A) securities held by TFVP V consisting of (i) 207,547 shares of
Common Stock, (ii) 78,750 shares of Common Stock issuable upon conversion
of 7,875 shares of Convertible Preferred Stock and (iii) 90,957 shares of
Common Stock issuable upon exercise of warrants which are exercisable
within 60 days, and (B) securities held by TFP III consisting of (i) 69,180
shares of Common Stock, (ii) 236,250 shares of Common Stock issuable upon
conversion of 23,625 shares of Convertible Preferred Stock and (iii)
134,513 shares of Common Stock issuable upon exercise of warrants which are
exercisable within 60 days. Also includes currently exercisable options
issued to Peter Gardner, formerly an Investment Officer of TFI, to purchase
15,338 shares of Common Stock. Excludes (i) options issued to Peter Gardner
to purchase 16,000 shares of Common Stock which are not exercisable within
60 days and (ii) options issued to Peter Gardner to purchase 25,000 shares
of Common Stock which were granted following the termination of his
employment with TFI.

(18) PCAM is the Investment Manager to The Aries Fund, a Cayman Island Trust
(the "Aries Trust"). Lindsay A. Rosenwald, M.D. is President and sole
shareholder of PCAM. PCAM and Dr. Rosenwald may be considered to
beneficially own the securities owned by the Aries Trust by virtue of their
authority to vote and/or dispose of the securities. PCAM and Dr. Rosenwald
disclaim beneficial ownership of all securities of the Company held by the
Aries Trust. Securities held by the Aries Trust consist of 46,888 Class A
Warrants which entitle the holder to acquire one share of Common Stock and
one Class B Warrant to acquire one share of Common Stock; warrants to
purchase an additional 81,274 shares of Common Stock; and 66,000 shares of
Convertible Preferred Stock convertible into 660,000

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<PAGE>

shares of Common Stock. In addition, Dr. Rosenwald beneficially owns
warrants to purchase 44,719 shares of the Company's Common Stock.

(19) PCAM is the General Partner of the Aries Domestic Fund L.P. Dr. Rosenwald
is the President and sole shareholder of PCAM. PCAM and Dr. Rosenwald may
be considered to beneficially own the securities owned by the Aries
Domestic Fund, L.P. by virtue of their authority to vote and/or dispose of
the securities. PCAM and Dr. Rosenwald disclaim beneficial ownership of all
securities of the Company held by the Aries Domestic Fund, L.P. Securities
held by Aries Domestic Fund, L.P. consist of 78,147 Class A Warrants which
entitle the holder to acquire one share of Common Stock and one Class B
Warrant to acquire one share of Common Stock; warrants to purchase an
additional 43,763 shares of Common Stock; and 34,000 shares of Convertible
Preferred Stock convertible into 340,000 shares of Common Stock. In
addition, Dr. Rosenwald beneficially owns warrants to purchase 44,719
shares of the Company's Common Stock.

(20) Jeffrey H. Porter, the Managing General Partner of Porter Partners, L.P.
Mr. Porter may be considered a beneficial owner of the securities owned by
Porter Partners, L.P. by virtue of his authority to vote and/or dispose of
the securities held by Porter Partners, L.P. Mr. Porter disclaims
beneficial ownership of all securities of the Company held by Porter
Partners, L.P.

(21) Peter Wright is the Investment Manager for the P.A.W. Offshore Fund, Ltd.
Mr. Wright may be considered the beneficial owner of the securities owned
by the P.A.W. Offshore Fund, Ltd. by virtue of his authority to vote and/or
dispose of the Company's securities held by P.A.W. Offshore Fund, Ltd. Mr.
Wright disclaims beneficial ownership of all securities of the Company held
by P.A.W. Offshore Fund, Ltd.

(22) Edmund H. Shea, Jr. is Vice President of J.F. Shea Co., Inc. Mr. Shea may
be considered the beneficial owner of the securities owned by J.F. Shea
Co., Inc. by virtue of his authority to vote and/or dispose of the
Company's securities held by J.F. Shea Co., Inc. Mr. Shea disclaims
beneficial ownership of all securities of the Company held by J.F. Shea
Co., Inc.
</FN>
</TABLE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with William L. Amt,
who became President and Chief Executive Officer in August 1997. See "Employment
Contracts and Employment Termination Arrangements" below.

CONSULTING AGREEMENTS

In March 1995, the Company entered into a Consulting Agreement with Eckardt
C. Beck. The Consulting Agreement was amended in February and August 1997.
Pursuant to the

-10-
<PAGE>

Consulting Agreement, Mr. Beck has agreed to, among other things, assist the
Company in strategic planning, business development, investor relations, fund
raising and such other activities as shall be reasonably requested by the Board
and within Mr. Beck's areas of expertise. Mr. Beck will receive a monthly
consulting fee of $8,000 pursuant to the Consulting Agreement until its
expiration in August 2000.

In May 1995, the Company entered into a consulting agreement with TFP III
and TFP V (the "TFI Consulting Agreement"). Pursuant to the TFI Consulting
Agreement, the consultants agreed to, among other things, introduce the Company
to strategic partners and potential customers, provide strategic marketing
advice, identify complementary technologies with strategic synergies, and
identify and assist in procuring appropriate media channels for the Company's
products. As compensation for their services, the consultants received warrants
which were amended in May 1996 to become warrants to purchase 69,177 shares of
the Company's common stock, at an exercise price of $5.28 per share. Peter H.
Gardner, a director of the Company, was formerly an Investment Officer at TFI,
the Managing General Partner of TFP III and TFVP V, and serves as TFI's designee
on the Board of Directors.

In July 1995, the Company entered into a Project Development Assistance
Agreement with TFI (the "TFI Assistance Agreement"). Pursuant to the TFI
Assistance Agreement, certain designated principals of TFI will, among other
things, assist the Company in project development efforts both in the United
States and abroad by identifying potential strategic partners, assisting in
obtaining regulatory approvals and providing regulatory guidance and otherwise
facilitating project development activities. The Company will pay to TFI or its
designees a success fee of $75,000 for completed projects and a fee of 7% on any
funds invested in the Company by a strategic partner introduced by TFI (together
with warrants to purchase that number of shares of Common Stock of the Company
as is equal to 5% of the amount invested divided by the Common Stock share
purchase price, at an exercise price equal to 110% of such purchase price). The
term of the TFI Assistance Agreement is one year, subject to renewal, cancelable
by either party upon 30 days' prior written notice.

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminated his prior employment agreement with the Company and
contains mutual releases for claims under such prior agreement. Pursuant to the
Consulting Agreement, Mr. Goldman has agreed to, among other things, assist the
Company in project development, strategic planning and such other activities as
shall be reasonably requested by the Board of Directors and within Mr. Goldman's
areas of expertise. Mr. Goldman is entitled to receive a monthly consulting fee
of $10,000 per month for nine months terminating with the final payment due in
June 1998.

In January 1998, Jack D. Hays, Jr. and Richard H. Hughes, formerly
executive officers of the Company, ceased to be employed with the Company. In
connection with the termination of their employment with the Company, each of
Mr. Hays and Mr. Hughes entered into a Termination Agreement with the Company.
The Termination Agreements (i) terminate the Employment Agreements between the
Company and Mr. Hays and Mr. Hughes (except with respect to continued
indemnification as former officers of the Company and confidentiality

-11-
<PAGE>

obligations of Mr. Hays and Mr. Hughes), (ii) provide that Mr. Hays and Mr.
Hughes forfeit all stock options held by them whether or not vested, (iii)
provide that each of them will receive a cash payment of $18,000 in full
satisfaction of accrued salary and any other amounts otherwise due under their
Employment Agreements, (iv) contain a release by Mr. Hays and Mr. Hughes with
respect to any claims against the Company and (v) require Mr. Hays and Mr.
Hughes to refrain from soliciting any employees of the Company. The Company has
also entered into a marketing and sales representative agreement (the
"Manufacturer's Representative Agreement") with Engineered Product Sales
Associates, a company formed and owned by Messrs. Hays and Hughes. The
Manufacturer's Representative Agreement provides for commission payments based
on sales at various levels. The Company believes that the terms of the
Manufacturer's Representative Agreement are no less favorable than those
available from unaffiliated third parties.

SERIES A CONVERTIBLE PREFERRED STOCK

On December 8, 1997, the Company consummated the final closing of a private
placement of the Company's Convertible Preferred Stock (the "Convertible
Preferred Stock Private Placement"). The Company sold an aggregate of 553,000
shares of Preferred Stock. Each share of Preferred Stock has a stated value of
$10.00 and is convertible into 10 shares of Common Stock at a conversion price
of $1.00 per share. Paramount (sometimes referred to herein as the "Placement
Agent") acted as placement agent for the Convertible Preferred Stock Private
Placement and received an aggregate placement fee of $497,700, and an aggregate
expense allowance of $232,700. In addition, the Company granted to the Placement
Agent, and/or its designees, warrants to purchase 55,300 shares of Convertible
Preferred Stock at an exercise price equal to $11.00 per share. The warrants
will remain exercisable until June 8, 2008. The warrants contain certain
antidilution and registration rights provisions. David R. Walner, a nominee for
director, is an Associate Director of Paramount.

The proceeds of the offering were used to (i) redeem $8 million principal
amount IDA Bonds for approximately $1.6 million; (ii) repay the $500,000
principal amount 1997 Bridge Loan, including interest; (iii) pay transaction
costs incurred in connection with the offering; and (iv) provide working capital
for the Company's operations.

PRIOR PREFERRED STOCK PLACEMENT

Between August 1994 and May 1995, Paramount acted as placement agent in
connection with the private placement (the "Initial Private Placement") of a
prior series of Preferred Stock (the "Old Preferred Shares"). Paramount received
$632,250 in commissions and a non-accountable expense allowance of $281,000 in
consideration of its services as placement agent. In addition, designees of
Paramount received, as additional compensation, warrants to purchase an
aggregate of 281,000 Old Preferred Shares, at an exercise price of $2.75 per
share, exercisable for a period of 10 years following the closing of the
offering. Such warrants were amended and restated in May 1996 to be warrants to
purchase 97,185 shares of Common Stock at an exercise price of $4.84 per share.
In connection with the Initial Private Placement, Paramount was entitled to
receive a fee of 13% on any investments received by the Company from investors
or

-12-
<PAGE>

corporate partners (excluding project finance investors) that were introduced to
the Company by Paramount until November 1997.

Lindsay A. Rosenwald, M.D., is the President, Chairman and sole
stockholder, and Peter Kash is a Managing Director, of Paramount. In connection
with the Initial Private Placement, Dr. Rosenwald and Mr. Kash received warrants
to purchase shares of Old Preferred Shares, which currently represent warrants
to purchase 34,353 and 4,788 shares of Common Stock, respectively.

BRIDGE LOANS

In connection with a bridge financing in 1994 (the "1994 Financing"),
designees of Paramount received warrants to purchase an aggregate of 7,307
shares of Common Stock with an initial per share exercise price equal to $13.55.
Such warrants were amended and restated in May 1996 to become exercisable for
20,750 shares of Common Stock at an exercise price of $4.77 per share. Such
warrants include warrants to purchase 10,374 shares of Common Stock issued to
Dr. Rosenwald and warrants to purchase 4,671 shares of Common Stock issued to
Mr. Kash.

In September, October and November 1995, the Company borrowed an aggregate
of $650,000 from stockholders of the Company or their affiliates for working
capital. Of such amount, an aggregate of $250,000 was provided by TFP III and
TFVP V, and an aggregate of $200,000 was provided by Aries Domestic Fund, L.P.
and the Aries Trust (collectively, the "Aries Funds"), two funds for which PCAM
is the general partner and investment manager, respectively. Dr. Rosenwald is
the President and sole stockholder of PCAM. The principal amount of such loans
was exchanged in December 1995 for $650,000 principal amount of new notes and
warrants to purchase 325,000 shares of Common Stock (which warrants were
exchanged automatically on the closing of the Company's initial public offering
("IPO") for Redeemable Class A Warrants to purchase 325,000 shares of Common
Stock). The notes received by such stockholders were repaid at the closing of
the IPO.

In March 1996, the Company borrowed an aggregate of $200,000 pursuant to
promissory notes bearing interest at the rate of 10% per annum. Of such amount,
Dr. Rosenwald provided $150,000, Scott A. Katzmann, a former director of the
Company, and Peter Kash each provided $18,750 and Harvey Goldman provided
$12,500. Such notes were repaid at the closing of the IPO.

In May 1996, the Company borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, which were
repaid at the closing of the IPO.

-13-
<PAGE>

warrants expire July 21, 2002 and contain certain antidilution and registration
rights provisions. In August 1997, the Aries Funds purchased 100,000 shares of
Convertible Preferred Stock for $1,000,000 in the Convertible Preferred Stock
Private Placement.

ISSUANCES OF SECURITIES TO EXECUTIVE OFFICERS AND DIRECTORS

From the period from inception to December 1995, the Company granted
options to purchase an aggregate of 48,891 shares of Common Stock to executive
officers and directors of the Company with exercise prices ranging from $ 13.55
to $20.53 per share. Such options were repriced in May 1996 to $4.40 per share.

In April 1996, the Company issued non-qualified stock options outside of
the Employee Stock Option Plan, all of which are Escrow Options (defined
herein), to Mr. Goldman, to purchase 50,000 shares of Common Stock. Such options
have an exercise price of $4.40 per share and vest ratably over three years on
an annual basis. Mr. Goldman was also granted options to purchase 40,000 shares
of Common Stock in October 1996 at an exercise price of $4.40. All of Mr.
Goldman's options have terminated.

On July 1, 1996, each director received an option to purchase 121 shares of
Common Stock pursuant to an automatic grant under the Company's Stock Option
Plan for Non-Employee Directors. Such options have an exercise price of $5.00
per share and are fully vested.

On October 11, 1996, Mr. Goldman and Mr. Pappas purchased 80,000 and 10,000
shares, respectively, of Common Stock for a purchase price of $.00025 per share,
pursuant to restricted stock grant awards under the 1996 Employee Incentive
Plan, which shares are fully vested.

On October 15, 1996, the Board of Directors granted options to its
non-employee directors pursuant to the Stock Option Plan for Non-Employee
Directors to purchase an aggregate of 50,000 shares of Common Stock. Such
options have an exercise price of $3.125 per share and are fully vested.

On July 1, 1997, Messrs. Hays and Hughes, former executive officers of the
Company, were granted incentive stock options to purchase 100,000 and 75,000
shares of Common Stock, respectively, at an exercise price of $1.625 per share.
Such options were canceled in connection with the termination of their
employment with the Company in January 1998.

On July 22, 1997, Messrs. Beck and Pappas were granted non-qualified stock
options to purchase 300,000 and 20,000 shares, respectively, of Common Stock at
an exercise price of $1.375. Mr. Beck's options vest twenty percent (20%) at
issuance and twenty percent (20%) on the first, second, third and fourth
anniversary of the date of issuance. Mr. Pappas' options were vested upon
issuance.

On August 1, 1997, Mr. Amt was granted a non-qualified stock option to
purchase 300,000 shares of Common Stock at an exercise price of $1.375. Twenty
percent (20%) vest on the first, second, third and fourth anniversary of the
date of issuance.

-14-
<PAGE>

On August 6, 1997, Messrs. Gardner and Katzmann were each granted stock
options to purchase 20,000 shares of Common Stock at an exercise price of $1.875
under the Stock Option Plan for Non-Employee Directors. Twenty percent (20%) of
such options vested upon issuance and twenty percent (20%) vest on the first,
second, third and fourth anniversary of the date of issuance. Mr. Katzmann
ceased to be a director of the Company in December 1997 and all options granted
to Mr. Katzmann under the Stock Option Plan for Non-Employee Directors have
expired.

On August 29, 1997, Mr. Fish purchased 20,000 shares of Convertible
Preferred Stock for $200,000, and on September 5, 1997, Mr. Beck purchased
10,000 shares of Convertible Preferred Stock for $100,000 in the Convertible
Preferred Stock Private Placement.

On January 27, 1998, Messrs. Costle, Fish and Gardner were each granted
stock options to purchase 25,000 shares of Common Stock at an exercise price of
$0.78 (the closing price of the Common Stock on the Nasdaq SmallCap Market on
such date) under the Stock Option Plan for Non-Employee Directors. Forty percent
(40%) of such options vested upon issuance and twenty percent (20%) vest on the
first, second and third anniversary of the date of issuance. Also on January 27,
1998, Messrs. Rosenthal and Haig were each granted stock options to purchase
20,000 shares of Common Stock at an exercise price of $0.78 under the Stock
Option Plan for Non-Employee Directors. Twenty-five percent (25%) of such
options vested upon issuance and twenty-five percent (25%) vest on the first,
second and third anniversary of the date of issuance. Each of these grants under
the Stock Option Plan for Non-Employee Directors is subject to the stockholders
approving the proposal to increase the maximum number of shares of Common Stock
available for issuance under the Stock Option Plan for Non-Employee Directors
from 100,000 to 250,000 shares. In addition, Scott A. Katzmann, a former
director of the Company, was granted an option to purchase 15,000 shares of
Common Stock with an exercise price of $0.78 outside of the Company's stock
option plans.

Also on January 27, 1998, Messrs. Murchie and Jellum were each granted
stock options to purchase 100,000 shares of Common Stock at an exercise price of
$0.78. Thirty-three percent (33%) of such options vest on the first, second and
third anniversary of the date of issuance.

Also on January 27, 1998, the Board repriced options to purchase 300,000
shares of Common Stock held by each of Mr. Beck and Mr. Amt from $1.375 to $0.78
per share (the last reported sale price of the Common Stock as of such date)
under its 1996 Long-Term Employee Incentive Plan, and options to purchase an
aggregate of 21,580 shares of Common Stock outstanding under the Stock Option
Plan for Non-Employee Directors held by Mr. Beck, Mr. Haig and Mr. Rosenthal
from exercise prices ranging from $3.125 to $5.00 to an exercise price of $0.78
per share.

BOARD DESIGNEE AND OTHER TFI COVENANTS

-15-
<PAGE>

officers, directors and consultants only pursuant to Board approved plans and
agreements containing three-year vesting provisions (except in the case of sales
of stock or grants of options to new employees where the Board determines
otherwise for valid business reasons). Such covenants terminate upon the earlier
of (a) May 1999 and (b) such time as TFP III and TFVP V cease to hold
approximately 18,270 shares of Common Stock in the aggregate. At February 20,
1998, TFP III and TFVP V collectively hold 276,727 shares of Common Stock,
31,500 shares of Convertible Preferred Stock and warrants to purchase an
additional 225,470 shares of Common Stock.

ESCROW SECURITIES

In connection with the IPO, 740,559 shares of Common Stock (the "Escrow
Shares") and options to purchase an aggregate of 71,923 shares of Common Stock
(the "Escrow Options"), of which options to purchase 50,000 shares of Common
Stock have been canceled, were deposited into escrow by the holders thereof. The
Escrow Shares include shares held by Harvey Goldman (10,725) and Scott A.
Katzmann (12,179) shares. The Escrow Securities are not assignable or
transferable. The holders thereof have the power to vote the Escrow Shares while
such shares are held in escrow. Holders of any options in escrow may exercise
their options prior to their release from escrow; however, the shares issuable
upon any such exercise will continue to be held in escrow as Escrow Shares. The
Escrow Securities will be released from escrow, on a pro rata basis, if, and
only if, one or more of the following conditions is/are met: (a) the Company's
net income before provision for income taxes and exclusive of any extraordinary
earnings or charges which would result from the release of the Escrow Securities
(all as audited by the Company's independent public accountants) (the "Minimum
Pretax Income") amounts to at least $4.7 million for the fiscal year ending June
30, 1998; (b) the Minimum Pretax Income amounts to at least $7.0 million for the
fiscal year ending June 30, 1999; (c) the Minimum Pretax Income amounts to at
least $9.3 million for the fiscal year ending June 30, 2000; (d) the Closing
Price (as defined) of the Company Common Stock averages in excess of $11.25 per
share for 60 consecutive business days during the 18-month period commencing on
May 16, 1996; (e) the Closing Price of the Company Common Stock averages in
excess of $15.00 per share for 60 consecutive business days during the 18-month
period commencing 18 months from May 16, 1996; or (f) during the periods
specified in (d) or (e) above, the Company is acquired by or merged into another
entity in a transaction in which the value of the per share consideration
received by the stockholders of the Company on the date of such transaction or
at any time during the applicable period set forth in (d) or (e), respectively,
equals or exceeds the applicable levels set forth in (d) or (e), respectively.

The Minimum Pretax Income amounts set forth above are those originally
established at the time of the IPO. Such Minimum Pretax Income amounts have been
increased as a result of the issuance of the Preferred Stock.

-16-
<PAGE>

Stock are issued. The Closing Price amounts set forth above are subject to
adjustment in the event of any stock splits, reverse stock splits or other
similar events.

Any money, securities, rights or property distributed in respect of the
Escrow Securities, including any property distributed as dividends or pursuant
to any stock split, merger, recapitalization, dissolution or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Securities. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by October 15, 2000, the Escrow Securities,
as well as any dividends or other distributions made with respect thereto, will
be canceled and contributed to the capital of the Company. The Company expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could increase the loss
or reduce or eliminate the Company's net income for financial reporting purposes
for the period(s) during which such shares are, or become probable of being,
released from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total stockholders' equity, it may
have a negative effect on the market price of the Company's securities.

The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and D.H. Blair Investment Banking
Corp., the underwriter of the IPO, and should not be construed to imply or
predict any future earnings by the Company or any increase in the market price
of its securities.

All future transactions with beneficial owners of the Company's securities
and the Company's directors or executive officers will be on terms no less
favorable than those available from unaffiliated parties.

EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation earned by
Eckardt C. Beck, the Company's Chairman who served as Acting Chief Executive
Officer from June 1997 to August 1997, Harvey Goldman, the Company's former
Vice-Chairman, President and Chief Executive Officer, and Perry A. Pappas, the
Company's former Vice President and General Counsel (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the Company's fiscal years ended June 30, 1995, 1996 and 1997. No other
executive officer of the Company received salary and bonus compensation in
excess of $100,000 during Fiscal Year 1997. William L. Amt, the Company's
current President and Chief Executive Officer is not included below because his
employment began after Fiscal Year 1997.

-17-
<PAGE>

<TABLE>
Summary Compensation Table
<CAPTION>

Annual
Compensation Long-Term Compensation
------------ ----------------------

Restricted Securities
Stock Underlying
Name and Principal Position Year Salary($) Awards($) Options/SARs(#)
- --------------------------- ---- --------- --------- ---------------

<S> <C> <C> <C> <C>
Eckardt C. Beck .................................... 1997 $48,000(1) --- 10,121(2)
Chairman and Acting President and Chief 1996 $12,000 --- 1,217
Executive Officer from June 1997 to August 1997 1995 --- ---

Harvey Goldman...................................... 1997 $168,750(3) $260,000(4) 40,000(5)
Former Vice - Chairman, President and Chief 1996 $180,000 --- 50,000(6)
Executive Officer 1995 $180,000 --- ---

Perry A. Pappas..................................... 1997 $119,790 $ 32,500(7) 15,000(8)
Former Vice President, General Counsel and Secretary 1996 $104,167 21,923
1995 --- --- ---
- -----------
<FN>

* Less than one percent.

(1) Mr. Beck became Chairman in February 1997 and served as Acting President
and Chief Executive Officer from June 1997 to August 1997. Compensation
represents consulting fees pursuant to his Consulting Agreement with the
Company. See "Certain Relationships and Related Transactions." Mr. Beck
currently receives $8,000 per month under the Consulting Agreement.

(2) Granted in July and October 1996 pursuant to the Company's Non-Employee
Director Stock Option Plan. All options vest one year from grant date.

(3) Mr. Goldman ceased being an officer of the Company in June 1997. He is
currently a Consultant to the Company and receives $10,000 per month under
such Consulting Agreement through June 1998. See "Certain Relationships and
Related Transactions."

(4) Granted in October 1996 pursuant to the Company's Long-Term Employee
Incentive Plan. The shares vest in January 1998 and had a market value of
$130,000 on June 30, 1997. The shares are entitled to receive dividends if
and when declared by the Company. Mr. Goldman does not hold any other
restricted stock in the Company.

(5) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have terminated.

(6) Non-qualified stock options granted in April 1996. The options have
terminated.

(7) Granted in October 1996 pursuant to the Company's Long-Term Employee
Incentive Plan. The shares vest in January 1998 and had a market value of
$16,250 on June 30, 1997. The shares are entitled to receive dividends if
and when declared by the Company. Mr. Pappas does not hold any other
restricted stock in the Company.

(8) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have an exercise price of $4.40 per
share and are fully vested.
</FN>
</TABLE>

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<PAGE>

OPTION GRANTS IN FISCAL YEAR 1997

The following table sets forth the number of individual stock option grants
made to each Named Executive Officer during Fiscal Year 1997.
<TABLE>
<CAPTION>

Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price
Name Granted (#) Fiscal Year(1) ($/sh) Expiration Date
---- ----------- -------------- ------ ---------------
<S> <C> <C> <C> <C>

Eckardt C. Beck....... 121(2) * $4.40 7/1/06
10,000(3) 5.1% $5.00 10/15/06

Harvey Goldman........ 40,000 (4) 20.5% $4.40

Perry A. Pappas....... 15,000 (5) 7.7% $4.40 7/23/03

- -----------
<FN>

* Less than one percent.

(1) The Company granted options to purchase an aggregate of 155,347 shares of
Common Stock during Fiscal Year 1997.

(2) Granted on July 1, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on July 1, 1997.

(3) Granted on October 15, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on October 15, 1997.

(4) Non-qualified Options granted outside of the Company's Employee Stock
Option Plan. Mr. Goldman's options have terminated.

(5) Incentive Stock Options granted pursuant to the Company's Employee Stock
Option Plan. All options were vested in July 1997.
</FN>
</TABLE>

-19-
<PAGE>

AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION VALUES

The following table sets forth the aggregate value of unexercised options
to acquire shares of the Company's Common Stock by the Named Executive Officers
exercised during Fiscal Year 1997. None of the Named Executive Officers
exercised options during Fiscal year 1997.
<TABLE>
<CAPTION>

Number of
Unexercised Value of Unexercised In-the-
Options at FY- Money Options at FY-
End (#) End($)(1)
-------------------- ------------------------

Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ----------------------------------------- -------------------- ------------------------
<S> <C> <C>

Eckardt C. Beck ......................... 1,338/10,000 $0/$0

Harvey Goldman .......................... 0/0 $0/$0

Perry A. Pappas ......................... 7,308/29,615 $0/$0
<FN>

(1) Calculated based on the difference between the exercise price and the price
of a share of the Company's Common Stock on June 30, 1997. As of June 30,
1997, the exercise prices of each of the options held by the Named
Executive Officers exceeded the price of a share of the Company's Common
Stock.
</FN>
</TABLE>

COMPENSATION OF DIRECTORS

In Fiscal Year 1997, Directors who were full-time employees of the Company
received no cash compensation for services rendered as members of the Board or
committees thereof. Directors who were not full-time employees of the Company
received reimbursement of out-of-pocket expenses for attendance at Board
meetings. The Company maintains a Stock Option Plan for Non-Employee Directors,
pursuant to which options to purchase an aggregate of 50,847 shares of Common
Stock were issued during Fiscal Year 1997. Such options vest one year from the
date of grant and contain exercise prices of between $3.125 and $5.00 per share,
certain of which were repriced effective as of January 27, 1998 to $0.78 per
share. See "Certain Relationships and Related Transactions -- Issuances of
Securities to Executive Officers and Directors." Non-Employee directors received
no other compensation for their services as directors. Commencing in September
1997, non-employee directors, other than Mr. Beck, will also receive $1,000 for
each Board meeting attended in person and $500 for each committee meeting
attended.

The Company entered into a Consulting Agreement with Eckardt C. Beck in
March 1995, which was amended in February 1997 and August 1997. Pursuant to the
Consulting Agreement,

-20-
<PAGE>

Mr. Beck has agreed to, among other things, assist the Company in strategic
planning, business development, investor relations, fund raising and such other
activities as shall be reasonably requested by the Board and within Mr. Beck's
areas of expertise. Mr. Beck will receive a monthly salary of $8,000 pursuant to
the Consulting Agreement until its expiration in August 2000.

EMPLOYMENT CONTRACTS AND EMPLOYMENT TERMINATION ARRANGEMENTS

William L. Amt is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Amt receives an annual salary of $160,000, subject to increase at the discretion
of the Board of Directors. Mr. Amt will not receive an annual bonus or an
incentive bonus, except as may be provided by the Board of Directors. Both the
Company and Mr. Amt may terminate the employment agreement at any time by
providing written notice to the other party. If the termination is initiated by
the Company without cause, Mr. Amt is entitled to receive severance in the
amount of one years' salary. Mr. Amt has also been granted non-qualified stock
options to purchase 300,000 shares of Common Stock, the exercise price of which
was repriced from $1.375 to $0.78 per share in January 1998. See "--Issuances of
Securities to Executive Officers and Directors." Twenty percent (20%) of such
options were vested immediately and twenty percent (20%) of such options will
vest on the first, second, third and fourth anniversary of the date of issuance.

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for any claims under such prior agreement. Mr. Goldman
is entitled to receive a monthly consulting fee of $10,000 pursuant to the
Consulting Agreement through June 1998. In the event that the Company fails to
pay the consideration due under the Consulting Agreement, Mr. Goldman retains
all rights that he had under his prior agreement with respect to termination.

In January 1998, Jack D. Hays, Jr. and Richard H. Hughes ceased to be
executive officers of the Company. In connection with the termination of their
employment with the Company, each of Mr. Hays and Mr. Hughes entered into a
Termination Agreement with the Company. The Termination Agreements (i) terminate
the Employment Agreements between the Company and Mr. Hays and Mr. Hughes
(except with respect to continued indemnification as former officers of the
Company and confidentiality obligations of Mr. Hays and Mr. Hughes), (ii)
provide that Mr. Hays and Mr. Hughes forfeit all stock options held by them
whether or not vested, (iii) provide that each of them will receive a cash
payment of $18,000 in full satisfaction of accrued salary and any other amounts
otherwise due under their Employment Agreements, (iv) contain a release by Mr.
Hays and Mr. Hughes with respect to any claims against the Company and (v)
require Mr. Hays and Mr. Hughes to refrain from soliciting any employees of the
Company. The Company has also entered into a Manufacturer's Representative
Agreement with an entity formed and owned by such former officers pursuant to
which they will continue to perform marketing services for the Company. Pursuant
to such Manufacturer's Representative

-21-
<PAGE>

Agreement, such entity will receive compensation on a commission basis with
respect to its sales of the Company's products. See "Certain Relationships and
Related Transactions -- Consulting Agreements."

PROPOSAL TO AMEND THE RESTATED
CERTIFICATE OF INCORPORATION

Stockholders are being asked to consider and vote upon a proposal to amend
the Restated Certificate of Incorporation of the Company, as amended, to
increase the number of authorized shares of Common Stock from 25,000,000 to
50,000,000.

The Company currently has insufficient shares of authorized Common Stock to
satisfy its obligations with respect to all outstanding and reserved securities
which are convertible into or exercisable for Common Stock. The Company
currently has (A) 5,539,745 shares of Common Stock outstanding and (B)
outstanding or reserved securities convertible into or exercisable for an
additional 25,351,544 shares of Common Stock, consisting of (i) 440,000 shares
of Common Stock reserved for issuance under the 1994 Employee Stock Option Plan,
(ii) 800,000 shares of Common Stock reserved for issuance under the Company's
1996 Long-Term Employee Incentive Plan, (iii) 100,000 shares of Common Stock
reserved under the Stock Option Plan for Non-Employee Directors, (iv) 319,204
shares of Common Stock reserved for issuance upon the exercise of certain
outstanding warrants to purchase Common Stock issued prior to the Company's
initial public offering, (v) 306,700 shares of Common Stock subject to purchase
by the underwriter of the Company's initial public offering, (vi) an aggregate
of 6,184,540 shares reserved for issuance upon exercise of outstanding Class A
Redeemable Warrants to purchase Common Stock, (vii) an aggregate of 10,978,063
shares reserved for issuance upon exercise of outstanding Class B Redeemable
Warrants to purchase Common Stock, (viii) 125,037 shares reserved for issuance
upon exercise of an outstanding warrant to purchase Common Stock issued in
connection with a bridge loan obtained by the Company in August 1997, (ix)
15,000 shares reserved for issuance upon the exercise of non-qualified options
granted to a former director of the Company and (x) an aggregate of 6,083,000
shares issuable upon conversion of Preferred Stock issued pursuant to the
Convertible Preferred Stock Private Placement (assuming conversion of shares of
Preferred Stock underlying the warrants issued to the Placement Agent).

Pursuant to the terms of the Convertible Preferred Stock Private Placement,
the Company is required to use its best efforts to increase its authorized
shares of Common Stock to up to 60,000,000 shares (but in any case to at least
40,000,000 shares) within 90 days following the final closing of the offering,
which occurred on December 8, 1997. In addition, the Company has agreed that for
each day after 180 days following such final closing that such additional shares
have not been authorized, the Company will issue to each holder of Preferred
Stock an additional number of shares of Preferred Stock equal to 0.25% of the
number of shares of Preferred Stock then held by such holder. ACCORDINGLY, THE
FAILURE OF THE COMPANY'S COMMON STOCKHOLDERS TO APPROVE THE PROPOSED INCREASE IN
SHARES OF THE AUTHORIZED COMMON STOCK OF THE COMPANY WILL RESULT IN SUBSTANTIAL
DILUTION TO SUCH HOLDERS WHICH WILL CONTINUE TO INCREASE UNTIL SUCH TIME AS SUCH

-22-
<PAGE>

ADDITIONAL AUTHORIZED SHARES ARE APPROVED OR THE VALUE OF THE SHARES OF COMMON
STOCK HELD BY SUCH HOLDERS IS COMPLETELY LOST.

As indicated above, the authorized but unissued shares of the Company's
Common Stock will be subject to issuance upon the exercise and conversion of the
Preferred Stock and various outstanding options and warrants. In the case of
options and warrants, such securities have various exercise prices. The Company
intends to use the proceeds of any such exercised securities for general working
capital purposes.

Stockholders are being asked to consider and vote upon this proposal to
increase the number of authorized shares of Common Stock to (i) provide
additional shares of Common Stock for issuance upon conversion or exercise of
the outstanding or reserved securities described above, (ii) increase the number
of shares reserved for issuance under the Stock Option Plan for Non-Employee
Directors from 100,000 to 250,000, (iii) provide additional flexibility with
respect to future increases to the Company's stock option and incentive
compensation plans and (iv) provide the Company flexibility to undertake future
financings or negotiate potential acquisition or partnering transactions,
although the Company has no current plans, commitments or understandings with
regard to any such transactions. The Company has not determined how many newly
authorized shares it intends to issue for any of these purposes, if any, or
when, if ever, it intends to issue such shares. The Board of Directors does not
intend to solicit shareholder authorization for the issuance of such additional
shares of Common Stock, unless required by applicable law or the requirements of
Nasdaq.

An affirmative vote of the majority of Stockholders constituting a quorum
is required to amend the Restated Certificate of Incorporation to increase the
number of authorized shares of Common Stock. The holders of the Convertible
Preferred Stock, who collectively have the power to vote 5,530,000 shares of
Common Stock, or approximately 50% of the voting stock, have agreed to vote FOR
this proposal to increase the number of authorized shares of Common Stock.

The rights of the Company's Stockholders will be affected by the increase
in the number of shares of authorized Common Stock to the extent of the
potential ownership dilution of the Company. Holders of Common Stock are not
entitled to appraisal rights under the Delaware General Corporation Law for this
proposal.

THE BOARD OF DIRECTORS HAS APPROVED AND RECOMMENDS A VOTE FOR THE PROPOSAL
TO AMEND THE RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED.

PROPOSAL TO AMEND THE COMPANY'S
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

GENERAL

In June 1994, the Board of Directors adopted, and in April 1995 the
stockholders of the Company approved, the Company's Stock Option Plan for
Non-Employee Directors. The

-23-
<PAGE>

purpose of the Stock Option Plan for Non-Employee Directors is to attract and
retain the services of experienced and knowledgeable independent directors of
the Company for the benefit of the Company and its stockholders and to provide
additional incentive for such directors to continue to work for the best
interests of the Company and its stockholders through continuing ownership of
Common Stock. The total number of shares which may be issued upon exercise of
options granted pursuant to the Stock Option Plan for Non-Employee Directors is
100,000 shares.

The Stock Option Plan for Non-Employee Directors is administered by the
Board. Subject to the terms of the Stock Option Plan for Non-Employee Directors,
the Board has the sole authority to determine questions arising under, and to
adopt rules for the administration of, the Stock Option Plan for Non-Employee
Directors.

Directors of the Company who are not, and who have not been during the
immediately preceding 12-month period, employees of the Company or any
subsidiary of the Company (a "Non-Employee Director") are automatically
participants in the Stock Option Plan for Non-Employee Directors.

On October 15, 1996, the Board amended the Stock Option Plan for
Non-Employee Directors to provide that grants of options to eligible directors
shall be on a discretionary, rather than automatic basis. The price of shares
that may be purchased upon exercise of an option is the fair market value of the
Common Stock on the date of grant, as evidenced by the average of the high and
low sales paces of Common Stock on such date as reported on the Nasdaq SmallCap
Market or the closing price, if applicable, or the average of the last bid and
asked prices on the date of the grant as reported on the Nasdaq SmallCap Market.
If there is no public trading market for such shares, the fair value of such
shares shall be determined in good faith by the Board. Options may not be
assigned or transferred except by will or by operation of the laws of descent
and distribution. The Stock Option Plan for Non-Employee Directors may be
terminated at any time by the Board, but such action will not affect options
previously granted pursuant thereto. Options granted under the Stock Option Plan
expire ten years after grant date.

In the event of a Change in Control of the Company (as defined below), an
option granted to a Non-Employee Director will become fully exercisable if,
within one year of such Change in Control, such Non-Employee Director ceases for
any reason to be a member of the Board. A Change in Control will be deemed to
have occurred if (a) there is consummated any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation or
any sale of all, or substantially all, of the assets of the Company; (b) the
stockholders approve any plan or proposal for the liquidation or dissolution of
the Company; (c) any person or entity becomes the beneficial owner of 50% or
more of the outstanding Common Stock; or (d) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board cease for any reason to constitute a majority thereof unless
the election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period. Any
exercise of an option permitted in the event of a Change of Control must be made
within 180 days of the relevant Non-Employee Director's termination as a
director of the Company.

-24-
<PAGE>

PREVIOUSLY GRANTED OPTIONS UNDER THE STOCK
OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

As of January 1, 1998, the Company had outstanding options to purchase an
aggregate of 52,918 shares of Common Stock under the Stock Option Plan for
Non-Employee Directors. The following table sets forth the options granted under
such plan to all current directors, each of whom has been nominated for
re-election, and all such directors as a group. All other options granted under
the Stock Option Plan for Non-Employee Directors were to former directors, none
of whom has been nominated for re-election, all of which options have expired.
<TABLE>
<CAPTION>

Weighted Average
Name Options Granted Exercise Price
- ---- --------------- ----------------
<S> <C> <C>

Eckardt C. Beck.................. 11,338 $3.28

Peter H. Gardner................. 31,338 $2.38

Alexander P. Haig................ 5,121 $3.17

Irwin M. Rosenthal............... 5,121 $3.17

All current directors............ 52,918 $2.73
</TABLE>

In addition, effective as of January 27, 1998, the Company granted
additional options under the Stock Option Plan for Non-Employee Directors
subject to the stockholders of the Company approving this proposal to amend the
Stock Option Plan for Non-Employee Directors to increase the number of shares
available for issuance. Such additional grants are as follows: options to
purchase 25,000 shares of Common Stock to each of Douglas M. Costle, Stephen D.
Fish and Peter H. Gardner, with respect to which 40% vest on grant and 20% vest
on each of the first, second and third anniversary of the date of grant, and
options to purchase 20,000 shares of Common Stock to each of Alexander P. Haig
and Irwin M. Rosenthal, with respect to which 25% vest on grant and 25% vest on
each of the first, second and third anniversary of the date of grant. These
options have an exercise price of $0.78 per share, the closing price of the
Company's Common Stock on the Nasdaq SmallCap Market on January 27, 1998.

At February 20, 1998, the last reported sale price of the Company's Common
Stock was $1.03.

TAX CONSEQUENCES

The options to be issued under the Stock Option Plan for Non-Employee
Directors will receive no special tax treatment, but are instead taxed pursuant
to Section 83 of the Code. Under the provisions of that Section and the related
regulations, if an option is granted to an employee or director in connection
with the performance of services and the option itself has a "readily
ascertainable fair market value" at the time of the grant, the employee or
director will be deemed to have received compensation income in the year of
grant in an amount equal to the excess of

-25-
<PAGE>

the fair market value of the option at the time of grant over the amount, if
any, paid by the optionee for the option. However, an option generally has
"readily ascertainable fair market value" only when the option is actively
traded on an established market and/or when certain requirements are met.

If the option does not have a readily ascertainable fair market value at
the time of the grant, the option is not included as compensation income at the
time of grant. Rather, the optionee realizes compensation income only when the
option is exercised, and the optionee has become substantially vested in the
shares transferred. The shares are considered to be substantially vested when
they are either transferable or not subject to a substantial risk of forfeiture.
The amount of income realized is equal to the excess of the fair market value of
the shares at the time the shares become substantially vested over the sum of
the exercise price plus the amount, if any, paid by the optionee for the option.

If an option is exercised through payment of the exercise price by the
delivery of Common Stock, to the extent that the number of shares received by
the optionee exceeds the number of shares surrendered, ordinary income will be
realized by the optionee at that time only in the amount of the fair market
value of such excess shares, and the tax basis of such excess shares will be
such fair market value.

Generally, the optionee's basis in the shares will be the exercise price
plus the compensation income realized at the time of grant or exercise,
whichever is applicable, and the amount, if any, paid by the optionee for the
option. In the compensatory option context, the optionee's basis in the shares
will generally be equal to the exercise price of the option plus the amount of
compensation income realized by the optionee plus the amount, if any, paid by
the optionee for the option. The capital gain or loss will be short-term if the
shares are disposed of within one year after the option is exercised, and
long-term if the shares are disposed of more than one year after the option is
exercised. If the shares are disposed of more than 18 months after the option is
exercised, the optionee should qualify for a further reduction in the applicable
tax rate for long-term capital gains.

If an option is taxed at the time of grant and expires or lapses without
being exercised, it is treated in the same manner as the lapse of an investment
option. The lapse is deemed to be a sale or exchange of the option on the day
the option expires and the amount of income realized is zero. The optionee
recognizes a capital loss in the amount of the optionee's basis (compensation
income realized at the time of the grant plus the amount, if any, paid by the
optionee for the option) in the option at the time of the lapse. The loss is
short-term or long-term, depending on the optionee's holding period in the
option.

If an option is not taxed at the time of grant and expires without being
exercised, the optionee will have no tax consequences unless the optionee paid
for the option. In such case, the optionee would recognize a loss in the amount
of the price paid by the optionee for the option.

The Company is generally entitled to a deductible compensation expense in
an amount equivalent to the amount included as compensation income to the
optionee. This deduction is

-26-
<PAGE>

allowed in the Company's taxable year in which the income is included as
compensation to the optionee.

The preceding discussion is based upon federal tax laws and regulations in
effect on the date of this Proxy Statement, which are subject to change, and
upon an interpretation of the relevant sections of the Code, their legislative
histories and the income tax regulations which interpret similar provisions of
the Code. Optionees may also be subject to state and local taxes in connection
with the grant or exercise of options granted under the Stock Option Plan for
Non-Employee Directors and the sale or other disposition of shares acquired upon
exercise of the options. Each optionee receiving a grant of options should
consult with his or her personal tax advisor regarding federal, state and local
tax consequences of participating in the Stock Option Plan for Non-Employee
Directors.

PROPOSED AMENDMENT

The Company currently has an aggregate of 52,918 shares of Common Stock
outstanding under the Stock Option Plan for Non-Employee Directors and has
granted options to purchase an additional 115,000 shares of Common Stock subject
to stockholder approval of this proposal. By this proposal, the Company seeks to
increase the number of shares available for issuance under the Stock Option Plan
for Non-Employee Directors from 100,000 to 250,000 shares.

