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

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.

                                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

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.


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<PAGE>


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. ("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


                                       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

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,  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.


                                       4
<PAGE>


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

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

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.


                                       5
<PAGE>

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.


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.


                                       6
<PAGE>

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

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

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.


                                       7
<PAGE>

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.

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

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


                                       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

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,   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


                                       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.

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

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

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.


                                       10
<PAGE>

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.

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

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  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


                                       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

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

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>

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.

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).

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


                                       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.

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 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.

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


                                       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.

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




                                       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.

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.  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.

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.)

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


                                       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 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).

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.

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


                                       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>

<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>


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.


                                       20
<PAGE>

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'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 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.

The Company has no material commitments for capital expenditures.

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  severely
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


                                       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.

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.  My. 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

                                       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.


                                                                     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)................      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>

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


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.

(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.

(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.

(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 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.



                                       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.

(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 (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>

(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) 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

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.


                                       30
<PAGE>

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 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 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. Such shares vest in January 1998.

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 $1.625 per share.  Twenty
percent (20%) of such options vested




                                       33
<PAGE>

upon  issuance and twenty  percent  (20%) vest on the first,  second,  third and
fourth anniversary of the date of issuance.

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. 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.

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.

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

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

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


                                       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.

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.

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)



                                       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.

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.



                                       36
<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:  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.


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                               ERNST & YOUNG LLP
September 18, 1997


                                      F-2
<PAGE>

<TABLE>
<CAPTION>

                               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)
                                     =========      ============      ============

</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
                                                                 -------------     -------------

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
                                                                 ============      ============
</TABLE>
                                     See accompanying notes.
                                      F-6
<PAGE>



<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.

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



                                      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.

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


                                      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 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.  Revenue is recognized for the sale of
products upon shipment to customers.

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.




                                      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

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  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

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.

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



                                      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

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.

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.




                                      F-13
<PAGE>


<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-14
<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-15
<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-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
                                       ---------------    ----------

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-17
<PAGE>




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


                                      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.

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-19
<PAGE>



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.

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

<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-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
                                  ---------     --------

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-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.

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-23
<PAGE>



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:

 <TABLE>
<CAPTION>

                                                     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>



                                      F-24
<PAGE>




8.   Income Taxes (continued)

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 ................     $      --       $      --
                                             ===========     ===========

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 severely 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



                                      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.

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



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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.

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.