The Board believes that this amendment provides an important inducement to
recruit and retain experienced and knowledgeable independent directors for the
benefit of the Company and its stockholders. If this proposal is not adopted by
the stockholders, the Company will not amend the Stock Option Plan for
Non-Employee Directors and would be forced to seek other alternatives, which may
or may not be available, to effectively recruit and retain qualified directors.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT.

PROPOSAL TO RATIFY THE SELECTION OF AUDITORS

The Board has selected the firm of Ernst & Young LLP to serve as
independent auditors for the Company for the fiscal year ending June 30, 1998.
Ernst & Young LLP has served as the Company's auditors since 1994. Although it
is not expected that a representative of Ernst & Young LLP will be present at
the Meeting, an Ernst & Young LLP representative will be available by telephone
to make a statement (if he or she desires to do so) and to respond to
appropriate questions at the Meeting. If the stockholders do not ratify the
selection of Ernst & Young LLP, the Board may consider selection of other
independent auditors, but no assurances can be made that the Board will do so or
that any other independent auditors would be willing to serve. The vote of a
majority of the shares of Common Stock represented in person or by proxy at the
Meeting is required to ratify the selection of auditors.

THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THIS SELECTION.

-27-
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's officers and
directors and persons who are beneficial owners of ten percent or more of the
Company's Common Stock to file reports of ownership and changes in ownership of
the Company's securities with the Securities and Exchange Commission. Such
officers, directors and beneficial owners are required by applicable regulations
to provide to the Company copies of all forms they file under Section 16(a).

Based solely upon a review of the copies of forms furnished to the Company,
and written representations from certain reporting persons, the Company believes
that during the fiscal year ended June 30, 1997, all filing requirements
applicable to its officers, directors and ten percent beneficial owners were
complied with except that Donald R. Kendall, Jr., a former director of the
Company, filed a Form 5 on August 25, 1997 which was required to be filed on
August 14, 1997.

STOCKHOLDER PROPOSALS

It is presently contemplated that the 1998 Annual Meeting of Stockholders
will be held on or about November 1, 1998. Proposals by stockholders intended
for inclusion in the proxy statement to be furnished to all stockholders
entitled to vote at the next annual meeting of the Company must be received at
the Company's principal executive offices not later than June 30, 1998. In order
to curtail controversy as to the date on which a proposal was received by the
Company, it is suggested that proponents submit their proposals by certified
mail, return receipt requested. Any such proposal must also meet the other
requirements of the rules of the Securities and Exchange Commission relating to
stockholder proposals.

EXPENSES AND SOLICITATION

The Company will bear the cost of soliciting proxies, including expenses in
connection with the preparation and mailing of this Proxy Statement and all
papers which now accompany or may hereafter supplement it. Solicitation of
proxies will be primarily by mail. However, proxies may also be solicited by
directors, officers and regular employees of the Company (who will not be
specifically compensated for such services) by telephone or otherwise. Brokerage
houses and other custodians, nominees and fiduciaries will be requested to
forward proxies and proxy material to the beneficial owners of Common Stock, and
the Company will reimburse them for their expenses.

-28-
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents which previously have been filed by the Company
with the Securities and Exchange Commission pursuant to the Exchange Act are
incorporated in and made a part of this Proxy Statement by reference:

1. The Company's Annual Report on Form 10-KSB for the fiscal year ended
June 30, 1997, as amended by Form 10-KSB/A, Form 10-KSB/A2 and Form
10-KSB/A3 filed by the Company with the Securities and Exchange
Commission on October 28, 1997, December 29, 1997 and February 12,
1998, respectively;

2. The Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1997, as amended by Form 10-QSB/A1 filed by the Company
with the Securities and Exchange Commission on December 19, 1997.

3. The Company's Quarterly Report on Form 10-QSB for the quarter ended
December 31, 1997;

4. The Company's Current Report on Form 8-K dated September 8, 1997; and

5. The description of the Company's Common Stock, $.00025 par value,
which is contained in the Company's Registration Statement on Form
SB-2 pursuant to Section 12 of the Exchange Act which was declared
effective by the Commission on May 6, 1996.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Meeting shall be deemed to be incorporated by reference herein and to be a
part hereof from the date of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document,
which also is or is deemed to be incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part hereof.

THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THE COMPANY HEREBY UNDERTAKES TO
PROVIDE, WITHOUT CHARGE, TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM
A COPY OF THIS PROXY STATEMENT IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF
SUCH PERSON, A COPY OF ANY OR ALL OF THE INFORMATION INCORPORATED HEREIN BY
REFERENCE. EXHIBITS TO ANY OF SUCH DOCUMENTS, HOWEVER, WILL NOT BE PROVIDED
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH
DOCUMENTS. ANY REQUEST SHOULD BE ADDRESSED TO THE COMPANY'S PRINCIPAL EXECUTIVE
OFFICES: PRESIDENT, CONVERSION TECHNOLOGIES INTERNATIONAL, INC., 3452 LAKE LYNDA
DRIVE, ORLANDO, FLORIDA 32817, TELEPHONE NUMBER (407) 207-5900.

By Order of the Board of Directors
William L. Amt
President and Chief Executive Officer
Orlando, Florida
March 2, 1998

-29
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY FOR THE ANNUAL MEETING OF STOCKHOLDERS

The undersigned hereby constitutes and appoints William Gary Jellum and
John G. Murchie, and each of them, his or her true and lawful agent and proxy
with full power of substitution in each, to represent and to vote on behalf of
the undersigned all of the shares of Conversion Technologies International, Inc.
(the "Company") which the undersigned is entitled to vote at the Annual Meeting
of Stockholders of the Company to be held at 10:00 A.M., local time, on March
26, 1998 at the Company at 3452 Lake Lynda Drive, Suite 280, Orlando, Florida
32817 and at any adjournment or adjournments thereof, upon the following
proposals more fully described in the Notice of Annual Meeting of Stockholders
and Proxy Statement for the Meeting (receipt of which is hereby acknowledged).

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.

1. ELECTION OF DIRECTORS.
Nominees: William L. Amt, Eckardt C. Beck, Douglas M. Costle, Peter H.
Gardner, Alexander P. Haig, Stephen D. Fish, Irwin M.
Rosenthal and David R. Walner.

(Mark one only)

VOTE FOR all the nominees listed above; except vote withheld from the following
nominees (if any).
---------

- --------------------------------------------------------------------------------
VOTE WITHHELD from all nominees.

---------

2. APPROVAL OF PROPOSAL TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED FROM
25,000,000 TO 50,000,000 SHARES.

FOR AGAINST ABSTAIN
------ ------ ------

3. APPROVAL FOR PROPOSAL TO AMEND THE COMPANY'S 1994 STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS (THE "PLAN") TO INCREASE THE MAXIMUM NUMBER OF SHARES OF
COMMON STOCK AVAILABLE FOR ISSUANCE UNDER THE PLAN FROM 100,000 TO 250,000
SHARES.

FOR AGAINST ABSTAIN
------ ------ ------

(continued and to be signed on reverse side)

-29-
<PAGE>

4. APPROVAL OF PROPOSAL TO RATIFY THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
INDEPENDENT AUDITORS OF THE COMPANY FOR THE YEAR ENDING JUNE 30, 1998.

FOR AGAINST ABSTAIN
------ ------ ------

5. In his discretion, the proxy is authorized to vote upon other matters as may
properly come before the Meeting.

Dated: THIS PROXY MUST BE SIGNED
------------------------ EXACTLY AS THE NAME APPEARS
HEREON. WHEN SHARES ARE HELD
BY JOINT TENANTS, BOTH SHOULD
- ------------------------------ SIGN. IF THE SIGNER IS A
Signature of Stockholder CORPORATION, PLEASE SIGN FULL
CORPORATE NAME BY DULY
AUTHORIZED OFFICER, GIVING FULL
- ------------------------------ TITLE AS SUCH. IF A
Signature of Stockholder if held Jointly PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED
PERSON.

I WILL WILL NOT attend the
---- ---- Meeting.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.

-30-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10-KSB

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

For the fiscal year ended: Commission File No.:
JUNE 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

DELAWARE 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 LAKE LYNDA DRIVE
ORLANDO, FLORIDA 32817
(Address of principal executive offices) (Zip Code)

(407) 207-5900
(Issuer's telephone number including area code)

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

Securities registered under Section 12(b) of the Exchange Act: NONE

Securities registered under Section 12(g) of the Exchange Act:

COMMON STOCK, REDEEMABLE CLASS A WARRANTS AND REDEEMABLE CLASS B WARRANTS

Check whether the issuer: (1) 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 past 90 days.

Yes X No
--- ---

<PAGE>

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, 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 this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's revenues for the fiscal year ended June 30, 1997 were $1,429,008.

The aggregate market value of voting stock held by non-affiliates of registrant
was $11,941,310 as of September 19, 1997, based on the average of the closing
bid and closing ask price of the Common Stock on the Nasdaq SmallCap Market on
such date, and assuming the conversion of all outstanding shares of Series A
Convertible Preferred Stock held by non-affiliates of registrant into Common
Stock.

As of September 19, 1997, the issuer had outstanding 5,539,745 shares of Common
Stock, $.00025 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed pursuant to
Regulation 14(a) not later than October 28, 1997 are incorporated by reference
into Part III of this Report on Form 10-KSB.

2
<PAGE>

PART I

ITEM 1. BUSINESS

Overview
- --------

Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufactures and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products.

The Company's industrial abrasives and construction material substrates include
ALUMAGLASS(R), an alumino-silicate glass produced in a patented process
utilizing industrial waste streams and certain virgin materials, as well as
other glass and fired ceramic materials produced utilizing the Company's
manufacturing equipment. ALUMAGLASS was introduced in 1995, but has generated
only minimal sales to date. Although the Company intends to continue to market
ALUMAGLASS, the Company has shut-down the melter used to manufacture ALUMAGLASS
at its Dunkirk, New York, facility and is currently satisfying limited orders
through inventory of ALUMAGLASS. The Company does not intend to restart the
melter in the foreseeable future. If warranted by market demand for ALUMAGLASS,
the Company intends to pursue opportunities to license its ALUMAGLASS patents to
third parties. The Company would then purchase the raw ALUMAGLASS particles from
such manufacturers and process the material for resale to is customers. Although
the Company is currently in discussions with one such potential licensee, there
can be no assurance that such arrangements will be consummated on terms
satisfactory to the Company, or at all, or that there will ever be significant
sales of ALUMAGLASS.

The Company was incorporated in June 1993 for the purpose of acquiring its
Dunkirk International Glass and Ceramics Corporation ("Dunkirk") subsidiary, and
conducted no business activities prior to such acquisition. Dunkirk was acquired
by the Company in August 1994 pursuant to a merger in which holders of the
common stock of Dunkirk received Common Stock of the Company. Prior to such
acquisition, Dunkirk was a development stage company, principally engaged in the
construction of its manufacturing facilities and initial CRT glass recycling
efforts. In June 1997, the Company purchased the remaining 50% interest in
Advanced Particle Technologies, Inc.

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<PAGE>

("APT"), a corporation formed in October 1996 by the Company and a former joint
venture partner for the purpose of applying color coatings to particles, as a
result of which APT became a wholly-owned subsidiary of the Company.

The Company recently relocated its executive offices to 3452 Lake Lynda Drive,
Suite 280, Orlando, Florida 32817. The Company's telephone number is (407)
207-5900.

This Form 10-KSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's efforts to increase sales
of its abrasives, manufacture and sell, on a commercial scale, its decorative
particles and the possibility of outsourcing ALUMAGLASS production. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and that the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
when such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) the risk that the Company will lose
key CRT customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with applicable environmental laws and regulations,
and (x) the risk that the Company will not be able to continue to satisfy the
minimum maintenance requirements for continued listing which were recently
adopted by the Nasdaq SmallCap Market.

CERTAIN RECENT EVENTS
- ---------------------

Termination of Merger With Octagon
- ----------------------------------

In November 1996, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Octagon, Inc. ("Octagon") pursuant
to which a wholly-owned subsidiary of the Company would be merged with and into
Octagon (the "Merger"), whereby Octagon would become a wholly-owned subsidiary
of the Company. In July 1997, the Company and Octagon announced that they had
mutually terminated the Merger Agreement. Pursuant to the terms of the
Termination Agreement, Octagon agreed to provide certain support services to the
Company on an interim basis and the Company agreed to forgive bridge loans in
the approximate amount of $630,000 it made to Octagon in payment for certain
services provided by Octagon to the Company prior to the termination of the
Merger. The Company also hired certain employees of Octagon who had been hired
by Octagon in anticipation of the Merger, including Jack D. Hays, Jr., the
Company's Executive Vice President - Operations and Marketing, and Richard H.
Hughes,

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<PAGE>

Vice President - Sales and Marketing. William L. Amt, Octagon's former President
and Chief Executive Officer also joined the Company on August 1, 1997.

New Management
- --------------

The Company has obtained new management. On August 1, 1997, William L. Amt,
previously the President and Chief Executive Officer of Octagon, joined the
Company as President and Chief Executive Officer. In July 1997, Jack D. Hays,
Jr., and Richard H. Hughes, who had previously joined Octagon in anticipation of
the closing of the Merger, became Executive Vice President - Operations and
Marketing and Vice President - Sales and Marketing, respectively, of the
Company. With the exception of Robert Dejaiffe, who remains the Company's Vice
President - Technology, the former executive officers of the Company, including
Harvey Goldman, the Company's former Vice-Chairman, President and Chief
Executive Officer, ceased to be employees of the Company in June 1997. Eckardt
C. Beck, who remains as the Company's Chairman of the Board, served as acting
President and Chief Executive Officer of the Company from June 1997 until August
1, 1997.

Write-Down of Non-Productive Assets and Related Charges to Earnings
- -------------------------------------------------------------------

The Company has shutdown its melter and certain other equipment not currently
being used by the Company. Accordingly, in the quarter ended June 30, 1997, the
Company has recorded a $5,712,000 write-down in the value of such assets to
reflect that such assets are no longer productive, which write down has resulted
in a $5,712,000 charge to earnings for such quarter, increasing the Company's
loss for such quarter by an equal amount.

Redemption of IDA Bonds
- -----------------------

In 1995, the Company's subsidiary, Dunkirk, financed certain equipment purchases
and manufacturing improvements through the issuance of $8,000,000 in Solid Waste
Disposal Facility Bonds, Series 1995 (the "IDA Bonds"), by the County of
Chatauqua Industrial Development Agency (the "Agency") pursuant to a Trust
Indenture dated as of March 1, 1995 between the Agency and United States Trust
Company of New York, as trustee. Pursuant to agreements among the parties, in
September 1997, the IDA Bonds were redeemed in full in exchange for a cash
payment of $1,620,000 and Dunkirk's forfeiture of its interest in a related debt
service reserve fund (which had a then current balance of approximately
$190,000).

Termination of VANGKOE Joint Venture
- ------------------------------------

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<PAGE>

milestones), and VANGKOE agreed to sell the particles in certain markets as
APT's exclusive distributor. The Company recently commenced manufacturing such
particles and the parties are in the process of creating inventory and
conducting customer sampling and sales efforts. There can be no assurance,
however, that the Company will be able to manufacture such particles
consistently or that sales of such particles will occur.

Preferred Stock Financing
- -------------------------

In August and September 1997, the Company raised aggregate gross proceeds of
$4,145,000 in a private placement of Series A Convertible Preferred Stock (the
"Preferred Stock"). An aggregate of 414,500 shares of Preferred Stock were
issued. Each share of Preferred Stock is initially convertible into eight shares
of Common Stock at a conversion price of $1.25 per share, subject to adjustment
based on the lesser of $1.25 and the prevailing average market price of the
Common Stock immediately preceding any subsequent closing, if any.

Repayment of Bridge Loan
- ------------------------

In July and August 1997, the Company borrowed an aggregate of $500,000 (the
"1997 Bridge Loan") for general working capital purposes from Aries Domestic
Fund, L.P. and The Aries Trust (collectively, the "Aries Funds"). In connection
with the 1997 Bridge Loan, the Company issued warrants to purchase 100,000
shares of Common Stock to the Aries Funds at an exercise price equal to $1 5/16.
The 1997 Bridge Loan, together with 12% interest thereon, was repaid on
September 8, 1997.

Other Changes to Indebtedness
- -----------------------------

Dunkirk is obligated with respect to $1,888,000 outstanding aggregate principal
amount of equipment term notes issued in December 1994 and January 1995 to Key
Bank of New York ("Key Bank"), which were guaranteed by the Empire State
Development Corporation/Job Development Authority ("ESDC"). In July 1997, ESDC
agreed to honor its guarantee of such loans and Key Bank and ESDC are in the
process of assigning such loans from Key Bank to ESDC. ESDC has agreed to defer
all interest and principal payments due under the loans through January 1, 1998
until the maturity date of the notes, with interest continuing to accrue on such
deferred amounts payable at maturity. ESDC has also agreed to allow Dunkirk to
reduce the principal amount of such loans by the amount of a debt service
reserve fund (with a balance as of June 30, 1997 of approximately $449,190) that
will be forfeited by Dunkirk.

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<PAGE>

PRODUCTS
- --------

Abrasives
- ---------

The Company produces several products which can be used as industrial abrasives.
These products currently include ALUMAGLASS, which has achieved only limited
sales to date, and other glass and ceramic formulation materials, marketed as
VISIGRIT(TM) and GREAT WHITE(TM). Such glass and ceramic products have only
recently been produced by the Company in limited amounts. As loose grain
abrasives, these products can be applied with blasting equipment for industrial
cleaning and maintenance and manufacturing operations. Potential purchasers
include military and defense agencies, entities engaged in the electronics,
aerospace, automotive, glass products and construction industries and entities
engaged in surface finishing, coating removal and maintenance of manufacturing
and processing equipment, buildings, highways, bridges and commercial vehicles
and vessels.

The Company has shut down the melter used to manufacture ALUMAGLASS and is
currently satisfying limited orders through inventory of ALUMAGLASS. The Company
does not currently intend to restart the melter. If market demand for ALUMAGLASS
warrants further ALUMAGLASS production, the Company intends to pursue
opportunities to license its ALUMAGLASS patents to third parties. The Company
could then purchase the raw ALUMAGLASS particles from such manufacturers and
process the material for resale to its customers. The Company expects this
process to provide a lower cost of production.

Decorative Particles
- --------------------

The Company's facility in St. Augustine, Florida color coats various glass
substrates to produce decorative particles. Decorative particles are widely used
in the construction industry to visually enhance structural materials such as
plasters, tiles, grouts, wall systems and roofing and flooring. Colored
particles are also incorporated into countertops and cabinetry. The substrates
currently being coated in St. Augustine are produced at the Company's Dunkirk,
New York facility, however, locally sourced substrates, including ceramic or
mined mineral substrates, will also be used. The Company believes that the
proprietary color coating process it employs in St. Augustine yields a coating
of superior visual quality and endurance compared to competing products and
believes that there is a potential market for these products. There can be no
assurance, however, that the Company will ever achieve significant sales of
these products. The Company recently commenced commercial production of these
products and has been working with VANGKOE to initiate customer sampling and
testing in the swimming pool plaster market in the southeast, which will be the
initial marketing focal point for these products.

Performance Aggregates
- ----------------------

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<PAGE>

consistency to materials such as cements, plasters, grouts, mortars, roofing and
flooring and other glass and ceramic materials.

Recycled CRT Glass
- ------------------

The Company is also engaged in recycling CRT glass used in televisions. The
Company's current CRT glass recycling customers include electronics
manufacturers such as Techneglas, Inc. ("Techneglas"), Toshiba Display Devices,
Inc. ("Toshiba") and Hitachi Electronic Devices, U.S.A., Inc. Thomson Consumer
Electronics, Inc. ("Thomson"), which had been a significant CRT customer of the
Company, ceased shipping CRT glass to, and purchasing recycled CRT glass from,
the Company in March 1997

In the Company's CRT recycling operations, waste CRT glass is shipped to the
Company by its customers pursuant to agreements with the Company. The Company
receives both funnel glass (the back of a television screen, which is relatively
thin and tubular in shape) and panel glass (the front of a television screen,
which is relatively thick and flat in shape). The funnel glass is cleaned,
separated and sold back to the original manufacturers and others. The panel
glass is cleaned, separated and sold as a raw material to the original
manufacturers and others, used as a raw material by the Company in the
production of abrasives or further processed for sale as an aggregate for
construction materials.

Manufacturing and Recycling Processes
- -------------------------------------

The Company utilizes the crushing, sizing and packaging equipment at its
Dunkirk, New York facility to manufacture its abrasives, uncoated decorative
particle substrates and performance aggregate products. The Company has
identified several waste streams which it receives, including post-consumer
bottle glass, waste ceramics and CRT panel glass, which can be used as a
manufacturing raw material for these products. The Company identifies the
chemical or other valuable properties of these materials and identifies third
parties that can utilize the materials in their manufacturing or other
operations. Then, depending on the customer's needs, the Company utilizes its
equipment, principally its recycling lines and post-melting, abrasives finishing
equipment, to sort, clean and/or grind and crush the material into the desired
form. The material is then packaged and shipped to customers.

The Company's St. Augustine, Florida, facility is utilized to color-coat and
package particles for pool plasters and other construction materials. The
proprietary manufacturing process consists of applying various pigments and
other coating materials at the St. Augustine facility to particles produced at
the Company's Dunkirk, New York facility in a thermodynamic process. The
material is then bagged on-site in St. Augustine and shipped to customers.

8
<PAGE>

smaller pieces of glass. Generally, CRT glass fragments received by the Company
of approximately one inch or less in diameter have not been recycled by the
Company due to limitations of its technology. Although the Company has recently
initiated a process to recycle this material, there can be no assurance the
Company will in fact sell such material on a profitable basis or at all. In the
event the Company is unable to sell such glass, it believes it can dispose of
such glass by smelting at prevailing rates.

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

The Company's research and development efforts have been conducted principally
through the Company's internal staff and the Center for Advanced Ceramic
Technology ("CACT") at Alfred University. The Company currently employs one
individual principally devoted to research and development, and maintains an
on-site laboratory at its Dunkirk facility where various analyses, tests and
other research and development activities are conducted. CACT is the Company's
primary outside research and development partner, and works on various matters
from time to time as requested by the Company.

Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is anticipated that such efforts will be
focused in the near term on ALUMAGLASS licensing possibilities and expanding
color coating offerings for its decorative particles.

MARKETS FOR PRODUCTS AND SERVICES
- ---------------------------------

Abrasives
- ---------

A variety of media and methodologies have traditionally been used as industrial
abrasives. In particular, sand used in blasting applications and chemical
solvents have held a significant share of the market. In recent years, however,
increased regulations relating to the environment and worker health and safety
have resulted in a dramatic decline in the use of sand, which is known to
contribute to the lung disease silicosis. In addition, given the greater demand
for reclaimable abrasives, which reduce the amount of spent abrasive material
subject to landfill and potential environmental liability, the Company believes
that non-reclaimable abrasives, such as sand and metal slags, are competitively
disadvantaged. Chemical solvents have also decreased in use with respect to many
applications due to such regulatory changes, particularly regulations which have
resulted in increased disposal costs. Products such as ALUMAGLASS, glass beads
and mineral, metallic and plastic abrasives are affected to a lesser extent by
such regulations due to the nature of their composition and the fact that they
are reclaimable for multiple uses and have a lower quantity for disposal.
ALUMAGLASS, for example, contains no free silica, which causes silicosis, and,
depending on the application, could potentially be recycled rather than disposed
of after use. Other approaches such as high pressure water and dry ice blasting
are also gaining acceptance.

Loose grain abrasives, typically applied with blasting equipment, are used in
numerous industries throughout the world for equipment and facilities
maintenance. Applications include cleaning,

9
<PAGE>

stripping and other surface treatment or surface preparation applications, such
as industrial metal finishing, coating removal, structural steel and commercial
vehicle cleaning, paint removal and the cleaning and preparation of surface
substrates. Potential purchasers include utilities, military and defense
agencies, entities engaged in the electronics, aerospace, automotive, glass
products and construction industries and entities engaged in surface finishing,
coating removal and the maintenance of manufacturing and process industries
equipment and facilities, buildings, highways, bridges and commercial vehicles
and vessels.

Decorative Particles
- --------------------

The Company believes that there is a large market for decorative particles, of
which 3M holds a significant share. End users for decorative substrates or
particles include ceramic tile manufacturers, producers of swimming pool
plasters, decorative roofing and wall systems, pottery and porcelain producers
and others.

The production of plasters, mortars, terrazzo, and ceramic tiles requires large
quantities of fillers and expanders. Crushed marble, white sand, kaolin or
similar low cost white calcium based material have traditionally been used as
fillers and expanders. Because of the high cost of coloring agents, pigments and
the process to coat substrates, it is not economical to color coat large volumes
of these fillers. Instead, the construction industry adds into the filler small
quantities of particles that have been previously color coated. The resulting
mixture, when viewed over a large surface area and from a distance, will appear
to have a consistent color or hue.

The Company believes that market acceptance of colored particles is largely a
function of the brilliance and endurance of the color, which results from the
level of translucence or reflectivity of the substrate. Because in most
applications the coated surface of a particle is subject to erosion, colored
substrates must have translucent properties to maintain their color
characteristics with a translucent or clear particle, as the color is eroded
from the exposed surface of the particle embedded in the mortar or plaster, the
color on the back side of the particle will remain visible, thereby extending
the life of the color system significantly. Traditionally quartz and high
quality silica sands have been employed as substrates to produce translucent
colored particles. The Company believes, however, that its glass formulation
substrates provide superior translucence and clarity compared to these
materials, and may have a lower cost of production. In addition, the Company
believes that its proprietary coating process will produce a coating of superior
endurance and visual appeal. There can be no assurance, however, that the
Company will be able to successfully manufacture and sell its color coated
substrates.

Performance Aggregates
- ----------------------

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<PAGE>

has been purchased in limited quantities as an additive for non-slip epoxy
flooring systems. The Company believes that its fired ceramic substrates will
also have applicability in these markets, particularly as filler for tiles and
plasters. The Company further believes that, since many of its substrates are
produced from waste material, it may have production cost advantages over
certain materials traditionally used in this market, such as mined substrates.

Recycled CRT Glass
- ------------------

The Company currently recycles waste CRT glass generated by television
manufacturers located in the United States. The Company's potential sales
revenue from such customers is therefore limited by the relatively few
manufacturers located in the United States, the relatively low percentage of CRT
glass which becomes waste prior to being incorporated into televisions, which
such manufacturers continually strive to reduce further, and shipping costs
associated with doing business with manufacturers located at significant
distances from the Company. In addition, the Company has recently experienced
increased competition with respect to CRT glass recycling services. Thomson,
historically a significant CRT customer, ceased doing business with the Company
in March 1997.

Dependence on Certain Customers
- -------------------------------

For the year ended June 30, 1997, two of the Company's CRT glass recycling
customers, Techneglas and Thomson each accounted for more than 10% of the
Company's revenues and, in the aggregate, accounted for approximately 61.2% of
the Company's revenues. Thomson ceased shipping CRT glass to, and purchasing
recycled CRT glass from, the Company as of March 1997. Although the Company has
a limited number of customers for ALUMAGLASS and other materials, the Company is
currently dependent on its CRT customers for substantially all of its revenues.

Sales and Marketing
- -------------------

To date, the Company's products have been marketed and distributed in the United
States primarily through distributors and limited direct sales efforts by the
Company and only limited sales have been achieved. N.T. Ruddock & Company, Fusco
Abrasive Systems, Inc., Standard Sand & Silica Co. and Porter Warner Industries,
Inc. are regional distributors of the Company's abrasives and are large-volume
distributors of loose grain abrasives in the United States. The Company has also
established relationships with distributors in the United Kingdom, Canada,
Mexico, China and Israel. The Company's marketing strategies include, among
others, telemarketing, direct mail and trade journal advertising, product
sampling programs and customer support programs such as technical assistance
programs and testing support.

To date, the Company's efforts through distributors have failed to generate
significant sales of ALUMAGLASS. Accordingly, the Company plans to explore joint
ventures and other corporate teaming efforts to increase outlets for its
products, which may include product bundling or composite production. The
Company also intends to review and evaluate its distributor

11
<PAGE>

relationships and incentives as well as its direct sales initiatives. There can
be no assurance, however, that such efforts will be successful.

In connection with the termination of the Company's joint venture with VANGKOE,
the parties entered into a Distributor Agreement, pursuant to which VANGKOE will
purchase the colored particles from APT and sell the particles to distributors
and others. The Distributor Agreement provides that VANGKOE will be APT's
exclusive distributor of colored particles for the swimming pool and other
pool-related markets, and that VANGKOE will purchase colored particles for such
markets exclusively from APT, subject to APT's ability to supply such particles.
VANGKOE must meet certain sales targets to maintain its exclusivity as a
distributor, although VANGKOE is under no obligation to meet such sales targets.
VANGKOE has been released from its previous minimum purchase commitment of
approximately $1.2 million of ALUMAGLASS and other materials. VANGKOE is a new
company without significant assets or experience in marketing aggregates and,
therefore, there can be no assurance that it will be successful in marketing the
Company's products.

The Company currently has three individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis.

Intellectual Property
- ---------------------

The Company has been awarded two United States patents. The first patent was
issued in December 1993 and relates to the Company's process for manufacturing
abrasive particles from inorganic waste materials, including sludges from
various industrial processes and waste water treatment, emission control dusts
from high-temperature industrial processes, fly ash from incineration of
industrial and residential wastes and certain other process-specific effluents.
Examples of such inorganic wastes are spent pot liner from the aluminum
industry, refractory wastes from smelting, melting or refining furnaces, various
types of slags and precipitants related to metal recovery operations, foundry
sands, glass wastes, including television and computer monitor CRT glass, and
certain wastes from the manufacture of ceramic products. The second patent was
issued in October 1995 and relates to the pre-melting batching process involved
in the manufacture of the Company's abrasives. In addition, the Company has
filed jointly with another party an application for a U.S. patent on the X-ray
fluorescence technology that has been used in the Company's CRT glass recycling
operations. The Company has three additional patent applications on file. One
relates to ALUMAGLASS, one relates to the Company's potential glass bead product
and one relates to the use of the Company's products as aggregates in
construction materials. The Company's logo and ALUMAGLASS are registered
trademarks.

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

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<PAGE>

manufactured metallic abrasives include: Exolon-ESK, General Abrasives
Triebacher, Inc., Washington Mills Electro Minerals Corp., Irvin Industries,
Inc., Norton/St. Gobain and others. Various other manufacturers produce mined,
plastic, glass bead and mineral abrasives, as well as high speed water jet spray
abrasive systems. The Company's ability to effectively compete against these
companies could be adversely affected by the ability of these competitors to
offer their products at lower prices than the Company's products and to devote
greater resources to the marketing and promotion of their products than are
available to the Company.

The Company's decorative particles and performance aggregates will also face
substantial competitive pressures. The Company believes that 3M has a
significant share of the market for decorative particles. 3M has available to it
financial, technical and other resources far superior to those of the Company.
In addition, certain customers of other products may be unwilling to switch to
the Company's particles due to factors such as personal preferences for a
competitor's color selections, consistency with colors previously sold,
performance concerns or satisfaction with its current products. The Company's
performance aggregates will face similar competitive pressures from producers of
mined minerals, aluminum oxide and others. These producers include 3M and
Norton/St. Gobain, each with resources superior to those of the Company.

With respect to its industrial CRT glass recycling operations, the Company
competes with several other companies who accept waste CRT glass for recycling
or other purposes, each of which may deal with customers of the Company and
satisfy their recycling, beneficial reuse or disposal needs. In addition, under
certain conditions, CRT glass might also be disposed of by melting it to
recapture the residuals. The Company has recently experienced increased
competition from companies offering to take CRT glass from sources free of
charge. In general, the Company has received revenue both when it receives and
when it sells recycled CRT glass. There can be no assurance that the Company
will be able to recycle CRT glass on a profitable basis if it is required to
eliminate the fee it receives upon receipt of such glass from customers in order
to maintain or attract additional sources of CRT glass. In addition, Thomson, a
significant CRT recycling customer, ceased doing business with the Company in
March 1997.

Environmental Matters
- ---------------------

The federal environmental legislation and policies that the Company believes are
applicable to its manufacturing operations include the Comprehensive
Environmental Response, Compensation and Liability Act of 1978, as amended
("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Clean Air Act of 1970, as amended, the Federal Water Pollution
control Act of 1976, as amended, the Superfund Amendments and Reauthorization
Act ("SARA") and the Pollution Prevention Act of 1990. The Company is also
subject to state air, water and solid and hazardous waste laws and regulations
that affect its manufacturing operations.

13
<PAGE>

Company handles secondary materials in a way to qualify such materials for
exclusions under state or federal RCRA regulations (for example, use of
materials as effective substitutes for other products in a manufacturing
process), and the Company stores materials in an environmentally sound manner
(for example, within the manufacturing building or on a concrete slab).

The New York State Department of Environmental Conservation ("NYSDEC") has been
delegated authority to administer the RCRA program in New York, and has adopted
regulations governing the treatment, storage and disposal of solid and hazardous
wastes. NYSDEC regulations require the Company to obtain regulatory exemptions
and/or beneficial use determinations for each hazardous waste material it
accepts for recycling purposes. Without these regulatory exemptions and/or
beneficial use determinations, the Company would be required to obtain a State
RCRA permit to operate its facility, and would become subject to onerous RCRA
regulatory requirements.

CERCLA and subsequent amendments under SARA impose continuing liability upon
generators of hazardous substances and owners and operators of facilities where
hazardous waste is released or threatened to be released, as well as upon
parties who arrange for the transportation of hazardous substances to such
facilities. CERCLA effectively imposes strict, joint and several liability upon
these parties. Accordingly, although the Company strives to operate its
facilities in compliance with regulatory requirements, there can be no assurance
that the Company will not incur liability as an owner or operator for releases
of hazardous substances, or possibly as a hazardous waste generator.

Employees
- ---------

At September 19, 1997, the Company had 38 full-time employees consisting of 30
employees in manufacturing, one employee in research and product applications
development, three employees in sales and marketing and four employees in
finance and administration. The Company also has one part-time employee. None of
the Company's employees are subject to a collective bargaining agreement and the
Company has not experienced any work stoppages.

ITEM 2. PROPERTIES

The Company owns its 230,000 square foot manufacturing facility in Dunkirk, New
York. Such facility is subject to a first mortgage held by the New York Job
Development Authority securing a promissory note issued to the Chautauqua Region
Industrial Development Corporation, with respect to which approximately $304,432
principal amount was outstanding at June 30, 1997. In addition, such facility is
subject to a second mortgage securing a promissory note issued to the former
owner of the property as part of the purchase price therefor, with respect to
which approximately $288,516 principal amount was outstanding on June 30, 1997.

The Company recently relocated its headquarters to Orlando, Florida, and has
entered into a three-year lease for approximately 4,700 square feet of executive
office space and rent is approximately $7,000 per month.

The Company has terminated its lease on approximately 3,000 square feet of
office space in Hazlet, New Jersey, effective September 30, 1997.

14
<PAGE>

APT currently leases approximately 10,000 square feet of manufacturing space in
St. Augustine, Florida. The lease will expire in February 2000 and rent is
approximately $6,000 per month.

ITEM 3. LEGAL PROCEEDINGS

The Company is a party to litigation, Conversion Technologies International,
Inc. v. R.E. Williams and Company, Inc., commenced by the Company on October 26,
1995 in the Supreme Court of New York, County of Chautauqua, against a general
contractor hired to construct the improved abrasives finishing area at the
Dunkirk facility. The contractor commenced work in April 1995, but was asked to
stop work in November 1995 following significant cost overruns, problems and
delays in construction and disputes with the Company over the scope of the work
to be performed by the contractor. The Company has served the contractor with
its complaint, alleging, among other things, breach of contract, fraud and
defamation, and seeks damages in excess of $1,000,000. The contractor has
counterclaimed damages of approximately $483,000, and has filed a mechanic's
lien with respect to such claim. The case is currently in the discovery phase.
The Company does not believe that there will be a material adverse outcome in
this dispute. The Company is not involved in any other material legal
proceedings.

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

None.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been quoted on the Nasdaq SmallCap Market (the
"SmallCap Market") under the symbol "CTIX" since May 16, 1996, the effective
date of the Company's registration statement relating to its initial public
offering of Common Stock (the "IPO"). The following table sets forth, for each
of the quarters indicated, the high and low bid prices per share of Common Stock
as quoted on the SmallCap Market (source, the Nasdaq Stock Market). The prices
shown represent quotations among securities dealers, do not include retail
markups, markdowns or commissions and may not represent actual transactions.

Quarter Ended High Low
- --------------------- ----------- ---------

June 30, 1996 $7.25 $5.00
September 30, 1996 $5.00 $3.375
December 31, 1996 $3.375 $2.25
March 31, 1997 $2.625 $1.375
June 30, 1997 $3.00 $1.00

15
<PAGE>

No dividends have ever been declared or paid on the Company's Common Stock, and
the Company does not anticipate declaring or paying dividends in the foreseeable
future.

As of September 19, 1997, the Company had approximately 114 holders of record of
Common Stock.

On October 11, 1996, pursuant to the Company's 1996 Long-Term Incentive Plan,
the Company sold 80,000 shares of restricted Common Stock to Harvey Goldman, the
Company's former President and Chief Executive Officer, and 10,000 shares of
restricted Common Stock to Perry A. Pappas, the Company's former Vice President
and General Counsel. Such shares were sold at a purchase price of $0.00025 per
share (or aggregate consideration of $22.50) and will vest on January 1, 1998.
The Company claims that the issuance and sale of all such securities were exempt
from registration under Section 4(2) of the Securities Act as transactions not
involving a public offering. Appropriate legends will be affixed to the
certificates evidencing such securities. All recipients had adequate access to
information relating to the Company. There were no other unregistered securities
sold by the Company during the fiscal year ended June 30, 1997.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview
- --------

Since inception through June 30, 1997, the Company has sustained cumulative
losses of approximately $30,034,000. Such amount includes (i) a one-time,
non-cash charge to operations of approximately $6,232,000 relating to the
write-off of research and development (in-process) technologies that had not
reached technological feasibility and, in the opinion of management, had no
alternative use, which were purchased in conjunction with the Company's
acquisition of Dunkirk in 1994, (ii) approximately $2,528,000 expensed as
process development costs related to research and development of the Company's
CRT glass processing and ALUMAGLASS product lines, (iii) a non-cash charge to
operations of approximately $5,712,000 relating to the write-off of
non-productive fixed assets during the quarter ended June 30, 1997 and (iv)
other expenses, net of revenue, of approximately $15,562,000. The Company will
continue to incur losses until such time as revenues are sufficient to fund its
continuing operations.

16
<PAGE>

marketing will be increased. Manufacturing and operating overheads have also
been reduced through payroll reductions and savings associated with
non-productive equipment and processes that have been shut-down, such as the
Company's melter. The Company has begun to sell limited amounts of the
decorative particles produced by its APT subsidiary and hopes to increase
revenue from this product line. The Company will also strive to increase sales
of other abrasives and aggregates as new marketing efforts are implemented.
Although management believes these steps will allow the Company to continue as a
going concern for at least 12 months, there can be no assurance that the
foregoing steps will result in the Company ever achieving profitability.

The Company has continued to experience limited revenue and negative cash flow
from operations. The Company had revenues of approximately $277,000 for the
quarter ended June 30, 1997 and expects revenues to be approximately $300,000
for the quarter ending September 30, 1997. In general, revenues have been
reduced from prior periods due to the loss of Thomson as a CRT customer in March
1997. The Company has recently begun to sell increased amounts of certain
recycled glass and hopes to obtain modest increases in CRT revenue as a result.
In addition, the Company has recently begun sales of limited amounts of
decorative particles manufactured by its APT subsidiary. Although the Company
plans to maintain its CRT recycling revenue, the Company will focus its efforts
on sales of decorative particles, abrasives and other substrates. The Company
anticipates that these efforts will result in increased revenue for the quarter
ending December 31, 1997 as compared to the quarter ending September 30, 1997,
however, there can be no assurance that such results will actually be achieved.

Since the Company has had limited revenue and has incurred significant losses
which has resulted in a working capital deficiency and a stockholders'
deficiency at June 30, 1997, the Report of Independent Auditors includes an
explanatory paragraph indicating there is substantial doubt as to the Company's
ability to continue as a going concern. See Report of Independent Auditors.

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

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

Consolidated revenues for the year ended June 30, 1997 ("fiscal 1997") were
approximately $1,429,000, consisting primarily of CRT glass recycling fees and
approximately $248,000 of ALUMAGLASS sales. For fiscal 1996, the Company had
consolidated revenues of approximately $2,680,000, of which approximately
$214,000 was from sales of ALUMAGLASS and the remainder was CRT recycling fees.
This decrease in revenue during fiscal 1997 primarily reflects reduced beginning
inventory of unprocessed CRT glass and the loss of Thomson as a CRT customer.

Cost of goods sold was approximately $3,952,000 for fiscal 1997 versus
approximately $3,094,000 for the prior fiscal year. Included in the fiscal 1997
cost was a $24,000 decrease in the Company's reserve for potential disposal
costs of raw materials, as compared to a $623,000 decrease in the reserve for
fiscal 1996 reflecting a significantly larger decrease in the Company's
beginning raw materials inventory, plus approximately $392,000 of costs for
starting up operations at the Company's particle coating facility in St.
Augustine, Florida. Excluding the effect of the change in the Company's reserve
for disposal during fiscal 1997 and fiscal 1996, and the St. Augustine start-up
costs, cost of goods sold decreased only approximately $133,000 in fiscal 1997
versus fiscal 1996, despite the over 40% decrease in revenues noted above. Major
factors contributing to the higher relative fiscal 1997 cost as compared to
sales were higher depreciation costs due to increased

17
<PAGE>

equipment purchases, an approximately $97,000 write-off of raw material and
in-process inventories related to discontinued processes and the fact that under
the prevailing operating conditions in both periods a significant portion of the
cost of production was fixed in nature. Some savings were realized as a result
of lower freight costs, resulting from a change in product pricing policy
whereby customers now pay freight on most shipments.

The Company's gross loss on sales of approximately $(2,523,000) during fiscal
1997 compares with a loss of approximately $(414,000) for the prior fiscal year
and reflects the lower revenue and higher costs detailed above.

Selling, general and administrative expenses for fiscal 1997 increased to
approximately $3,919,000 from $1,821,000 for fiscal 1996. This increase includes
(i) approximately $988,000 in higher consulting costs of which approximately
$705,000 was directly related to the terminated merger with Octagon and $90,000
was an accrued severance payment to the former President and Chief Executive
Officer of the Company, (ii) approximately $369,000 in higher legal costs and
approximately $181,000 in outside service costs (primarily financial printing)
both of which also relate to the terminated merger activities, (iii)
approximately $165,000 in compensation expenses relating to capital stock, (iv)
approximately $135,000 for the purchase of the APT particle coating technology
that had not reached technological feasibility at the time of purchase, (v) a
$99,000 settlement received in fiscal 1996 from a former officer of Dunkirk and
(vi) approximately $93,000 in higher insurance costs.

A charge against operations of approximately $5,712,000 was recorded in the
fourth quarter of fiscal 1997 to write down fixed assets to their estimated fair
market value for processes which have been shut down and no longer appear to be
viable for the forseeable future. There had been no comparable expense in fiscal
1996.

The Company incurred process development costs of approximately $996,000 for
fiscal 1996. There were no similar charges in fiscal 1997.

Interest expense increased to approximately $1,277,000 for fiscal 1997 from
approximately $1,077,000 for fiscal 1996, reflecting the capitalization of
approximately $440,000 in interest during fiscal 1996. No interest expense was
capitalized during fiscal 1997. Partially offsetting this cost increase was
approximately $240,000 in lower interest expense in fiscal 1997 as a result of
reductions in debt principal.

Interest income of approximately $227,000 in fiscal 1997 compares with
approximately $114,000 in fiscal 1996. The increase reflects higher earnings on
cash received from the Company's initial public offering in May 1996.

Other income of approximately $349,000 in fiscal 1997 was approximately $267,000
higher than fiscal 1996, due entirely to a $331,547 New York State net
investment tax credit recognized in June 1997. (A cash refund of $566,547 was
received, but provision has been made for the return of an estimated $235,000 of
this to the State as a result of the shut down of related fixed assets.)

18
<PAGE>

The fiscal 1996 Statement of Operations includes an extraordinary item amounting
to $442,000. This charge includes underwriting, debt discount, legal and
accounting costs relating to Bridge Notes issued in December, 1995 to provide
interim working capital until the initial public offering could be closed.

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

The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of preferred
stock and the proceeds of the IPO. At June 30, 1997, the Company had
approximately $11,315,000 in principal amount of long-term indebtedness
(excluding capital lease obligations) and net working capital deficiency of
approximately $(3,394,554). As of June 30, 1997, the Company had cash and
marketable securities of approximately $325,000.

In August and September 1997, the Company raised aggregate gross proceeds of
$4,145,000 in a private placement of Preferred Stock. An aggregate of 414,500
shares of Preferred Stock were issued. Each share of Preferred Stock is
initially convertible into eight shares of Common Stock at a conversion price of
$1.25 per share, subject to adjustment based on the lesser of $1.25 and the
prevailing average market price of the Common Stock immediately preceding any
subsequent closing, if any. The maximum amount of such offering, including gross
proceeds received to date, would result in gross proceeds of $5,000,000
($8,000,000 if the Placement Agent's over-allotment option is exercised in
full), although there can be no assurance that any additional closings under the
offering will occur.

The Company received net proceeds of $3,606,150 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance). Of such net proceeds, $1,620,000 was used to
redeem the IDA Bonds and $500,000 plus accrued interest was used to repay the
1997 Bridge Loan, with the remainder to be used for transaction expenses
estimated at $150,000 and general working capital purposes, including accrued
payables.

In July and August 1997, the 1997 Bridge Loan provided the Company with an
aggregate of $500,000 which was used for general working capital purposes. The
1997 Bridge Loan was repaid, together with accrued interest at the rate of 12%
per annum, on September 8, 1997 out of the proceeds of the Preferred Stock
placement. In connection with such 1997 Bridge Loan, the Company issued warrants
to purchase 100,000 shares of Common Stock to the Aries Funds at an exercise
price equal to $1 5/16 per share.

In September 1997, the $8,000,000 principal amount of IDA Bonds were redeemed in
full in exchange for a cash payment of $1,620,000 and Dunkirk's forfeiture of
its interest in a related debt service reserve fund (which had a then current
balance of approximately $190,000).

19
<PAGE>

January 1, 1998 until the maturity date of the loans, with interest continuing
to accrue on such deferred amounts payable at maturity. ESDC has also agreed to
allow Dunkirk to reduce the principal amount of such loans by the amount of a
debt service reserve fund (the balance at June 30, 1997 was $449,190) that will
be forfeited by Dunkirk.

As of September 19, 1997, the Company had approximately $3,287,000 in principal
amount of long-term indebtedness (excluding capital lease obligations),
consisting of (i) approximately $1,888,000 outstanding principal amount under
the Key Bank term loans guaranteed by ESDC, which loans bear interest at the
prime rate and are payable in monthly installments through December 2001
(subject to the deferral through January 1, 1998 described above), (ii)
approximately $695,000 aggregate outstanding principal amount under various
mortgage and secured equipment loans and (iii) approximately $704,000 aggregate
outstanding principal amount under subordinated indebtedness from certain of the
Company's CRT glass customers who provided financial assistance to the Company
during its start-up phase. The Company's long-term indebtedness is secured by
liens on its fixed assets. The Company's long-term indebtedness has been used to
finance its facility, equipment and related capital expenditures. Certain of the
agreements related to such long-term indebtedness contain customary covenants
and default provisions.

The following unaudited pro forma balance sheet data reflects the following
transactions as if they had occurred as of June 30, 1997: (i) the private
placement of 414,500 shares of Preferred Stock resulting in gross proceeds of
$4,145,000 less commissions and a non-accountable expense allowance totaling
$538,850 and placement expenses estimated at $150,000 (of which $60,000 was paid
from the proceeds and $32,522 had been recorded by the Company at June 30,
1997), and (ii) retirement of the $8,000,000 principal amount of IDA Bonds for a
payment of $1,620,000 plus $190,000 representing debt service reserve funds
forfeited by Dunkirk upon such retirement in September 1997 plus $230,000
removed from the debt service fund on September 1, 1997 for payment of interest
(with the assumption that there was no related tax on the gain), and (iii)
write-off of $330,361 of deferred finance charges related to the $8,000,000
retired IDA Bonds.

20
<PAGE>

<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------------------
Pro Forma
Actual Adjustments As Adjusted
------------ ------------- ------------
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C>
Cash .............................................................. $ 325,092 $ 1,868,672(1) $ 2,193,764
Other current assets .............................................. 855,810 (32,522) 823,288
------------ ------------ ------------
Total current assets ......................................... 1,180,902 1,836,150 3,017,052
Property, plant and equipment (net) ............................... 6,939,782 -- 6,939,782
Noncurrent assets ................................................. 446,929 (330,361) 116,568
Restricted assets ................................................. 869,311 (419,964) 449,347
------------ ------------ ------------
$ 9,436,924 $ 1,085,825 $ 10,522,749
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Accrued expenses .................................................. $ 858,447 (76,667) $ 781,780
All other current liabilities ..................................... 3,717,009 -- 3,717,009
------------ ------------ ------------
Total current liabilities .................................... 4,575,456 (76,667) 4,498,789

Capital lease obligations, less current portion 39,414 -- 39,414
Long-term debt, less current portion .............................. 10,784,343 (8,000,000) 2,784,343

Stockholders' equity (deficiency):
Common stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares .......................................... 1,385 -- 1,385
Additional paid-in capital, common stock ..................... 24,186,932 -- 24,186,932
Preferred stock, $.001 par value, authorized
15,000,000 shares, issued and outstanding
414,500 shares ............................................ 415 415
Additional paid-in capital, preferred stock .................. -- 3,455,735 3,455,735
Unearned stock compensation .................................. (116,369) -- (116,369)
Accumulated deficit .......................................... (30,034,237) 5,706,342(2) (24,327,895)
------------ ------------ ------------
Total stockholders' equity (deficiency) ........................... (5,962,289) 9,162,492 3,200,203
------------ ------------ ------------
$ 9,436,924 $ 1,085,825 $ 10,522,749
============ ============ ============
<FN>
- ----------
(1) Reflects gross proceeds of $4,145,000 on the sale of Preferred Stock, less
commissions and estimated expenses totaling $656,328 and $1,620,000 paid to
retire the IDA Bonds.

(2) Reflects a pre-tax gain on retirement of $8,000,000 IDA Bonds based on (i)
payments of $1,620,000 cash, (ii) forfeiture of $419,964 in debt service
reserve funds, (iii) $76,667 accrued interest recorded at June 30, 1997 on
the IDA Bonds which was paid from the debt service reserve fund subsequent
to June 30, 1997, and (iv) a write-off of $330,361 for deferred finance
charges related to the retired IDA Bonds. The pro forma adjustment does not
include the related tax, if any, that may be payable with respect to the
debt retirement. If Dunkirk is deemed to be solvent immediately prior to
the retirement of the IDA Bonds, the Company will recognize taxable income
for the debt forgiveness in its tax year ending June 30, 1998. The amount
of such income may be offset by net operating loss carryforwards ("NOLs"),
subject to possible limitations (see below). Even if sufficient NOLs were
available to offset such taxable income, the Company may still be subject
to alternative minimum tax. To the extent that Dunkirk is deemed to be
insolvent immediately prior to such repayment by an amount which equals or
exceeds the amount of debt forgiveness, the Company will not recognize
taxable income from such repayment; however, certain of Dunkirk's tax
attributes (such as NOLs) would be subject to reduction and would not be
available to offset future income from operations, if any. For this
purpose, the amount of insolvency is defined to be the excess of Dunkirk's
liabilities over the fair value of its assets. An independent appraisal of
the fair value of Dunkirk' assets has not been completed at this time to
determine Dunkirk's solvency.
</FN>
</TABLE>

21
<PAGE>

The Company's capital lease payments were approximately $84,000 for the year
ended June 30, 1997 and are estimated to be approximately $41,000, $27,000 and
$23,000 for the fiscal years ending June 30, 1998, 1999 and 2000, respectively,
under current commitments. The Company's utility expenses average approximately
$35,000 per month at its current level of operations.

The Company's base annual fixed expenses include approximately $447,000 in
aggregate annual base compensation for the current executive officers of the
Company and debt service obligations relating to the Company's outstanding
indebtedness, which are estimated to aggregate approximately $489,000 for the
fiscal year ending June 30, 1998, excluding capital lease obligations.

The Company has federal net operating loss carryforwards that amounted to
approximately $20.6 million at June 30, 1997, which expire between 2006 and
2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of net operating loss carryforwards is limited if
there has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
prior shifts in ownership (the Dunkirk merger and the completion of the IPO) and
anticipated shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severly
limited.

Pending Accounting Pronouncements
- ---------------------------------

SFAS No. 128 "Earning Per Share," SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosure about segments of an Enterprise and Related
Information" are not effective for the Company until December 31, 1997, June 30,
1999 and June 30, 1999, respectively. Management believes these standards will
not have a material impact on the Company.

ITEM 7. FINANCIAL STATEMENTS

See Financial Statements annexed.

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

None.

PART III

Portions of the Company's definitive Proxy Statement, which the Company will
file with the Securities and Exchange Commission on or before October 28, 1997,
are incorporated herein by reference as items 9 through 12 of Part III.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) 1. Financial Statements and Schedules

See Financial Statements annexed.

2. Exhibits

See Exhibits annexed.

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K on April 2, 1997 relating to its
private placement of preferred stock.

22
<PAGE>

SIGNATURES

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: September 29, 1997 /s/ William L. Amt
------------------
William L. Amt
President and Chief Executive Officer

23
<PAGE>

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.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ William L. Amt President, Chief Executive September 29, 1997
- --------------------------- Officer and Director
William L. Amt (principal executive officer)

/s/ John G. Murchie Controller(principal September 29, 1997
- --------------------------- accounting officer)
John G. Murchie

/s/ Eckardt C. Beck Chairman of the Board September 29, 1997
- ---------------------------
Eckardt C. Beck

/s/ Peter H. Gardner Director September 29, 1997
- ---------------------------
Peter H. Gardner

/s/ Alexander P. Haig Director September 29, 1997
- ---------------------------
Alexander P. Haig

/s/ Scott A. Katzmann Director September 29, 1997
- ---------------------------
Scott A. Katzmann

/s/Irwin M. Rosenthal, Esq. Director September 29, 1997
- ---------------------------
Irwin M. Rosenthal, Esq.

24
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS
-----------------------------

Report of Independent Auditors...............................................F-2

Consolidated Balance Sheets of Conversion Technologies International,
Inc. and Subsidiaries as of June 30, 1997 and June 30, 1996...............F-3

Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the years ended June 30, 1997
and June 30, 1996.........................................................F-4

Consolidated Statements of Stockholders' Equity of Conversion Technologies
International, Inc. and Subsidiaries for the years ended June 30,
1997 and June 30, 1996.................................................F-5

Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the years ended June 30, 1997
and June 30, 1996..........................................................F-6

Notes to Consolidated Financial Statements...................................F-8

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Conversion Technologies International, Inc.

We have audited the accompanying consolidated balance sheets of Conversion
Technologies International, Inc. and Subsidiaries (Company) at June 30, 1997 and
1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. 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 Conversion
Technologies International, Inc. and Subsidiaries at June 30, 1997 and 1996, and
the consolidated results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has generated only minimal revenue, has incurred significant losses, has
a working capital deficiency and has a stockholders' deficiency. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.

Metro Park, New Jersey /s/ERNST & YOUNG LLP
September 18, 1997

F-2
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Balance Sheets

June 30,
------------------------------
1997 1996
------------- ------------

ASSETS
<S> <C> <C>
Cash and cash equivalents ........................................... $ 325,092 $ 4,539,464
Marketable securities ............................................... -- 2,009,632
Accounts receivable, less allowance for doubtful accounts
of $18,000 at June 30, 1997 and $25,000 at June 30, 1996 ....... 146,225 343,214
Inventories ......................................................... 521,060 337,736
Prepaid expenses and other current assets ........................... 188,525 205,984
------------ ------------
Total current assets ................................................ 1,180,902 7,436,030

Property, plant and equipment:
Land ........................................................... 75,000 75,000
Building and improvements ...................................... 1,578,293 1,609,832
Machinery and equipment ........................................ 6,713,599 11,573,933
Construction in progress ....................................... 29,500 1,008,480
------------ ------------
8,396,392 14,267,245
Less accumulated depreciation .................................. (1,456,610) (1,630,639)
------------ ------------
6,939,782 12,636,606

Deferred finance charges, less accumulated amortization of
$135,786 at June 30, 1997 and $81,272 at June 30, 1996 ......... 443,829 494,843
Other noncurrent assets ............................................. 3,100 38,304
Restricted assets
Project Fund ................................................... 158 72,859
Debt service reserve funds ..................................... 869,153 1,268,457
------------ ------------
$ 9,436,924 $ 21,947,099
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Accounts payable .................................................... $ 1,711,212 $ 1,279,280
Deferred revenue .................................................... 491,944 557,907
Reserve for disposal ................................................ 713,100 737,000
Accrued expenses .................................................... 858,447 778,306
Investment tax credit payable ....................................... 235,000 --
Current portion of capital lease obligations 35,495 72,914
Current portion of long-term debt ................................... 530,258 437,285
------------ ------------
Total current liabilities ........................................... 4,575,456 3,862,692

Capital lease obligations, less current portion ..................... 39,414 74,693
Long-term debt, less current portion ................................ 10,784,343 11,281,715

Stockholders' equity (deficiency):
Class A common stock, $.00025 par value, authorized 25,000,000
shares, issued and outstanding 5,539,745 shares at June 30,
1997 and 5,449,745 shares at June 30, 1996 .................. 1,385 1,362
Additional paid-in capital ..................................... 24,186,932 23,905,705
Unearned Stock Compensation .................................... (116,369) --
Accumulated deficit ............................................ (30,034,237) (17,179,068)
------------ ------------
Total stockholders' equity (deficiency) ............................. (5,962,289) 6,727,999
------------ ------------
$ 9,436,924 $ 21,947,099
============ ============

See accompanying notes.
</TABLE>

F-3
<PAGE>
<TABLE>
<CAPTION>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

Year ended June 30,
------------------------------
1997 1996
------------ ------------

<S> <C> <C>
Revenue ........................... $ 1,429,008 $ 2,679,987

Cost of goods sold ................ 3,952,374 3,093,560
------------ ------------

Gross loss on sales ............... (2,523,366) (413,573)

Selling, general and administrative 3,918,726 1,821,179
Process development costs ......... -- 996,259
Write-off of fixed assets ......... 5,711,567 --
------------ ------------
Loss from operations .............. (12,153,659) (3,231,011)

Interest expense .................. (1,277,310) (1,076,077)
Interest income ................... 226,505 114,326
Other income ...................... 349,295 81,811
------------ ------------

Loss before extraordinary item .... (12,855,169) (4,110,951)

Extraordinary item ................ -- 442,000
------------ ------------

Net loss .......................... $(12,855,169) $ (4,552,951)
============ ============

Net loss per common share
before extraordinary item .... $ (2.69) $ (2.64)
============ ============

Net loss per common share ......... $ (2.69) $ (2.92)
============ ============
</TABLE>

See accompanying notes.

F-4
<PAGE>
<TABLE>
<CAPTION>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Stockholders' Equity

Years ended June 30, 1997 and June 30, 1996

Preferred Stock Class A Common Stock
------------------------------------------ ----------------------------------------
Additional Additional
Number Paid-In Number Paid-In
of Shares Amount Capital of Shares Amount Capital
--------- ------ ------- --------- ------ -------

<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1995 ........ 2,958,000 $ 2,958 $5,994,271 909,404 $ 227 4,427,710
Issuance of Class A
common stock ............ 3,527,050 882 13,526,159
Converted to Common Stock . (2,958,000) (2,958) (5,994,271) 1,023,054 255 5,996,974
Surrendered and canceled .. (7,308) (1) (98,999)
Repurchased and canceled .. (2,455) (1) (12,889)
Debt discount on Bridge ... 66,750
Net Loss ..................
--------- ---------- ---------- --------- ------ ------------
Balance at June 30, 1996 ....... -- -- -- 5,449,745 1,362 23,905,705
Issuance of Class A
common stock ............ 90,000 23
Stock Compensation ........ 281,227
Net Loss ..................
--------- ---------- ---------- --------- ------ ------------
Balance at June 30, 1997 ....... -- $ -- $ -- 5,539,749 $1,385 $ 24,186,932
========= ========== ========== ========= ====== ============

Total
Unearned Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficiency)
------------ ----------- ------------

Balance at July 1, 1995 ........ $ -- $(12,626,117) $ (2,200,951)
Issuance of Class A
common stock ............ 13,527,041
Converted to Common Stock . --
Surrendered and canceled .. (99,000)
Repurchased and canceled .. (12,890)
Debt discount on Bridge ... 66,750
Net Loss .................. (4,552,951) (4,552,951)
--------- ------------ ------------

Balance at June 30, 1996 ....... -- (17,179,068) 6,727,999
Issuance of Class A
common stock ............ 23
Stock Compensation ........ (116,369) 164,858
Net Loss .................. (12,855,169) (12,855,169)
--------- ------------ ------------
Balance at June 30, 1997 ....... $(116,369) $(30,034,237) $ (5,962,289)
========= ============ ============

See accompanying notes.

F-5
</TABLE>

<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

Year ended June 30,
-------------------------------
1997 1996
------------- -------------

OPERATING ACTIVITIES
<S> <C> <C>
Net loss ................................................... $(12,855,169) $ (4,552,951)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation expense .................................. 1,036,416 886,863
Amortization of deferred financing and patent costs ... 54,514 54,302
Write-down of fixed assets ............................ 5,711,567 --
Write-off of inventories .............................. 96,752 --
Stock compensation expense ............................ 164,858 --
Settlement with former officer ........................ (99,000)
Debt discount on Bridge Notes ......................... 66,750
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ......... 196,989 (59,643)
Increase in inventories ............................ (280,076) (110,012)
Decrease (increase) in other current assets ........ 17,459 (72,952)
Decrease (increase) in other noncurrent assets ..... 35,204 (7,038)
Decrease in deferred revenue ....................... (65,963) (386,323)
Increase (decrease) in accounts payable, reserve
for disposal and other accrued expenses ...... 723,173 (811,824)
------------ ------------
Net cash used in operating activities ...................... (5,164,276) (5,091,828)

INVESTING ACTIVITIES
Sale (purchase) of marketable securities ................... 2,009,632 (2,009,632)
Capital expenditures ....................................... (1,051,159) (4,396,016)
------------ ------------
Net cash provided by (used in) investing activities ........ 958,473 (6,405,648)

FINANCING ACTIVITIES
Increase in deferred finance and registration costs ........ (3,500) (40,427)
Issuance of notes payable .................................. -- 2,675,000
Payment of notes payable ................................... -- (3,061,500)
Issuance of long-term debt ................................. 8,282 3,056,476
Decrease (increase) in restricted assets ................... 472,005 (347,408)
Principal payments on long-term debt ....................... (412,681) (399,445)
Principal payments under capital lease obligations ......... (72,698) (93,750)
Issuance of common stock ................................... 23 13,514,151
------------ ------------
Net cash (used in) provided by financing activities ........ (8,569) 15,303,097
------------ ------------

(Decrease) increase in cash and cash equivalents ........... (4,214,372) 3,805,621
Cash and cash equivalents at beginning of period ........... 4,539,464 733,843
------------ ------------
Cash and cash equivalents at end of period ................. $ 325,092 $ 4,539,464
============ ============

See accompanying notes.
</TABLE>

F-6
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Year ended June 30,
----------------------------
1997 1996
------------ ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Interest paid, net of amount capitalized ............. $ 1,320,882 $ 1,009,746
=========== ===========

SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Surrender and cancellation of common stock ........... -- (99,000)
Issuance of warrants in connection with bridge notes.. -- 66,750

See accompanying notes.
</TABLE>

F-7
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

1. Organization
------------

Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufacturers and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products. The Company's revenue streams
are a combination of waste conversion fees and manufactured product sales.

On November 9, 1995, the Board of Directors approved an approximate
0.1218-for-one reverse split of its common stock. The accompanying consolidated
financial statements have been retroactively restated to reflect this reverse
stock split.

On May 16, 1996 the Company completed its initial public offering ("IPO"). The
funds generated by this offering became available at the closing on May 21,
1996, and included the proceeds from 3,067,000 shares of common stock sold at
$4.40 per share, 3,067,000 Class A Warrants sold at $0.05 each and 3,067,000
Class B Warrants sold at $0.05 each. On June 7, 1996 the Company closed on the
underwriter's over-allotment option for sales of 460,050 of each of the
foregoing securities at identical pricing. (See Note 7).

In November 1996, the Company entered into an Agreement and Plan of
Reorganization with Octagon, Inc. ("Octagon") pursuant to which a wholly-owned
subsidiary of the Company would be merged with and into Octagon (the "Merger"),
whereby, Octagon would become a wholly-owned subsidiary of the Company. On June
30, 1997, the Company and Octagon mutually terminated the Merger. Pursuant to
the terms of a Termination Agreement, the Company agreed to forgive remaining
bridge loans, including interest, in the approximate amount of $630,000 it made
to Octagon in fiscal 1997 in payment for certain services provided by Octagon to
the Company prior to the termination of the Merger and Octagon agreed to provide
certain services to the Company. This amount is included in Selling, General and
Administrative expenses in the Consolidated Statement of Operations.

F-8
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

1. Organization (continued)
------------------------

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. In view of the foregoing,
there is a substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.

In late fiscal 1997 and early fiscal 1998 the Company engaged new management.
The Company's new management team has initiated a plan to reverse the history of
limited revenues and continued losses through a series of deliberate actions
based upon the following five elements. Long term debt has been renegotiated to
reduce interest expense (see Note 9). Raw material costs are being cut through
the use of third party tollers and the application of lower cost alternative
substrates. Revenues from colored substrates are anticipated to increase as the
Company's decorative particle production facility in St. Augustine, Florida
becomes fully operational. Investments in product development have been
curtailed and investments in sales and marketing will be increased.
Manufacturing and operating overheads have been reduced. Although management
believes the foregoing course of action would allow the Company to continue as a
going concern for the next year, there are no assurances that management will be
successful in implementing the plans and eliminating the substantial doubt as to
its ability to continue as a going concern.

2. Summary of Significant Accounting Policies
------------------------------------------

Basis of Presentation
- ---------------------

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of Conversion Technologies International, Inc. and its wholly-owned
subsidiaries, Dunkirk International Glass and Ceramics Corporation and Advanced
Particle Technologies, Inc. Intercompany accounts and transactions have been
eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

F-9
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------

Revenue Recognition
- -------------------

The Company derives most of its revenue from a combination of fees charged to
accept waste materials and from the sale of its products. Revenue recognition of
the fees charged to accept the waste material is deferred until the material is
placed through the conversion process.

For the year ended June 30, 1997, 61.2% of the Company's revenue was derived
from two major customers. Revenue generated from each of these customers
amounted to $621,830 and $252,686 which represents 43.5% and 17.7% of total
revenue, respectively. For the year ended June 30, 1996, 87.6% of the Company's
revenue was derived from three major customers. Revenue generated from each of
these customers amounted to $1,395,568, $677,648 and $273,709 which represents
52.1%, 25.3% and 10.2% of total revenue, respectively. The Company's customer
who generated the 17.7% and 25.3% of the total revenue for fiscal 1997 and 1996,
respectively, ceased shipping CRT glass and purchasing recycled CRT glass from
the Company in March 1997.

Reserve for Disposal
- --------------------

Dunkirk began accepting waste materials (primarily CRT glass) in early 1994.
Upon accepting the waste materials, Dunkirk established a reserve for the
potential disposal costs for the waste materials accepted, in the event that the
conversion processes being developed were not successful. From July 1, 1995 to
June 30, 1996, the Company reduced the reserve by approximately $623,000, and
from July 1, 1996 to June 30, 1997 the Company further reduced the reserve by
approximately $24,000. The decreases in the reserve, which substantially
resulted from changes in the volume of inventory, have been credited against
operations. The Company intends to adjust the reserve when the conversion
processes prove commercially successful.

Inventories
- -----------

Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.

Inventories consisted of the following:

June 30,
------------------------
1997 1996
---- ----

Raw materials ....... $ 61,949 $ 79,237
Work-in-process...... 111,961 135,536
Finished goods....... 347,150 122,963
-------- --------
$521,060 $337,736
======== ========

F-10
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------

Property, Plant and Equipment
- -----------------------------

Property, plant and equipment is stated at cost. The Company capitalized
interest costs of $439,932 in the year ended June 30, 1996 with respect to the
construction of certain long-term assets. Depreciation and amortization is
computed on the straight-line method over the estimated useful lives of the
assets. Amortization on assets under capital leases is provided on a
straight-line basis over the lesser of the useful lives of the related assets or
the terms of the leases.

During fiscal 1997, the Company experienced reduced levels of revenue and
increased costs. Also in fiscal 1997 the Company shut down its melter and
certain related equipment which it does not intend to use in the foreseeable
future and as such, the Company adjusted the asset values to their estimated
fair value. As a result, the Company has taken a charge in the fourth quarter
pursuant to SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" in the amount of $5,711,567.

Cash Equivalents
- ----------------

The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.

Marketable Securities
- ---------------------

The Company considers all marketable securities to be available for sale. These
securities were carried at cost which approximated fair value at June 30, 1996.

Deferred Financing Costs
- ------------------------

Deferred costs include costs related to obtaining debt financing, and are being
amortized under the interest method of accounting. (See Note 9).

Income Taxes
- ------------

Deferred income tax assets and liabilities are recorded for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.

F-11
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------

Process Development Costs
- -------------------------

Process development costs represent research and development associated with the
Company's CRT glass processing and ALUMAGLASS(TM) product lines (technologies)
in fiscal 1996. No such costs were incurred in fiscal 1997.

Investment Tax Credit
- ---------------------

The Company received a gross cash refund of $566,547 related to a New York State
investment tax credit in June 1997. However, the Company has recorded a $235,000
reserve against this amount as the Company may be required to refund such amount
pursuant to a recapture provision. The net amount of $331,547 is included in
"Other Income."

Extraordinary Item
- ------------------

The consolidated statement of operations for the fiscal year ended June 30, 1996
includes an extraordinary charge of $442,000, representing the costs of
obtaining bridge financing in the form of Bridge Notes totaling $2,225,000 which
were repaid out of the proceeds of the Company's IPO (see Note 4).

Net Loss Per Common Share
- -------------------------

The net loss per common share is based on the net loss for the year, divided by
the weighted average number of common shares outstanding during the year
(excluding the common shares that were deposited into escrow in connection with
the Company's initial public offering-see Note 7). Common Stock equivalents such
as stock options and warrants are not included as their effect is anti-dilutive.
However, immediately prior to the closing of the Company's initial public
offering, the Company's Series A Preferred Stock was converted into 1,023,054
shares of common stock (see Note 7). The weighted average number of these
converted shares, at June 30, 1997 and 1996 were 1,023,054, and they have been
included in the related net loss per common share calculation. Therefore, the
weighted average number of common shares outstanding at June 30, 1997 and 1996
were 4,773,311 and 1,559,908, respectively.

Employee Stock Option Plan
- --------------------------

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of the Company's employee stock options equals or is greater
than the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

F-12
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------

Pending Accounting Pronouncements
- ---------------------------------

SFAS No. 128 "Earnings Per Share," SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosure about segments of an Enterprise and Related
Information" are not effective for the Company until December 31, 1997, June 30,
1999 and June 30, 1999, respectively. Management believes these standards will
not have a material impact on the Company.

3. Debt
----

Long-term debt consists of the following obligations as of June 30, 1997 and
1996:

<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
----------- ----------

<S> <C> <C>
Dunkirk--Chautauqua Region Industrial Development
Corporation (CRIDA) mortgage note (collateralized by a
mortgage on real property having a carrying value of
approximately $1,510,100 at June 30, 1997) payable in
monthly installments of $4,285 including interest at a
variable rate (6% at June 30, 1997) through October 1,
2004. $ 304,432 $ 336,529

Dunkirk--Term loans with a bank payable in 84 monthly
installments of $40,944 including principal and
interest at the prime rate (8.50% at June 30, 1997)
through December 27, 2001. Collateral for this loan is
a first purchase money lien on the Company's machinery
and equipment, and repayment is guaranteed by the
former Dunkirk president and the New York State Job
Development Authority (JDA). (See Note 9). 1,887,871 2,192,379

Dunkirk--Subordinated mortgage note (collateralized by a
mortgage on real property having a carrying value of
approximately $1,510,100 at June 30, 1997) payable in
monthly installments of $4,956 including interest at
10% through January 21, 2004. 288,516 317,517

Dunkirk--Chautauqua County Industrial Development
Agency (CCIDA) subordinated note payable in monthly
payments of $1,485 including interest at 7% through
June 1, 1999. The note contains various restrictive
covenants, is guaranteed by the former Dunkirk
president and is collateralized by a subordinated
security interest in certain machinery and equipment
having a carrying value of approximately $5,163,200. 33,170 49,295

F-13
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

3. Debt (continued)
----------------

June 30,
------------------------
1997 1996
----------- ----------

Dunkirk--Southern Tier Enterprise Development Organization
(STEDO) subordinated note payable in monthly payments
of $1,169 including interest at 8% through July 1,
2002. The note contains various restrictive covenants,
is guaranteed by the former Dunkirk president and is
collateralized by a subordinated security interest in
certain equipment having a carrying value of
approximately $5,163,200. 48,727 59,974

Dunkirk--New York Job Development Authority (Al Tech)
subordinated note payable in monthly payments of $1,887
including interest at 5% through September 1, 1999. The
note contains various restrictive covenants, is
guaranteed by the former Dunkirk president and is
collateralized by a subordinated security interest in
certain equipment having a carrying value of
approximately $5,163,200. 48,096 67,799

Dunkirk--Chautauqua County Industrial Development Agency
solid waste disposal facility bonds payable in
quarterly payments of interest only through September
1, 1998 at a rate of 11.5% subject to adjustment upon
the achievement of stated debt service coverage ratio.
Beginning December 1, 1998 and annually through
December 1, 2010 principal payments which increase from
$325,000 to $1,025,000 are payable with interest
continuing to be paid quarterly. The bond security
agreement contains various restrictive covenants and is
collateralized by a security interest in the equipment
acquired with the proceeds (see Notes 5 and 9). 8,000,000 8,000,000

F-14
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

3. Debt (continued)
----------------

June 30,
------------------------
1997 1996
----------- ----------

Dunkirk--Subordinated unsecured debt from various electronic
companies; OI-NEG TV Products, Inc. (Techneglas),
Thomson Consumer Electronics, Sanyo Manufacturing
Corp., Toshiba Display Devices and Hitachi Electronic
Devices (USA), begin with quarterly payments of
interest only at prime plus 2% (10.50% at June 30,
1997) through a range of dates ending January 1, 1999.
Beginning between March 31, 1998 and April 1, 1999 and
going through a range of dates with the final
subordinate debt issue ending January 1, 2004 quarterly
installments of principal plus interest at prime plus
2% are payable. The first five quarterly interest
payments for a portion of the debt has been converted
by the Company into subordinated notes ($43,789
converted at June 30, 1997) payable in quarterly
payments of interest only at 8% for nineteen quarters
and the principal amount plus interest being due
between April 1, 1999 through April 1, 2000. 703,789 695,507
----------- -----------
Total Debt 11,314,601 11,719,000

Less current maturities 530,258 437,285
----------- -----------
$10,784,343 $11,281,715
=========== ===========
</TABLE>

The Company has agreed to indemnify and hold harmless the former Dunkirk
president with respect to guarantees made by him for obligations of Dunkirk. In
addition, the Company has agreed to use its reasonable efforts to cause the
release of such guarantees.

Maturities on long-term debt for the next five years are as follows (see Note
9):

June 30,
1998 $ 530,258
1999 1,044,448
2000 1,107,982
2001 990,836
2002 865,939
Thereafter 6,775,138
------------
$ 11,314,601
============

F-15
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

3. Debt (continued)
----------------

The carrying amounts and fair values of long-term borrowings consisted of the
following at June 30, 1997:

Carrying Amount Fair Value
--------------- ----------

5% subordinated note .............. $ 48,096 $ 45,206
6% mortgage note .................. 304,432 262,189
7% subordinated note .............. 33,170 32,023
8% subordinated note .............. 48,727 46,420
8.50% secured bank loan ........... 1,887,871 1,887,871
10% subordinated mortgage note .... 288,516 284,256
Variable rate debt ................ 703,789 703,789
11.5% solid waste disposal bonds .. 8,000,000 8,000,000
----------- -----------
Total Long-Term Borrowings ... $11,314,601 $11,261,754
=========== ===========

The fair values of fixed long-term borrowings were calculated as the present
value of future cash flows discounted at the Company's estimated current
borrowing rate of the respective issues ranging from prime plus 2% to prime plus
3% (See Note 9).

4. Notes Payable
-------------

During the period commencing September 1995 and ending November 1995, the
Company issued $700,000 of 6% convertible promissory notes, in anticipation of
additional equity financing, of which $50,000 was paid during fiscal 1996 (see
below).

During the period commencing December 7, 1995 and ending December 15, 1995, the
Company obtained additional bridge financing ("bridge loan") in the principal
amount of $2,225,000, (recorded, net of the value assigned to the attached
warrants, at $2,158,250) which includes the conversion of $650,000 of the
$700,000 convertible promissory notes discussed above. The bridge loan was
issued through a private placement arranged by the underwriter of the Company's
IPO. This bridge loan was comprised of bridge units, each consisting of a bridge
note in the principal amount of $50,000 bearing interest at the rate of 10% per
annum, and warrants to purchase 25,000 shares of the Company's common stock at
an exercise price of $4.00 per share commencing one year from the date of
issuance and expiring three years after the initial closing date of the bridge
loan offering.

F-16
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

4. Notes Payable (continued)
-------------------------

In March 1996, the Company issued $200,000 of promissory notes, due upon the
earlier of the closing of the IPO and six months from the date issued, to
certain directors, officers and security holders which bore interest at 10% per
annum. In May 1996, the Company issued an additional $200,000 of promissory
notes to a securityholder with identical terms to the notes issued in March
1996.

All of the outstanding bridge notes and promissory notes were repaid at the
closing of the IPO from the proceeds thereof. Concurrent with the closing of the
offering, the common stock warrants issued to the bridge note holders were
converted into an equivalent number (1,112,500) of Class A warrants, each of
which entitles the holder to purchase, at an exercise price of $5.85, subject to
adjustment, one share of common stock and one Class B warrant. Each Class B
warrant entitles the holder to purchase one share of common stock at an exercise
price, subject to adjustment, of $7.80 (see Note 7).

During fiscal 1996 Dunkirk repaid a $262,500 balance plus accrued interest to
close a $300,000 line of credit arrangement with a bank. In June, 1996 Dunkirk
repaid a $124,000 demand note plus accrued interest payable to a bank.

5. Restricted Assets
-----------------

Dunkirk has $158 and $72,859 of project funds available at June 30, 1997 and
June 30, 1996, respectively, for the acquisition of qualified machinery and
equipment from the unexpended balance on the sale of the solid waste disposal
facility bonds. In addition, a debt service reserve fund equivalent to 10% of
the bonds plus interest is required to be deposited in escrow ($419,963 at June
30, 1997 and $840,442 at June 30, 1996), and may be released under certain
conditions (see Note 9).

Dunkirk also has a debt service reserve fund of $449,190 at June 30, 1997 and
$428,015 at June 30, 1996, including interest, deposited in escrow as required
by the JDA for payment of the final installments due on the related debt (see
Note 9).

6. Commitments and Contingencies
-----------------------------

The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct the improved abrasives finishing area, which was a part of the
Company's capital expansion program. The contractor commenced work in April
1995, but was asked to stop work in November 1995 following significant cost
overruns, problems and delays in construction and disputes with the Company over
the scope of the work to be performed by the contractor. The Company has served
the contractor with its complaint, alleging, among other things, breach of
contract, fraud and defamation, and seeks damages in excess of $1,000,000. The
contractor has served an answer with affirmative defenses and counterclaims
against the Company for

F-17
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

6. Commitments and Contingencies (continued)
-----------------------------------------

breach of contract. The aggregate amount of the claims by the contractor against
the Company is $483,000 plus interest.

The Company does not believe that there will be a material adverse outcome in
the foregoing dispute.

The Company has entered into capital leases for machinery and equipment that may
be purchased on expiration of the leases on various dates through 2000. The net
asset value of property under capitalized leases, included in property, plant
and equipment, is as follows:

June 30,
------------------------
1997 1996
---- ----

Machinery and equipment ............ $353,686 $354,352
Less accumulated amortization....... 289,382 217,375
-------- --------
$ 64,304 $136,977
======== ========

Lease amortization of $72,637 and $101,531 for the years ended June 30, 1997 and
1996, respectively, is included in cost of goods sold.

Future minimum lease payments together with the present value of the net minimum
lease payments for capitalized leases as of June 30, 1997 is as follows:

Capitalized Operating
Leases Leases
----------- ---------
June 30,
1998......................................... $41,486 $75,780
1999......................................... 27,179 75,780
2000......................................... 22,854 50,520
2001......................................... -- --
2002......................................... -- --
-------- --------
Total net minimum lease payments............. 91,519 $202,080
========
Less amount representing interest............ 16,610
-------
Present value of net minimum lease payments.. $74,909
=======

Total rent expense of the Company for the periods ended June 30, 1997 and 1996
was $73,674 and $99,530, respectively.

F-18
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

7. Capital Stock
-------------

On May 16, 1996, the Company completed an initial public offering of the
Company's common stock, Class A warrants and Class B warrants. Concurrent with
the closing of the IPO, the Company's Preferred Stock ($.001 par value,
authorized 15,000,000 shares) was converted into 1,023,054 shares of common
stock as a result of the restatement of the Company's Certificate of
Incorporation which adjusted the Preferred Stock conversion ratio due to
anti-dilution provisions. In addition, preferred stock warrants became
exercisable for common stock (adjusted for a 0.1218-for-one reverse common stock
split-see Note 1) and the number of common shares into which certain common
stock warrants and all preferred stock warrants are convertible increased by a
factor of approximately 2.84 upon the effective date of the IPO due to the fact
that those warrants had protection against the dilutive effect of the valuation
placed on the Company upon the IPO. Also, upon the effective date of the IPO,
the Company adjusted the exercise price of all the options and warrants
outstanding prior to the IPO to $4.40 with some warrants having an exercise
price equal to $4.40 plus a premium in certain circumstances. All amounts
disclosed related to options and warrants have been restated to reflect the
adjusted exercise prices.

The Company has issued the following common stock purchase warrants, all of
which expire between the fifth and seventh anniversary of the date of grant:

F-19
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

7. Capital Stock (continued)
-------------------------

<TABLE>
<CAPTION>
Number of Exercise
Shares Price
--------- --------

<S> <C> <C> <C>
Outstanding at July 1, 1995 ........................... 316,771 4.77-5.28
Granted July 21, 1995 through December 15, 1995 .... 1,114,933 4.00-4.40
Canceled ........................................... (1,112,500) 4.00
----------
Outstanding at June 30, 1996 .......................... 319,204 4.40-5.28
Granted July 1, 1996 through June 30, 1997 ......... -- --
Canceled July 1, 1996 through June 30, 1997 ........ -- --
----------
Outstanding at June 30, 1997 .......................... 319,204 4.40-5.28
==========
</TABLE>

In conjunction with its initial public offering, the Company has issued the
following Class A and Class B warrants, all of which expire on the fifth
anniversary of the date issued:

<TABLE>
<CAPTION>
Class A Class B
---------------------- ----------------------
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- --------

<S> <C>
Outstanding at July 1, 1995 ............ -- -- -- --
Issued May 16, 1996 and June 7, 1996.. 4,639,550 $ 5.85 3,527,050 $ 7.80
--------- ---------
Outstanding at June 30, 1997 and 1996... 4,639,550 3,527,050
========= =========
</TABLE>

The Company maintains an Employee Stock Option Plan (the "Employee Plan") and a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan"). Stock options
may be granted at the discretion of the Board of Directors. The Company has
reserved 440,000 and 70,400 shares of its common stock for issuance upon the
exercise of options granted under the Employee and Non-Employee Plans,
respectively. The Non-Employee Plan options are exercisable in full one year
after the date of grant and expire ten years from the date of grant. The
Employee Plan options primarily vest one-third on each of the first three
anniversaries of the date of grant and expire on the seventh anniversary of the
date of grant. The Company grants stock options at exercise prices equal to or
greater than the fair market value of the Company's common stock on the date of
grant.

On April 21, 1996, the Company granted, effective as of the effective date of
the IPO, non-qualified options to purchase 50,000 shares of its common stock at
an exercise price of $4.40 per share to an executive officer and director. These
options are not part of the Employee Plan and Non-Employee Plan, and were
canceled in June of 1997 with the resignation of the executive officer and
director.

F-20
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

7. Capital Stock (continued)
-------------------------

The following table summarizes the activity in options under the Employee and
Non-Employee Plans, plus options granted on a non-qualified basis:

Weighted
Average
Number Exercise
of Shares Price
--------- --------

EMPLOYEE PLAN OPTIONS
Outstanding at July 1, 1995... 38,083 4.40
Granted ................... 38,424 4.40
Canceled and expired ...... (6,884) 4.40
-------
Outstanding at June 30, 1996.. 69,623 4.40
Granted ................... 148,000 4.40
Canceled .................. (48,543) 4.40
-------
Outstanding at June 30, 1997.. 169,080 4.40
=======

NON-EMPLOYEE PLAN OPTIONS
Outstanding at July 1, 1995 6,266 4.40
Granted ................... 1,217 4.40
-------
Outstanding at June 30, 1996 7,483 4.40
Granted ................... 50,847 3.16
-------
Outstanding at June 30, 1997.. 58,330 3.32
=======

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
at June 30, 1997 At June 30, 1997
----------------------------------- ----------------------------
Weighted Average
Number of Weighted Average Contractual Life Number of Weighted Average
Range Shares Exercise Price (Years) Shares Exercise Price
--------- ---------------- ---------------- --------- ----------------

<S> <C> <C> <C> <C> <C>
$3.125 50,000 $3.13 10.00
$4.40-$5.00 177,410 4.40 6.39 75,557 $4.40
------- ------
TOTAL 227,410 $4.12 7.18 75,557 $4.40
======= ======
</TABLE>

Of the total options outstanding under the plans, 75,557 and 24,081 were
exercisable at June 30, 1997 and 1996, respectively.

F-21
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

7. Capital Stock (continued)
-------------------------

At June 30, 1997, the Company has reserved 510,400 shares of Common Stock for
the exercise of options.

Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123, and has been determined as if the Company had been accounting for
its employee and non-employee director stock options under the fair value method
of that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model for 1997 and the Minimum Value
Method for 1996 prior to becoming a public company in May 1996, with the
following assumptions for 1997 and 1996, respectively: weighted-average
risk-free interest rate of 6.0% for both years; volatility factors of the
expected market price of the Company's common stock of .778 for fiscal 1997 and
a weighted average expected life of the options of 7.36 for fiscal 1997 and 6.08
for fiscal 1996.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and non-employee director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and non-employee director options.

For purposes of pro forma disclosures, the estimated fair value of the options
granted in 1997 and 1996 is amortized to expense over the options' vesting
period. The weighted-average grant date fair value of options granted during
fiscal years 1997 and 1996 were $2.79 and $1.30, respectively. The Company's pro
forma information follows:

1997 1996
---- ----

Pro Forma net loss..................... $(13,127,518) $(4,576,091)
Pro Forma loss per common share........ $(2.75) $(2.93)

The pro forma disclosures presented above for fiscal year 1996 reflect
compensation expense only for options granted in fiscal 1996 and for fiscal 1997
only for options granted in fiscal years 1996 and 1997. These amounts may not
necessarily be indicative of the pro forma effect of SFAS No. 123 for future
periods in which options may be granted.

F-22
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

7. Capital Stock (continued)
-------------------------

Effective as of August 26, 1996 ("Effective Date"), the Company approved and
adopted the 1996 Long-Term Employee Incentive Plan (the "Plan"). Under the Plan,
payment of awards may be in cash or the common stock of the Company or a
combination of both, at the option of the Company. The maximum number of shares
of the Company's common stock available for awards under the Plan is 800,000,
subject to adjustments as provided in the Plan. The Plan will terminate without
further action of the board of directors on the tenth anniversary of the
Effective Date. In October 1996, the Company issued a total of 90,000 shares (at
par value and, accordingly, compensation expense is being recognized) to two
former officers of the Company under the Plan which shares vest January 1, 1998.
Effective in July 1997, the Company issued a total of 600,000 options to two
officers of the Company which vest 20% at date of grant and 20% for each of the
next four years.

8. Income Taxes
------------

There was no income tax expense/benefit for the Company for the years ended June
30, 1997 and 1996.

Following is a reconciliation of income tax expense (credit) to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1997 and 1996:

For the year ended June 30,
---------------------------
1997 1996
----------- -----------

<S> <C> <C>
Income tax benefit based on U.S. statutory rate... $(4,370,758) $(1,548,003)
Current year addition to the (federal) valuation
allowance ...................................... 4,370,758 1,548,003
----------- -----------
$ -- $ --
=========== ===========
</TABLE>

The significant components of the Company's deferred tax assets and liabilities
are as follows:

June 30,
---------------------------
1997 1996
----------- -----------
Deferred tax assets:
Deferred revenue ..................... $ 196,778 $ 223,163
Reserve for disposal ................. 285,240 294,800
Start-up costs ....................... 57,334 86,000
Fixed assets ......................... 1,422,000
Tax loss carryforward ................ 8,228,700 4,584,808
----------- -----------
Total deferred tax assets .............. 10,190,052 5,188,771

Valuation allowances (federal & state).. 10,190,052 5,188,771
----------- -----------
Net deferred tax assets ................ $ -- $ --
=========== ===========

F-23
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

8. Income Taxes (continued)
------------------------

The above net deferred tax assets have been reserved because it is not more
likely than not that they would be recognized.

At June 30, 1997, the Company has approximately $20.6 million of net operating
loss carryforwards, which expire between 2006 and 2012. The Tax Reform Act of
1986 enacted a complex set of rules (Section 382) limiting the potential
utilization of net operating loss carryforwards in periods following a corporate
"ownership change". In general, an ownership change is deemed to occur if the
percentage of stock of a loss corporation owned (actually, constructively and,
in some cases, deemed) by one or more "5% shareholders" has increased by more
than 50 percentage points over the lowest percentage of such stock owned during
a three year testing period. Although a comprehensive evaluation has not yet
been performed, it is likely that due to prior shifts in ownership (the Dunkirk
merger and the completion of the IPO) and anticipated shifts in ownership (See
Note 9), the Company's ability to utilize its net operating loss carryforwards
could be severly limited.

9. Subsequent Events
-----------------

In September 1997 the beneficial holders of Dunkirk's $8,000,000 Chautauqua
County Industrial Development Agency Solid Waste Disposal Facility Bonds (the
"IDA Bonds") retired the IDA Bonds in exchange for receipt of a cash payment of
$1,620,000 and the remaining balance of a related debt service reserve fund
which has been reduced for interest payments made to the beneficial holders
during fiscal 1997 through September 1, 1997. The cash payment was made
utilizing proceeds from the private placement discussed below. This retirement
will result in a net pretax gain to the Company of approximately $6,190,000
which will be recorded in the first quarter of fiscal 1998. The Company will
also write-off approximately $330,000 of deferred financing costs relating to
such debt. If Dunkirk is deemed to be solvent immediately prior to the time of
such repayment, the Company will recognize taxable income for the debt
forgiveness in its tax year ending June 30, 1998. The amount of such income may
be offset by net operating loss carryforwards ("NOLs"), subject to the possible
limitations discussed in Note 8. Even if sufficient NOLs were available to
offset such taxable income after the limitations described below, the Company
may still be subject to alternative minimum tax. To the extent that Dunkirk is
deemed to be insolvent immediately prior to such repayment by an amount which
equals or exceeds the amount of debt forgiveness, the Company will not recognize
taxable income from such repayment; however, certain of Dunkirk's tax attributes
(such as NOLs) would be subject to reduction and would not be available to
offset future income from operations, if any. For this purpose, the amount of
insolvency is defined to be the excess of Dunkirk's liabilities over the fair
value of its assets. An independent appraisal of the fair value of Dunkirk's
assets has not been completed at this time to determine Dunkirk's solvency.

F-24
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

9. Subsequent Events (continued)
-----------------------------

Guaranties to make the payments required under the term loans directly to Key
Bank, provided that Key Bank applies the amount currently held in the Company's
related debt service reserve fund to reduce the principal amount of the term
loans. Upon the assignment of the term loans and related loan documents to the
JDA, the JDA has also agreed to defer monthly payments of principal and interest
due from Dunkirk under each term loan through January 1998 until the maturity
date of such loans. Interest will continue to accrue on the principal amount and
interest so deferred will be payable at maturity.

In July and August 1997, the Company borrowed an aggregate of $500,000 (the
"1997 Bridge Loan") for general working capital purposes. In connection with the
1997 Bridge Loan, the Company issued warrants to purchase 100,000 shares of
Common Stock at an exercise price equal to $1 5/16. The 1997 Bridge Loan was
repaid in full plus accrued interest at 12% per annum on September 8, 1997 from
proceeds from the private placement discussed below.

The Company has entered into a placement agency agreement for a private
placement of the Company's preferred stock. The private placement consists of a
minimum of 300,000 and a maximum of 500,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") with an option for the Placement Agent
to sell up to an additional 300,000 shares to cover over-allotments, if any,
(the Preferred Stock is to be sold in units of 10,000) with a par value of $.001
per share and a stated value of $10 per share. Each share of Preferred Stock is
initially convertible into eight shares of common stock at a conversion price of
$1.25 per share, subject to adjustment based on the lesser of $1.25 and the
prevailing average market price of the common stock immediately preceding any
subsequent closing, if any. Commencing 12 months from the final closing of the
private placement, the holders of the Preferred Stock are entitled to receive
dividends payable in cash or, at the option of the Company, in additional shares
of Preferred Stock at the rate of 10% per annum. The Placement Agent is entitled
to receive a cash commission of 9% and a non-accountable expense allowance of 4%
of the total proceeds. The Placement Agent is also entitled to receive warrants
to purchase shares of the Company's Preferred Stock equal to 10% of the total
shares issued at an exercise price equal to 110% of the offering price of such
shares. Through September 18, 1997, 414,500 shares of Preferred Stock had been
sold, with net proceeds (after deducting the placement agent commissions and
expenses - see above) to the Company of $3,606,150.

In August 1997, The Company's Board of Directors authorized an increase of the
authorized number of the Company's common shares of up to a maximum of 60
million. This is subject to ratification of the Company's stockholders.

F-25
<PAGE>

EXHIBIT INDEX

Exhibit
Number Description of Exhibit
------- ----------------------

2.1* Agreement and Plan of Reorganization dated August 16, 1994, among
the Company, CTI Acquisition Corporation, Dunkirk International
Glass and Ceramics Corporation ("Dunkirk") and certain
shareholders of Dunkirk listed on the signature pages thereto

3.1* Amended and Restated Certificate of Incorporation of the Company

3.2 Certificate of Designation of Series A Convertible Preferred
Stock

3.3* By-laws of the Company

4.1* Form of Warrant Agreement, including Form of Class A and Class B
Warrant Certificates

4.2* Form of Underwriter's Unit Purchase Option

4.3* Term Note No. 2 dated as of January 27, 1995, between Key Bank of
New York and Dunkirk

4.4* Security Agreement dated as of January 27, 1995, between Key Bank
of New York and Dunkirk

4.5* Debt Service Reserve Agreement dated as of January 27, 1995,
between Key Bank of New York and Dunkirk

10.1* Conversion Technologies International, Inc. 1994 Employee Stock
Option Plan, As Amended

10.2* Conversion Technologies International, Inc. 1994 Stock Option
Plan for Non-Employee Directors, As Amended

10.3 Conversion Technologies International, Inc. 1996 Long-Term
Employee Incentive Plan, As Amended

10.4 Consulting Agreement dated March 1, 1995 between the Company and
Eckardt C. Beck, As Amended

10.5 Employment Agreement dated as of August 1, 1997 between the
Company and William L. Amt

10.6 Employment Agreement dated as of July 2, 1997 between the Company
and Jack D. Hays, Jr.

10.7 Employment Agreement dated as of July 2, 1997 between the Company
and Richard H. Hughes

10.8 Consulting Agreement dated as of June 4, 1997, between the
Company and Harvey Goldman

10.9* Form of Indemnification Agreement

10.10 Termination of Lease Agreement dated as of September 4, 1997
between County of Chautauqua Industrial Development Agency and
Dunkirk

<PAGE>

Exhibit
Number Description of Exhibit
------- ----------------------

10.11 Bill of Sale dated as of September 4, 1997 between County
Chautauqua Industrial Development Agency and Dunkirk

10.12 Termination of Security Agreement dated as of September 4, 1997
between County of Chautauqua Industrial Development Agency and
Dunkirk

10.13 Release of Company Guaranty dated as of September 4, 1997 between
United States Trust Company of New York and Dunkirk

10.14 Release of Corporate Guaranty dated as of September 4, 1997
between United States Trust Company of New York and the Company

10.15 Lease Agreement dated July 15, 1997 between Koger Equity, Inc.
and the Company

10.16 Termination Agreement dated as of June 30, 1997 between the
Company, CTI Acqsub-II, Inc., and Octagon, Inc.

10.17* Sludge and Mixed Cullet Purchase Agreement dated January 1994,
between Toshiba Display Devices, Inc. and Dunkirk

10.18* Clean Cullet Sale Agreement dated as of August 27, 1993, between
OI-Neg TV Products, Inc. and Dunkirk

10.19 Technology Purchase Agreement dated as of June 30, 1997 between
Advanced Particle Technologies, Inc. and Vangkoe Industries, Inc.

10.20 Distributor Agreement dated as of June 30, 1997 between Advanced
Particle Technologies, Inc. and Vangkoe Industries, Inc.

10.21* Consulting Agreement dated as of May 5, 1995, among the Company,
Technology Funding Partners III, L.P. and Technology Funding
Venture Partners V, An Aggressive Growth Fund, L.P.

10.22* Registration Rights Agreement dated as of May 5, 1995, among the
Company, Technology Funding Partners III, L.P. and Technology
Funding Venture Partners V, An Aggressive Growth Fund, L.P.

10.23* Registration Rights Agreement dated as of April 21, 1994, among
the Company, Palmetto Partners, Ltd., Harvey Goldman and Donald
R. Kendall, Jr.

10.24* Registration Rights Agreement dated as of August 19, 1994, among
the Company and certain former Dunkirk stockholders

10.25* Warrant for the Purchase of Shares of Series A Convertible
Preferred Stock issued to Paramount Capital, Inc. by the Company

10.26* Series A Preferred Stock Purchase Agreement dated as of May 5,
1995, among the Company, Technology Funding Partners III, L.P.
and Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.

- 2 -
<PAGE>

Exhibit
Number Description of Exhibit
------- ----------------------

10.27 Form of Placement Agency Agreement between the Company and
Placement Agent

10.28 Form of Subscription Agreement between the Company and various
subscribers of Series A Preferred Stock

10.29 Form of Placement Agent Warrant

10.30 Form of Financial Advisory Services Agreement between the Company
and Placement Agent

10.31 Form of Warrant issued in connection with Senior Secured Line of
Credit Agreement

10.32 Letter from Empire State Development Corporation ("ESDC") to
Dunkirk dated July 22, 1997 confirming its guarantee of the Key
Bank Note

10.33 Letter from Key Bank to ESDC dated July 30, 1997 confirming that
it will not exercise any remedies under the Key Bank Note and
will execute documents to assign the Key Bank Note to ESDC

11.0 Statement of Computation of Net Loss Per Share

21 Subsidiaries of the Company

27 Financial Data Schedule for the year ended June 30, 1997

* Incorporated by reference to the exhibits to the Company's Registration
Statement on form SB-2, Registration No. 333-00756.

All other Exhibits filed herewith.

- 3 -

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-KSB/A

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

For the fiscal year ended: Commission File No.:
June 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive
Orlando, Florida 32817
(Address of principal executive offices) (Zip Code)

(407) 207-5900
(Issuer's telephone number including area code)

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

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants

Yes X No
----- -----

<PAGE>

Issuer's revenues for the fiscal year ended June 30, 1997 were $1,429,008.

As of September 19, 1997, the issuer had outstanding 5,539,745 shares of Common
Stock, $.00025 par value.

EXPLANATORY NOTE

Conversion Technologies International, Inc. (the "Company") hereby amends Items
9, 10, 11 and 12 of Part III of its Annual Report on Form 10-KSB, which was
filed with the Securities and Exchange Commission on September 29, 1997, by
including the disclosures set forth herein.

Item 9. Section 16(a) Beneficial Ownership Reporting Compliance
-------------------------------------------------------

Section 16(a) of the Exchange Act requires the Company's officers and directors
and persons who are beneficial owners of ten percent or more of the Company's
Common Stock to file reports of ownership and changes in ownership of the
Company's securities with the Securities and Exchange Commission. Such officers,
directors and beneficial owners are required by applicable regulations to
provide to the Company copies of all forms they file under Section 16(a).

Based solely upon a review of the copies of forms furnished to the Company, and
written representations from certain reporting persons, the Company believes
that during the fiscal year ended June 30, 1997, all filing requirements
applicable to its officers, directors and ten percent beneficial owners were
complied with except that Donald R. Kendall, Jr., a former director of the
Company, filed a Form 5 on August 25, 1997 which was required to be filed on
August 14, 1997.

Item 10. Executive Compensation
----------------------

-2-
<PAGE>

Company during the Company's fiscal years ended June 30, 1995, 1996 and 1997. No
other executive officer of the Company received salary and bonus compensation in
excess of $100,000 during the fiscal year ended June 30, 1997 (sometimes
referred to herein as "Fiscal Year 1997"). William L. Amt, the Company's current
President and Chief Executive Officer and Jack D. Hays, Jr., the Company's
current Executive Vice President - Operations and Marketing and Secretary are
not included below because their employment began after Fiscal Year 1997.

<TABLE>
Summary Compensation Table
<CAPTION>

Annual
Compensation Long-Term Compensation
------------ ----------------------

Restricted Securities
Stock Underlying
Name and Principal Position Year Salary($) Awards($) Options/SARs(#)
- -------------------------------------------------------------- ---- ---------- ---------- ----------------

<S> <C> <C> <C> <C>
Eckardt C. Beck .............................................. 1997 $ 48,000(1) 10,121(2)
Chairman and Acting President and Chief Executive Officer from 1996 $ 12,000 1,217
June 1997 to August 1997 ..................................... 1995

Harvey Goldman ............................................... 1997 $168,750(3) $260,000(4) 40,000(5)
Former Vice - Chairman, President and Chief Executive Officer 1996 $180,000 50,000(6)
1995 $180,000

Perry A. Pappas .............................................. 1997 $119,790 $ 32,500(7) 15,000(8)
Former Vice President, General Counsel and Secretary 1996 $104,167 21,923
1995

- -----------
<FN>

(2) Granted in July and October 1996 pursuant to the Company's Non-Employee
Director Stock Option Plan. All options vest one year from grant date.

(5) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have terminated.

(6) Non-qualified stock options granted in April 1996. The options have
terminated.

-3-
<PAGE>

(8) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have an exercise price of $4.40 per
share and are fully vested.
</FN>
</TABLE>

Option Grants in Fiscal Year 1997
- ---------------------------------

The following table sets forth the number of individual stock option grants made
to each Named Executive Officer during Fiscal Year 1997.

<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARS
Underlying Granted to Exercise or
Options/SARs Employees in Base Price
Name Granted(#) Fiscal Year(1) ($/sh) Expiration Date
- ------------------------- ------------ ---------------- ----------- ---------------
<S> <C> <C> <C> <C>

Eckardt C. Beck.......... 121(2) * $4.40 7/1/06
10,000(3) 5.1% $5.00 10/15/06
Harvey Goldman........... 40,000(4) 20.5% $4.40
Perry A. Pappas.......... 15,000(5) 7.7% $4.40 7/23/03

- -----------
<FN>

* Less than one percent.

(1) The Company granted options to purchase an aggregate of 155,347 shares of
Common Stock during Fiscal Year 1997.

(2) Granted on July 1, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on July 1, 1997.

(3) Granted on October 15, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on October 15, 1997.

(4) Non-qualified Options granted outside of the Company's Employee Stock
Option Plan. Mr. Goldman's options have terminated.

(5) Incentive Stock Options granted pursuant to the Company's Employee Stock
Option Plan. All options were vested in July 1997.
</FN>
</TABLE>

Aggregated Options/SAR Exercises in Last
Fiscal Year and Year End Option Values
- -----------------------------------------

The following table sets forth the aggregate value of unexercised options to
acquire shares of the Company's Common Stock by the Named Executive Officers
exercised during Fiscal Year 1997. None of the Named Executive Officers
exercised options during Fiscal Year 1997.

-4-
<PAGE>

<TABLE>
<CAPTION>
Number of
Unexercised Value of Unexercised In-the
Options at FY- Money Options at FY-
End(#) End($)(1)
------------------- ----------------------------

Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ----------------------------------------- ------------------- ----------------------------
<S> <C> <C>

Eckardt C. Beck.......................... 1,338/10,000 $0/$0
Harvey Goldman........................... 0/0 $0/$0
Perry A. Pappas.......................... 7,308/29,615 $0/$0

<FN>

Compensation of Directors
- -------------------------

In Fiscal Year 1997, Directors who were full-time employees of the Company
received no cash compensation for services rendered as members of the Board of
Directors (the "Board") or committees thereof. Directors who were not full-time
employees of the Company received reimbursement of out-of-pocket expenses for
attendance at Board meetings. The Company maintains a Stock Option Plan for
Non-Employee Directors, pursuant to which options to purchase an aggregate of
50,847 shares of Common Stock were issued during Fiscal Year 1997. Such options
vest one year from the date of grant and contain exercise prices of between
$3.125 and $5.00 per share. Non-Employee directors received no other
compensation for their services as directors for Fiscal Year 1997.

The Company entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997 and August 1997. Pursuant to the
Consulting Agreement, Mr. Beck has agreed to, among other things, assist the
Company in strategic planning, business development, investor relations, fund
raising and such other activities as shall be reasonably requested by the Board
and within Mr. Beck's areas of expertise. Mr. Beck will receive a monthly
consulting fee of $8,000 pursuant to the Consulting Agreement until its
expiration in August 2000.

Employment Contracts and Employment Termination Arrangements
- ------------------------------------------------------------

-5-
<PAGE>

competition provisions, Mr. Amt receives an annual salary of $160,000, subject
to increase at the discretion of the Board. Mr. Amt will not receive an annual
bonus or an incentive bonus, except as may be provided by the Board. Both the
Company and Mr. Amt may terminate the employment agreement at any time by
providing written notice to the other party. If the termination is initiated by
the Company without cause, Mr. Amt is entitled to receive severance in the
amount of one years' salary. Mr. Amt has also been granted incentive stock
options to purchase 300,000 shares of Common Stock at an exercise price of
$1.375 per share. Twenty percent (20%) of such options were vested immediately
and twenty percent (20%) of such options will vest on the first, second, third
and fourth anniversary of the date of issuance.

Jack D. Hays, Jr. is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Hays receives an annual salary of $125,000, subject to increase at the
discretion of the Board. Mr. Hays will not receive an annual bonus or an
incentive bonus, except as may be provided by the Board. Both the Company and
Mr. Hays may terminate the employment agreement at any time by providing written
notice to the other party. If the termination is initiated by the Company
without cause, Mr. Hays is entitled to receive severance in the amount of one
years' salary. Mr. Hays has also been granted incentive stock options to
purchase 100,000 shares of Common Stock at an exercise price of $1 5/8 per
share. Twenty percent (20%) of such options were vested upon issuance and twenty
percent (20%) of such options vest on the first, second, third and fourth
anniversary of the date of issuance.

Richard H. Hughes is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Hughes receives an annual salary of $90,000, subject to increase at the
discretion of the Board. Mr. Hughes will not receive an annual bonus or an
incentive bonus, except as may be provided by the Board. Both the Company and
Mr. Hughes may terminate the employment agreement at any time by providing
written notice to the other party. If the termination is initiated by the
Company without cause, Mr. Hughes is entitled to receive severance in the amount
of one years' salary. Mr. Hays has also been granted incentive stock options to
purchase 75,000 shares of Common Stock at an exercise price of $1 5/8 per share.
Twenty percent (20%) of such options were vested upon issuance and twenty
percent (20%) of such options vest on the first, second, third and fourth
anniversary of the date of issuance.

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for any claims under such prior agreement. Mr. Goldman
is entitled to receive a monthly consulting fee of $10,000 pursuant to the
Consulting Agreement through June 1998. In the event that the Company fails to
pay the consideration due under the Consulting Agreement, Mr. Goldman retains
all rights that he had under his prior agreement with respect to termination.

-6-
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management
-------------------------------------------------------------

The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Series A Convertible Preferred Stock
(the "Convertible Preferred Stock") as of September 30, 1997 by (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock or Convertible Preferred Stock of the Company, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers (defined
herein), and (iv) all directors and executive officers of the Company as a
group. Holders of the Convertible Preferred Stock are entitled to the number of
votes equal to the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible, and are entitled to vote together
with the holders of the Common Stock. Accordingly, the information in the table
below reflects ownership by the above individuals of each of the Company's
Common Stock assuming the conversion of all outstanding shares of the
Convertible Preferred Stock and the Convertible Preferred Stock separately. At
September 30, 1997 each share of Convertible Preferred Stock was convertible
into eight shares of Common Stock.

Percentage
Number of of
Shares Convertible
Beneficially Percentage of Preferred
Name of Beneficial Owner (1) Owned(2) Voting Power(3) Stock(4)
- ---------------------------- ------------ --------------- -----------

Eckardt C. Beck (5).................... 165,171 1.9 2.4
William L. Amt (6)..................... 60,000 * -
Peter H. Gardner (7)................... 747,486 8.2 7.6
Alexander P. Haig (8).................. 9,992 * -
Scott A. Katzmann (9).................. 50,950 * -
Douglas M. Costle ..................... - * -
Stephen D. Fish........................ 160,000 1.8 4.8
Irwin M. Rosenthal (10)................ 5,121 * -
Jack D. Hays, Jr. (11)................. 20,000 * -
Richard H. Hughes (12)................. 15,000 * -
Technology Funding Venture Partners
V, An Aggressive Growth Fund,
L.P. (13)............................ 747,486 8.2 7.6
All officers and directors as a
group(11 persons) (14)............... 1,244,785 13.4 14.8
Harvey Goldman (15).................... 185,964 2.1 -
Perry A. Pappas (16)................... 66,923 * -
The Aries Trust ....................... 528,000 6.0 15.9
Aries Domestic Fund, L.P. ............. 272,000 3.1 8.2
Porter Partners, L.P. ................. 320,000 3.6 9.7
P.A.W. Offshore Fund, Ltd. ............ 400,000 4.5 12.1
J.F. Shea Co., Inc. a Nominee 1977-44.. 240,000 2.7 7.2
Pequot Scot Fund, LP .................. 180,000 2.0 5.4

-7-
<PAGE>

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

* Less than one percent.

(2) The number of shares beneficially owned by each person named in the table
consists of the number of shares held by each individual of (i) the
Company's Common Stock; (ii) the Company's Preferred Stock, as converted
into Common Stock; and (iii) Common Stock subject to options or warrants
that are presently exercisable or exercisable within 60 days of September
30, 1997.

(3) Applicable percentage of voting power is based on the 8,855,745 shares of
Common Stock entitled to vote at the Meeting. That number is comprised of
5,539,745 outstanding shares of Common Stock and 3,316,000 shares of Common
Stock issuable upon conversion of 414,500 outstanding shares of Convertible
Preferred Stock. Shares of Common Stock subject to options that are
presently exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other
person.

(4) Applicable percentage of ownership is based on 3,316,000 shares of Common
Stock issuable upon conversion of the 414,500 shares of Convertible
Preferred Stock outstanding as of September 30, 1997.

(6) Includes currently exercisable options to purchase 60,000 shares of Common
Stock. Excludes options to purchase 240,000 shares of Common Stock which
are not exercisable within 60 days.

-8-
<PAGE>

Mr. Gardner disclaims beneficial ownership of all securities of the Company
owned by TFP III and TFVP V. Includes currently exercisable options to
purchase 11,338 shares of Common Stock. Also includes options to purchase
4,000 shares of Common Stock which are exercisable within 60 days. Excludes
options to purchase 16,000 shares of Common Stock which are not exercisable
within 60 days. The address of such stockholder is c/o Technology Funding
Inc., 2000 Alameda de las Pulgas, San Mateo, California 94403.

(8) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.

(9) Includes currently exercisable options and warrants to purchase 24,771
shares of Common Stock and 12,179 Escrow Shares beneficially owned by Scott
A. Katzmann. Also includes options to purchase 14,000 shares of Common
Stock which are exercisable within 60 days. Excludes options to purchase
16,000 shares of Common Stock which are not exercisable within 60 days.

(10) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.

(11) Includes currently exercisable options to purchase 20,000 shares of Common
Stock. Excludes options to purchase 80,000 shares of Common Stock which are
not exercisable within 60 days.

(12) Includes currently exercisable options to purchase 15,000 shares of Common
Stock. Excludes options to purchase 60,000 shares of Common Stock which are
not exercisable within 60 days.

(13) Includes (i) 207,547 shares of Common Stock, (ii) 7,875 shares of
Convertible Preferred Stock, (iii) warrants, exercisable within 60 days, to
purchase 84,027 shares of Common Stock, (iv) 69,180 shares of Common Stock
and 23,625 shares of Convertible Preferred Stock held by TFP III and (v)
warrants, exercisable within 60 days, to purchase 119,384 shares of Common
Stock held by TFP III. Includes currently exercisable options issued to
Peter Gardner to purchase 11,338 shares of Common Stock. Also includes
options to purchase 4,000 shares of Common Stock which are exercisable
within 60 days. Excludes options issued to Peter Gardner to purchase 16,000
shares of Common Stock which are not exercisable within 60 days. Excludes
warrants to purchase (i) 2,104 shares of Common Stock held by TFVP V and
(ii) 680 shares of Common Stock held by TFP III, in each case, which are
not exercisable within 60 days.

(14) Calculation does not include securities held by Mr. Goldman or Mr. Pappas
who are no longer directors or officers of the Company.

-9-
<PAGE>

(15) Includes currently exercisable warrants to purchase 5,239 shares of Common
Stock. Mr. Goldman is no longer an officer or director of the Company. (See
"Certain Relationships and Related Transactions Consulting Agreements").

(16) Includes currently exercisable options to purchase 56,923 shares of Common
Stock. Mr. Pappas is no longer an officer of the Company.

Item 12. Certain Relationships and Related Transactions
----------------------------------------------

Employment Agreements
- ---------------------

The Company has entered into employment agreements with William L. Amt, who
became President and Chief Executive Officer in August 1997, Jack D, Hays, Jr.,
who became Executive Vice President - Operations and Marketing and Secretary of
the Company in July 1997, and Richard H. Hughes, who also became Vice President
- - Sales and Marketing of the Company in July 1997. See "Executive Compensation -
Employment Contracts and Employment Termination Arrangements."

Consulting Agreements
- ---------------------

In March 1995, the Company entered into a Consulting Agreement with Eckardt C.
Beck. The Consulting Agreement was amended in February and August 1997. Pursuant
to the Consulting Agreement, Mr. Beck has agreed to, among other things, assist
the Company in strategic planning, business development, investor relations,
fund raising and such other activities as shall be reasonably requested by the
Board and within Mr. Beck's areas of expertise. Mr. Beck will receive a monthly
consulting fee of $8,000 pursuant to the Consulting Agreement until its
expiration in August 2000.

In May 1995, the Company entered into a consulting agreement with TFP III and
TFP V (the "TFI Consulting Agreement"). Pursuant to the TFI Consulting
Agreement, the consultants agreed to, among other things, introduce the Company
to strategic partners and potential customers, provide strategic marketing
advice, identify complementary technologies with strategic synergies, and
identify and assist in procuring appropriate media channels for the Company's
products. As compensation for their services, the consultants received warrants
which were amended in May 1996 to become warrants to purchase 69,177 shares of
the Company's common stock, at an exercise price of $5.28 per share. Peter H.
Gardner, a director of the Company, is an Investment Officer at TFI, the
Managing General Partner of TFP III and TFVP V, and serves as TFI's designee on
the Board.

-10-
<PAGE>

obtaining regulatory approvals and providing regulatory guidance and otherwise
facilitating project development activities. The Company will pay to TFI or its
designees a success fee of $75,000 for completed projects and a fee of 7% on any
funds invested in the Company by a strategic partner introduced by TFI (together
with warrants to purchase that number of shares of Common Stock of the Company
as is equal to 5% of the amount invested divided by the Common Stock share
purchase price, at an exercise price equal to 110% of such purchase price). The
term of the TFI Assistance Agreement is one year, subject to renewal, cancelable
by either party upon 30 days' prior written notice.

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for claims under such prior agreement. Pursuant to the
Consulting Agreement, Mr. Goldman has agreed to, among other things, assist the
Company in project development, strategic planning and such other activities as
shall be reasonably requested by the Board of Directors and within Mr. Goldman's
areas of expertise. Mr. Goldman is entitled to receive a monthly consulting fee
of $10,000 per month for nine months terminating with the final payment due in
June 1998.

Series A Convertible Preferred Stock
- ------------------------------------

On September 5, 1997, the Company closed on the second tranch of a private
placement of the Company's Convertible Preferred Stock (the "Convertible
Preferred Stock Private Placement"). The placement agent (the "Placement Agent")
for the Convertible Preferred Stock Private Placement has received an aggregate
placement fee to date of $373,050, which represents 9% of the aggregate gross
proceeds, and an expense allowance of $165,800 which represents 4% of the
aggregate gross proceeds. In addition, upon the closing of the Convertible
Preferred Stock Private Placement, the Company will grant to the Placement
Agent, and/or its designees, warrants to purchase Convertible Preferred Stock
equal to 10% of the total number of shares of Convertible Preferred Stock sold
in the Convertible Preferred Stock Private Placement at an exercise price equal
to 110% of the offering price of the Convertible Preferred Stock. The warrant(s)
to be issued upon the closing of the Convertible Preferred Stock Private
Placement are exercisable for ten years commencing six months from the final
closing of the Convertible Preferred Stock Private Placement. The warrants
contain certain antidilution and registration rights provisions. Scott A.
Katzmann, a director of the Company, is a Managing Director of the Placement
Agent.

Prior Preferred Stock Placement
- -------------------------------

Between August 1994 and May 1995, Paramount Capital, Inc. ("Paramount") acted as
placement agent in connection with the private placement of a prior series of
Preferred Stock (the "Old Preferred Shares"). Paramount received $632,250 in
commissions and a non-accountable expense allowance of $281,000 in consideration
of its services as placement agent. In addition, designees of Paramount
received, as additional compensation, warrants to purchase an aggregate of
281,000 Old Preferred Shares, at an exercise price of $2.75 per share,
exercisable for a period

-11-
<PAGE>

of 10 years following the closing of the offering. Such warrants were amended
and restated in May 1996 to be warrants to purchase 97,185 shares of Common
Stock at an exercise price of $4.84 per share. In connection with this private
placement, until November 1997, Paramountwill be entitled to receive a placement
fee of 9%, plus a 4% expense allowance, on any investments received by the
Company from investors or corporate partners (excluding project finance
investors) that were introduced to the Company by Paramount. Scott A. Katzmann,
a director of the Company, is a Managing Director of Paramount.

Lindsay A. Rosenwald, M.D., is the President, Chairman and sole stockholder, and
Peter Kash is a Managing Director, of Paramount. In connection with the private
placement of Old Series A Shares, Dr. Rosenwald and Mr. Kash received warrants
to purchase shares of Old Series A Shares, which currently represent warrants to
purchase 34,353 and 4,788 shares of Common Stock, respectively.

Bridge Loans
- ------------

In connection with a bridge financing in 1994 (the "1994 Financing"), designees
of Paramount received warrants to purchase an aggregate of 7,307 shares of
Common Stock with an initial per share exercise price equal to $13.55. Such
warrants were amended and restated in May 1996 to become exercisable for 20,750
shares of Common Stock at an exercise price of $4.77 per share. Such warrants
include warrants to purchase 10,374 shares of Common Stock issued to Dr.
Rosenwald and warrants to purchase 4,671 shares of Common Stock issued to Mr.
Kash.

In September, October and November 1995, the Company borrowed an aggregate of
$650,000 from stockholders of the Company or their affiliates for working
capital. Of such amount, an aggregate of $250,000 was provided by TFP III and
TFVP V, and an aggregate of $200,000 was provided by Aries Domestic Fund, L.P.
and The Aries Trust (collectively, the "Aries Funds"), two funds for which
Paramount Capital Asset Management, Inc. is the general partner and investment
manager, respectively. Dr. Rosenwald is the President and sole stockholder of
Paramount Capital Asset Management, Inc. The principal amount of such loans was
exchanged in December 1995 for $650,000 principal amount of new notes and
warrants to purchase 325,000 shares of Common Stock (which warrants were
exchanged automatically on the closing of the Company's initial public offering
("IPO") for Redeemable Class A Warrants to purchase 325,000 shares of Common
Stock). The notes received by such stockholders were repaid at the closing of
the IPO.

In March 1996, the Company borrowed an aggregate of $200,000 pursuant to
promissory notes bearing interest at the rate of 10% per annum. Of such amount,
Dr. Rosenwald provided $150,000, Scott A. Katzmann and Peter Kash each provided
$18,750 and Harvey Goldman provided $12,500. Such notes were repaid at the
closing of the IPO.

In May 1996, the Company borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, which were
repaid at the closing of the IPO.

-12-
<PAGE>

In July and August 1997, the Company borrowed an aggregate of $500,000 from the
Aries Funds pursuant to a line of credit agreement (the "1997 Bridge Loan"). The
1997 Bridge Loan bears interest at the rate of 12% per annum and was repaid in
August 1997. In connection with the1997 Bridge Loan, the Company issued to the
Aries Funds warrants to purchase an aggregate of 100,000 shares of Common Stock
at a per share exercise price equal to $1 5/16. Such warrants expire July 21,
2002 and contain certain antidilution and registration rights provisions. In
connection with the Convertible Preferred Stock Private Placeement, in August
1997, the Aries Funds purchased 100,000 shares of Convertible Preferred Stock
for $1,000,000.

Issuances of Securities to Executive Officers and Directors
- -----------------------------------------------------------

From the period from inception to December 1995, the Company granted options to
purchase an aggregate of 48,891 shares of Common Stock to executive officers and
directors of the Company with exercise prices ranging from $ 13.55 to $20.53 per
share. Such options were repriced in May 1996 to $4.40 per share.

In April 1996, the Company issued non-qualified stock options outside of the
Employee Stock Option Plan, all of which are Escrow Options (defined herein), to
Mr. Goldman, to purchase 50,000 shares of Common Stock. Such options have an
exercise price of $4.40 per share and vest ratably over three years on an annual
basis. Mr. Goldman was also granted options to purchase 40,000 shares of Common
Stock in October 1996 at an exercise price of $4.40. All of Mr. Goldman's
options have terminated.

On October 15, 1996, the Board of Directors granted options to its non-employee
directors pursuant to the Stock Option Plan for Non-Employee Directors to
purchase an aggregate of 50,000 shares of Common Stock. Such options have an
exercise price of $3.125 per share and are fully vested.

On July 1, 1997, Messrs. Hays and Hughes were granted incentive stock options to
purchase 100,000 and 75,000 shares of Common Stock, respectively. Messrs. Hays
and Hughes' stock options have an exercise price of $1.675 per share. Twenty
percent (20%) of such options vested upon issuance and twenty percent (20%) vest
on the first, second, third and fourth anniversary of the date of issuance.

-13-
<PAGE>

On August 1, 1997, Mr. Amt was granted a non-qualified stock option to purchase
300,000 shares of Common Stock at an exercise price of $1.375. Mr. Amt's options
vest twenty percent (20%) at issuance and twenty percent (20%) on the first,
second, third and fourth anniversary of the date of issuance.

In connection with the Convertible Preferred Stock Private Placement, on August
29, 1997, Mr. Fish purchased 20,000 shares of Convertible Preferred Stock for
$200,000, and on September 5, 1997, Mr. Beck purchased 10,000 shares of
Convertible Preferred Stock for $100,000.

Board Designee and Other TFI Covenants
- --------------------------------------

The Company, TFP III and TFVP V entered into a Series A Preferred Stock Purchase
Agreement in May 1995 with respect to the Old Preferred Shares. The agreement,
as amended in December 1995, provides that the Company will (i) use its best
efforts to nominate a designee of TFI to the Board of Directors and (ii) sell
shares of stock and grant options to employees, officers, directors and
consultants only pursuant to Board approved plans and agreements containing
three-year vesting provisions (except in the case of sales of stock or grants of
options to new employees where the Board determines otherwise for valid business
reasons). Such covenants terminate upon the earlier of (a) May 1999 and (b) such
time as TFP III and TFVP V cease to hold approximately 18,270 shares of Common
Stock in the aggregate. At September 30, 1997, TFP III and TFVP V collectively
hold 276,727 shares of Common Stock, 31,500 shares of Convertible Preferred and
warrants to purchase an additional 69,171 shares of Common Stock.

Escrow Securities
- -----------------

-14-
<PAGE>

amounts to at least $9.3 million for the fiscal year ending June 30, 2000; (d)
the Closing Price (as defined) of the Company Common Stock averages in excess of
$11.25 per share for 60 consecutive business days during the 18-month period
commencing on May 16, 1996; (e) the Closing Price of the Company Common Stock
averages in excess of $15.00 per share for 60 consecutive business days during
the 18-month period commencing 18 months from May 16, 1996; or (f) during the
periods specified in (d) or (e) above, the Company is acquired by or merged into
another entity in a transaction in which the value of the per share
consideration received by the stockholders of the Company on the date of such
transaction or at any time during the applicable period set forth in (d) or (e),
respectively, equals or exceeds the applicable levels set forth in (d) or (e),
respectively.

The Minimum Pretax Income amounts set forth above are those originally
established at the time of the IPO. Such Minimum Pretax Income amounts will be
increased as a result of the issuance of the Preferred Stock offered hereby.

The Minimum Pretax Income amounts shall (i) be calculated exclusive of any
extraordinary earnings or any charges to income resulting from release of the
Escrow Securities and (ii) be increased proportionately, with certain
limitations, in the event additional shares of the Common Stock or securities
convertible into, exchangeable for or exercisable into the Common Stock are
issued. The Closing Price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits or other similar events.

Any money, securities, rights or property distributed in respect of the Escrow
Securities, including any property distributed as dividends or pursuant to any
stock split, merger, recapitalization, dissolution or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Securities. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by October 15, 2000, the Escrow Securities,
as well as any dividends or other distributions made with respect thereto, will
be canceled and contributed to the capital of the Company. The Company expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could increase the loss
or reduce or eliminate the Company's net income for financial reporting purposes
for the period(s) during which such shares are, or become probable of being,
released from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total stockholders' equity, it may
have a negative effect on the market price of the Company's securities.

-15-
<PAGE>

SIGNATURES

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: October 28, 1997 /s/ William L. Amt
-----------------------------
William L. Amt
President and Chief Executive Officer

-16-
<PAGE>

SIGNATURE TITLE DATE
--------- ----- ----

/s/ William L. Amt President, Chief Executive October 28, 1997
- --------------------------- Officer and Director
William L. Amt (principal executive officer)

/s/ John G. Murchie Controller(principal October 28, 1997
- --------------------------- accounting officer)
John G. Murchie

Chairman of the Board October __, 1997
- ---------------------------
Eckardt C. Beck

/s/ Peter H. Gardner Director October 28, 1997
- ---------------------------
Peter H. Gardner

/s/ Alexander P. Haig Director October 28, 1997
- ---------------------------
Alexander P. Haig

/s/ Scott A. Katzmann Director October 28, 1997
- ---------------------------
Scott A. Katzmann

/s/Irwin M. Rosenthal Director October 28, 1997
- ---------------------------
Irwin M. Rosenthal

/s/Douglas M. Costle Director October 28, 1997
- ---------------------------
Douglas M. Costle

Director October __, 1997
- ---------------------------
Stephen D. Fish
-17-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10-KSB/A2

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

For the fiscal year ended: Commission File No.:
June 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive
Orlando, Florida 32817
(Address of principal executive offices) (Zip Code)

(407) 207-5900
(Issuer's telephone number including area code)

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

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants

Yes X No
----- -----

<PAGE>

Issuer's revenues for the fiscal year ended June 30, 1997 were $1,429,008.

As of September 19, 1997, the issuer had outstanding 5,539,745 shares of Common
Stock, $.00025 par value.

Explanatory Note

Conversion Technologies International, Inc. (the "Company") hereby amends Items
1, 6 and 7 (footnotes only) of its Annual Report on Form 10-KSB, which was filed
with the Securities and Exchange Commission (the "Commission") on September 29,
1997, and Items 9, 11 and 12 of its first amendment thereto, which was filed on
October 28, 1997 by deleting the items included therein and replacing such items
with the disclosure set forth herein.

Part I

Item 1. Business

Overview

2
<PAGE>

The Company recently relocated its executive offices to 3452 Lake Lynda Drive,
Suite 280, Orlando, Florida 32817. The Company's telephone number is (407)
207-5900.

3
<PAGE>

such taxable income, if any, result in the Company being required to satisfy
such obligations out of its available cash, at a time when such obligations
could exceed the Company's available cash, (iv) the risk that the Company will
experience interruptions in its manufacturing operations which will delay
shipments or result in lost business, (v) risks associated with retaining and
attracting key personnel, (vi) the risk that the Company will lose key CRT
customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with applicable environmental laws and regulations
and (x) the risk that the Company will not be able to continue to satisfy the
minimum maintenance requirements for continued listing which were recently
adopted by the Nasdaq SmallCap Market .

Certain Recent Events

Termination of Merger With Octagon

New Management

The Company has obtained new management. On August 1, 1997, William L. Amt,
previously the President and Chief Executive Officer of Octagon, joined the
Company as President and Chief Executive Officer. In July 1997, Jack D. Hays,
Jr., and Richard H. Hughes, who had previously joined Octagon in anticipation of
the closing of the Merger, became Executive Vice President Operations and
Marketing and Vice President - Sales and Marketing, respectively, of the
Company. With the exception of Robert Dejaiffe, who remains the Company's Vice
President - Technology, the former executive officers of the Company, including
Harvey Goldman, the Company's former Vice-Chairman, President and Chief
Executive Officer, ceased to be employees of the Company in June 1997. Eckardt
C. Beck, who remains as the Company's Chairman of the Board, served as acting
President and Chief Executive Officer of the Company from June 1997 until August
1, 1997.

4
<PAGE>

Write-Down of Non-Productive Assets and Related Charges to Earnings

Redemption of IDA Bonds

Termination of VANGKOE Joint Venture

In June 1997, the Company terminated its joint venture with VANGKOE Industries,
Inc. ("VANGKOE") by purchasing for nominal consideration VANGKOE's 50% interest
in APT, located in St. Augustine, Florida. APT was organized by the Company and
VANGKOE for the purpose of applying color coatings in a proprietary process to
create decorative particles. Pursuant to the termination of such joint venture,
APT became a wholly-owned subsidiary of the Company, APT purchased the
proprietary color coating process used to manufacture the particles from VANGKOE
for $135,000 (and a contingent payment of $30,000 based on certain milestones),
and VANGKOE agreed to sell the particles in certain markets as APT's exclusive
distributor. The Company recently commenced manufacturing such particles and the
parties are in the process of creating inventory and conducting customer
sampling and sales efforts. There can be no assurance, however, that the Company
will be able to manufacture such particles consistently or that sales of such
particles will occur.

Preferred Stock Financing

5
<PAGE>

Repayment of Bridge Loan

Other Changes to Indebtedness

Products
- --------

Abrasives

6
<PAGE>

Decorative Particles

Performance Aggregates

ALUMAGLASS and the Company's other glass and ceramic products, individually or
in blended combinations, can also be used as structural or textural enhancers,
fillers and additives. These products, which can be sized according to industry
standards, can be used to strengthen and add consistency to materials such as
cements, plasters, grouts, mortars, roofing and flooring and other glass and
ceramic materials.

Recycled CRT Glass

7
<PAGE>

Manufacturing and Recycling Processes

The Company recycles CRT glass through two processing lines. The process
involves extracting pieces of CRT glass of less than a specified size,
separating panel glass from funnel glass on a primary processing line, cleaning
and removing coatings on the glass and batching the funnel glass and panel glass
for resale back to customers. This process is repeated for CRT glass fragments
too small for the primary line by identical processing through a second line
designed to handle smaller pieces of glass. Generally, CRT glass fragments
received by the Company of approximately one inch or less in diameter have not
been recycled by the Company due to limitations of its technology. Although the
Company has recently initiated a process to recycle this material, there can be
no assurance the Company will in fact sell such material on a profitable basis
or at all. In the event the Company is unable to sell such glass, it believes it
can dispose of such glass by smelting at prevailing rates.

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

Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is

8
<PAGE>

anticipated that such efforts will be focused in the near term on ALUMAGLASS
licensing possibilities and expanding color coating offerings for its decorative
particles.

Markets for Products and Services
- ---------------------------------

Abrasives

Loose grain abrasives, typically applied with blasting equipment, are used in
numerous industries throughout the world for equipment and facilities
maintenance. Applications include cleaning, stripping and other surface
treatment or surface preparation applications, such as industrial metal
finishing, coating removal, structural steel and commercial vehicle cleaning,
paint removal and the cleaning and preparation of surface substrates. Potential
purchasers include utilities, military and defense agencies, entities engaged in
the electronics, aerospace, automotive, glass products and construction
industries and entities engaged in surface finishing, coating removal and the
maintenance of manufacturing and process industries equipment and facilities,
buildings, highways, bridges and commercial vehicles and vessels.

Decorative Particles

9
<PAGE>

that have been previously color coated. The resulting mixture, when viewed over
a large surface area and from a distance, will appear to have a consistent color
or hue.

Performance Aggregates

The Company also believes that there is a large market for performance
aggregates. Materials such as plasters, mortars, terrazzo, flooring tiles, and
other ceramic or cement based mixtures require fillers, expanders or
particulates that will add consistency or texture for functional purposes. If
needed, the Company has the ability to size its aggregates within narrow
specifications for specialty applications. Although the Company has only
recently begun to explore the use of its various substrates for this market, the
Company's ALUMAGLASS product has been purchased in limited quantities as an
additive for non-slip epoxy flooring systems. The Company believes that its
fired ceramic substrates will also have applicability in these markets,
particularly as filler for tiles and plasters. The Company further believes
that, since many of its substrates are produced from waste material, it may have
production cost advantages over certain materials traditionally used in this
market, such as mined substrates.

Recycled CRT Glass

10
<PAGE>

Dependence on Certain Customers

The Company sells its recycled glass to Techneglas pursuant to a Clean Cullet
Sale Agreement (the "Cullet Agreement") and an open purchase order arrangement.
The Cullet Agreement had an initial term of three years expiring August 1998 and
automatically renews for additional one year terms unless either party gives the
other written notice of termination at least 120 days prior to the end of any
term. The Cullet Agreement includes provisions relating to specifications,
delivery and acceptance of processed CRT glass. The Cullet Agreement also
requires the Company to sell, and Techneglas to purchase, various amounts of the
CRT glass processed by the Company. The Cullet Agreement also contains pricing
and other customary terms. Techneglas has been purchasing substantially all of
the CRT glass processed by the Company since the loss of Thomsen as a customer.

Sales and Marketing

11
<PAGE>

particles for such markets exclusively from APT, subject to APT's ability to
supply such particles. VANGKOE must meet certain sales targets to maintain its
exclusivity as a distributor, although VANGKOE is under no obligation to meet
such sales targets. VANGKOE has been released from its previous minimum purchase
commitment of approximately $1.2 million of ALUMAGLASS and other materials.
VANGKOE is a new company without significant assets or experience in marketing
aggregates and, therefore, there can be no assurance that it will be successful
in marketing the Company's products.

The Company currently has three individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis.

Intellectual Property

Competition

The Company's products and services are subject to substantial competition. The
Company's abrasives compete with product offerings of other companies,
principally aluminum oxide, glass beads, plastic abrasives, garnet, steel grit,
coal slag and, with respect to certain applications, sand or water blasting
techniques. Many of the companies offering such products are large corporations
with substantially greater financial resources than the Company. Large
international competitors of manufactured metallic abrasives include:
Exolon-ESK, General Abrasives Triebacher, Inc., Washington Mills Electro
Minerals Corp., Irvin Industries, Inc., Norton/St. Gobain and others. Various
other manufacturers produce mined, plastic, glass bead and mineral abrasives, as
well as high speed water jet spray abrasive systems. The Company's ability to
effectively compete against these companies could be adversely affected by the
ability of these competitors to offer their products at lower prices than the
Company's products and to devote greater resources to the marketing and
promotion of their products than are available to the Company.

12
<PAGE>

Environmental Matters

To maximize market acceptance of the Company's manufacturing technology, the
Company has chosen to focus its initial efforts on the development of recycling
processes, materials and products which are most likely to qualify for
exemptions or favorable regulatory treatment. For example, the Company uses
materials that are not solid wastes and are not subject to RCRA permitting
requirements (for example, reclaimed characteristically hazardous by-products or
sludges). The Company handles secondary materials in a way to qualify such
materials for exclusions under state or federal RCRA regulations (for example,
use of materials as effective substitutes for other products in a manufacturing
process), and the Company stores materials in an environmentally sound manner
(for example, within the manufacturing building or on a concrete slab).

13
<PAGE>

Company to obtain regulatory exemptions and/or beneficial use determinations for
each hazardous waste material it accepts for recycling purposes. Without these
regulatory exemptions and/or beneficial use determinations, the Company would be
required to obtain a State RCRA permit to operate its facility, and would become
subject to onerous RCRA regulatory requirements.

Employees

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

14
<PAGE>

payments until maturity which defers the required cash outlays. Raw material
costs will be reduced through the use of third party tollers and the application
of lower cost alternative substrates. Investments in product development have
been curtailed and investments in sales and marketing will be increased.
Manufacturing and operating overheads have also been reduced through payroll
reductions and savings associated with non-productive equipment and processes
that have been shut-down, such as the Company's melter. The Company has begun to
sell limited amounts of the decorative particles produced by its APT subsidiary
and hopes to increase revenue from this product line. The Company will also
strive to increase sales of other abrasives and aggregates as new marketing
efforts are implemented. Although management believes these steps will allow the
Company to continue as a going concern for at least 12 months, there can be no
assurance that the foregoing steps will result in the Company ever achieving
profitability.

Results of Operations

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

Cost of goods sold was approximately $3,952,000 for fiscal 1997 versus
approximately $3,094,000 for the prior fiscal year. Included in the fiscal 1997
cost was a $24,000 decrease in the Company's

15
<PAGE>

reserve for potential disposal costs of raw materials, as compared to a $623,000
decrease in the reserve for fiscal 1996 reflecting a significantly larger
decrease in the Company's beginning raw materials inventory, plus approximately
$392,000 of costs for starting up operations at the Company's particle coating
facility in St. Augustine, Florida. Excluding the effect of the change in the
Company's reserve for disposal during fiscal 1997 and fiscal 1996, and the St.
Augustine start-up costs, cost of goods sold decreased only approximately
$133,000 in fiscal 1997 versus fiscal 1996, despite the over 40% decrease in
revenues noted above. Major factors contributing to the higher relative fiscal
1997 cost as compared to sales were higher depreciation costs due to increased
equipment purchases, an approximately $97,000 write-off of raw material and
in-process inventories related to discontinued processes and the fact that under
the prevailing operating conditions in both periods a significant portion of the
cost of production was fixed in nature. Some savings were realized as a result
of lower freight costs, resulting from a change in product pricing policy
whereby customers now pay freight on most shipments.

A charge against operations of approximately $5,712,000 was recorded in the
fourth quarter of fiscal 1997 to write down fixed assets to their estimated fair
market value for processes which have been shut down and no longer appear to be
viable for the forseeable future. Most of these processes relate to the
manufacture of ALUMAGLASS. There had been no comparable expense in fiscal 1996.

The shut-down of the melter used to manufacture ALUMAGLASS and its related
processing equipment is expected to improve the operating results and liquidity
of the Company by reducing its operating expenses. The expenses estimated to be
associated with the melter operations were approximately $1,100,000 for the year
ended June 30, 1997. The revenues included for that year were approximately
$248,000 for the sale of products produced by the melter. The Company has
located a source of material that is comparable to that produced by the melter
which can be obtained at a significantly lower cost which is expected to improve
future operating results and liquidity.

16
<PAGE>

The Company incurred process development costs of approximately $996,000 for
fiscal 1996. There were no similar charges in fiscal 1997.

Liquidity and Capital Resources

17
<PAGE>

interest was used to repay the 1997 Bridge Loan, with the remainder to be used
for transaction expenses estimated at $150,000 and general working capital
purposes, including accrued payables.

In July 1997, ESDC agreed to honor its guarantee of approximately $1,888,000
outstanding principal amount of term loans owing by the Company's Dunkirk
subsidiary to Key Bank, and ESDC is in the process of assuming from Key Bank,
and Key Bank is assigning to ESDC, such loans. ESDC has agreed to defer all
interest and principal payments due under the loans through January 1, 1998
until the maturity date of the loans, with interest continuing to accrue on such
deferred amounts payable at maturity. ESDC has also agreed to allow Dunkirk to
reduce the principal amount of such loans by the amount of a debt service
reserve fund (the balance at June 30, 1997 was $449,190) that will be forfeited
by Dunkirk.

18
<PAGE>

such retirement in September 1997 plus $230,000 removed from the debt service
fund on September 1, 1997 for payment of interest (with the assumption that
there was no related tax on the gain), and (iii) write-off of $330,361 of
deferred finance charges related to the $8,000,000 retired IDA Bonds.

19
<PAGE>

Capital lease obligations, less current portion 39,414 -- 39,414
Long-term debt, less current portion .............................. 10,784,343 (8,000,000) 2,784,343

20
<PAGE>

The Company's short-term and long-term liquidity will depend on its ability to
achieve cash-flow break even on its operations and to increase sales of its
products. The Company currently is not profitable and therefore relies on cash
from its financing activities to fund its operations. As discussed above under
the heading "Overview", the Company has taken a number of steps to preserve
cash, reduce costs and increase its revenues, but there can be no assurance that
the Company will ever achieve profitability. In addition, the Company has not
yet achieved sufficient sales to replace all the revenue lost from the
termination of the Company's relationship with Thomson in March 1997, and will
not achieve the levels of revenue it experienced during the period when Thomson
was a customer until such time as additional revenue is obtained. The Company is
not aware of any other matters which are likely to have a material impact on the
Company's short-term or long-term liquidity.

The Company has no material commitments for capital expenditures.

Pending Accounting Pronouncements

SFAS No. 128 "Earning Per Share," SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosure about segments of an Enterprise and Related
Information" are not effective for

21
<PAGE>

the Company until December 31, 1997, June 30, 1999 and June 30, 1999,
respectively. Management believes these standards will not have a material
impact on the Company.

Item 7. Financial Statements

See Financial Statements annexed.

Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act

William L. Amt, 56, joined the Company in August 1997 as President and Chief
Executive Officer and was appointed to the Board in September 1997. Prior to
joining the Company, Mr. Amt was the President and Chief Executive Officer of
Octagon, Inc., a publicly-held company providing radiological control and
operations and maintenance services to utilities and governmental agencies. From
1991 until joining Octagon in November 1993, Mr. Amt was both the Vice President
International and the Vice President of the Chemicals Business Unit for Ford
Bacon & Davis, Incorporated, a multinational engineering and consulting firm
serving the chemical and hydrocarbon industry. From 1988 to 1991, Mr. Amt was
Director of Marketing and Business Development Manager for Simons Eastern
Consultants, Inc., a major international design and engineering firm. Mr. Amt is
a registered professional engineer and holds a B.S. Degree from Purdue
University.

Eckardt C. Beck, 54, has been a director of the Company since February 1995,
Chairman of the Board since February 1997, and served as Acting President and
Chief Executive Officer from June to August 1997. Mr. Beck served as the
Chairman and Chief Executive Officer of Air & Water Technologies Corporation
from October 1987 through June 1994 and as a director from June 1990 through
November 1994. Mr. Beck has served as Chairman and Chief Executive Officer of
other environmental technologies companies prior to 1987. Mr. Beck also served
as the Assistant Administrator of the United States Environmental Protection
Agency in charge of the national water and waste programs and as the Regional
Administrator of EPA Region 2. Except with respect to Mr. Beck's involvement
with the Company as set forth above, from December 1994 through the present, Mr.
Beck has not had any employment or material consulting relationships with any
entity.

Douglas M. Costle, 58, was appointed to the Company's Board of Directors in
October 1997. Mr. Costle has been a director of Niagara Mohawk Power
Corporation, a publicly held utility company, from January 1991 through present.
Mr. Costle is currently a director of several privately held technology
companies and is an Independent Trustee of John Hancock Mutual Funds. Retired
since 1992, Mr. Costle served as Dean of Vermont Law School from 1987 to 1992
and is a former Administrator of the U.S. Environmental Protection Agency.

Stephen D. Fish, 51, was appointed to the Company's Board of Directors in
October 1997. Mr. Fish has been President of Fish Enterprises, a privately held
real estate development and

22
<PAGE>

management company, from 1970 through present. Mr. Fish also serves on the
Advisory Board of Fleet Bank of Connecticut.

Peter H. Gardner, 31, has been a director of the Company since October 1995. Mr.
Gardner is a Vice President at Technology Funding Inc., the Managing General
Partner of two investment funds which are stockholders of and consultants to the
Company. See "Security Ownership of Certain Beneficial Owners, Directors and
Management" and "Certain Relationships and Related Transactions." Mr. Gardner
joined Technology Funding Inc. in July 1994. Mr. Gardner held the position of
Project Leader and Project Scientist at Roy F. Weston, Inc., an environmental
engineering firm, from June 1990 through August 1993. In 1993 to 1994, Mr.
Gardner pursued a graduate degree in business administration.

Scott A. Katzmann, 41, has been a director of the Company since October 1994.
Mr. Katzmann is a Managing Director and the Head of Capital Markets at Paramount
Capital Inc. Prior to joining Paramount Capital, Inc. in March 1993, Mr.
Katzmann spent over 10 years with The First Boston Corporation, where he
specialized in early stage venture capital financings, leveraged acquisition
financings, investment partnerships, oil and gas transactions, expansion capital
financings and project financings. Prior to that, he was an Investment Officer
in the Investment Department of Aetna Life & Casualty, where he specialized in
private placements.

Alexander P. Haig, 45, has been a director of the Company since May 1996. Since
February 1996, Mr. Haig has been President and Chief Operating Officer of Sky
Station International Inc., a privately-held telecommunications company. Mr.
Haig has served since 1988 as a principal and legal counsel to Worldwide
Associates, Inc., a privately-held business adviser to both U.S. and foreign
countries for marketing and sales activities. Prior to 1988, Mr. Haig was an
attorney in private practice.

Irwin M. Rosenthal, 68, was appointed as a director of the Company in May 1996.
Mr. Rosenthal is an attorney and since 1960 has specialized in securities law.
He is currently a senior partner at Rubin Baum Levin Constant & Friedman. From
January 1990 to November 1991, Mr. Rosenthal was a senior partner at Baer, Marks
and Upham and prior thereto he was an attorney at various other law firms. Mr.
Rosenthal serves as Secretary and as a director of Magar Inc., a private
investment firm, of which he is a principal stockholder. He is also a director
of Magna-Lab, Inc., a publicly-traded medical technology company, Symbollon
Corporation, a publicly-traded chemical and medical technology company, Life
Medical Sciences, Inc., a publicly-traded medical technology company, and
Echocath, Inc., a publicly-traded medical technology company, and is a general
partner of Alliance which is a partnership which invests in companies and may
take on a management role in such companies.

23
<PAGE>

March 1993 to June 1993. Mr. Hays was Executive Vice President at Ford, Baron &
Davis, Incorporated, an engineering and construction consulting firm from
February 1992 through March 1993. Prior to joining Ford, Bacon & Davis,
Incorporated, Mr. Hays was with PPG Industries, Inc., where he had over 30 years
of experience in various operating and management positions. Mr. Hays received a
B.S. and M.S. in Chemical Engineering from Louisiana State University and a
M.B.A. from the University of Pittsburgh.

Richard H. Hughes joined the Company in July 1997 as Vice President-Sales and
Marketing. Prior to joining the Company, Mr. Hughes was Vice-President of IBMS,
Inc. from September 1993 to June 1997, where he consulted on various market
research projects for companies in the chemical processing industry. Mr. Hughes
was Vice-President Sales and Marketing for ISE America, Inc., a chemical
manufacturing company and a division of Mitsubishi Industries, from December
1990 to December 1995. Mr. Hughes received his B.S. in Chemistry and Mathematics
from the University of Charleston.

Robert Dejaiffe is the Company's Vice President - Technology and has been Vice
President and Technical Director of the Company's wholly-owned subsidiary,
Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), since joining
Dunkirk in July 1992. His career started as an engineer with Corning
Incorporated where he was responsible for the design and construction of several
specialty glass furnaces. Mr. Dejaiffe then became Manager of Research and
Development for the 48 Insulation Division of Foster Wheeler Corporation, where
he developed a new electric furnace design and worked with high temperature
industrial insulations using reduced glass. From 1981 to 1989, he was at Potters
Industries as Manager of Advanced Technology and Manager of Process Development
Engineering, and from October 1989 until joining the Company, he managed a
research and testing facility at Penn State University. He holds several patents
on glass composites, furnace accessories and refractory treatments. Mr. Dejaiffe
received his B.S. in Ceramics Engineering from Penn State University and M.B.A.
from Syracuse University.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company's officers and directors
and persons who are beneficial owners of ten percent or more of the Company's
Common Stock to file reports of ownership and changes in ownership of the
Company's securities with the Securities and Exchange Commission. Such officers,
directors and beneficial owners are required by applicable regulations to
provide to the Company copies of all forms they file under Section 16(a).

Based solely upon a review of the copies of forms furnished to the Company, and
written representations from certain reporting persons, the Company believes
that during the fiscal year ended June 30, 1997, all filing requirements
applicable to its officers, directors and ten percent beneficial owners were
complied with except that Donald R. Kendall, Jr., a former director of the
Company, filed a Form 5 on August 25, 1997 which was required to be filed on
August 14, 1997.

24
<PAGE>

27 Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Series A Convertible Preferred Stock
(the "Convertible Preferred Stock") as of September 30, 1997 by (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock or Convertible Preferred Stock of the Company, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers (defined
herein), and (iv) all directors and executive officers of the Company as a
group. Holders of the Convertible Preferred Stock are entitled to the number of
votes equal to the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible, and are entitled to vote together
with the holders of the Common Stock. Accordingly, the information in the table
below reflects ownership by the above individuals of each of the Company's
Common Stock assuming the conversion of all outstanding shares of the
Convertible Preferred Stock and the Convertible Preferred Stock separately. At
September 30, 1997 each share of Convertible Preferred Stock was convertible
into eight shares of Common Stock.

Eckardt C. Beck (5)................. 165,171 1.9 2.4
William L. Amt (6).................. 60,000 * --
Peter H. Gardner (7)................ 746,421 8.2 7.6
Alexander P. Haig (8)............... 9,992 * --
Scott A. Katzmann (9)............... 50,950 * --
Douglas M. Costle .................. -- * --
Stephen D. Fish..................... 160,000 1.8 4.8
Irwin M. Rosenthal (10)............. 5,121 * --
Jack D. Hays, Jr. (11).............. 20,000 * --
Richard H. Hughes (12).............. 15,000 * --
Technology Funding Venture Partners
V, An Aggressive Growth Fund,
L.P.(13)......................... 746,421 8.2 7.6
All officers and directors as a group
(10 persons) (14)................. 1,243,720 13.4 14.8
Harvey Goldman (15)................. 185,964 2.1 --
c/o Vestcom International, Inc.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071
Perry A. Pappas (16)................ 66,923 * --
c/o Buchanan Ingersoll
500 College Road East
Princeton, New Jersey 08540

25
<PAGE>

The Aries Fund, 680,279 7.6 15.9
a Cayman Islands Trust (17).......
787 7th Avenue
48th Floor
New York, New York 10019
Aries Domestic Fund, L.P. (18)...... 446,034 4.9 8.2
787 7th Avenue
48th Floor
New York, New York 10019
Porter Partners, L.P. (19).......... 320,000 3.6 9.7
100 Shoreline, Suite 211B
Mill Valley, CA 94941
P.A.W. Offshore Fund, Ltd. (20)..... 400,000 4.5 12.1
90 Mees Pierson
904 East Bay Street
P.O. Box 55-6233
Nassau, Bahamas
J.F. Shea Co., Inc. (21)............ 240,000 2.7 7.2
655 Brea Canyon Road
Walnut, California 91789
Pequot Scot Fund, LP (22)........... 180,000 2.0 5.4
354 Pequot Avenue
Southport, CT 06490

26
<PAGE>

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

* Less than one percent.

(4) Applicable percentage of ownership is based on 3,316,000 shares of Common
Stock issuable upon conversion of the 414,500 shares of Convertible
Preferred Stock outstanding as of September 30, 1997.

(6) Includes currently exercisable options to purchase 60,000 shares of Common
Stock. Excludes options to purchase 240,000 shares of Common Stock which
are not exercisable within 60 days.

27
<PAGE>

Mr. Gardner disclaims beneficial ownership of all securities of the Company
owned by TFP III and TFVP V. Includes currently exercisable options to
purchase 11,338 shares of Common Stock and options to purchase 4,000 shares
of Common Stock which are exercisable within 60 days. Excludes options to
purchase 16,000 shares of Common Stock which are not exercisable within 60
days. The address of such stockholder is c/o Technology Funding Inc., 2000
Alameda de las Pulgas, San Mateo, California 94403.

(8) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.

(10) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.

(11) Includes currently exercisable options to purchase 20,000 shares of Common
Stock. Excludes options to purchase 80,000 shares of Common Stock which are
not exercisable within 60 days.

(12) Includes currently exercisable options to purchase 15,000 shares of Common
Stock. Excludes options to purchase 60,000 shares of Common Stock which are
not exercisable within 60 days.

(13) Includes (A) securities held by TFVP V consisting of (i) 207,547 shares of
Common Stock, (ii) 7,875 shares of Convertible Preferred Stock, (iii)
warrants, exercisable within 60 days, to purchase 83,771 shares of Common
Stock, and (B) securities held by TFP III consisting of (i) 69,180 shares
of Common Stock, (ii) 23,625 shares of Convertible Preferred Stock and
(iii) warrants, exercisable within 60 days, to purchase 118,585 shares of
Common Stock. Includes currently exercisable options issued to Peter
Gardner to purchase 11,338 shares of Common Stock and options to purchase
4,000 shares of Common Stock which are exercisable within 60 days. Excludes
(i) options issued to Peter Gardner to purchase 16,000 shares of Common
Stock, (ii) warrants to purchase 2,104 shares of Common Stock held by TFVP
V and (iii) 680 shares of Common Stock held by TFP III, which, in each
case, are not exercisable within 60 days.

(14) Calculation does not include securities held by Mr. Goldman or Mr. Pappas
who are no longer directors or officers of the Company.

28
<PAGE>

(16) Includes currently exercisable options to purchase 56,923 shares of Common
Stock. Mr. Pappas is no longer an officer of the Company.

(17) Paramount Capital Asset Management, Inc. ("PCAM") is the Investment Manager
to The Aries Fund, a Cayman Islands Trust (the "Aries Trust"). Lindsay A.
Rosenwald, M.D. is President and sole shareholder of PCAM. PCAM and Dr.
Rosenwald may be considered to beneficially own the securities owned by the
Aries Trust by virtue of their authority to vote and/or dispose of the
securities. PCAM and Dr. Rosenwald disclaim beneficial ownership of all
securities of the Company held by the Aries Trust. Securities held by the
Aries Trust consist of 40,789 Class A Warrants which entitle the holder to
acquire one share of Common Stock and one Class B Warrant to acquire one
share of Common Stock; warrants to purchase an additional 70,701 shares of
Common Stock; and 66,000 shares of Convertible Preferred Stock convertible
into 528,000 shares of Common Stock. In addition, Dr. Rosenwald
beneficially owns warrants to purchase 44,719 shares of the Company's
Common Stock.

(18) PCAM is the General Partner of the Aries Domestic Fund L.P. Dr. Rosenwald
is the President and sole shareholder of PCAM. PCAM and Dr. Rosenwald may
be considered to beneficially own the securities owned by the Aries
Domestic Fund, L.P. by virtue of their authority to vote and/or dispose of
the securities. PCAM and Dr. Rosenwald disclaim beneficial ownership of all
securities of the Company held by the Aries Domestic Fund, L.P. Securities
held by Aries Domestic Fund, L.P. consist of 67,982 Class A Warrants which
entitle the holder to acquire one share of Common Stock and one Class B
Warrant to acquire one share of Common Stock; warrants to purchase an
additional 38,070 shares of Common Stock; and 34,000 shares of Convertible
Preferred Stock convertible into 272,000 shares of Common Stock. In
addition, Dr. Rosenwald beneficially owns warrants to purchase 44,719
shares of the Company's Common Stock.

(19) Jeffrey H. Porter, the Managing General Partner of Porter Partners, L.P.
Mr. Porter may be considered a beneficial owner of the securities owned by
Porter Partners, L.P. by virtue of his authority to vote and/or dispose of
the securities held by Porter Partners, L.P. Mr. Porter disclaims
beneficial ownership of all securities of the Company held by Porter
Partners, L.P.

(20) Peter Wright is the Investment Manager for the P.A.W. Offshore Fund, Ltd.
Mr. Wright may be considered the beneficial owner of the securities owned
by the P.A.W. Offshore Fund, Ltd. by virtue of his authority to vote and/or
dispose of the Company's securities held by P.A.W. Offshore Fund, Ltd. Mr.
Wright disclaims beneficial ownership of all securities of the Company held
by P.A.W. Offshore Fund, Ltd.

29
<PAGE>

(21) Edmund H. Shea, Jr. is Vice President of J.F. Shea Co., Inc. Mr. Shea may
be considered the beneficial owner of the securities owned by J.F. Shea
Co., Inc. by virtue of his authority to vote and/or dispose of the
Company's securities held by J.F. Shea Co., Inc. Mr. Shea disclaims
beneficial ownership of all securities of the Company held by J.F. Shea
Co., Inc.

(22) Amiel Peretz is Chief Financial Officer of Dawson-Samberg Capital
Management, Inc., the investment advisor of Pequot Scot Fund LP. Mr. Peretz
may be considered the beneficial owner of the securities owned by Pequot
Scot Fund, LP. by virtue of his authority to vote and/or dispose of the
Company's securities held by Pequot Scot Fund, LP. Mr. Peretz disclaims
beneficial ownership of all securities of the Company held by Pequot Scot
Fund, LP.

Item 12. Certain Relationships and Related Transactions

Employment Agreements

Consulting Agreements

In May 1995, the Company entered into a consulting agreement with TFP III and
TFP V (the "TFI Consulting Agreement"). Pursuant to the TFI Consulting
Agreement, the consultants agreed to, among other things, introduce the Company
to strategic partners and potential customers, provide strategic marketing
advice, identify complementary technologies with strategic synergies, and
identify and assist in procuring appropriate media channels for the Company's
products. As compensation for their services, the consultants received warrants
which were amended in May 1996 to become warrants to purchase 69,177 shares of
the Company's common stock, at an exercise price of $5.28 per share. Peter H.
Gardner, a director of the Company, is an Investment Officer at TFI, the
Managing General Partner of TFP III and TFVP V, and serves as TFI's designee on
the Board.

30
<PAGE>

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for claims under such prior agreement. Pursuant to the
Consulting Agreement, Mr. Goldman has agreed to, among other things, assist the
Company in project development, strategic planning and such other activities as
shall be reasonably requested by the Board of Directors and within Mr. Goldman's
areas of expertise. Mr. Goldman is entitled to receive a monthly consulting fee
of $10,000 per month for nine months terminating with the final payment due in
June 1998.

Series A Convertible Preferred Stock

On September 5, 1997, the Company closed on the second tranch of a private
placement of the Company's Convertible Preferred Stock (the "Convertible
Preferred Stock Private Placement"). Paramount Capital, Inc. acted as placement
agent (the "Placement Agent" or "Paramount") for the Convertible Preferred Stock
Private Placement and has received an aggregate placement fee to date of
$373,050, which represents 9% of the aggregate gross proceeds, and an expense
allowance of $165,800 which represents 4% of the aggregate gross proceeds. In
addition, upon the closing of the Convertible Preferred Stock Private Placement,
the Company will grant to the Placement Agent, and/or its designees, warrants to
purchase Convertible Preferred Stock equal to 10% of the total number of shares
of Convertible Preferred Stock sold in the Convertible Preferred Stock Private
Placement at an exercise price equal to 110% of the offering price of the
Convertible Preferred Stock. The warrant(s) to be issued upon the closing of the
Convertible Preferred Stock Private Placement are exercisable for ten years
commencing six months from the final closing of the Convertible Preferred Stock
Private Placement. The warrants contain certain antidilution and registration
rights provisions. Scott A. Katzmann, a director of the Company, is a Managing
Director of the Placement Agent.

Prior Preferred Stock Placement

Between August 1994 and May 1995, Paramount acted as placement agent in
connection with the private placement of a prior series of Preferred Stock (the
"Old Preferred Shares"). The

31
<PAGE>

Placement Agent received $632,250 in commissions and a non-accountable expense
allowance of $281,000 in consideration of its services as placement agent. In
addition, designees of the Placement Agent received, as additional compensation,
warrants to purchase an aggregate of 281,000 Old Preferred Shares, at an
exercise price of $2.75 per share, exercisable for a period of 10 years
following the closing of the offering. Such warrants were amended and restated
in May 1996 to be warrants to purchase 97,185 shares of Common Stock at an
exercise price of $4.84 per share. In connection with this private placement,
until November 1997, the Placement Agent will be entitled to receive a placement
fee of 9%, plus a 4% expense allowance, on any investments received by the
Company from investors or corporate partners (excluding project finance
investors) that were introduced to the Company by Paramount. Scott A. Katzmann,
a director of the Company, is a Managing Director of Paramount.

Lindsay A. Rosenwald, M.D., is the President, Chairman and sole stockholder, and
Peter Kash is a Managing Director, of Paramount. In connection with the private
placement of Old Series A Shares, Dr. Rosenwald and Mr. Kash received warrants
to purchase Old Series A Shares, which currently represent warrants to purchase
34,353 and 4,788 shares of Common Stock, respectively.

Bridge Loans

In connection with a bridge financing in 1994 (the "1994 Financing"), designees
of Paramount received warrants to purchase an aggregate of 7,307 shares of
Common Stock with an initial per share exercise price equal to $13.55. Such
warrants were amended and restated in May 1996 to become exercisable for 20,750
shares of Common Stock at an exercise price of $4.77 per share. Such warrants
include warrants to purchase 10,374 shares of Common Stock issued to Dr.
Rosenwald and warrants to purchase 4,671 shares of Common Stock issued to Mr.
Kash.

In September, October and November 1995, the Company borrowed an aggregate of
$650,000 from stockholders of the Company or their affiliates for working
capital. Of such amount, an aggregate of $250,000 was provided by TFP III and
TFVP V, and an aggregate of $200,000 was provided by Aries Domestic Fund, L.P.
and the Aries Trust (collectively, the "Aries Funds"), two funds for which
Paramount Capital Asset Management, Inc. is the general partner and investment
manager, respectively. Dr. Rosenwald is the President and sole stockholder of
Paramount Capital Asset Management, Inc. The principal amount of such loans was
exchanged in December 1995 for $650,000 principal amount of new notes and
warrants to purchase 325,000 shares of Common Stock (which warrants were
exchanged automatically on the closing of the Company's initial public offering
("IPO") for Redeemable Class A Warrants to purchase 325,000 shares of Common
Stock). The notes received by such stockholders were repaid at the closing of
the IPO.

In March 1996, the Company borrowed an aggregate of $200,000 pursuant to
promissory notes bearing interest at the rate of 10% per annum. Of such amount,
Dr. Rosenwald provided $150,000, Scott A. Katzmann and Peter Kash each provided
$18,750 and Harvey Goldman provided $12,500. Such notes were repaid at the
closing of the IPO.

32
<PAGE>

In May 1996, the Company borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, which were
repaid at the closing of the IPO.

In July and August 1997, the Company borrowed an aggregate of $500,000 from the
Aries Funds pursuant to a line of credit agreement (the "1997 Bridge Loan"). The
1997 Bridge Loan bears interest at the rate of 12% per annum and was repaid in
August 1997. In connection with the 1997 Bridge Loan, the Company issued to the
Aries Funds warrants to purchase an aggregate of 100,000 shares of Common Stock
at a per share exercise price equal to $1 5/16. Such warrants expire July 21,
2002 and contain certain antidilution and registration rights provisions. In
August 1997 the Aries Funds purchased 100,000 shares of Convertible Preferred
Stock for $1,000,000 in the Convertible Preferred Stock Private Placement.

Issuances of Securities to Executive Officers and Directors

From the period from inception to December 1995, the Company granted options to
purchase an aggregate of 48,891 shares of Common Stock to executive officers and
directors of the Company with exercise prices ranging from $13.55 to $20.53 per
share. Such options were repriced in May 1996 to $4.40 per share.

In April 1996, the Company issued non-qualified stock options outside of the
Employee Stock Option Plan, all of which are Escrow Options (defined herein), to
Mr. Goldman, to purchase 50,000 shares of Common Stock. Such options have an
exercise price of $4.40 per share and vest ratably over three years on an annual
basis. Mr. Goldman was also granted options to purchase 40,000 shares of Common
Stock in October 1996 at an exercise price of $4.40. All of Mr. Goldman's
options have terminated.

On October 15, 1996, the Board of Directors granted options to its non-employee
directors pursuant to the Stock Option Plan for Non-Employee Directors to
purchase an aggregate of 50,000 shares of Common Stock. Such options have an
exercise price of $3.125 per share and are fully vested.

33
<PAGE>

upon issuance and twenty percent (20%) vest on the first, second, third and
fourth anniversary of the date of issuance.

On August 29, 1997, Mr. Fish purchased 20,000 shares of Convertible Preferred
Stock for $200,000, and on September 5, 1997, Mr. Beck purchased 10,000 shares
of Convertible Preferred Stock for $100,000 in the Convertible Preferred Stock
Private Placement.

Board Designee and Other TFI Covenants

Escrow Securities

34
<PAGE>

(100,725) and Scott A. Katzmann (12,179 shares). The Escrow Securities are not
assignable or transferable. The holders thereof have the power to vote the
Escrow Shares while such shares are held in escrow. Holders of any options in
escrow may exercise their options prior to their release from escrow; however,
the shares issuable upon any such exercise will continue to be held in escrow as
Escrow Shares. The Escrow Securities will be released from escrow, on a pro rata
basis, if, and only if, one or more of the following conditions is/are met: (a)
the Company's net income before provision for income taxes and exclusive of any
extraordinary earnings or charges which would result from the release of the
Escrow Securities (all as audited by the Company's independent public
accountants) (the "Minimum Pretax Income") amounts to at least $4.7 million for
the fiscal year ending June 30, 1998; (b) the Minimum Pretax Income amounts to
at least $7.0 million for the fiscal year ending June 30, 1999; (c) the Minimum
Pretax Income amounts to at least $9.3 million for the fiscal year ending June
30, 2000; (d) the Closing Price (as defined) of the Company Common Stock
averages in excess of $11.25 per share for 60 consecutive business days during
the 18-month period commencing on May 16, 1996; (e) the Closing Price of the
Company Common Stock averages in excess of $15.00 per share for 60 consecutive
business days during the 18-month period commencing 18 months from May 16, 1996;
or (f) during the periods specified in (d) or (e) above, the Company is acquired
by or merged into another entity in a transaction in which the value of the per
share consideration received by the stockholders of the Company on the date of
such transaction or at any time during the applicable period set forth in (d) or
(e), respectively, equals or exceeds the applicable levels set forth in (d) or
(e), respectively.

Any money, securities, rights or property distributed in respect of the Escrow
Securities, including any property distributed as dividends or pursuant to any
stock split, merger, recapitalization, dissolution or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Securities. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by October 15, 2000, the Escrow Securities,
as well as any dividends or other distributions made with respect thereto, will
be canceled and contributed to the capital of the Company. The Company expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could increase the loss
or reduce or eliminate the Company's net income for financial reporting purposes
for the period(s)

35
<PAGE>

during which such shares are, or become probable of being, released from escrow.
Although the amount of compensation expense recognized by the Company will not
affect the Company's total stockholders' equity, it may have a negative effect
on the market price of the Company's securities.

All future transactions with beneficial owners of the Company's securities and
the Company's directors or executive officers will be on terms no less favorable
than those available from unaffiliated parties.

36
<PAGE>

SIGNATURES

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: December 18, 1997 /s/ William L. Amt
-------------------------------------------
William L. Amt
President and Chief Executive Officer

Dated: December 18, 1997 /s/ John G. Murchie
-------------------------------------------
John G. Murchie
Controller and Principal Financial Officer

37
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors.......... ....................................F-2

Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of June 30,
1997 and June 30, 1996....................................................F-3

Consolidated Statements of Operations of Conversion
Technologies International, Inc. and Subsidiaries for
the years ended June 30, 1997 and June 30, 1996...........................F-4

Consolidated Statements of Stockholders' Equity of
Conversion Technologies International, Inc. and Subsidiaries
for the years ended June 30, 1997 and June 30, 1996.......................F-5

Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the years ended
June 30, 1997 and June 30, 1996...........................................F-6

Notes to Consolidated Financial Statements...................................F-8

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Conversion Technologies International, Inc.

Metro Park, New Jersey ERNST & YOUNG LLP
September 18, 1997

F-2
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Balance Sheets

June 30,
------------------------------
1997 1996
------------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Capital lease obligations, less current portion ..................... 39,414 74,693
Long-term debt, less current portion ................................ 10,784,343 11,281,715

See accompanying notes.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

Year ended June 30,
------------------------------
1997 1996
------------ ------------

<S> <C> <C>
Revenue ........................... $ 1,429,008 $ 2,679,987

Cost of goods sold ................ 3,952,374 3,093,560
------------ ------------

Gross loss on sales ............... (2,523,366) (413,573)

Interest expense .................. (1,277,310) (1,076,077)
Interest income ................... 226,505 114,326
Other income ...................... 349,295 81,811
------------ ------------

Loss before extraordinary item .... (12,855,169) (4,110,951)

Extraordinary item ................ -- 442,000
------------ ------------

Net loss .......................... $(12,855,169) $ (4,552,951)
============ ============

Net loss per common share
before extraordinary item .... $ (2.69) $ (2.64)
============ ============

Net loss per common share ......... $ (2.69) $ (2.92)
============ ============
</TABLE>

See accompanying notes.

F-4
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Stockholders' Equity

Years ended June 30, 1997 and June 30, 1996

Total
Unearned Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficiency)
------------ ----------- ------------

</TABLE>

See accompanying notes.

F-5
<PAGE>

<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

Year ended June 30,
-------------------------------
1997 1996
------------- -------------

<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Year ended June 30,
----------------------------
1997 1996
------------ ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Interest paid, net of amount capitalized ............. $ 1,320,882 $ 1,009,746
=========== ===========

SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Surrender and cancellation of common stock ........... -- (99,000)
Issuance of warrants in connection with bridge notes.. -- 66,750

See accompanying notes.
</TABLE>

F-7
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Note to Consolidated Financial Statements

June 30, 1997

1. Organization

Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufacturers and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products. The Company's revenue streams
are a combination of waste conversion fees and manufactured product sales.

F-8
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Note to Consolidated Financial Statements

June 30, 1997

1. Organization (continued)

to the Company. This amount is included in Selling, General and Administrative
expenses in the Consolidated Statement of Operations.

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. In view of the foregoing,
there is substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.

2. Summary of Significant Accounting Policies

Basis of Presentation

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the amounts

F-9
<PAGE>

2. Summary of Significant Accounting Policies (continued)

reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.

Revenue Recognition

Reserve for Disposal

Inventories

Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.

F-10
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Inventories consisted of the following:

June 30,
------------------------
1997 1996
---- ----

Raw materials ....... $ 61,949 $ 79,237
Work-in-process...... 111,961 135,536
Finished goods....... 347,150 122,963
-------- --------
$521,060 $337,736
======== ========

Property, Plant and Equipment

During fiscal 1997, the Company experienced reduced levels of revenue and
increased costs. Also in fiscal 1997, the Company shut down its melter and
certain related equipment which it does not intend to use in the foreseeable
future, and accordingly, the Company has adjusted these asset values to their
estimated fair value which was determined to be zero as it is estimated that the
cost to disassemble, transport and reassemble the melter and peripheral
equipment would approximate any remaining fair value of those assets. As a
result, the Company has taken a charge in the fourth quarter pursuant to SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" in the amount of $5,711,567.

Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.

Marketable Securities

The Company considers all marketable securities to be available for sale. These
securities were carried at cost which approximated fair value at June 30, 1996.

F-11
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Deferred Financing Costs

Deferred costs include costs related to obtaining debt financing, and are being
amortized under the interest method of accounting. (See Note 9).

Income Taxes

Process Development Costs

Investment Tax Credit

Extraordinary Item

Net Loss Per Common Share

The net loss per common share is based on the net loss for the year, divided by
the weighted average number of common shares outstanding during the year
(excluding the common shares that

F-12
<PAGE>

2. Summary of Significant Accounting Policies (continued)

were deposited into escrow in connection with the Company's initial public
offering-see Note 7). Common Stock equivalents such as stock options and
warrants are not included as their effect is anti-dilutive. However, immediately
prior to the closing of the Company's initial public offering, the Company's
Series A Preferred Stock was converted into 1,023,054 shares of common stock
(see Note 7). The weighted average number of these converted shares, at June 30,
1997 and 1996 were 1,023,054, and they have been included in the related net
loss per common share calculation. Therefore, the weighted average number of
common shares outstanding at June 30, 1997 and 1996 were 4,773,311 and
1,559,908, respectively.

Employee Stock Option Plan

Pending Accounting Pronouncements

F-13
<PAGE>

<TABLE>
<CAPTION>
June 30,
------------------------
1997 1996
----------- ----------

F-14
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

3. Debt (continued)
----------------

June 30,
------------------------
1997 1996
----------- ----------

F-15
<PAGE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 1997

3. Debt (continued)
----------------

June 30,
------------------------
1997 1996
----------- ----------

Less current maturities 530,258 437,285
----------- -----------
$10,784,343 $11,281,715
=========== ===========
</TABLE>

Maturities on long-term debt for the next five years are as follows (see Note
9):

June 30,
1998 $ 530,258
1999 1,044,448
2000 1,107,982
2001 990,836
2002 865,939
Thereafter 6,775,138
------------
$ 11,314,601
============

F-16
<PAGE>

3. Debt (continued)

The carrying amounts and fair values of long-term borrowings consisted of the
following at June 30, 1997:

Carrying Amount Fair Value
--------------- ----------

4. Notes Payable

F-17
<PAGE>

4. Notes Payable (continued)

5. Restricted Assets

6. Commitments and Contingencies

F-18
<PAGE>

6. Commitments and Contingencies (continued)

Company over the scope of the work to be performed by the contractor. The
Company has served the contractor with its complaint, alleging, among other
things, breach of contract, fraud and defamation, and seeks damages in excess of
$1,000,000. The contractor has served an answer with affirmative defenses and
counterclaims against the Company for breach of contract. The aggregate amount
of the claims by the contractor against the Company is $483,000 plus interest.

The Company does not believe that there will be a material adverse outcome in
the foregoing dispute.

June 30,
------------------------
1997 1996
---- ----

Machinery and equipment ............ $353,686 $354,352
Less accumulated amortization....... 289,382 217,375
-------- --------
$ 64,304 $136,977
======== ========

Lease amortization of $72,637 and $101,531 for the years ended June 30, 1997 and
1996, respectively, is included in cost of goods sold.

Future minimum lease payments together with the present value of the net minimum
lease payments for capitalized leases as of June 30, 1997 is as follows:

Total rent expense of the Company for the periods ended June 30, 1997 and 1996
was $73,674 and $99,530, respectively.

F-19
<PAGE>

7. Capital Stock

In connection with the IPO, 740,559 shares of the Company's common stock and
options to purchase 71,923 shares of Common Stock (the "Escrow Securities") were
deposited into escrow by the holders thereof. The Escrow Securities will only be
released from escrow when the Company attains certain earnings levels or the
market price of the Company's common stock achieves certain levels. These Escrow
Securities are subject to cancellation if such conditions are not achieved. In
the event that the Escrow Securities are released from escrow to the
stockholders of the Company who are officers, directors, employees or
consultants of the Company, compensation expense will be recorded for financial
reporting purposes. This non-cash charge to earnings will be equal to the fair
value of such securities on the date of their release.

The Company has issued the following common stock purchase warrants, all of
which expire between the fifth and seventh anniversary of the date of grant:

F-20
<PAGE>

7. Capital Stock (continued)

<TABLE>
<CAPTION>
Number of Exercise
Shares Price
--------- --------

In conjunction with its initial public offering, the Company has issued the
following Class A and Class B warrants, all of which expire on the fifth
anniversary of the date issued:

<TABLE>
<CAPTION>
Class A Class B
---------------------- ----------------------
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- --------

F-21
<PAGE>

7. Capital Stock (continued)

The following table summarizes the activity in options under the Employee and
Non-Employee Plans, plus options granted on a non-qualified basis:

Weighted
Average
Number Exercise
of Shares Price
--------- --------

<S> <C> <C> <C> <C> <C>
$3.125 50,000 $3.13 10.00
$4.40-$5.00 177,410 4.40 6.39 75,557 $4.40
------- ------
TOTAL 227,410 $4.12 7.18 75,557 $4.40
======= ======
</TABLE>

Of the total options outstanding under the plans, 75,557 and 24,081 were
exercisable at June 30, 1997 and 1996, respectively.

F-22
<PAGE>

7. Capital Stock (continued)

At June 30, 1997, the Company has reserved 510,400 shares of Common Stock for
the exercise of options.

1997 1996
---- ----

Pro Forma net loss..................... $(13,127,518) $(4,576,091)
Pro Forma loss per common share........ $(2.75) $(2.93)

F-23
<PAGE>

7. Capital Stock (continued)

8. Income Taxes

There was no income tax expense/benefit for the Company for the years ended June
30, 1997 and 1996.

Following is a reconciliation of income tax expense (credit) to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1997 and 1996:

For the year ended June 30,
---------------------------
1997 1996
----------- -----------

F-24
<PAGE>

8. Income Taxes (continued)

The significant components of the Company's deferred tax assets and liabilities
are as follows:

Valuation allowances (federal & state).. 10,190,052 5,188,771
----------- -----------
Net deferred tax assets ................ $ -- $ --
=========== ===========

The above net deferred tax assets have been reserved because it is not more
likely than not that they would be recognized.

9. Subsequent Events

F-25
<PAGE>

9. Subsequent Events (continued)

quarter of fiscal 1998. The Company will also write-off approximately $330,000
of deferred financing costs relating to such debt. If Dunkirk is deemed to be
solvent immediately prior to the time of such repayment, the Company will
recognize taxable income for the debt forgiveness in its tax year ending June
30, 1998. The amount of such income may be offset by net operating loss
carryforwards ("NOLs"), subject to the possible limitations discussed in Note 8.
Even if sufficient NOLs were available to offset such taxable income after the
limitations described below, the Company may still be subject to alternative
minimum tax. To the extent that Dunkirk is deemed to be insolvent immediately
prior to such repayment by an amount which equals or exceeds the amount of debt
forgiveness, the Company will not recognize taxable income from such repayment;
however, certain of Dunkirk's tax attributes (such as NOLs) would be subject to
reduction and would not be available to offset future income from operations, if
any. For this purpose, the amount of insolvency is defined to be the excess of
Dunkirk's liabilities over the fair value of its assets. An independent
appraisal of the fair value of Dunkirk's assets has not been completed at this
time to determine Dunkirk's solvency.

The New York State Job Development Authority (JDA) issued its guaranties (the
"Guaranties)") in favor of Key Bank of New York ("Key Bank") with respect to two
promissory notes (the "term loans") issued by Dunkirk and payable to the order
of Key Bank. The JDA has agreed to exercise its option under the Guaranties to
make the payments required under the term loans directly to Key Bank, provided
that Key Bank applies the amount currently held in the Company's related debt
service reserve fund to reduce the principal amount of the term loans. Upon the
assignment of the term loans and related loan documents to the JDA, the JDA has
also agreed to defer monthly payments of principal and interest due from Dunkirk
under each term loan through January 1998 until the maturity date of such loans.
Interest will continue to accrue on the principal amount and interest so
deferred will be payable at maturity.

F-26
<PAGE>

9. Subsequent Events (continued)

adjustment based on the lesser of $1.25 and the prevailing average market price
of the common stock immediately preceding any subsequent closing, if any.
Commencing 12 months from the final closing of the private placement, the
holders of the Preferred Stock are entitled to receive dividends payable in cash
or, at the option of the Company, in additional shares of Preferred Stock at the
rate of 10% per annum. The Placement Agent is entitled to receive a cash
commission of 9% and a non-accountable expense allowance of 4% of the total
proceeds. The Placement Agent is also entitled to receive warrants to purchase
shares of the Company's Preferred Stock equal to 10% of the total shares issued
at an exercise price equal to 110% of the offering price of such shares. Through
September 18, 1997, 414,500 shares of Preferred Stock had been sold, with net
proceeds (after deducting the placement agent commissions and expenses - see
above) to the Company of $3,606,150.

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10- KSB/A2

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

For the fiscal year ended: Commission File No.:
June 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive
Orlando, Florida 32817
(Address of principal executive offices) (Zip Code)

(407) 207-5900
(Issuer's telephone number including area code)

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

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants

Yes X No
----- -----

<PAGE>

Issuer's revenues for the fiscal year ended June 30, 1997 were $1,429,008.

As of September 19, 1997, the issuer had outstanding 5,539,745 shares of Common
Stock, $.00025 par value.

Part I

Item 1. Business

Overview
- --------

-2-
<PAGE>

manufacture ALUMAGLASS at its Dunkirk, New York, facility and is currently
satisfying limited orders through inventory of ALUMAGLASS. The Company does not
intend to restart the melter in the foreseeable future. If warranted by market
demand for ALUMAGLASS, the Company intends to pursue opportunities to license
its ALUMAGLASS patents to third parties. The Company would then purchase the raw
ALUMAGLASS particles from such manufacturers and process the material for resale
to is customers. Although the Company is currently in discussions with one such
potential licensee, there can be no assurance that such arrangements will be
consummated on terms satisfactory to the Company, or at all, or that there will
ever be significant sales of ALUMAGLASS.

The Company recently relocated its executive offices to 3452 Lake Lynda Drive,
Suite 280, Orlando, Florida 32817. The Company's telephone number is (407)
207-5900.

This Form 10- KSB/A2 contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding the Company's efforts to increase sales
of its abrasives, manufacture and sell, on a commercial scale, its decorative
particles and the possibility of outsourcing ALUMAGLASS production. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and that the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
when such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) the risk that the Company will lose
key CRT customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with

-3-
<PAGE>

applicable environmental laws and regulations and (x) the risk that the Company
will not be able to continue to satisfy the minimum maintenance requirements for
continued listing which were recently adopted by the Nasdaq SmallCap Market .

Certain Recent Events
- ---------------------

Termination of Merger With Octagon
- ----------------------------------

New Management
- --------------

The Company has obtained new management. On August 1, 1997, William L. Amt,
previously the President and Chief Executive Officer of Octagon, joined the
Company as President and Chief Executive Officer. In July 1997, Jack D. Hays,
Jr., and Richard H. Hughes, who had previously joined Octagon in anticipation of
the closing of the Merger, became Executive Vice President Operations and
Marketing and Vice President - Sales and Marketing, respectively, of the
Company. With the exception of Robert Dejaiffe, who remains the Company's Vice
President - Technology, the former executive officers of the Company, including
Harvey Goldman, the Company's former Vice-Chairman, President and Chief
Executive Officer, ceased to be employees of the Company in June 1997. Eckardt
C. Beck, who remains as the Company's Chairman of the Board, served as acting
President and Chief Executive Officer of the Company from June 1997 until August
1, 1997.

Write-Down of Non-Productive Assets and Related Charges to Earnings
- -------------------------------------------------------------------

-4-
<PAGE>

Redemption of IDA Bonds
- -----------------------

Termination of VANGKOE Joint Venture
- ------------------------------------

Preferred Stock Financing
- -------------------------

Repayment of Bridge Loan
- ------------------------

-5-
<PAGE>

Other Changes to Indebtedness
- -----------------------------

Products
- --------

Abrasives
- ---------

Decorative Particles
- --------------------

-6-
<PAGE>

yields a coating of superior visual quality and endurance compared to competing
products and believes that there is a potential market for these products. There
can be no assurance, however, that the Company will ever achieve significant
sales of these products. The Company recently commenced commercial production of
these products and has been working with VANGKOE to initiate customer sampling
and testing in the swimming pool plaster market in the southeast, which will be
the initial marketing focal point for these products.

Performance Aggregates
- ----------------------

Recycled CRT Glass
- ------------------

-7-
<PAGE>

Manufacturing and Recycling Processes
- -------------------------------------

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

Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is

-8-
<PAGE>

anticipated that such efforts will be focused in the near term on ALUMAGLASS
licensing possibilities and expanding color coating offerings for its decorative
particles.

Markets for Products and Services
- ---------------------------------

Abrasives
- ---------

Decorative Particles
- --------------------

-9-
<PAGE>

that have been previously color coated. The resulting mixture, when viewed over
a large surface area and from a distance, will appear to have a consistent color
or hue.

Performance Aggregates
- ----------------------

Recycled CRT Glass
- ------------------

-10-
<PAGE>

Dependence on Certain Customers
- -------------------------------

Sales and Marketing
- -------------------

-11-
<PAGE>

The Company currently has three individuals dedicated principally to sales and
marketing and several others who support the sales and marketing effort on a
regular basis.

Intellectual Property
- ---------------------

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

-12-
<PAGE>

Environmental Matters
- ---------------------

-13-
<PAGE>

Employees
- ---------

Item 2. Properties
- -------------------

The Company has terminated its lease on approximately 3,000 square feet of
office space in Hazlet, New Jersey, effective September 30, 1997.

APT currently leases approximately 10,000 square feet of manufacturing space in
St. Augustine, Florida. The lease will expire in February 2000 and rent is
approximately $6,000 per month.

Item 3. Legal Proceedings
- --------------------------

The Company is a party to litigation, Conversion Technologies International,
Inc. v. R.E. Williams and Company, Inc., commenced by the Company on October 26,
1995 in the Supreme Court of

-14-
<PAGE>

New York, County of Chautauqua, against a general contractor hired to construct
the improved abrasives finishing area at the Dunkirk facility. The contractor
commenced work in April 1995, but was asked to stop work in November 1995
following significant cost overruns, problems and delays in construction and
disputes with the Company over the scope of the work to be performed by the
contractor. The Company has served the contractor with its complaint, alleging,
among other things, breach of contract, fraud and defamation, and seeks damages
in excess of $1,000,000. The contractor has counterclaimed damages of
approximately $483,000, and has filed a mechanic's lien with respect to such
claim. The case is currently in the discovery phase. The Company does not
believe that there will be a material adverse outcome in this dispute. The
Company is not involved in any other material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------

None.

Part II

Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------

Quarter Ended High Low
- -------------------------- -------------------- --------------------

June 30, 1996 $7.25 $5.00
September 30, 1996 $5.00 $3.375
December 31, 1996 $3.375 $2.25
March 31, 1997 $2.625 $1.375
June 30, 1997 $3.00 $1.00

No dividends have ever been declared or paid on the Company's Common Stock, and
the Company does not anticipate declaring or paying dividends in the foreseeable
future.

As of September 19, 1997, the Company had approximately 114 holders of record of
Common Stock.

-15-
<PAGE>

Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ---------------------------------------------------------------------

Overview
- --------

Although the Company has not yet achieved profitability, the Company has taken a
number of recent steps in an effort to preserve cash, reduce its costs and
increase revenues. In late fiscal 1997 and early fiscal 1998, the Company
obtained a new management team that includes senior executives with significant
experience in the engineering, construction and marketing fields. As discussed
elsewhere, the Company's long-term debt has been reduced through the redemption,
at a discount, of the IDA Bonds, reducing interest expense and cash required for
principal repayments significantly and, with respect to the Key Bank loans,
renegotiated debt to defer payments until maturity which defers the required
cash outlays. Raw material costs will be reduced through the use of third party
tollers and the application of lower cost alternative substrates. Investments in
product development have been curtailed and investments in sales and marketing
will be increased. Manufacturing and operating overheads have also been reduced
through payroll reductions and savings associated with non-productive equipment
and processes that have been shut-down, such as the Company's melter. The
Company has begun to sell limited amounts of the decorative particles produced
by its APT subsidiary and hopes to increase revenue from this product line. The
Company will also strive to increase sales of other abrasives and aggregates as
new marketing efforts are implemented. Although management believes these

-16-
<PAGE>

steps will allow the Company to continue as a going concern for at least 12
months, there can be no assurance that the foregoing steps will result in the
Company ever achieving profitability.

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

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

-17-
<PAGE>

inventories related to discontinued processes and the fact that under the
prevailing operating conditions in both periods a significant portion of the
cost of production was fixed in nature. Some savings were realized as a result
of lower freight costs, resulting from a change in product pricing policy
whereby customers now pay freight on most shipments.

A charge against operations of approximately $5,712,000 was recorded in the
fourth quarter of fiscal 1997 to write down fixed assets to their estimated fair
market value for processes which have been shut down and no longer appear to be
viable for the forseeable future. Most of these processes relate to the
manufacture of ALUMAGLASS. There had been no comparable expense in fiscal 1996.

The Company incurred process development costs of approximately $996,000 for
fiscal 1996. There were no similar charges in fiscal 1997.

-18-
<PAGE>

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

-19-
<PAGE>

Company issued warrants to purchase 100,000 shares of Common Stock to the Aries
Funds at an exercise price equal to $1 5/16 per share.

-20-
<PAGE>

Cash .............................................................. $ 325,092 $ 1,868,672(1) $ 2,193,764
Other current assets .............................................. 855,810 (32,522) 823,288
------------ ------------ ------------
Total current assets ......................................... 1,180,902 1,836,150 3,017,052
Property, plant and equipment (net) ............................... 6,939,782 -- 6,939,782
Noncurrent assets ................................................. 446,929 (330,361) 116,568
Restricted assets ................................................. 869,311 (419,964) 449,347
------------ ------------ ------------
$ 9,436,924 $ 1,085,825 $ 10,522,749
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Capital lease obligations, less current portion 39,414 -- 39,414
Long-term debt, less current portion .............................. 10,784,343 (8,000,000) 2,784,343

<FN>
- ----------
(1) Reflects gross proceeds of $4,145,000 on the sale of Preferred Stock, less
commissions and estimated expenses totaling $656,328 and $1,620,000 paid to
retire the IDA Bonds.

-21-
<PAGE>

The Company has no material commitments for capital expenditures.

Pending Accounting Pronouncements
- ---------------------------------

SFAS No. 128 "Earning Per Share," SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosure about segments of an Enterprise and Related
Information" are not effective for

-22-
<PAGE>

the Company until December 31, 1997, June 30, 1999 and June 30, 1999,
respectively. Management believes these standards will not have a material
impact on the Company.

Item 7. Financial Statements
- -----------------------------

See Financial Statements annexed.

Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
- ----------------------------------------------------------

None.

Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ---------------------------------------------------------------------

-23-
<PAGE>

Funds. Retired since 1992, Mr. Costle served as Dean of Vermont Law School from
1987 to 1992 and is a former Administrator of the U.S. Environmental Protection
Agency.

Stephen D. Fish, 51, was appointed to the Company's Board of Directors in
October 1997. Mr. Fish has been President of Fish Enterprises, a privately held
real estate development and management company, from 1970 through present. Mr.
Fish also serves on the Advisory Board of Fleet Bank of Connecticut.

-24-
<PAGE>

Jack D. Hays, Jr., joined the Company in July 1997 as Executive Vice
President-Operations and Marketing and Secretary. Prior to joining the Company,
Mr. Hays was vice president of IBMS, Inc., a market chemical process consulting
company from, September 1993 through June 1997. Mr. Hays was also a National
Account Executive at Brown & Root, Inc., an engineering, construction and
environmental consulting firm, from July 1993 through June 1996. Prior to his
employment at Brown & Root, Inc., Mr. Hays served as a consultant to Brown &
Root, Inc. from March 1993 to June 1993. Mr. Hays was Executive Vice President
at Ford, Baron & Davis, Incorporated, an engineering and construction consulting
firm from February 1992 through March 1993. Prior to joining Ford, Bacon &
Davis, Incorporated, Mr. Hays was with PPG Industries, Inc., where he had over
30 years of experience in various operating and management positions. Mr. Hays
received a B.S. and M.S. in Chemical Engineering from Louisiana State University
and a M.B.A. from the University of Pittsburgh.

Section 16(a) Beneficial Ownership Reporting Compliance
- --------------------------------------------------------

Section 16(a) of the Exchange Act requires the Company's officers and directors
and persons who are beneficial owners of ten percent or more of the Company's
Common Stock to file reports of ownership and changes in ownership of the
Company's securities with the Securities and Exchange Commission. Such officers,
directors and beneficial owners are required by applicable regulations to
provide to the Company copies of all forms they file under Section 16(a).

Based solely upon a review of the copies of forms furnished to the Company, and
written representations from certain reporting persons, the Company believes
that during the fiscal year

-25-
<PAGE>

ended June 30, 1997, all filing requirements applicable to its officers,
directors and ten percent beneficial owners were complied with except that
Donald R. Kendall, Jr., a former director of the Company, filed a Form 5 on
August 25, 1997 which was required to be filed on August 14, 1997.

Item 10. Executive Compensation
- -------------------------------

The following table sets forth a summary of the compensation earned by Eckardt
C. Beck, the Company's Chairman who served as Acting Chief Executive Officer
from June 1997 to August 1997, Harvey Goldman, the Company's former
Vice-Chairman, President and Chief Executive Officer, and Perry A. Pappas, the
Company's former Vice President and General Counsel (collectively, the "Named
Executive Officers") for services rendered in all capacities to the Company
during the Company's fiscal years ended June 30, 1995, 1996 and 1997. No other
executive officer of the Company received salary and bonus compensation in
excess of $100,000 during the fiscal year ended June 30, 1997 (sometimes
referred to herein as "Fiscal Year 1997"). William L. Amt, the Company's current
President and Chief Executive Officer and Jack D. Hays, Jr., the Company's
current Executive Vice President - Operations and Marketing and Secretary are
not included below because their employment began after Fiscal Year 1997.

<TABLE>
Summary Compensation Table
<CAPTION>

Annual
Compensation Long-Term Compensation
------------ ----------------------

Perry A. Pappas .............................................. 1997 $119,790 $ 32,500(7) 15,000(8)
Former Vice President, General Counsel and Secretary 1996 $104,167 21,923
1995

- -----------
<FN>

(2) Granted in July and October 1996 pursuant to the Company's Non-Employee
Director Stock Option Plan. All options vest one year from grant date.

-26-
<PAGE>

(5) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have terminated.

(6) Non-qualified stock options granted in April 1996. The options have
terminated.

(8) Incentive Stock Options granted in October 1996 pursuant to the Company's
Employee Stock Option Plan. The options have an exercise price of $4.40 per
share and are fully vested.
</FN>
</TABLE>

Option Grants in Fiscal Year 1997
- ---------------------------------

The following table sets forth the number of individual stock option grants made
to each Named Executive Officer during Fiscal Year 1997.

Eckardt C. Beck.......... 121(2) * $4.40 7/1/06
10,000(3) 5.1% $5.00 10/15/06
Harvey Goldman........... 40,000(4) 20.5% $4.40
Perry A. Pappas.......... 15,000(5) 7.7% $4.40 7/23/03

- -----------
<FN>

* Less than one percent.

(1) The Company granted options to purchase an aggregate of 155,347 shares of
Common Stock during Fiscal Year 1997.

(2) Granted on July 1, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on July 1, 1997.

-27-
<PAGE>

(3) Granted on October 15, 1996 pursuant to the Company's Stock Option Plan for
Non-Employee Directors. These options vested on October 15, 1997.

(4) Non-qualified Options granted outside of the Company's Employee Stock
Option Plan. Mr. Goldman's options have terminated.

(5) Incentive Stock Options granted pursuant to the Company's Employee Stock
Option Plan. All options were vested in July 1997.
</FN>
</TABLE>

Aggregated Options/SAR Exercises in Last Fiscal Year and Year End Option Values
- -------------------------------------------------------------------------------

The following table sets forth the aggregate value of unexercised options to
acquire shares of the Company's Common Stock by the Named Executive Officers
exercised during Fiscal Year 1997. None of the Named Executive Officers
exercised options during Fiscal Year 1997.

<TABLE>
<CAPTION>
Number of
Unexercised Value of Unexercised In-the
Options at FY- Money Options at FY-
End(#) End($)(1)
------------------- ----------------------------

Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ----------------------------------------- ------------------- ----------------------------
<S> <C> <C>

Eckardt C. Beck.......................... 1,338/10,000 $0/$0
Harvey Goldman........................... 0/0 $0/$0
Perry A. Pappas.......................... 7,308/29,615 $0/$0

<FN>

Compensation of Directors
- -------------------------

-28-
<PAGE>

Employment Contracts and Employment Termination Arrangements
- ------------------------------------------------------------

William L. Amt is employed with the Company under a one-year employment
agreement, which provides for automatic one-year renewal options unless contrary
written notice is given by either party. Under the terms of the employment
agreement, which includes confidentiality and non-competition provisions, Mr.
Amt receives an annual salary of $160,000, subject to increase at the discretion
of the Board. Mr. Amt will not receive an annual bonus or an incentive bonus,
except as may be provided by the Board. Both the Company and Mr. Amt may
terminate the employment agreement at any time by providing written notice to
the other party. If the termination is initiated by the Company without cause,
Mr. Amt is entitled to receive severance in the amount of one years' salary. Mr.
Amt has also been granted incentive stock options to purchase 300,000 shares of
Common Stock at an exercise price of $1.375 per share. Twenty percent (20%) of
such options were vested immediately and twenty percent (20%) of such options
will vest on the first, second, third and fourth anniversary of the date of
issuance.

-29-
<PAGE>

options to purchase 75,000 shares of Common Stock at an exercise price of $1 5/8
per share. Twenty percent (20%) of such options were vested upon issuance and
twenty percent (20%) of such options vest on the first, second, third and fourth
anniversary of the date of issuance.

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for any claims under such prior agreement. Mr. Goldman
is entitled to receive a monthly consulting fee of $10,000 pursuant to the
Consulting Agreement through June 1998. In the event that the Company fails to
pay the consideration due under the Consulting Agreement, Mr. Goldman retains
all rights that he had under his prior agreement with respect to termination.

Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------

The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock and Series A Convertible Preferred Stock
(the "Convertible Preferred Stock") as of September 30, 1997 by (i) each person
known by the Company to own beneficially more than 5% of the outstanding Common
Stock or Convertible Preferred Stock of the Company, (ii) each of the Company's
directors, (iii) each of the Company's Named Executive Officers (defined
herein), and (iv) all directors and executive officers of the Company as a
group. Holders of the Convertible Preferred Stock are entitled to the number of
votes equal to the number of shares of Common Stock into which such shares of
Convertible Preferred Stock are convertible, and are entitled to vote together
with the holders of the Common Stock. Accordingly, the information in the table
below reflects ownership by the above individuals of each of the Company's
Common Stock assuming the conversion of all outstanding shares of the
Convertible Preferred Stock and the Convertible Preferred Stock separately. At
September 30, 1997 each share of Convertible Preferred Stock was convertible
into eight shares of Common Stock.

-30-
<PAGE>

Technology Funding Venture Partners
V, An Aggressive Growth Fund, L.P. (13) 746,421 8.2 7.6

All officers and directors as a

group (10 persons) (14)........... 1,243,720 13.4 14.8
Harvey Goldman (15)................. 185,964 2.1 --
c/o Vestcom International, Inc.
1100 Valley Brook Avenue
Lyndhurst, New Jersey 07071

Perry A. Pappas (16)................ 66,923 * --

c/o Buchanan Ingersoll
500 College Road East
Princeton, New Jersey 08540
The Aries Fund, 680,279 7.6 15.9
a Cayman Islands Trust (17)......
787 7th Avenue
48th Floor
New York, New York 10019
Aries Domestic Fund, L.P. (18)..... 446,034 4.9 8.2
787 7th Avenue
48th Floor
New York, New York 10019
Porter Partners, L.P. (19).......... 320,000 3.6 9.7
100 Shoreline, Suite 211B
Mill Valley, CA 94941
P.A.W. Offshore Fund, Ltd. (20)..... 400,000 4.5 12.1
90 Mees Pierson
904 East Bay Street
P.O. Box 55-6233
Nassau, Bahamas
J.F. Shea Co., Inc. (21)........... 240,000 2.7 7.2
655 Brea Canyon Road
Walnut, California 91789
Pequot Scot Fund, LP (22)........... 180,000 2.0 5.4
354 Pequot Avenue
Southport, CT 06490

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

* Less than one percent.

-31-
<PAGE>

(4) Applicable percentage of ownership is based on 3,316,000 shares of Common
Stock issuable upon conversion of the 414,500 shares of Convertible
Preferred Stock outstanding as of September 30, 1997.

(6) Includes currently exercisable options to purchase 60,000 shares of Common
Stock. Excludes options to purchase 240,000 shares of Common Stock which
are not exercisable within 60 days.

(7) Includes securities beneficially owned by Technology Funding Partners III,
L.P. ("TFP III") and Technology Funding Partners V, An Aggressive Growth
Fund, L.P. ("TFVP V") (as detailed in footnote 13 to this table). Mr.
Gardner is an Investment Officer at Technology Funding, Inc. ("TFI") and
the Managing General Partner of TFP III and TFVP V. Mr. Gardner disclaims
beneficial ownership of all securities of the Company owned by TFP III and
TFVP V. Includes currently exercisable options to purchase 11,338 shares of
Common Stock and options to purchase 4,000 shares of Common Stock which are
exercisable within 60 days. Excludes options to purchase 16,000 shares of
Common Stock which are not exercisable within 60 days. The address of such
stockholder is c/o Technology Funding Inc., 2000 Alameda de las Pulgas, San
Mateo, California 94403.

-32-
<PAGE>

(8) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.

(10) Includes currently exercisable options to purchase 121 shares of Common
Stock. Also includes options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.

(11) Includes currently exercisable options to purchase 20,000 shares of Common
Stock. Excludes options to purchase 80,000 shares of Common Stock which are
not exercisable within 60 days.

(12) Includes currently exercisable options to purchase 15,000 shares of Common
Stock. Excludes options to purchase 60,000 shares of Common Stock which are
not exercisable within 60 days.

(13) Includes (A) securities held by TFVP V consisting of (i) 207,547 shares of
Common Stock, (ii) 7,875 shares of Convertible Preferred Stock, (iii)
warrants, exercisable within 60 days, to purchase 83,771 shares of Common
Stock, and (B) securities held by TFP III consisting of (i) 69,180 shares
of Common Stock , (ii) 23,625 shares of Convertible Preferred Stock and
(iii) warrants, exercisable within 60 days, to purchase 118,585 shares of
Common Stock . Includes currently exercisable options issued to Peter
Gardner to purchase 11,338 shares of Common Stock and options to purchase
4,000 shares of Common Stock which are exercisable within 60 days. Excludes
(i) options issued to Peter Gardner to purchase 16,000 shares of Common
Stock , (ii) warrants to purchase 2,104 shares of Common Stock held by TFVP
V and (iii) 680 shares of Common Stock held by TFP III, which, in each
case, are not exercisable within 60 days.

(14) Calculation does not include securities held by Mr. Goldman or Mr. Pappas
who are no longer directors or officers of the Company.

(16) Includes currently exercisable options to purchase 56,923 shares of Common
Stock. Mr. Pappas is no longer an officer of the Company.

-33-
<PAGE>

-34-
<PAGE>

and/or dispose of the Company's securities held by Pequot Scot Fund, LP.
Mr. Peretz disclaims beneficial ownership of all securities of the Company
held by Pequot Scot Fund, LP.

Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------

Employment Agreements

Consulting Agreements
- ---------------------

In May 1995, the Company entered into a consulting agreement with TFP III and
TFP V (the "TFI Consulting Agreement"). Pursuant to the TFI Consulting
Agreement, the consultants agreed to, among other things, introduce the Company
to strategic partners and potential customers, provide strategic marketing
advice, identify complementary technologies with strategic synergies, and
identify and assist in procuring appropriate media channels for the Company's
products. As compensation for their services, the consultants received warrants
which were amended in May 1996 to become warrants to purchase 69,177 shares of
the Company's common stock, at an exercise price of $5.28 per share. Peter H.
Gardner, a director of the Company, is an Investment Officer at TFI, the
Managing General Partner of TFP III and TFVP V, and serves as TFI's designee on
the Board.

-35-
<PAGE>

Common Stock share purchase price, at an exercise price equal to 110% of such
purchase price). The term of the TFI Assistance Agreement is one year, subject
to renewal, cancelable by either party upon 30 days' prior written notice.

In June 1997, the Company entered into a Consulting Agreement with Harvey
Goldman, former Vice-Chairman, President and Chief Executive Officer of the
Company, which terminates his prior employment agreement with the Company and
contains mutual releases for claims under such prior agreement. Pursuant to the
Consulting Agreement, Mr. Goldman has agreed to, among other things, assist the
Company in project development, strategic planning and such other activities as
shall be reasonably requested by the Board of Directors and within Mr. Goldman's
areas of expertise. Mr. Goldman is entitled to receive a monthly consulting fee
of $10,000 per month for nine months terminating with the final payment due in
June 1998.

Series A Convertible Preferred Stock
- ------------------------------------

On September 5, 1997, the Company closed on the second tranch of a private
placement of the Company's Convertible Preferred Stock (the "Convertible
Preferred Stock Private Placement"). Paramount Capital, Inc. acted as placement
agent (the "Placement Agent" or "Paramount") for the Convertible Preferred Stock
Private Placement and has received an aggregate placement fee to date of
$373,050, which represents 9% of the aggregate gross proceeds, and an expense
allowance of $165,800 which represents 4% of the aggregate gross proceeds. In
addition, upon the closing of the Convertible Preferred Stock Private Placement,
the Company will grant to the Placement Agent, and/or its designees, warrants to
purchase Convertible Preferred Stock equal to 10% of the total number of shares
of Convertible Preferred Stock sold in the Convertible Preferred Stock Private
Placement at an exercise price equal to 110% of the offering price of the
Convertible Preferred Stock. The warrant(s) to be issued upon the closing of the
Convertible Preferred Stock Private Placement are exercisable for ten years
commencing six months from the final closing of the Convertible Preferred Stock
Private Placement. The warrants contain certain antidilution and registration
rights provisions. Scott A. Katzmann, a director of the Company, is a Managing
Director of the Placement Agent.

-36-
<PAGE>

Prior Preferred Stock Placement
- -------------------------------

Between August 1994 and May 1995, Paramount acted as placement agent in
connection with the private placement of a prior series of Preferred Stock (the
"Old Preferred Shares"). The Placement Agent received $632,250 in commissions
and a non-accountable expense allowance of $281,000 in consideration of its
services as placement agent. In addition, designees of the Placement Agent
received, as additional compensation, warrants to purchase an aggregate of
281,000 Old Preferred Shares, at an exercise price of $2.75 per share,
exercisable for a period of 10 years following the closing of the offering. Such
warrants were amended and restated in May 1996 to be warrants to purchase 97,185
shares of Common Stock at an exercise price of $4.84 per share. In connection
with this private placement, until November 1997, the Placement Agent will be
entitled to receive a placement fee of 9%, plus a 4% expense allowance, on any
investments received by the Company from investors or corporate partners
(excluding project finance investors) that were introduced to the Company by
Paramount.

Lindsay A. Rosenwald, M.D., is the President, Chairman and sole stockholder, and
Peter Kash is a Managing Director, of Paramount. In connection with the private
placement of Old Series A Shares, Dr. Rosenwald and Mr. Kash received warrants
to purchase Old Series A Shares, which currently represent warrants to purchase
34,353 and 4,788 shares of Common Stock, respectively.

Bridge Loans
- ------------

In connection with a bridge financing in 1994 (the "1994 Financing"), designees
of Paramount received warrants to purchase an aggregate of 7,307 shares of
Common Stock with an initial per share exercise price equal to $13.55. Such
warrants were amended and restated in May 1996 to become exercisable for 20,750
shares of Common Stock at an exercise price of $4.77 per share. Such warrants
include warrants to purchase 10,374 shares of Common Stock issued to Dr.
Rosenwald and warrants to purchase 4,671 shares of Common Stock issued to Mr.
Kash.

In September, October and November 1995, the Company borrowed an aggregate of
$650,000 from stockholders of the Company or their affiliates for working
capital. Of such amount, an aggregate of $250,000 was provided by TFP III and
TFVP V, and an aggregate of $200,000 was provided by Aries Domestic Fund, L.P.
and the Aries Trust (collectively, the "Aries Funds"), two funds for which
Paramount Capital Asset Management, Inc. is the general partner and investment
manager, respectively. Dr. Rosenwald is the President and sole stockholder of
Paramount Capital Asset Management, Inc. The principal amount of such loans was
exchanged in December 1995 for $650,000 principal amount of new notes and
warrants to purchase 325,000 shares of Common Stock (which warrants were
exchanged automatically on the closing of the Company's initial public offering
("IPO") for Redeemable Class A Warrants to purchase 325,000 shares of Common
Stock). The notes received by such stockholders were repaid at the closing of
the IPO.

In March 1996, the Company borrowed an aggregate of $200,000 pursuant to
promissory notes bearing interest at the rate of 10% per annum. Of such amount,
Dr. Rosenwald provided

-37-
<PAGE>

$150,000, Scott A. Katzmann and Peter Kash each provided $18,750 and Harvey
Goldman provided $12,500. Such notes were repaid at the closing of the IPO.

In May 1996, the Company borrowed $200,000 from Dr. Rosenwald pursuant to
promissory notes bearing interest at the rate of 10% per annum, which were
repaid at the closing of the IPO.

In July and August 1997, the Company borrowed an aggregate of $500,000 from the
Aries Funds pursuant to a line of credit agreement (the "1997 Bridge Loan"). The
1997 Bridge Loan bears interest at the rate of 12% per annum and was repaid in
August 1997. In connection with the 1997 Bridge Loan, the Company issued to the
Aries Funds warrants to purchase an aggregate of 100,000 shares of Common Stock
at a per share exercise price equal to $1 5/16. Such warrants expire July 21,
2002 and contain certain antidilution and registration rights provisions. In
August 1997 the Aries Funds purchased 100,000 shares of Convertible Preferred
Stock for $1,000,000 in the Convertible Preferred Stock Private Placement.

Issuances of Securities to Executive Officers and Directors
- -----------------------------------------------------------

From the period from inception to December 1995, the Company granted options to
purchase an aggregate of 48,891 shares of Common Stock to executive officers and
directors of the Company with exercise prices ranging from $13.55 to $20.53 per
share. Such options were repriced in May 1996 to $4.40 per share.

In April 1996, the Company issued non-qualified stock options outside of the
Employee Stock Option Plan, all of which are Escrow Options (defined herein), to
Mr. Goldman, to purchase 50,000 shares of Common Stock. Such options have an
exercise price of $4.40 per share and vest ratably over three years on an annual
basis. Mr. Goldman was also granted options to purchase 40,000 shares of Common
Stock in October 1996 at an exercise price of $4.40. All of Mr. Goldman's
options have terminated.

On October 15, 1996, the Board of Directors granted options to its non-employee
directors pursuant to the Stock Option Plan for Non-Employee Directors to
purchase an aggregate of 50,000 shares of Common Stock. Such options have an
exercise price of $3.125 per share and are fully vested.

-38-
<PAGE>

vested upon issuance and twenty percent (20%) vest on the first, second, third
and fourth anniversary of the date of issuance.

On August 29, 1997, Mr. Fish purchased 20,000 shares of Convertible Preferred
Stock for $200,000, and on September 5, 1997, Mr. Beck purchased 10,000 shares
of Convertible Preferred Stock for $100,000 in the Convertible Preferred Stock
Private Placement.

Board Designee and Other TFI Covenants
- --------------------------------------

Escrow Securities
- -----------------

-39-
<PAGE>

transferable. The holders thereof have the power to vote the Escrow Shares while
such shares are held in escrow. Holders of any options in escrow may exercise
their options prior to their release from escrow; however, the shares issuable
upon any such exercise will continue to be held in escrow as Escrow Shares. The
Escrow Securities will be released from escrow, on a pro rata basis, if, and
only if, one or more of the following conditions is/are met: (a) the Company's
net income before provision for income taxes and exclusive of any extraordinary
earnings or charges which would result from the release of the Escrow Securities
(all as audited by the Company's independent public accountants) (the "Minimum
Pretax Income") amounts to at least $4.7 million for the fiscal year ending June
30, 1998; (b) the Minimum Pretax Income amounts to at least $7.0 million for the
fiscal year ending June 30, 1999; (c) the Minimum Pretax Income amounts to at
least $9.3 million for the fiscal year ending June 30, 2000; (d) the Closing
Price (as defined) of the Company Common Stock averages in excess of $11.25 per
share for 60 consecutive business days during the 18-month period commencing on
May 16, 1996; (e) the Closing Price of the Company Common Stock averages in
excess of $15.00 per share for 60 consecutive business days during the 18-month
period commencing 18 months from May 16, 1996; or (f) during the periods
specified in (d) or (e) above, the Company is acquired by or merged into another
entity in a transaction in which the value of the per share consideration
received by the stockholders of the Company on the date of such transaction or
at any time during the applicable period set forth in (d) or (e), respectively,
equals or exceeds the applicable levels set forth in (d) or (e), respectively.

Any money, securities, rights or property distributed in respect of the Escrow
Securities, including any property distributed as dividends or pursuant to any
stock split, merger, recapitalization, dissolution or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Securities. If none of the applicable Minimum Pretax Income or Closing Price
levels set forth above have been met by October 15, 2000, the Escrow Securities,
as well as any dividends or other distributions made with respect thereto, will
be canceled and contributed to the capital of the Company. The Company expects
that the release of any Escrow Securities to officers, directors, employees and
consultants of the Company will be deemed compensatory and, accordingly, will
result in a charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could increase the loss
or reduce or eliminate the Company's net income for financial reporting purposes
for the period(s) during which such shares are, or become probable of being,
released from escrow. Although the amount of compensation expense recognized by
the Company will not affect the Company's total

-40-
<PAGE>

stockholders' equity, it may have a negative effect on the market price of the
Company's securities.

All future transactions with beneficial owners of the Company's securities and
the Company's directors or executive officers will be on terms no less favorable
than those available from unaffiliated parties.

Item 13. Exhibits and Reports on Form 8-K
- -----------------------------------------

(a) 1. Financial Statements and Schedules

See Financial Statements annexed.

2. Exhibits

See Exhibits annexed.

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K on April 2, 1997 relating to its
private placement of preferred stock.

-41-
<PAGE>

SIGNATURES

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: December 18, 1997 /s/ William L. Amt
-------------------------------------------

William L. Amt
President and Chief Executive Officer

Dated: December 18, 1997 /s/ John G. Murchie
-------------------------------------------
John G. Murchie
Controller and Principal Financial Officer

-42-
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors.......... ....................................F-2

Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of June 30,
1997 and June 30, 1996....................................................F-3

Consolidated Statements of Operations of Conversion
Technologies International, Inc. and Subsidiaries for
the years ended June 30, 1997 and June 30, 1996...........................F-4

Consolidated Statements of Stockholders' Equity of
Conversion Technologies International, Inc. and Subsidiaries
for the years ended June 30, 1997 and June 30, 1996.......................F-5

Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the years ended
June 30, 1997 and June 30, 1996...........................................F-6

Notes to Consolidated Financial Statements...................................F-8

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Conversion Technologies International, Inc.

Metro Park, New Jersey ERNST & YOUNG LLP
September 18, 1997

F-2
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Balance Sheets

June 30,
------------------------------
1997 1996
------------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Capital lease obligations, less current portion ..................... 39,414 74,693
Long-term debt, less current portion ................................ 10,784,343 11,281,715

See accompanying notes.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

Year ended June 30,
------------------------------
1997 1996
------------ ------------

<S> <C> <C>
Revenue ........................... $ 1,429,008 $ 2,679,987

Cost of goods sold ................ 3,952,374 3,093,560
------------ ------------

Gross loss on sales ............... (2,523,366) (413,573)

Interest expense .................. (1,277,310) (1,076,077)
Interest income ................... 226,505 114,326
Other income ...................... 349,295 81,811
------------ ------------

Loss before extraordinary item .... (12,855,169) (4,110,951)

Extraordinary item ................ -- 442,000
------------ ------------

Net loss .......................... $(12,855,169) $ (4,552,951)
============ ============

Net loss per common share
before extraordinary item .... $ (2.69) $ (2.64)
============ ============

Net loss per common share ......... $ (2.69) $ (2.92)
============ ============
</TABLE>

See accompanying notes.

F-4
<PAGE>
<TABLE>
<CAPTION>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Stockholders' Equity

Years ended June 30, 1997 and June 30, 1996

Total
Unearned Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficiency)
------------ ----------- ------------

<S> <C> <C> <C>
Balance at July 1, 1995 ........ $ -- $(12,626,117) $ (2,200,951)
Issuance of Class A
common stock ............ 13,527,041
Converted to Common Stock . --
Surrendered and canceled .. (99,000)
Repurchased and canceled .. (12,890)
Debt discount on Bridge ... 66,750
Net Loss .................. (4,552,951) (4,552,951)
--------- ------------ ------------

See accompanying notes.
</TABLE>

F-5
<PAGE>
<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

Year ended June 30,
-------------------------------
1997 1996
------------- -------------

<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Year ended June 30,
----------------------------
1997 1996
------------ ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Interest paid, net of amount capitalized ............. $ 1,320,882 $ 1,009,746
=========== ===========

SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Surrender and cancellation of common stock ........... -- (99,000)
Issuance of warrants in connection with bridge notes.. -- 66,750

See accompanying notes.
</TABLE>

F-7
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

1. ORGANIZATION

Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufacturers and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products. The Company's revenue streams
are a combination of waste conversion fees and manufactured product sales.

F-8
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

1. ORGANIZATION (CONTINUED)

to the Company. This amount is included in Selling, General and Administrative
expenses in the Consolidated Statement of Operations.

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. In view of the foregoing,
there is substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the amounts

F-9
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.

Revenue Recognition

Reserve for Disposal

Inventories

Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.

F-10
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories consisted of the following:

June 30,
------------------------
1997 1996
---- ----

Raw materials ....... $ 61,949 $ 79,237
Work-in-process...... 111,961 135,536
Finished goods....... 347,150 122,963
-------- --------
$521,060 $337,736
======== ========

Property, Plant and Equipment

Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.

Marketable Securities

The Company considers all marketable securities to be available for sale. These
securities were carried at cost which approximated fair value at June 30, 1996.

F-11
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Deferred Financing Costs

Deferred costs include costs related to obtaining debt financing, and are being
amortized under the interest method of accounting. (See Note 9).

Income Taxes

Process Development Costs

Investment Tax Credit

Extraordinary Item

Net Loss Per Common Share

The net loss per common share is based on the net loss for the year, divided by
the weighted average number of common shares outstanding during the year
(excluding the common shares that

F-12
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Employee Stock Option Plan

Pending Accounting Pronouncements

F-13
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

<TABLE>
<CAPTION>
3. DEBT

Long-term debt consists of the following obligations as of June 30, 1997 and 1996:

June 30,
------------------------
1997 1996
----------- ----------

F-14
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

3. DEBT (CONTINUED)

June 30,
------------------------
1997 1996
----------- ----------

F-15
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

3. DEBT (CONTINUED)

June 30,
------------------------
1997 1996
----------- ----------

Less current maturities 530,258 437,285
----------- -----------
$10,784,343 $11,281,715
=========== ===========
</TABLE>

Maturities on long-term debt for the next five years are as follows (see Note
9):

June 30,
1998 $ 530,258
1999 1,044,448
2000 1,107,982
2001 990,836
2002 865,939
Thereafter 6,775,138
------------
$ 11,314,601
============

F-16
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

3. DEBT (CONTINUED)

The carrying amounts and fair values of long-term borrowings consisted of the
following at June 30, 1997:

Carrying Amount Fair Value
--------------- ----------

4. NOTES PAYABLE

F-17
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

4. NOTES PAYABLE (CONTINUED)

5. RESTRICTED ASSETS

6. COMMITMENTS AND CONTINGENCIES

F-18
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company does not believe that there will be a material adverse outcome in
the foregoing dispute.

June 30,
------------------------
1997 1996
---- ----

Machinery and equipment ............ $353,686 $354,352
Less accumulated amortization....... 289,382 217,375
-------- --------
$ 64,304 $136,977
======== ========

Lease amortization of $72,637 and $101,531 for the years ended June 30, 1997 and
1996, respectively, is included in cost of goods sold.

Future minimum lease payments together with the present value of the net minimum
lease payments for capitalized leases as of June 30, 1997 is as follows:

Total rent expense of the Company for the periods ended June 30, 1997 and 1996
was $73,674 and $99,530, respectively.

F-19
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK

F-20
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

The Company has issued the following common stock purchase warrants, all of
which expire between the fifth and seventh anniversary of the date of grant:

<TABLE>
<CAPTION>
Number of Exercise
Shares Price
--------- --------

<S> <C> <C>
Outstanding at July 1, 1995 ........................... 316,771 4.77-5.28
Granted July 21, 1995 through December 15, 1995 .... 1,114,933 4.00-4.40
Canceled ........................................... (1,112,500) 4.00
----------
Outstanding at June 30, 1996 .......................... 319,204 4.40-5.28
Granted July 1, 1996 through June 30, 1997 ......... -- --
Canceled July 1, 1996 through June 30, 1997 ........ -- --
----------
Outstanding at June 30, 1997 .......................... 319,204 4.40-5.28
==========
</TABLE>

In conjunction with its initial public offering, the Company has issued the
following Class A and Class B warrants, all of which expire on the fifth
anniversary of the date issued:

<TABLE>
<CAPTION>
Class A Class B
---------------------- ----------------------
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- --------

<S> <C> <C> <C> <C>
Outstanding at July 1, 1995 ............ -- -- -- --
Issued May 16, 1996 and June 7, 1996.. 4,639,550 $ 5.85 3,527,050 $ 7.80
--------- ---------
Outstanding at June 30, 1997 and 1996... 4,639,550 3,527,050
========= =========
</TABLE>

F-21
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

The following table summarizes the activity in options under the Employee and
Non-Employee Plans, plus options granted on a non-qualified basis:

Weighted
Average
Number Exercise
of Shares Price
--------- --------

<S> <C> <C> <C> <C> <C>
$3.125 50,000 $3.13 10.00
$4.40-$5.00 177,410 4.40 6.39 75,557 $4.40
------- ------
TOTAL 227,410 $4.12 7.18 75,557 $4.40
======= ======
</TABLE>

Of the total options outstanding under the plans, 75,557 and 24,081 were
exercisable at June 30, 1997 and 1996, respectively.

F-22
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

At June 30, 1997, the Company has reserved 510,400 shares of Common Stock for
the exercise of options.

1997 1996
---- ----

Pro Forma net loss..................... $(13,127,518) $(4,576,091)
Pro Forma loss per common share........ $(2.75) $(2.93)

F-23
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

8. INCOME TAXES

There was no income tax expense/benefit for the Company for the years ended June
30, 1997 and 1996.

Following is a reconciliation of income tax expense (credit) to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1997 and 1996:

For the year ended June 30,
---------------------------
1997 1996
----------- -----------

F-24
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

8. INCOME TAXES (CONTINUED)

The significant components of the Company's deferred tax assets and liabilities
are as follows:

Valuation allowances (federal & state).. 10,190,052 5,188,771
----------- -----------
Net deferred tax assets ................ $ -- $ --
=========== ===========

The above net deferred tax assets have been reserved because it is not more
likely than not that they would be recognized.

9. SUBSEQUENT EVENTS

F-25
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

9. SUBSEQUENT EVENTS (CONTINUED)

F-26
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

9. SUBSEQUENT EVENTS (CONTINUED)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10- KSB/A3

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

For the fiscal year ended: Commission File No.:
June 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive
Orlando, Florida 32817
(Address of principal executive offices) (Zip Code)

(407) 207-5900
(Issuer's telephone number including area code)

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

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants

Yes X No
----- -----

<PAGE>

Issuer's revenues for the fiscal year ended June 30, 1997 were $1,429,008.

As of September 19, 1997, the issuer had outstanding 5,539,745 shares of Common
Stock, $.00025 par value.

Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------

Overview

-2-
<PAGE>

substrates. Investments in product development have been curtailed and
investments in sales and marketing will be increased. Manufacturing and
operating overheads have also been reduced through payroll reductions and
savings associated with non-productive equipment and processes that have been
shut-down, such as the Company's melter. The Company has begun to sell limited
amounts of the decorative particles produced by its APT subsidiary and hopes to
increase revenue from this product line. The Company will also strive to
increase sales of other abrasives and aggregates as new marketing efforts are
implemented. Although management believes these steps will allow the Company to
continue as a going concern for at least 12 months, there can be no assurance
that the foregoing steps will result in the Company ever achieving
profitability.

Results of Operations

Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996

Consolidated revenues for the year ended June 30, 1997 ("fiscal 1997") were
approximately $1,429,000, consisting primarily of CRT glass recycling fees and
related clean cullet sales and approximately $248,000 of ALUMAGLASS sales. For
fiscal 1996, the Company had consolidated revenues of approximately $2,680,000,
of which approximately $214,000 was from sales of ALUMAGLASS and the remainder
was CRT recycling fees and related clean cullet sales. This decrease in revenue
during fiscal 1997 primarily reflects reduced beginning inventory of unprocessed
CRT glass and the loss of Thomson as a CRT customer.

-3-
<PAGE>

materials inventory, plus approximately $392,000 of costs for starting up
operations at the Company's particle coating facility in St. Augustine, Florida.
Excluding the effect of the change in the Company's reserve for disposal during
fiscal 1997 and fiscal 1996, and the St. Augustine start-up costs, cost of goods
sold decreased only approximately $133,000 in fiscal 1997 versus fiscal 1996,
despite the over 40% decrease in revenues noted above. Major factors
contributing to the higher relative fiscal 1997 cost as compared to sales were
higher depreciation costs due to increased equipment purchases, an approximately
$97,000 write-off of raw material and in-process inventories related to
discontinued processes and the fact that under the prevailing operating
conditions in both periods a significant portion of the cost of production was
fixed in nature. Some savings were realized as a result of lower freight costs,
resulting from a change in product pricing policy whereby customers now pay
freight on most shipments.

A charge against operations of approximately $5,712,000 was recorded in the
fourth quarter of fiscal 1997 to write down fixed assets to their estimated fair
market value for processes which have been shut down and no longer appear to be
viable for the forseeable future. Most of these processes relate to the
manufacture of ALUMAGLASS. There had been no comparable expense in fiscal 1996.

The Company incurred process development costs of approximately $996,000 for
fiscal 1996. There were no similar charges in fiscal 1997.

-4-
<PAGE>

Liquidity and Capital Resources

-5-
<PAGE>

expenses estimated at $150,000 and general working capital purposes, including
accrued payables.

-6-
<PAGE>
September 1, 1997 for payment of interest (with the assumption that there was no
related tax on the gain), and (iii) write-off of $330,361 of deferred finance
charges related to the $8,000,000 retired IDA Bonds.

Capital lease obligations, less current portion 39,414 -- 39,414
Long-term debt, less current portion .............................. 10,784,343 (8,000,000) 2,784,343

Stockholders' equity (deficiency):
Common stock, $.00025 par value, authorized 25,00,000
shares, issued and outstanding 5,539,745 shares ........... 1,385 -- 1,385
Additional paid-in capital, common stock ..................... 24,186,932 -- 24,186,932
Preferred stock, $.001 par value, authorized 15,000,000
shares, issued and outstanding 414,500 shares ............. 415 415
Additional paid-in capital, preferred stock .................. -- 3,455,735 3,455,735
Unearned stock compensation .................................. (116,369) -- (116,369)
Accumulated deficit .......................................... (30,034,237) 5,706,342(2) (24,327,895)
------------ ------------ ------------
Total stockholders' equity (deficiency) ........................... (5,962,289) 9,162,492 3,200,203
------------ ------------ ------------
$ 9,436,924 $ 1,085,825 $ 10,522,749
============ ============ ============
<FN>
- ----------
(1) Reflects gross proceeds of $4,145,000 on the sale of Preferred Stock, less
commissions and estimated expenses totaling $656,328 and $1,620,000 paid to
retire the IDA Bonds.

The Company's capital lease payments were approximately $84,000 for the year
ended June 30, 1997 and are estimated to be approximately $41,000, $27,000 and
$23,000 for the fiscal years

-7-
<PAGE>

ending June 30, 1998, 1999 and 2000, respectively, under current commitments.
The Company's utility expenses average approximately $35,000 per month at its
current level of operations.

The Company receives waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal costs of waste material it has
received which cannot be processed through the Company's current processing
methods, net of the amount of deferred revenue recorded with respect to such
materials. The Company is continually attempting to refine existing processes to
increase yields and/or develop new processes for the waste materials on hand
which have not been able to be processed, and therefore has not disposed of any
waste materials to date. The Company records a disposal reserve with respect to
materials it cannot process because it is probable it will incur these costs on
the ultimate disposition of the waste materials. The Company estimates that the
disposal costs for material received by the Company that the Company cannot
process, if and when incurred, will exceed the fees the Company was paid to
accept such materials.

-8-
<PAGE>

The Company has no material commitments for capital expenditures.

Pending Accounting Pronouncements

-9-
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Report of Independent Auditors.......... ....................................F-2

Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of June 30,
1997 and June 30, 1996....................................................F-3

Consolidated Statements of Operations of Conversion
Technologies International, Inc. and Subsidiaries for
the years ended June 30, 1997 and June 30, 1996...........................F-4

Consolidated Statements of Stockholders' Equity of
Conversion Technologies International, Inc. and Subsidiaries
for the years ended June 30, 1997 and June 30, 1996.......................F-5

Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the years ended
June 30, 1997 and June 30, 1996...........................................F-6

Notes to Consolidated Financial Statements...................................F-8

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Conversion Technologies International, Inc.

Metro Park, New Jersey ERNST & YOUNG LLP
September 18, 1997

F-2
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Balance Sheets

June 30,
------------------------------
1997 1996
------------- ------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Capital lease obligations, less current portion ..................... 39,414 74,693
Long-term debt, less current portion ................................ 10,784,343 11,281,715

Stockholders' equity (deficiency):
Class A common stock, $.00025 par value, authorized 25,000,000 shares,
issued and outstanding 5,539,745 shares at June 30,
1997 and 5,449,745 shares at June 30, 1996 .................. 1,385 1,362
Additional paid-in capital ..................................... 24,186,932 23,905,705
Unearned Stock Compensation .................................... (116,369) --
Accumulated deficit ............................................ (30,034,237) (17,179,068)
------------ ------------
Total stockholders' equity (deficiency) ............................. (5,962,289) 6,727,999
------------ ------------
$ 9,436,924 $ 21,947,099
============ ============

See accompanying notes.
</TABLE>
F-3
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

Year ended June 30,
------------------------------
1997 1996
------------ ------------

Revenues:
Product sales $ 945,871 $ 2,075,118
Recycling fees 483,137 604,869
------------ ------------
Total revenue 1,429,008 2,679,987

Cost of goods sold 3,952,374 3,093,560
------------ ------------

Gross loss on sales (2,523,366) (413,573)

Selling, general and administrative 3,918,726 1,821,179
Process development costs -- 996,259
Write-off of fixed assets 5,711,567 --
------------ ------------
Loss from operations (12,153,659) (3,231,011)

Interest expense (1,277,310) (1,076,077)
Interest income 226,505 114,326
Other income 349,295 81,811
------------ ------------

Loss before extraordinary item (12,855,169) (4,110,951)

Extraordinary item -- 442,000
------------ ------------

Net loss $(12,855,169) $ (4,552,951)
============ ============

Net loss per common share
before extraordinary item $ (2.69) $ (2.64)
============ ============

Net loss per common share $ (2.69) $ (2.92)
============ ============
</TABLE>

See accompanying notes.

F-4
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Stockholders' Equity

Years ended June 30, 1997 and June 30, 1996

Total
Unearned Stockholders'
Stock Accumulated Equity
Compensation Deficit (Deficiency)
------------ ----------- ------------

See accompanying notes.
</TABLE>

F-5
<PAGE>

<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

Year ended June 30,
-------------------------------
1997 1996
------------- -------------

OPERATING ACTIVITIES
<S> <C> <C>
Net loss ................................................... $(12,855,169) $ (4,552,951)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation expense .................................. 1,036,416 886,863
Amortization of deferred financing and patent costs ... 54,514 54,302
Write-down of fixed assets ............................ 5,711,567 --
Write-off of inventories .............................. 96,752 --
Stock compensation expense ............................ 164,858 --
Settlement with former officer ........................ (99,000)
Debt discount on Bridge Notes ......................... 66,750
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ......... 196,989 (59,643)
Increase in inventories ............................ (280,076) (110,012)
Decrease (increase) in other current assets ........ 17,459 (72,952)
Decrease (increase) in other noncurrent assets ..... 35,204 (7,038)
Decrease in deferred revenue ....................... (65,963) (386,323)
Increase (decrease) in accounts payable, reserve
for disposal and other accrued expenses ...... 723,173 (811,824)
------------ ------------
Net cash used in operating activities ...................... (5,164,276) (5,091,828)

F-6
<PAGE>

<TABLE>
<CAPTION>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows (continued)

Year ended June 30,
----------------------------
1997 1996
------------ ------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C> <C>
Interest paid, net of amount capitalized ............. $ 1,320,882 $ 1,009,746
=========== ===========

SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTIONS
Surrender and cancellation of common stock ........... -- (99,000)
Issuance of warrants in connection with bridge notes.. -- 66,750

See accompanying notes.
</TABLE>

F-7
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

1. ORGANIZATION

Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing, recycling and processing various substrates and
advanced materials. These substrates and materials include (i) industrial
abrasives which can be used for surface cleaning and surface preparation
applications such as in cleaning steel structures, railcars, aircraft parts, and
equipment in loose grain blasting operations; (ii) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (iii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company is also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufacturers and others.
Although substantially all of the Company's revenues to date have been derived
from its CRT recycling operations, the Company intends to focus its efforts on
its substrates and advanced materials products. The Company's revenue streams
are a combination of waste conversion fees and manufactured product sales.

F-8
<PAGE>

1. Organization (continued)

to the Company. This amount is included in Selling, General and Administrative
expenses in the Consolidated Statement of Operations.

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. In view of the foregoing,
there is substantial doubt about the Company's ability to continue as a going
concern. The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.

2. Summary of Significant Accounting Policies

Basis of Presentation

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the amounts

F-9
<PAGE>

2. Summary of Significant Accounting Policies (continued)

reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.

Revenue Recognition

The Company derives most of its revenue from fees charged to accept waste
materials and from the sale of its products. With respect to revenue from fees
charged to accept waste materials, the Company initially records the fees it
receives for accepting waste materials for processing as deferred revenue. After
the materials have been processed into finished goods inventory, the deferred
revenue is recognized as fee revenue based upon the amount of finished goods
inventory produced (by tonnage) valued at the fee charged for accepting the
waste material. With respect to revenue from product sales, including products
created from processed waste materials, revenue is recognized only upon shipment
of products to customers.

Reserve for Disposal

Dunkirk began accepting waste materials (primarily CRT glass) in early 1994.
Upon accepting the waste materials, Dunkirk established a reserve for the
probable disposal costs for the unprocessed waste materials on hand in the event
the conversion processes being developed were not successful. To date, the
Company has not yet disposed of the materials which it has not been able to
process. The amount of unprocessed waste materials on hand was 7,232 tons at
June 30, 1996 and 6,732 tons at June 30, 1997. From July 1, 1995 to June 30,
1996, the Company reduced the reserve by approximately $623,000; and from July
1, 1996 to June 30, 1997 the Company further reduced the reserve by
approximately $24,000. The decrease in the reserve, which resulted from the
reduction in the quantities of unprocessed waste materials on hand, as they were
subsequently processed, have been credited against operations. The Company
intends to adjust the reserve for disposal if and when it can refine existing
processes to increase yields and/or develop new processes for the unprocessed
waste materials on hand.

F-10
<PAGE>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories consisted of the following:

June 30,
------------------------
1997 1996
---- ----

Raw materials ....... $ 61,949 $ 79,237
Work-in-process...... 111,961 135,536
Finished goods....... 347,150 122,963
-------- --------
$521,060 $337,736
======== ========

Property, Plant and Equipment

Cash Equivalents

The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.

F-11
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Marketable Securities

The Company considers all marketable securities to be available for sale. These
securities were carried at cost which approximated fair value at June 30, 1996.

Deferred Financing Costs

Deferred costs include costs related to obtaining debt financing, and are being
amortized under the interest method of accounting. (See Note 9).

Income Taxes

Process Development Costs

Investment Tax Credit

Extraordinary Item

F-12
<PAGE>

2. Summary of Significant Accounting Policies (continued)

Net Loss Per Common Share

The net loss per common share is based on the net loss for the year, divided by
the weighted average number of common shares outstanding during the year
(excluding the common shares that were deposited into escrow in connection with
the Company's initial public offering -see Note 7). Common Stock equivalents
such as stock options and warrants are not included as their effect is
anti-dilutive. However, immediately prior to the closing of the Company's
initial public offering, the Company's Series A Preferred Stock was converted
into 1,023,054 shares of common stock (see Note 7). The weighted average number
of these converted shares, at June 30, 1997 and 1996 were 1,023,054, and they
have been included in the related net loss per common share calculation.
Therefore, the weighted average number of common shares outstanding at June 30,
1997 and 1996 were 4,773,311 and 1,559,908, respectively.

Employee Stock Option Plan

Pending Accounting Pronouncements

F-13
<PAGE>

<TABLE>
<CAPTION>
3. DEBT

Long-term debt consists of the following obligations as of June 30, 1997 and 1996:

June 30,
------------------------
1997 1996
----------- ----------

F-14
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

3. DEBT (CONTINUED)

June 30,
------------------------
1997 1996
----------- ----------

F-15
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

3. DEBT (CONTINUED)

June 30,
------------------------
1997 1996
----------- ----------

Less current maturities 530,258 437,285
----------- -----------
$10,784,343 $11,281,715
=========== ===========
</TABLE>

Maturities on long-term debt for the next five years are as follows (see Note
9):

June 30,
1998 $ 530,258
1999 1,044,448
2000 1,107,982
2001 990,836
2002 865,939
Thereafter 6,775,138
------------
$ 11,314,601
============

F-16
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

3. DEBT (CONTINUED)

The carrying amounts and fair values of long-term borrowings consisted of the
following at June 30, 1997:

Carrying Amount Fair Value
--------------- ----------

4. NOTES PAYABLE

F-17
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

4. NOTES PAYABLE (CONTINUED)

5. RESTRICTED ASSETS

6. COMMITMENTS AND CONTINGENCIES

F-18
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company does not believe that there will be a material adverse outcome in
the foregoing dispute.

June 30,
------------------------
1997 1996
---- ----

Machinery and equipment ............ $353,686 $354,352
Less accumulated amortization....... 289,382 217,375
-------- --------
$ 64,304 $136,977
======== ========

Lease amortization of $72,637 and $101,531 for the years ended June 30, 1997 and
1996, respectively, is included in cost of goods sold.

Future minimum lease payments together with the present value of the net minimum
lease payments for capitalized leases as of June 30, 1997 is as follows:

Total rent expense of the Company for the periods ended June 30, 1997 and 1996
was $73,674 and $99,530, respectively.

F-19
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK

F-20
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

The Company has issued the following common stock purchase warrants, all of
which expire between the fifth and seventh anniversary of the date of grant:

<TABLE>
<CAPTION>
Number of Exercise
Shares Price
--------- --------

In conjunction with its initial public offering, the Company has issued the
following Class A and Class B warrants, all of which expire on the fifth
anniversary of the date issued:

<TABLE>
<CAPTION>
Class A Class B
---------------------- ----------------------
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- --------

F-21
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

The following table summarizes the activity in options under the Employee and
Non-Employee Plans, plus options granted on a non-qualified basis:

Weighted
Average
Number Exercise
of Shares Price
--------- --------

<S> <C> <C> <C> <C> <C>
$3.125 50,000 $3.13 10.00
$4.40-$5.00 177,410 4.40 6.39 75,557 $4.40
------- ------
TOTAL 227,410 $4.12 7.18 75,557 $4.40
======= ======
</TABLE>

Of the total options outstanding under the plans, 75,557 and 24,081 were
exercisable at June 30, 1997 and 1996, respectively.

F-22
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

At June 30, 1997, the Company has reserved 510,400 shares of Common Stock for
the exercise of options.

1997 1996
---- ----

Pro Forma net loss..................... $(13,127,518) $(4,576,091)
Pro Forma loss per common share........ $(2.75) $(2.93)

F-23
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

7. CAPITAL STOCK (CONTINUED)

8. INCOME TAXES

There was no income tax expense/benefit for the Company for the years ended June
30, 1997 and 1996.

Following is a reconciliation of income tax expense (credit) to the amount based
on the U.S. statutory rate of 34% for the years ended June 30, 1997 and 1996:

For the year ended June 30,
---------------------------
1997 1996
----------- -----------

F-24
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

8. INCOME TAXES (CONTINUED)

The significant components of the Company's deferred tax assets and liabilities
are as follows:

Valuation allowances (federal & state).. 10,190,052 5,188,771
----------- -----------
Net deferred tax assets ................ $ -- $ --
=========== ===========

The above net deferred tax assets have been reserved because it is not more
likely than not that they would be recognized.

9. SUBSEQUENT EVENTS

F-25
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

9. SUBSEQUENT EVENTS (CONTINUED)

F-26
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 1997

9. SUBSEQUENT EVENTS (CONTINUED)

F-27
<PAGE>

SIGNATURES

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: February 12, 1998 /s/ William L. Amt
-------------------------------------------
William L. Amt
President and Chief Executive Officer

Dated: February 12, 1998 /s/ John G. Murchie
-------------------------------------------
John G. Murchie
Controller and Principal Financial Officer

-10-

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10-QSB

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

For the quarterly period ended: Commission File No.:
September 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
(Address of principal executive offices)

(407) 207-5900
(Issuer's telephone number, including area code)

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

Yes X No
----- -----

Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of October 20, 1997, the
Issuer had outstanding 5,539,745 shares of Common Stock, 414,500 shares of
Series A Convertible Preferred Stock, 4,639,550 Redeemable Class A Warrants and
3,527,050 Redeemable Class B Warrants.

Transactional Small Business Disclosure Format

Yes No X
----- -----
<PAGE>

Contents

Page
No.
----

Part I - Financial Information

Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of September
30, 1997 and June 30, 1997.................................... 3

Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 4

Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 5

Notes to Consolidated Financial Statements....................... 6

Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 10

Part II - Other Information......................................... 13

2
<PAGE>

<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, June 30,
1997 1997
------------- -----------
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 637,506 $ 325,092
Accounts receivable, less allowance for
doubtful accounts of $18,000 at September
30, 1997 and June 30, 1997 212,319 146,225
Inventories 627,539 521,060
Prepaid expenses and other current assets 161,409 188,525
----------- -----------
Total current assets 1,638,773 1,180,902

Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,578,293 1,578,293
Machinery and equipment 6,798,419 6,713,599
Construction in progress 29,500 29,500
----------- -----------
8,481,212 8,396,392
Less accumulated depreciation (1,654,274) (1,456,610)
----------- -----------
6,826,938 6,939,782

Deferred finance charges, less accumulated
amortization of $79,483 and $135,786
at September 30, 1997 and June 30, 1997
respectively 106,821 443,829
Other noncurrent assets 10,191 3,100
Restricted assets
Project fund 158
Debt service reserve funds 454,924 869,153
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========

Liabilities and stockholders' equity (deficiency)

Accounts payable $ 1,377,967 $ 1,711,212
Deferred revenue 439,948 491,944
Reserve for disposal 651,550 713,100
Accrued expenses 873,350 858,447
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 35,098 35,495
Current portion of long-term debt 673,487 530,258
----------- -----------
Total current liabilities 4,286,400 4,575,456

Capital lease obligations, less current portion 33,265 39,414
Long-term debt, less current portion 2,613,539 10,784,343

Stockholders' equity (deficiency):
Series A Convertible Preferred Stock,
$.001 par value, authorized 880,000
shares, issued and outstanding 414,500
shares at September 30, 1997 415
Common Stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares at September 30, 1997 and June
30, 1997 1,385 1,385
Additional paid-in capital 27,688,234 24,186,932
Unearned stock compensation (58,185) (116,369)
Accumulated deficit (25,527,406) (30,034,237)
----------- -----------

Total stockholders' equity (deficiency) 2,104,443 (5,962,289)
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========
See Accompanying Notes
</TABLE>
3
<PAGE>

<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

(Unaudited)
<CAPTION>

For the three months ended
September 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 325,142 $ 344,273

Cost of goods sold 685,776 1,206,908
---------------- ----------------

Gross loss on sales (360,634) (862,635)

Selling, general and administrative 685,562 557,379
---------------- ----------------

Loss from operations (1,046,196) (1,420,014)

Interest expense, net 308,991 230,771
---------------- ----------------

Loss before extraordinary item (1,355,187) (1,650,785)

Extraordinary item - Gain on
debt retirement 5,862,018
---------------- ----------------

Net income (loss) $ 4,506,831 $ (1,650,785)
================ ================

Loss per common share before
extraordinary item $ (0.28) $ (0.35)
================ ================

Net income (loss) per common share $ 0.92 $ (0.35)

Net income per common share assuming full
dilution $ 0.76 $ --
================ ================

See Accompanying Notes.
</TABLE>

4
<PAGE>

<TABLE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)
<CAPTION>

For the three months
ended
September 30,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Loss before extraordinary item $(1,355,187) $(1,650,785)
Adjustments to reconcile loss to net cash
provided by
(used in) operating activities: 197,644 339,821
Depreciation expense 11,302 13,628
Amortization of deferred financing costs
Accrued interest income on marketable
securities (26,718)
Stock compensation expense 58,184
Changes is operating assets and liabilities:
Increase in accounts receivable (66,094) (39,463)
Increase in inventories (106,479) (86,945)
Decrease (increase) in other current
assets 27,116 (116,225)
Increase in other noncurrent assets (7,091) (59,723)
Increase(decrease)in deferred revenue (51,996) 10,073
Decrease in accounts payable, reserve
for disposal and other accrued expenses (379,892) (327,749)
----------- -----------
Net cash used in operating activities (1,672,473) (1,944,086)

Investing activities
Issuance of notes receivable (250,000)
Capital expenditures (84,820) (706,569)
----------- -----------
Net cash used in investing activities (84,820) (956,569)

Financing activities
Decrease in deferred finance charges 1,750
Issuance of notes payable 500,000
Issuance of long-term debt 8,282
Payment of notes payable (500,000)
Decrease in restricted assets 220,361 56,686
Principal payments on long-term debt (1,647,575) (112,751)
Principal payments under capital lease
obligations (6,546) (39,939)
Issuance of Series A Preferred Stock 3,501,717
----------- -----------
Net cash provided by (used in) financing
activities 2,069,707 (87,722)
----------- -----------

Increase (decrease) in cash and cash
equivalents 312,414 (2,988,377)
Cash and cash equivalents at beginning of
period 325,092 4,539,464
------------ -----------
Cash and cash equivalents at end of period $ 637,506 $1,551,087
============ ============

Supplemental disclosure of cash flow
information
Interest paid $ 270,323 $ 470,765
============ ============

See Accompanying Notes.
</TABLE>

5
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 1997

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods presented have been
included. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes for the fiscal year
ended June 30, 1997 included in the Company's annual report on Form 10-KSB.

2. Inventories

Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.

Inventories consisted of the following:

September 30, 1997 June 30, 1997
------------------ -------------
Raw materials $ 86,954 $ 61,949
Work-in-process 94,295 111,961
Finished goods 446,290 347,150
------- -------
$ 627,539 $ 521,060
======= =======

3. Revenue Recognition

For the three months ended September 30, 1997, 89.6% of the Company's revenue
was derived from four major customers. Revenue generated from each of these
customers amounted to $160,856, $52,266, $41,607, and $36,442 which represents
49.5%, 16.1%, 12.8%, and 11.2% of total revenue, respectively. For the three
months ended September 30, 1996, 70.4% of the Company's revenue was derived from
three major customers. Revenue generated from each of these customers amounted
to $145,343, $62,039, and $34,979 which represents 42.2%, 18.0%, and 10.2% of
total revenue, respectively.

6
<PAGE>

4. Reserve for Disposal

Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), the
wholly-owned subsidiary of the Company, began accepting waste materials
(primarily CRT glass) in early 1994. Upon accepting the waste materials, Dunkirk
established a reserve for the potential disposal costs for the waste materials
accepted, in the event that the conversion processes being developed were not
successful. From July 1, 1996 to September 30, 1996, the Company increased the
reserve by approximately $14,000. From July 1, 1997 to September 30, 1997, the
Company decreased the reserve by approximately $62,000. The increases/decreases
in the reserve, which substantially resulted from changes in the volume of
inventory, have been charged/credited against operations. The Company intends to
adjust the reserve when the conversion processes prove commercially successful.

5. Net Income (Loss) Per Common Share

The net income (loss) per common share is based on the net income (loss) for the
three-month period, divided by the weighted average number of common shares
outstanding during the period (excluding 740,559 common shares that were
deposited into escrow in connection with the Company's initial public offering,
and including 1,023,054 shares of the Company's common stock into which the
Company's Series A Preferred Stock was converted upon the closing of the initial
public offering). Common Stock equivalents such as stock options and warrants
are included when their effect is not anti-dilutive. The weighted average number
of common shares outstanding at September 30, 1997 and 1996 was 4,874,695 and
4,709,186, respectively. The weighted average number of fully diluted common
shares outstanding at September 30, 1997 was 5,961,498.

6. Commitments and Contingencies

The Company is a party to litigation commenced by the Company in the Supreme
Court of New York, County of Chautauqua, against a general contractor hired to
construct an improved abrasives finishing area, which was a part of the
Company's capital expansion program. The contractor commenced work in April
1995, but was asked to stop work in November 1995 following significant cost
overruns, problems and delays in construction and disputes with the Company over
the scope of the work to be performed by the contractor. The Company has served
the contractor with its complaint, alleging, among other things, breach of
contract, fraud and defamation, and seeks damages in excess of $1,000,000. The
contractor has served an answer with affirmative defenses and counterclaims
against the Company for breach of contract. The aggregate amount of the claims
by the contractor against the Company is $483,000 plus interest. The Company
does not believe that there will be a material adverse outcome in the foregoing
dispute.

7
<PAGE>

7. Capital Stock

In August and September 1997, the Company sold 414,500 shares of Series A
Preferred Stock (the "Preferred Stock") under a placement agency agreement for
the private placement of the Preferred Stock. The net proceeds to the Company
were $3,501,717 after deducting the placement agent commissions and expenses and
other transaction expenses. The private placement consists of a minimum of
300,000 and a maximum of 500,000 shares of stock with an option for the
placement agent to sell up to an additional 300,000 shares to cover
over-allotments, if any, with a par value of $.001 per share and a stated value
of $10 per share. Each share of Preferred Stock is initially convertible into
eight shares of common stock at a conversion price of $1.25 per share, subject
to adjustment based on the lesser of $1.25 and the prevailing average market
price of the common stock immediately preceding any subsequent closing, if any.
Commencing 12 months from the final closing of the private placement, the
holders of the Preferred Stock are entitled to receive dividends payable in
cash, or at the option of the Company, in additional shares of Preferred Stock
at the rate of 10% per annum. The placement agent is entitled to receive a cash
commission of 9% and a non-accountable expense allowance of 4% of the gross
proceeds. The placement agent is also entitled to receive warrants to purchase
shares of the Company's Preferred Stock equal to 10% of the total shares issued
at an exercise price equal to 110% of the offering price of such shares.

In July and August 1997, the Company borrowed and repaid a total of $500,000 for
working capital purposes, and in connection therewith, issued warrants to
purchase 100,000 shares of Common Stock at an exercise price equal to $1 5/16.

In August 1997, the Company's Board of Directors authorized an increase of the
authorized number of common shares of up to a minimum of 40 million shares and a
maximum of 60 million shares, subject to the approval of the Company's
stockholders.

8
<PAGE>

8. Extraordinary Item

In September 1997, the holders of Dunkirk's $8,000,000 Chautauqua County
Industrial Development Agency Solid Waste Disposal Facility Bonds (the "IDA
Bonds") retired the IDA Bonds in exchange for a cash payment of $1,620,000 and
the balance of the related debt service reserve fund of $194,000. The cash
payment was made utilizing proceeds from the private placement discussed in Note
7 above. This retirement results in a net pretax gain to the Company of
approximately $5,862,000 which is reported as an Extraordinary Item. To the
extent that Dunkirk is deemed to be insolvent immediately prior to such
repayment by an amount which equals or exceeds the amount of debt forgiveness,
the Company will not recognize taxable income from such repayment; however,
certain of Dunkirk's tax attributes (such as net operating loss carryforwards
("NOLs")) would be subject to reduction and would not be available to offset
future income from operations, if any. For this purpose, the amount of
insolvency is defined to be the excess of Dunkirk's liabilities over the fair
value of its assets. An independent appraisal of the fair value of Dunkirk's
assets has not been completed at this time to determine Dunkirk's solvency;
however, the Company believes that Dunkirk was insolvent at the time of
repayment, and accordingly has not recorded a tax provision on the Extraordinary
Item. If Dunkirk is deemed to be solvent immediately prior to the time of the
repayment, the Company will recognize taxable income for the debt forgiveness in
its tax year ending June 30, 1998. The amount of such income may be offset by
NOLs, subject to possible limitations as discussed below. Even if sufficient
NOLs were available to offset such taxable income after such limitations, the
Company may still be subject to alternative minimum tax.

The Company has federal NOLs that amounted to approximately $20.6 million at
June 30, 1997, which expire between 2006 and 2012. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"), utilization of NOLs
is limited if there has been a change in control (ownership) of the Company.
Although a comprehensive evaluation has not yet been performed, it is likely
that due to prior shifts in ownership (the Dunkirk merger and the completion of
the IPO) and the current shifts in ownership (the Preferred Stock offering), the
Company's ability to utilize its NOLs could be severely limited.

9
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations

Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996

Consolidated revenues for the three months ended September 30, 1997 were
approximately $325,000, consisting primarily of CRT glass recycling fees and
approximately $67,000 of ALUMAGLASS(TM) sales. For the same three-month period
of 1996, the Company's consolidated revenues were approximately $344,000, of
which approximately $65,000 was from sales of ALUMAGLASS and the remainder was
CRT recycling fees.

The net change in cost of goods sold for the three months ended September 30,
1997 versus the same prior year period, a decrease of $521,000 despite the
almost same sales volume, reflects a number of factors, including (i) a $76,000
net decrease in the non-cash charge associated with the reserve for potential
disposal costs of raw materials (a $62,000 decrease in the reserve for the three
months ended September 30, 1997 as a result of a decrease in certain raw
material inventories as compared with a $14,000 increase in the reserve for the
three months ended September 30, 1996, during which such inventories increased),
(ii) a decrease of $470,000 as a result of discontinuing the melter operations
and writing-off the assets associated therewith during the fourth quarter of
Fiscal 1997, (iii) a decrease of $105,000 due to the reduced level of operations
in the abrasives finishing department, and (iv) an increase of $168,000 from the
start-up of the decorative particles operations.

As a consequence of the above revenue and cost changes, the Company's gross
margin improved to a loss of approximately $361,000 for the three months ended
September 30, 1997 from a loss of approximately $863,000 for the same period of
1996.

Selling, general and administrative expenses of approximately $686,000 for the
three months ended September 30, 1997 compare with approximately $557,000 for
the same 1996 period. This increase reflects approximately $63,000 in
compensation expenses relating to capital stock and approximately $60,000 in
higher accounting and audit costs.

Net interest expense increased to approximately $309,000 for the three months
ended September 30, 1997 from approximately $231,000 for the same prior year
period. This cost increase reflects an approximate $78,000 decrease in interest
income on cash received from the Company's initial public offering.

10
<PAGE>

Liquidity and Capital Resources

The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of shares of
Series A Convertible Preferred Stock (the "Preferred Stock") and the proceeds of
the Company's initial public offering. At September 30, 1997, the Company had
approximately $3,287,000 in principal amount of long-term indebtedness
(excluding capital lease obligations) and net working capital deficiency of
approximately $2,648,000. As of September 30, 1997, the Company had cash and
cash equivalents of approximately $637,500.

The Company received net proceeds of $3,501,717 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance and other transaction expenses). Of such net
proceeds, $1,620,000 was used to redeem the IDA Bonds and $500,000 plus accrued
interest was used to repay the 1997 Bridge Loan, with the remainder to be used
for general working capital purposes, including accrued payables.

In July and August 1997, the Company borrowed an aggregate of $500,000 which was
used for general working capital purposes (the "1997 Bridge Loan"). On September
8, 1997, the 1997 Bridge Loan was repaid, together with accrued interest at the
rate of 12% per annum, out of the proceeds of the Preferred Stock placement. In
connection with the 1997 Bridge Loan, the Company issued warrants to purchase
100,000 shares of Common Stock at an exercise price equal to $1 5/16 per share.

In July 1997, ESDC agreed to honor its guarantee of approximately $1,888,000
outstanding principal amount of term loans owing by the Company's Dunkirk
subsidiary to Key Bank, and ESDC is in the process of assuming from Key Bank,
and Key Bank is assigning to ESDC, such loans. ESDC has agreed to defer all
interest and principal payments due under the loans through January 1, 1998
until the maturity date of the loans, with interest continuing to accrue on such
deferred amounts payable at maturity. ESDC has also agreed to allow Dunkirk to
reduce the principal amount of such loans by the amount of a debt service
reserve fund (the balance at September 30, 1997 was $454,924) that will be
forfeited by Dunkirk.

As of September 30, 1997, the Company had approximately $3,287,000 in principal
amount of long-term indebtedness (excluding capital lease obligations),
consisting of (i) approximately $1,888,000 outstanding principal amount under
the Key Bank term loans guaranteed by ESDC, which loans bear

11
<PAGE>

interest at the prime rate and are payable in monthly installments through
December 2001 (subject to the deferral through January 1, 1998 described above),
(ii) approximately $695,000 aggregate outstanding principal amount under various
mortgage and secured equipment loans and (iii) approximately $704,000 aggregate
outstanding principal amount under subordinated indebtedness from certain of the
Company's CRT glass customers who provided financial assistance to the Company
during its start-up phase. The Company's long-term indebtedness is secured by
liens on its fixed assets. The Company's long-term indebtedness has been used to
finance its facility, equipment and related capital expenditures. Certain of the
agreements related to such long-term indebtedness contain customary covenants
and default provisions.

The Company's capital lease payments were approximately $7,000 for the three
months ended September 30, 1997 and are estimated to be approximately $41,000,
$27,000 and $23,000 for the fiscal years ending June 30, 1998, 1999 and 2000,
respectively, under current commitments. The Company's utility expenses average
approximately $35,000 per month at its current level of operations.

The Company has federal net operating loss carryforwards that amounted to
approximately $20.6 million at June 30, 1997, which expire between 2006 and
2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of net operating loss carryforwards is limited if
there has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
prior shifts in ownership (the Dunkirk merger and the completion of the IPO) and
the current shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.

This Form 10-QSB contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements include risks and uncertainties, including, but not
limited to: (i) the risk that the Company's marketing efforts with respect to
its abrasives, decorative particles and other products will not result in
increased sales and that the Company will continue to experience substantial
losses from operations, (ii) the risk that the Company will require additional
financing prior to achieving positive cash flow from operations and that it may
not be able to obtain such financing on terms acceptable to the Company or at
all, (iii) the risk that the redemption of the IDA Bonds or removal of
non-productive assets from service will result in taxable income to the Company
or otherwise create tax or tax-related obligations of the Company the result of
which could reduce the Company's net operating loss carry-forwards and/or,
depending on the amount of such taxable income, if any, result in the Company
being required to satisfy such obligations out of its available cash, at a time
when such obligations could exceed the Company's available cash, (iv) the risk
that the Company will experience interruptions in its manufacturing operations
which will delay shipments or result in lost business, (v) risks associated with
retaining and attracting key personnel, (vi) the risk that the Company will lose
key CRT customers prior to obtaining increased sales of its abrasives and other
products, (vii) risks associated with being able to obtain requisite supplies of
raw materials for its products, (viii) risks associated with its ability to
protect its intellectual property and proprietary rights, (ix) risks associated
with the failure to comply with applicable environmental laws

12
<PAGE>

and regulations and (x) the risk that the Company will not be able to continue
to satisfy the minimum maintenance requirements for continued listing on the
Nasdaq SmallCap Market .

Part II - Other Information

Item 1. Legal Proceedings

See Note 6 of Notes to Consolidated Financial Statements above.

Item 2. Changes in Securities and Use of Proceeds

As previously disclosed by the Company in a Report on Form 8-K, dated September
8, 1997, on August 29, 1997 and September 8, 1997, the Company sold, pursuant to
a private placement, an aggregate 414,500 shares of Preferred Stock for
aggregate gross proceeds of $4,145,000 (the "Private Placement"). The Preferred
Stock was sold pursuant to an exemption from registration pursuant to Regulation
D, promulgated under the Securities Act of 1933, as amended (the "Securities
Act"). In connection with the sale of the Preferred Stock, the Company did not
conduct any general advertisement or solicitation; each purchaser of the
Preferred Stock represented that, among other things, the purchaser was an
"accredited investor" as that term is defined in Regulation D and the purchaser
was purchasing the shares of Preferred Stock for investment and not with a view
to distribution. Appropriate legends were affixed to the certificates
representing the Preferred Stock. Paramount Capital, Inc. acted as a placement
agent in the Private Placement and received an aggregate placement fee of
$373,050, and an expense reimbursement of $165,800.

Each share of Preferred Stock is initially convertible into eight shares of
Common Stock at a conversion price of $1.25 per share, subject to adjustment
based on the lesser of $1.25 and the prevailing average market price of the
Common Stock immediately preceding any subsequent sale of Preferred Stock, if
any. The holders of the Preferred Stock are entitled to the number of votes
equal to the number of shares of Common Stock of the Company into which such
shares of Preferred Stock are convertible, and are entitled to vote together
with the holders of the Common Stock.

The holders of the Preferred Stock are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Preferred Stock sold in the Private Placement remain outstanding. The
affirmative vote of the holders of at least two-thirds of the Preferred Stock
will be required for (i) the issuance of securities senior to or on a parity
with the Preferred Stock with respect to dividends, voting or liquidation, (ii)
any alterations to the rights of the Preferred Stock, (iii) a liquidation,
dissolution or sale of substantially all of the assets of the Company, (iv) the
incurrence of over $100,000 of indebtedness (other than borrowings under working
capital lines of credit), and (v) the repurchase of any of the securities of the
Company. In addition, the holders of the Preferred Stock are entitled to a
liquidation preference in an amount per share equal to $13.50 plus declared
and/or accrued but unpaid dividends, if any. Finally, the holders of the
preferred stock are entitled to dividends, payable in cash or in kind, at an
annual rate of 10% beginning one year after the final closing of the Private
Placement. The Company must pay such dividend prior to any dividend declared on
the Common Stock (For a detailed description of the terms of the Preferred
Stock, see the Certificate of Designation of

13
<PAGE>

Series A Convertible Preferred Stock, which was filed as an exhibit to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1997).

Item 3. Defaults Upon Senior Securities.

Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a wholly-owned
subsidiary of the Company, is obligated with respect to $1,888,000 outstanding
aggregate principal amount of equipment term notes issued in December 1994 and
January 1995 to Key Bank of New York ("Key Bank"), which were guaranteed by the
Empire State Development Corporation/Job Development Authority ("ESDC"). In June
1997, Key Bank and ESDC commenced discussions relating to ESDC's guarantee and
assumption of such loans from Key Bank. In July 1997, ESDC agreed to honor its
guarantee of such loans and assume such loans from ESDC. Dunkirk was in payment
default in the amount of approximately $113,000 under the Key Bank loan during
the period from July 1997 through August 1997, which default was waived by Key
Bank on August 28, 1997. Such amount, together with all interest and principal
payments due under the loans through January 1, 1998, have been deferred by ESDC
until the maturity date of the notes, with interest continuing to accrue on such
deferred amounts payable at maturity. Accordingly, Dunkirk is not currently in
arrears with respect to such loan.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

Exhibits
--------

11 Computation of per share earnings.

27 Financial Data Schedule.

Form 8-K
--------

The Company filed a Report on Form 8-K, dated September 8, 1997, with
respect to Item 5 therein.

14
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: October 24, 1997 /s/ William L. Amt
-------------------------------------------
William L. Amt
President and Chief
Executive Officer
(principal executive officer)

Dated: October 24, 1997 /s/ John G. Murchie
-------------------------------------------
John G. Murchie
Controller (principal accounting officer)

Exhibit 11
<TABLE>
<CAPTION>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY

STATEMENT OF COMPUTATION OF PRIMARY NET INCOME (LOSS) PER SHARE

For the three months ended September 30, 1997 and 1996

Three months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) before extraordinary item $ (1,355,187) $ (1,650,785)
================= =================

Net income (loss) as reported $ 4,506,831 $ (1,650,785)
================= =================

Weighted average number of common
shares outstanding 4,799,186 4,709,186

Assumed exercise of stock options and
warrants using the treasury stock
method 75,509 --
------------------ -----------------

Shares used in the computation 4,874,695 4,709,186
================= =================

Net (loss) per common share
before extraordinary item $ (0.28) $ (0.35)
================= =================

Net income (loss) as reported per
common share $ 0.92 $ (0.35)
================= =================

</TABLE>

<PAGE>

Exhibit 11
<TABLE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY

STATEMENT OF COMPUTATION OF FULLY DILUTED NET INCOME (LOSS) PER SHARE

For the three months ended September 30, 1997 and 1996

Three months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) before extraordinary item $ (1,355,187) $ (1,650,785)
================= =================

Net income (loss) as reported $ 4,506,831 $ (1,650,785)
================= =================

Weighted average number of common
shares outstanding 4,799,186 4,709,186

Assumed exercise of stock options and
warrants using the treasury stock
method 82,399 --

Weighted average number of common shares
representing assumed conversion of
Series A Convertible Preferred Stock 1,079,913 --
----------------- -----------------

Shares used in the computation 5,961,498 4,709,186
================= =================

Net (loss) per common share
before extraordinary item $ (0.23) $ (0.35)
================= =================

Net income (loss) as reported per
common share $ 0.76 $ (0.35)
================= =================
</TABLE>

<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000923978
<NAME> Conversion Technologies International, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 637,506
<SECURITIES> 0
<RECEIVABLES> 212,319
<ALLOWANCES> 18,000
<INVENTORY> 627,539
<CURRENT-ASSETS> 1,638,773
<PP&E> 8,481,212
<DEPRECIATION> 1,654,274
<TOTAL-ASSETS> 9,037,647
<CURRENT-LIABILITIES> 4,286,400
<BONDS> 2,646,804
0
415
<COMMON> 1,385
<OTHER-SE> 2,102,643
<TOTAL-LIABILITY-AND-EQUITY> 9,037,647
<SALES> 325,142
<TOTAL-REVENUES> 325,142
<CGS> 685,776
<TOTAL-COSTS> 1,371,338
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308,991
<INCOME-PRETAX> (1,355,187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,355,187)
<DISCONTINUED> 0
<EXTRAORDINARY> 5,862,018
<CHANGES> 0
<NET-INCOME> 4,506,831
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.76

</TABLE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10-QSB/A

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

For the quarterly period ended: Commission File No.:
September 30, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
(Address of principal executive offices)

(407) 207-5900
(Issuer's telephone number, including area code)

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

Yes X No
----- -----

<PAGE>

Transactional Small Business Disclosure Format

Yes No X
----- -----

Explanatory Note

Conversion Technologies International, Inc. (the "Company") hereby amends Item 1
of Part 1 of its Quarterly Report on Form 10-QSB for the quarter ended September
30, 1997 (the "Form 10-QSB"), which was filed with the Securities and Exchange
Commission on October 24, 1997, by deleting Item 1 of Part 1 of the Form 10Q-SB
and replacing Item 1 of Part 1 with the information set forth herein. The
Company also hereby amends Exhibit 11 to the Form 10-QSB by replacing Exhibit 11
with the information contained in the Exhibit 11 attached hereto.

Table of Contents
-----------------

Page
No.
----

Part I - Financial Information

Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of September
30, 1997 and June 30, 1997.................................... 3

Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 4

Consolidated Statements of Cash Flows of Conversion Technologies
International, Inc. and Subsidiaries for the three month
periods ended September 30, 1997 and 1996..................... 5

Notes to Consolidated Financial Statements....................... 6

2
<PAGE>
<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September 30, June 30,
1997 1997
------------- -----------
(Unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 637,506 $ 325,092
Accounts receivable, less allowance for
doubtful accounts of $18,000 at September
30, 1997 and June 30, 1997 212,319 146,225
Inventories 627,539 521,060
Prepaid expenses and other current assets 161,409 188,525
----------- -----------
Total current assets 1,638,773 1,180,902

Liabilities and stockholders' equity (deficiency)

Capital lease obligations, less current portion 33,265 39,414
Long-term debt, less current portion 2,613,539 10,784,343

Total stockholders' equity (deficiency) 2,104,443 (5,962,289)
----------- -----------
$ 9,037,647 $ 9,436,924
=========== ===========
See Accompanying Notes
</TABLE>

3
<PAGE>

<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

(Unaudited)
<CAPTION>

For the three months ended
September 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Revenue $ 325,142 $ 344,273

Cost of goods sold 685,776 1,206,908
---------------- ----------------

Gross loss on sales (360,634) (862,635)

Selling, general and administrative 685,562 557,379
---------------- ----------------

Loss from operations (1,046,196) (1,420,014)

Interest expense, net 308,991 230,771
---------------- ----------------

Loss before extraordinary item (1,355,187) (1,650,785)

Extraordinary item - Gain on
debt retirement 5,862,018
---------------- ----------------

Net income (loss) 4,506,831 (1,650,785)

Discount on issuance of Series A
Convertible Preferred Stock (1,573,500)
---------------- ----------------

Net income attributable to common
shareholders $ 2,933,331 $ (1,650,785)
================ ================

Loss per common share before
extraordinary item $ (0.60) $ (0.35)
================ ================

Net income (loss) per common share $ 0.60 $ (0.35)

See Accompanying Notes.
</TABLE>

4
<PAGE>

<TABLE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)
<CAPTION>

Investing activities
Issuance of notes receivable (250,000)
Capital expenditures (84,820) (706,569)
----------- -----------
Net cash used in investing activities (84,820) (956,569)

Supplemental disclosure of cash flow
information
Interest paid $ 270,323 $ 470,765
============ ============

See Accompanying Notes.
</TABLE>

5
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 1997

(Unaudited)

1. Basis of Presentation

2. Inventories

Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.

Inventories consisted of the following:

3. Revenue Recognition

6
<PAGE>

4. Reserve for Disposal

5. Net Income (Loss) Per Common Share

The net income (loss) per common share is based on the net income (loss)
attributable to common shareholders for the three-month period, divided by the
weighted average number of common shares outstanding during the period
(excluding 740,559 common shares that were deposited into escrow in connection
with the Company's initial public offering, and including 1,023,054 shares of
the Company's common stock into which the Company's original Series A Preferred
Stock was converted upon the closing of the initial public offering). Common
Stock equivalents such as stock options and warrants are included when their
effect is not anti-dilutive. The weighted average number of common shares
outstanding at September 30, 1997 and 1996 was 4,874,695 and 4,709,186,
respectively. The discount on the issuance of the Company's Series A Convertible
Preferred Stock (the "Preferred Stock") represents the aggregate discount
(difference) between the conversion price of the Preferred Stock and the fair
market value of the Company's Common Stock on each of the issuance dates of the
Preferred Stock by the Company in August and September 1997 (see Note 7).

6. Commitments and Contingencies

7
<PAGE>

The Company does not believe that there will be a material adverse outcome in
the foregoing dispute.

7. Capital Stock

In August and September 1997, the Company sold 414,500 shares of Preferred Stock
under a placement agency agreement for the private placement of the Preferred
Stock. The net proceeds to the Company were $3,501,717 after deducting the
placement agent commissions and expenses and other transaction expenses. The
private placement consists of a minimum of 300,000 and a maximum of 500,000
shares of stock with an option for the placement agent to sell up to an
additional 300,000 shares to cover over-allotments, if any, with a par value of
$.001 per share and a stated value of $10 per share. Each share of Preferred
Stock is initially convertible into eight shares of common stock at a conversion
price of $1.25 per share, subject to adjustment based on the lesser of $1.25 and
the prevailing average market price of the common stock immediately preceding
any subsequent closing, if any. Commencing 12 months from the final closing of
the private placement, the holders of the Preferred Stock are entitled to
receive dividends payable in cash, or at the option of the Company, in
additional shares of Preferred Stock at the rate of 10% per annum. The placement
agent is entitled to receive a cash commission of 9% and a non-accountable
expense allowance of 4% of the gross proceeds. The placement agent is also
entitled to receive warrants to purchase shares of the Company's Preferred Stock
equal to 10% of the total shares issued at an exercise price equal to 110% of
the offering price of such shares.

In August 1997, The Company's Board of Directors authorized an increase of the
authorized number of common shares of up to a minimum of 40 million shares and a
maximum of 60 million shares, subject to the approval of the Company's
stockholders.

8
<PAGE>

8. Extraordinary Item

9
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: December 19, 1997 /s/ William L. Amt
--------------------------------------------
William L. Amt
President and Chief
Executive Officer
(principal executive officer)

Dated: December 19, 1997 /s/ John G. Murchie
--------------------------------------------
John G. Murchie
Controller (principal financial officer)

Exhibit 11
<TABLE>

CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARY

STATEMENT OF COMPUTATION OF PRIMARY NET INCOME (LOSS) PER SHARE

For the three months ended September 30, 1997 and 1996

Three months ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net (loss) before extraordinary item $ (1,355,187) $ (1,650,785)

Discount on issuance of Series A
Convertible Preferred Stock (1,573,500)
---------------- -------------------

Net (loss) before extraordinary or
attributable to common shareholders $ (2,928,687) $ (1,650,785)
================= =================

Net income (loss) as reported $ 4,506,831 $ (1,650,785)
================= =================

Discount on issuance of Series A
Convertible Preferred Stock (1,573,500)
---------------- -------------------

Net income attributable to common
shareholders $ 2,933,331 $ (1,650,785)
================= =================

Weighted average number of common
shares outstanding 4,799,186 4,709,186

Assumed exercise of stock options and
warrants using the treasury stock
method 75,509 --
---------------- -------------------

Shares used in the computation 4,874,695 4,709,186
================= =================

Net (loss) per common share
before extraordinary item $ (0.60) $ (0.35)
================= =================

Net income (loss) as reported per
common share $ 0.60 $ (0.35)
================= =================
</TABLE>

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------

FORM 10-QSB

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

For the quarterly period ended: Commission File No.:
December 31, 1997 000-28198

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

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)

Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)

3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
(Address of principal executive offices)

(407) 207-5900
(Issuer's telephone number, including area code)

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

Yes X No
------ ------

Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of February 12, 1998, the
Issuer had outstanding 5,539,745 shares of Common Stock, 553,000 shares of
Series A Convertible Preferred Stock, 5,801,058 Redeemable Class A Warrants and
4,410,041 Redeemable Class B Warrants.

Transitional Small Business Disclosure Format

Yes No X
------ ------

<PAGE>

Contents

Page
No.
----

Part I - Financial Information

Consolidated Balance Sheets of Conversion Technologies
International, Inc. and Subsidiaries as of December 31, 1997
and June 30, 1997.................................................... 3

Consolidated Statements of Operations of Conversion Technologies
International, Inc. and Subsidiaries for the three and six
month periods ended December 31, 1997 and 1996....................... 4

Consolidated Statements of Cash Flows of Conversion
Technologies International, Inc. and Subsidiaries for the six
month periods ended December 31, 1997 and 1996....................... 5

Notes to Consolidated Financial Statements........................... 6

Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 11

Part II - Other Information............................................... 14

2
<PAGE>

<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
December 31, June 30,
1997 1997
------------- -----------
Assets
<S> <C> <C>
Cash and cash equivalents $ 992,494 $ 325,092
Accounts receivable, less allowance for
doubtful accounts of $18,000 at December
31, 1997 and June 30, 1997 271,540 146,225
Inventories 612,273 521,060
Prepaid expenses and other current assets 161,024 188,525
----------- ------------
Total current assets 2,037,331 1,180,902

Property, plant and equipment:
Land 75,000 75,000
Building and improvements 1,578,293 1,578,293
Machinery and equipment 6,899,414 6,713,599
Construction in progress 29,500 29,500
----------- ------------
8,582,207 8,396,392
Less accumulated depreciation (1,854,079) (1,456,610)
----------- ------------
6,728,128 6,939,782

Deferred finance charges, less accumulated
amortization of $86,155 and $135,786
at December 31, 1997 and June 30, 1997
respectively 82,574 443,829
Other noncurrent assets 10,145 3,100
Restricted assets
Project fund -- 158
Debt service reserve funds -- 869,153
----------- ------------
$ 8,858,178 $9,436,924
=========== ============

Liabilities and stockholders' equity (deficiency)

Accounts payable $ 1,572,238 $1,711,212
Deferred revenue 353,182 491,944
Reserve for disposal 596,000 713,100
Accrued expenses 798,468 858,447
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 25,898 35,495
Current portion of long-term debt 361,045 530,258
----------- ------------
Total current liabilities 3,941,831 4,575,456

Capital lease obligations, less current portion 26,949 39,414
Long-term debt, less current portion 1,961,010 10,784,343

Stockholders' equity (deficiency):
Series A Convertible Preferred Stock,
$.001 par value, authorized 880,000
shares, issued and outstanding 553,000
shares at December 31, 1997 553
Common Stock, $.00025 par value, authorized
25,000,000 shares, issued and outstanding
5,539,745 shares at December 31, 1997 and June
30, 1997 1,385 1,385
Additional paid-in capital 28,719,514 24,186,932
Unearned stock compensation -- (116,369)
Accumulated deficit (25,793,064) (30,034,237)
----------- ------------

Total stockholders' equity (deficiency) 2,928,388 (5,962,289)
----------- ------------
$ 8,858,178 $ 9,436,924
=========== ============
See Accompanying Notes
</TABLE>
3
<PAGE>

<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Operations

(Unaudited)
<CAPTION>

Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue
Product sales $ 408,972 $ 216,697 $ 651,068 $ 448,854
Recycling fees 82,448 123,188 165,494 235,304
------------ ---------------- ---------------- ---------------
Total revenues 491,420 339,885 816,562 684,158

Cost of goods sold 663,098 956,133 1,348,874 2,163,041
---------------- ----------------- ---------------- ---------------

Gross loss on sales (171,678) (616,248) (532,312) (1,478,883)

Selling, general and administrative 537,858 650,845 1,223,420 1,208,224
---------------- ----------------- ---------------- ---------------

Loss from operations (709,536) (1,267,093) (1,755,732) (2,687,107)

Interest expense, net 48,460 267,297 357,451 498,068
---------------- ---------------- --------------- --------------

Loss before extraordinary item (757,996) (1,534,390) (2,113,183) (3,185,175)

Extraordinary item - Gain on
debt retirement 492,338 -- 6,354,356 --
---------------- ---------------- ---------------- --------------

Net income (loss) (265,658) (1,534,390) 4,241,173 (3,185,175)

Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
---------------- ---------------- ---------------- -------------

Net income (loss) attributable to
common shareholders $ (265,658) $ (1,534,390) $ 2,667,673 $ (3,185,175)
================ ================ ================ ==============

Basic Earnings Per Common Share:
Loss before extraordinary item $ (0.16) $ (0.32) $ (0.77) $ (0.67)
Extraordinary item 0.10 -- 1.33 --
------------------ ---------------- ---------------- --------------

Net income (loss) $ (0.06) $ (0.32) $ (0.56) $ (0.67)
================ ================ ================ ==============
See Accompanying Notes.
</TABLE>
4
<PAGE>

<TABLE>

Conversion Technologies International, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)
<CAPTION>

For the six months
ended
December 31,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Loss before extraordinary item $(2,113,183) $(3,185,175)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation expense 401,796 625,014
Amortization of deferred financing costs 27,887 27,257
Stock compensation expense 116,369 48,488
Changes is operating assets and liabilities:
Decrease (increase) in accounts receivable (125,315) 102,998
(Increase)decrease in inventories ( 91,213) (93,688)
(Increase) decrease in other current
assets 27,501 (88,067)
(Increase) decrease in other noncurrent
assets (7,045) (106,412)
Increase(decrease)in deferred revenue (138,762) 24,165
Increase (decrease) in accounts payable,
reserve for disposal and other accrued
expenses (316,053) (713,504)
----------- ------------
Net cash used in operating activities (2,218,018) (3,358,924)

Investing activities
Sale of marketable securities -- 2,009,632
Issuance of notes receivable -- (416,761)
Capital expenditures (190,142) (785,430)
----------- -----------
Net cash used in investing activities (190,142) 807,441

Financing activities
Decrease in deferred finance charges 1,750 --
Issuance of notes payable 500,000 --
Issuance of long term debt -- 8,282
Payment of notes payable (500,000) --
Decrease in restricted assets 675,285 40,281
Principal payments on long-term debt (2,112,546) (218,279)
Principal payments under capital lease
obligations (22,062) (53,897)
Issuance of Series A Preferred Stock 4,533,135 --
Issuance of common stock -- 23
----------- -----------
Net cash provided by (used in) financing
activities 3,075,562 (223,590)
----------- -----------

(Decrease) increase in cash and cash
equivalents 667,402 (2,775,073)
Cash and cash equivalents at beginning of
period 325,092 4,539,464
------------ ------------
Cash and cash equivalents at end of period $ 992,494 $1,764,391
============ =============

Supplemental disclosure of cash flow
information
Interest paid $ 319,959 $ 725,582
============ =============

See Accompanying Notes.
</TABLE>
5
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 1997

(Unaudited)

1. Basis of Presentation

2. Inventories

Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.

Inventories consisted of the following:

December 31, 1997 June 30, 1997
----------------- -------------
Raw materials $ 105,429 $ 61,949
Work-in-process 9,718 111,961
Finished goods 497,126 347,150
------- -------
$ 612,273 $ 521,060
======= =======

3. Revenue Recognition

The Company derives most of its revenue from fees charged to accept waste
materials and from the sale of its products. With respect to revenue from fees
charged to accept waste materials, the Company initially records the fees it
receives for accepting waste materials for processing as deferred revenue. After
the materials have been processed into finished goods inventory, the deferred
revenue is recognized as fee revenue based upon the amount of finished goods
inventory produced (by tonnage), valued at the fee charged for accepting the
waste material. With respect to revenue from product sales, including products
created from processed waste materials, revenue is recognized only upon shipment
of products to customers.

For the three months ended December 31, 1997, 90.9% of the Company's revenue was
derived

6
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

from five major customers. Revenue generated from each of these customers
amounted to $243,382, $94,473, $42,111, $37,886 and $28,753, which represents
49.5%, 19.2%, 8.6%, 7.7% and 5.9% of total revenue, respectively. For the three
months ended December 31, 1996, 85.8% of the Company's revenue was derived from
four major customers. Revenues generated from each of these customers amounted
to $145,198, $91,838, $27,503 and $26,986, which represents 42.7%, 27.0%, 8.1%
and 8.0% of total revenue, respectively.

For the six months ended December 31, 1997, 91.6% of the Company's revenue was
derived from five major customers. Revenue generated from each of these
customers amounted to $404,238, $104,629, $81,019, $79,493 and $78,554, which
represents 49.5%, 12.8%, 9.9%, 9.8% and 9.6% of total revenue, respectively. For
the six months ended December 31, 1996, 81.8% of the Company's revenue was
derived from four major customers. Revenue generated from each of these
customers amounted to $290,540, $153,877, $61,965 and $53,035, which represents
42.5%, 22.5%, 9.1% and 7.7% of total revenue, respectively.

4. Reserve for Disposal

Dunkirk International Glass and Ceramics Corporation ("Dunkirk"), a wholly-owned
subsidiary of the Company, began accepting waste materials (primarily CRT glass)
in early 1994. Upon accepting the waste materials, Dunkirk established a reserve
for the probable disposal costs for the unprocessed waste materials on hand in
the event the conversion processes being developed were not successful. To date,
the Company has disposed of 158 tons of the waste materials which it had not
been able to process, all of which was disposed of during the three months ended
December 31, 1997. The amount of unprocessed waste materials on hand was 6,732
tons at June 30, 1997 and 5,301 tons at December 31, 1997. From July 1, 1996 to
December 31, 1996, the Company increased the reserve by approximately $54,000,
from $737,000 to $791,000. From July 1, 1997 to December 31, 1997, the Company
reduced the reserve by approximately $117,000 from $713,000 to $596,000. The
increases/decreases in the reserve, which resulted from changes in the
quantities of unprocessed waste materials on hand, have been charged/credited
against operations. The Company intends to adjust the reserve for disposal if
and when it can refine existing processes to increase yields and/or develop new
processes for the unprocessed waste materials on hand.

7
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

5. Net Income (Loss) Per Common Share

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.

The basic net income (loss) per common share is based on the net income (loss)
attributable to common shareholders for the three and six-month periods, divided
by the weighted average number of common shares outstanding during the period
(excluding 740,559 common shares that were deposited into escrow in connection
with the Company's initial public offering, and including 1,023,054 shares of
the Company's common stock into which the Company's original Series A Preferred
Stock was converted upon the closing of the initial public offering). The
diluted net income (loss) per common share is the same as the basic net income
(loss) per common share since the effect of the conversion of all dilutive
securities would be antidilutive due to the loss before extraordinary item. The
weighted average number of common shares outstanding for the three-month periods
ended December 31, 1997 and 1996 was 4,799,186 and 4,785,686, respectively. The
weighted average number of common shares outstanding for the six-month periods
ended December 31, 1997 and 1996 was 4,799,186 and 4,747,436, respectively. The
discount on the issuance of the Company's Series A Convertible Preferred Stock
(the "Preferred Stock"), which was issued in August, September and December
1997, represents the aggregate discount (difference) between the conversion
price of the Preferred Stock and the fair market value of the Company's Common
Stock, on each of the issuance dates of the Preferred Stock by the Company in
August and September 1997. For the issuance of Preferred Stock in December,
there was not any discount (See Note 7).

8
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

6. Commitments and Contingencies

7. Capital Stock

In August, September, and December of 1997, the Company sold 553,000 shares of
Preferred Stock, with a par value of $.001 per share and a stated value of $10
per share, under a placement agency agreement for the private placement of the
Preferred Stock. The net proceeds to the Company were $4,533,135 after deducting
the placement agent commissions and expenses and other transaction expenses.
Each share of Preferred Stock is convertible into ten shares of common stock at
a conversion price of $1.00 per share. Commencing in December 1998, the holders
of the Preferred Stock are entitled to receive dividends payable in cash, or at
the option of the Company, in additional shares of Preferred Stock at the rate
of 10% per annum. The placement agent received a cash commission of 9% and a
non-accountable expense allowance of 4% of the gross proceeds. The placement
agent also received 55,300 warrants to purchase shares of the Company's
Preferred Stock at an exercise price of $11.00.

In July and August of 1997 the Company borrowed and repaid a total of $500,000
for working capital purposes, and in connection therewith, issued warrants to
purchase 125,037 shares of Common Stock at an exercise price equal to $1.05.

The Company's Board of Directors authorized an increase of the authorized number
of common shares to 50 million shares, subject to the approval of the Company's
stockholders.

9
<PAGE>

Conversion Technologies International, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

8. Extraordinary Item

In December 1997, the Empire State Development Corporation/JDA (the "ESDC"),
which had previously assumed approximately $1,888,000 of debt plus accrued
interest of approximately $82,000 owed by Dunkirk to Key Bank of New York ("Key
Bank"), granted the Company a debt forgiveness of $500,000. Also, the balance of
the related debt service reserve fund of approximately $459,000 was applied
against the outstanding principal and accrued interest. This forgiveness
resulted in a net pretax gain to the Company of approximately$492,000, which is
reported as an Extraordinary Item.

To the extent that Dunkirk is deemed to be insolvent immediately prior to either
of these debt forgivenesses by an amount which equals or exceeds the amount of
debt forgiveness, the Company will not recognize taxable income from such
forgiveness; however, certain of Dunkirk's tax attributes (such as net operating
loss carryforwards ("NOLs")) would be subject to reduction and would not be
available to offset future income from operations, if any. For this purpose, the
amount of insolvency is defined to be the excess of Dunkirk's liabilities over
the fair value of its assets. An independent appraisal of the fair value of
Dunkirk's assets has not been completed at this time to determine Dunkirk's
solvency; however, the Company believes that Dunkirk was insolvent at the time
of forgiveness, and accordingly has not recorded a tax provision on the
Extraordinary Item. If Dunkirk is deemed to be solvent immediately prior to the
time of the forgiveness, the Company will recognize taxable income for the debt
forgiveness in its tax year ending June 30, 1998. The amount of such income may
be offset by NOLs, subject to possible limitations as discussed below. Even if
sufficient NOLs were available to offset such taxable income after such
limitations, the Company may be subject to alternative minimum tax.

10
<PAGE>

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations

Three Months Ended December 31, 1997 Compared to Three Months Ended December 31,
1996

Total revenues increased by $151,000 for the three months ended December 31,
1997 to $491,000 compared with $340,000 for the three months ended December 31,
1996 due to $94,000 of sales from the decorative particles business, which
started operations in 1997 and an increase of $72,000 in sales of clean cullet.

The decrease in cost of goods sold of $293,000 for the three months ended
December 31, 1997 to $663,000, compared with $956,000 for the three months ended
December 31, 1996, despite the increase in revenue of $151,000, is due to a
number of factors, including (i) a decrease of $206,000 as a result of
discontinuing the melter operations and writing-off the assets associated
therewith during the fourth quarter of Fiscal 1997, (ii) a net decrease in the
charge to operations of $74,000 for the change in the reserve for disposal costs
for the unprocessed waste materials on hand, (iii) a decrease of $78,000 due to
the reduced level of operations in the abrasives finishing department, and (iv)
an increase of $133,000 from the decorative particles business started in 1997.

As a result of the increased revenues and decreased cost of goods sold discussed
above, the Company's gross margin improved by $444,000 for the three months
ended December 31, 1997 to a loss of $172,000 compared with a loss of $616,000
for the three months ended December 31, 1996.

Selling, general and administrative expenses decreased by $113,000 for the three
months ended December 31, 1997 to $538,000, compared with $651,000 for the three
months ended December 31, 1996, as a result of a $53,000 decrease in salaries
and related fringe costs, a decrease of $103,000 in professional fees, and an
increase of $27,000 from the decorative particles business.

Net interest expense decreased by $219,000 to $48,000 for the three months ended
December 31, 1997, compared with $267,000 for the three months ended December
31, 1996. This resulted from a decrease in the interest income of $20,000 on
cash received from the Company's initial public offering and a decrease in
interest expense of $239,000 resulting from the reduction of debt from the
repayment and forgivenesses during 1997.

Six Months Ended December 31, 1997 Compared to Six Months Ended December 31,
1996.

Total revenues for the six months ended December 31, 1997 were $816,000 compared
to $684,000 for the six months ended December 31, 1996 or an increase of
$132,000 due to the $105,000 of sales from the decorative particles business and
an increase of $28,000 in the sales of ALUMAGLASS over the prior year.

The decrease in cost of goods sold of $814,000 to $1,349,000 for the six months
ended December 31, 1997, from $2,163,000 for the six months ended December 31,
1996, despite the increase in revenues of $816,000, is caused by a number of
factors, including (i) a decrease of $737,000 as a result of

11
<PAGE>

discontinuing the melter operations and writing-off the assets associated
therewith during the last quarter of Fiscal 1997, (ii) a net decrease in the
charge to operations of $150,000 for the change in the reserve for disposal
costs for the unprocessed waste materials on hand, (iii) a decrease of $156,000
due to the reduced level of operations in the abrasives finishing department,
and (iv) an increase of $301,000 from the decorative particles business started
in 1997.

The Company's gross margin improved by $946,000 to a loss of $533,000 for the
six months ended December 31, 1997, from a loss of $1,479,000 for the six months
ended December 31, 1996, as a result of the $132,000 increase in revenues and
the $814,000 decrease in cost of goods sold discussed above.

Selling, general and administrative expenses were approximately the same for the
six months ended December 31, 1997 at $1,223,000 compared to $1,208,000 for the
six months ended December 31, 1996. The decrease of $93,000 in salaries and
related fringe costs was more than offset by the $73,000 increase in
compensation expenses relating to capital stock and the $64,000 increase from
the decorative particles business.

Net interest expense decreased by $141,000 to $357,000 for the six months ended
December 31, 1997, from $498,000 for the six months ended December 31, 1996, as
a result of a $244,000 decrease in interest expense due to the reduction in debt
from the repayment and forgivenesses and of a $103,000 decrease in interest
income due mainly to the interest received on cash received from the Company's
initial public offering.

Liquidity and Capital Resources

The Company's business is capital intensive. The Company has funded its
operations principally from debt financing, the private placement of shares of
preferred stock and the proceeds of the Company's initial public offering. At
December 31, 1997, the Company had approximately $2,322,000 in principal amount
of long-term indebtedness (excluding capital lease obligations) and net working
capital deficiency of approximately $1,905,000. As of December 31, 1997, the
Company had cash and cash equivalents of approximately $992,000.

In August, September, and December 1997, the Company raised aggregate gross
proceeds of $5,530,000 in a private placement of Preferred Stock. An aggregate
of 553,000 shares of Preferred Stock were issued. Each share of Preferred Stock
is convertible into ten shares of Common Stock at a conversion price of $1.00
per share.

The Company received net proceeds of $4,533,135 from the placement of the
Preferred Stock (after deducting the placement agent's commissions and
non-accountable expense allowance and other transaction expenses). Of such net
proceeds, $1,620,000 was used to redeem the IDA Bonds and $500,000 plus accrued
interest was used to repay the 1997 Bridge Loan (defined below), with the
remainder to be used for general working capital purposes, including accrued
payables.

In July and August 1997, the Company borrowed an aggregate of $500,000, which
was used for general working capital purposes (the "1997 Bridge Loan"). On
September 8, 1997, the 1997 Bridge Loan was repaid, together with accrued
interest at the rate of 12% per annum, out of the proceeds of the Preferred
Stock placement. In connection with the 1997 Bridge Loan, the Company issued
warrants to purchase 125,037 shares of Common Stock at an exercise price equal
to $1.05 per share.

12
<PAGE>

In July 1997, ESDC agreed to honor its guarantee of the term loans owing by the
Company's Dunkirk subsidiary to Key Bank, which process was completed in
December 1997 by ESDC assuming the principal of approximately $1,888,000 and
accrued interest of approximately $82,000 due on the loans. In addition, in
December 1997 ESDC forgave $500,000 on the outstanding principal balance of the
loans. ESDC has agreed to defer all interest and principal payments due under
the loans through July 1998 until the maturity date of the loans, with interest
continuing to accrue on such deferred amounts payable at maturity. ESDC has also
allowed Dunkirk to reduce the amount owed on such loans by the amount of a debt
service reserve fund (approximately $459,000) that was forfeited by Dunkirk.

As of December 31, 1997, the Company had approximately $2,322,000 in principal
amount of long-term indebtedness (excluding capital lease obligations),
consisting of (i) approximately $ 951,000 outstanding principal amount under the
Key Bank term loans assumed by ESDC, which loans bear interest at the prime rate
and are payable in monthly installments through December 2001 (subject to the
deferral through July 1, 1998 described above), (ii) approximately $667,000
aggregate outstanding principal amount under various mortgage and secured
equipment loans and (iii) approximately $704,000 aggregate outstanding principal
amount under subordinated indebtedness from certain of the Company's CRT glass
customers who provided financial assistance to the Company during its start-up
phase. The Company's long-term indebtedness is secured by liens on its fixed
assets. The Company's long-term indebtedness has been used to finance its
facility, equipment and related capital expenditures. Certain of the agreements
related to such long-term indebtedness contain customary covenants and default
provisions.

The Company's capital lease payments were approximately $22,000 for the six
months ended December 31, 1997 and are estimated to be approximately $41,000,
$27,000 and $23,000 for the fiscal years ending June 30, 1998, 1999 and 2000,
respectively, under current commitments. The Company's utility expenses average
approximately $40,000 per month at its current level of operations.

The Company's base annual fixed expenses include approximately $316,000 in
aggregate annual base compensation for the current executive officers of the
Company and debt service obligations relating to the Company's outstanding
indebtedness, which are estimated to aggregate approximately $247,000 for the
fiscal year ending June 30, 1998, excluding capital lease obligations.

The Company has federal net operating loss carryforwards that amounted to
approximately $20.6 million at June 30, 1997, which expire between 2006 and
2012. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), utilization of net operating loss carryforwards is limited if
there has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
prior shifts in ownership (the Dunkirk merger and the completion of the IPO) and
the current shifts in ownership (the Preferred Stock offering), the Company's
ability to utilize its net operating loss carryforwards could be severely
limited.

13
<PAGE>

is continually attempting to refine existing processes to increase yields and/or
develop new processes for the waste materials on hand which have not been able
to be processed. The Company records a disposal reserve with respect to
materials it cannot process because it is probable it will incur these costs on
the ultimate disposition of the waste materials. The Company estimates that the
disposal costs for material received by the Company that the Company cannot
process, if and when incurred, will exceed the fees the Company was paid to
accept such materials.

The Company had 5,301 tons of unprocessed waste materials on hand as of December
31, 1997, compared to 7,670 tons at December 31, 1996 and 5,839 tons at
September 30, 1997. The Company's disposal reserve was $596,000 as of December
31, 1997, compared to $791,000 at December 31, 1996 and $751,000 at September
30, 1997. The decreases in unprocessed waste materials on hand, and related
decreases in reserve for disposal, resulted primarily from applying certain
manual and "off-line" processing efforts to certain types of unprocessed CRT
glass which were processed and then purchased by a customer of the Company.

Part II - Other Information

Item 1. Legal Proceedings

See Note 6 of Notes to Consolidated Financial Statements above.

Item 2. Changes in Securities and Use of Proceeds

On December 8, 1997, the Company sold, pursuant to a private placement, an
aggregate 138,500 shares of Preferred Stock for aggregate gross proceeds of
$1,385,000 (the "Private Placement"). The Preferred

14
<PAGE>

Stock was sold pursuant to an exemption from registration pursuant to Regulation
D, promulgated under the Securities Act of 1933, as amended (the"Securities
Act'). In connection with the sale of the Preferred Stock, the Company did not
conduct any general advertisement or solicitation; each purchaser of the
Preferred Stock represented that, among other things, the purchaser was an
"accredited investor" as that term is defined in Regulation D and the purchaser
was purchasing the shares of Preferred Stock for investment and not with a view
to distribution. Appropriate legends were affixed to the certificates
representing the Preferred Stock. Paramount Capital, Inc. acted as a placement
agent in the Private Placement and received an aggregate placement fee of
$124,650, and an expense reimbursement of $66,896.

Each share of Preferred Stock is convertible into ten shares of Common Stock at
a conversion price of $1.00 per share. The holders of the Preferred Stock are
entitled to the number of votes equal to the number of shares of Common Stock of
the Company into which such shares of Preferred Stock are convertible, and are
entitled to vote together with the holders of the Common Stock.

The holders of the Preferred Stock are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Preferred Stock sold in the Private Placement remains outstanding. The
affirmative vote of the holders of at least two-thirds of the Preferred Stock
will be required for (i) the issuance of securities senior to or on a parity
with the Preferred Stock with respect to dividends, voting or liquidation, (ii)
any alterations to the rights of the Preferred Stock, (iii) a liquidation,
dissolution or sale of substantially all of the assets of the Company, (iv) the
incurrence of over $100,000 of indebtedness (other than borrowings under working
capital lines of credit), and (v) the repurchase of any of the securities of the
Company. In addition, the holders of the Preferred Stock are entitled to a
liquidation preference in an amount per share equal to $13.50 plus declared
and/or accrued but unpaid dividends, if any. Finally, the holders of the
preferred stock are entitled to dividends, payable in cash or in kind, at an
annual rate of 10% beginning in December 1998. The Company must pay such
dividend prior to any dividend declared on the Common Stock. (For a detailed
description of the terms of the Preferred Stock, see the Certificate of
Designation of Series A Convertible Preferred Stock, which was filed as an
exhibit to the Company's Annual Report on Form 10-KSB for the year ended June
30, 1997).

15
<PAGE>

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

Exhibits
--------

11 Computation of per share earnings.

27 Financial Data Schedule.

Form 8-K
--------

None.

16
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.

Dated: February 17, 1998 /s/ William L. Amt
--------------------------------------------
William L. Amt
President and Chief
Executive Officer
(Principal executive officer)

Dated: February 17, 1998 /s/ John G. Murchie
--------------------------------------------
John G. Murchie
Acting Chief Financial
Officer and Controller
(Principal financial officer)

17
<PAGE>

Exhibit 11

<TABLE>
Conversion Technologies International, Inc.
and Subsidiaries

Statement of Computation of Basic Net Income (Loss) Per Share

Three months ended Six months ended
December 31, December 31,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $ (757,996) $ (1,534,390) $ (2,113,183) $ (3,185,175)

Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
-------------- --------------- --------------- ---------------

Loss before extraordinary item
attributable to common shareholders $ (757,996) $ (1,534,390) $ (3,686,683) $ (3,185,175)
============== =============== =============== ===============

Weighted average number of
common shares outstanding 4,799,186 4,785,686 4,799,186 4,747,436
============== =============== =============== ===============

Loss per common share before
extraordinary item $ (0.16) $ (0.32) $ (0.77) $ (0.67)
============== =============== =============== ===============

Extraordinary item $ 492,338 $ -- $ 6,354,356 $ --
============== =============== =============== ===============
Income per share from
extraordinary item $ 0.10 $ -- $ 1.33 $ --
============== =============== =============== ===============

Net income (loss) $ (265,658) $ (1,534,390) $ 4,241,173 $ (3,185,175)

Discount on issuance of Series A
Convertible Preferred Stock -- -- (1,573,500) --
-------------- --------------- --------------- ---------------

Net income (loss) attributable
to common shareholders $ (265,658) $ (1,534,390) $ 2,667,673 $ (3,185,175)
============== =============== =============== ===============

Net income (loss) per
common share $ (0.06) $ (.032) $ 0.56 $ (0.67)
============== =============== =============== ===============

</TABLE>

<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000923978
<NAME> Conversion Technologies International, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S DOLLARS

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 992,494
<SECURITIES> 0
<RECEIVABLES> 271,540
<ALLOWANCES> 18,000
<INVENTORY> 612,273
<CURRENT-ASSETS> 2,037,331
<PP&E> 8,582,207
<DEPRECIATION> 1,854,079
<TOTAL-ASSETS> 8,858,178
<CURRENT-LIABILITIES> 3,941,831
<BONDS> 1,987,959
0
553
<COMMON> 1,385
<OTHER-SE> 2,926,450
<TOTAL-LIABILITY-AND-EQUITY> 8,858,178
<SALES> 816,562
<TOTAL-REVENUES> 816,562
<CGS> 1,348,874
<TOTAL-COSTS> 2,572,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,451
<INCOME-PRETAX> (2,113,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,113,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 6,354,356
<CHANGES> 0
<NET-INCOME> 4,241,173
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56

</TABLE>

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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

FORM 8-K

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

Date of report (Date of earliest event reported) September 8, 1997
-----------------

Conversion Technologies International, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

Delaware 000-28198 13-3754366
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)

3452 Lake Lynda Drive
Suite 280
Orlando, Florida 32817
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code (407) 207-5900
--------------

Bethany Crossing Office Center
82 Bethany Road
Hazlet, New Jersey 07730
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)

<PAGE>

Item 5. Other Events.

As permitted under Rule 135c promulgated under the Securities Act of 1933,
as amended, Conversion Technologies International, Inc. (the "Registrant") is
filing as an exhibit to this Current Report on Form 8-K a press release issued
by the Registrant on September 9, 1997.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

Exhibit No. Document
----------- --------

99.2 Press release issued by the Registrant on
September 9, 1997

- 2 -
<PAGE>

SIGNATURE
---------

Pursuant to the requirements 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.

CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.

By: /s/ William L. Amt
------------------
William L. Amt
President and Chief Executive Officer

September 9, 1997

- 3 -
<PAGE>

EXHIBIT INDEX
-------------

Exhibit No. Document Page No.
- ----------- -------- --------

99.2 Press release issued by the Registrant 5
on September 9, 1997.

- 4 -

FROM: CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
3452 Lake Lynda Drive, Suite 280
Orlando, Florida 32817
Contact: Colin Baekier - Investor Relations
(407) 207-5900

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

FOR IMMEDIATE RELEASE
---------------------

CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
RAISES $4 MILLION IN PRIVATE PLACEMENT OF
EQUITY SECURITIES

Orlando, FL, September 8, 1997 -- Conversion Technologies International,
Inc. (Nasdaq: CTIX, CTIXW, CTIXZ) announced today that it raised gross proceeds
of $4,145,000 in the first two tranches of a private placement. An aggregate of
414,500 shares of Series A Convertible Preferred Stock were issued. Each share
is initially convertible into eight shares of Common Stock at a conversion price
of $1.25 per share, subject to adjustment based on the lesser of $1.25 and the
prevailing average market price of the Common Stock immediately preceding any
subsequent closing, if any.

The securities offered in the private placement have not been registered
under the Securities Act of 1933, or applicable state securities laws, and may
not be offered or sold absent registration under the Securities Act of 1933 and
applicable state laws unless available exemptions from registration apply.

Conversion Technologies manufactures, recycles and processes various
substrates and advanced materials to be used as industrial abrasives, decorative
particles and performance aggregates. The Company also recycles cathode ray tube
glass for sale to the manufacturers of such glass and others.

Matters discussed in this News Release contain forward looking statements
that involve significant risks and uncertainties. The Company's results may
differ significantly from the results indicated by forward-looking statements.
Such statements are only predictions and actual events or results may differ
materially. In addition to the matters described in this press release, risk
factors from time to time in the Company's SEC reports including, but not
limited to, its reports on Form 10-QSB as well as its Annual Reports on Form
10-KSB, may affect the results achieved by the Company.

* * *