As filed with the Securities and Exchange Commission on December 1, 1999

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB

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

   For the fiscal year ended:                           Commission File No.:
        June 30, 1999                                       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)

         7 San Bartola Drive                                   32086
        St. Augustine, Florida                               (Zip Code)
(Address of principal executive offices)

                                 (904) 808-0503
                (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 |_|

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. |X|

Issuer's revenues for the fiscal year ended June 30, 1999 were $1,119,482. The
aggregate market value of the common stock of the registrant, $.00025 par value
per share (the "Common Stock"), held by non-affiliates of registrant was
$151,024 as of September 21, 1999. As of October 1, 1999, the issuer had
outstanding 7,565,045 shares of Common Stock.

                       Documents Incorporated by Reference

None.


                                       1
<PAGE>

                                Introductory Note

Conversion Technologies International, Inc., a Delaware Corporation (the
"Company" or "Conversion") is engaged in developing, manufacturing, marketing
and processing various substrates and advanced materials. As used herein, the
term Company includes each of the Company's subsidiaries, unless the context
otherwise requires.

This report on the Form 10-KSB (this "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including, without limitation, statements
regarding the Company's cash needs and ability to fund its ongoing working
capital requirements, efforts to shift its focus away from the sales of its
abrasives to manufacture and sell, on a commercial scale, its decorative
particles and the possibility to out source ALUMAGLASS(R) production. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. See "Item 1. Description of Business - Risk Factors"
for a discussion of these risks. When used in this Report, statements that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "anticipates," "plans,"
"intends," "expects" and similar expressions are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Report. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

                                     Part I

Item 1. Description of Business

Overview

For a discussion of certain recent developments concerning the Company and its
business, see "- Certain Recent Events."

The Company is engaged in the business of manufacturing and processing various
substrates and advanced materials that visually and texturally enhance
structural materials. These substrates and advanced 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 (exposed aggregates) 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. During the reporting period, the Company continued to
shift its focus away from industrial abrasives in favor of decorative particles
and performance aggregates due to the increased costs of production for
industrial abrasives relative to their market sales price.


                                       2
<PAGE>

Until the second quarter of calendar 1998, the Company was also engaged in
recycling cathode ray tube ("CRT") glass produced in the manufacture of
televisions for resale to television manufacturers and others, which business
accounted for approximately 65% of the Company's revenues for the year ended
June 30, 1998. In March 1998, as part of the shift in the Company's focus, the
Company agreed to subcontract its recycling operations to Dlubak Glass Company
("Dlubak"). See "Products-Recycled CRT Glass." The phase out of its CRT
recycling operations resulted in a decline in the Company's CRT revenues during
the fourth quarter of fiscal year 1998 when the Company commenced its
subcontracting arrangement with Dlubak, and such revenues have continued to
decrease during the first two quarters of fiscal 1999 and stopped thereafter.

The Company was incorporated in June 1993 for the purpose of acquiring Dunkirk
International Glass and Ceramics Corporation ("Dunkirk"), and conducted no
business activities prior to such acquisition. The Company acquired Dunkirk 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. The Company
currently owns one hundred percent of the issued and outstanding shares of
Dunkirk.

Advanced Particle Technologies, Inc. ("APT"), also a wholly-owned subsidiary of
the Company, was formed in October 1996 by the Company and a former joint
venture partner for the purpose of applying color coatings to particles. In June
1997, the Company purchased all of its former joint venture partner's 50%
interest in APT.

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 using the Company's
manufacturing equipment. ALUMAGLASS(R) was introduced in 1995, but has generated
only minimal sales to date. Although the Company intends to continue to market
ALUMAGLASS(R), in the fall of 1996 the Company shut down the melter used to
manufacture ALUMAGLASS(R) at its Dunkirk, New York facility (the "Dunkirk
facility"). The Company does not intend to restart the melter in the foreseeable
future. The melter was shut down after a significant inventory of material had
been produced and after determining that the cost of production was too high
relative to the market sales price for ALUMAGLASS(R). The Company is currently
satisfying limited orders for ALUMAGLASS(R) from inventory.

The Company's decorative particles include CERAMAGLASS(R) and CERAMAQUARTZ(R).
In 1996, the Company constructed a semi-works, low-volume production facility in
St. Augustine, Florida (the "St. Augustine facility") to produce these
materials. Market introductions of these products were made concurrently with
construction. The St. Augustine facility began operating in the spring of 1997
and the Company began accepting orders for production level quantities in June
1998. Although preliminary evaluations of the production facility indicate that
product quality, production costs and capacity are within all design parameters,
there can be no assurance that under long term production runs these parameters
will be maintained at levels satisfactory to the Company.


                                       3
<PAGE>

The Company's performance aggregates, fillers and enhancers are currently
produced in the Company's St. Augustine facility. Market introductions of
fillers and enhancers were made in St. Augustine concurrently with construction
of the St. Augustine facility. The Company began accepting orders for production
level quantities of these products in May and June 1998. Although preliminary
evaluations indicate that the product quality, cost of goods produced and
through put and capacity are within all design parameters, there can be no
assurance that under long term production runs these parameters will be
maintained at levels satisfactory to the Company.

Products

Abrasives

The Company's industrial abrasives include ALUMAGLASS(R) and other glass and
ceramic formulation materials, marketed as VISIGRIT(TM) and GREAT WHITE(TM). The
Company ceased production of industrial abrasives in October 1998, and the
Company's current limited sales are made from remaining inventory. As loose
grain abrasives, these industrial abrasives can be applied with blasting
equipment for industrial cleaning and maintenance and manufacturing operations.
Potential purchasers of the Company's remaining inventory of industrial
abrasives 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.

In January 1998, the Company entered into a letter agreement with Ormet Primary
Aluminum Corporation ("Ormet"), a producer of aluminum foil, whereby Ormet would
employ its production facility in Hannibel, Ohio to formulate and produce
ALUMAGLASS(R) which would then be crushed and screened in the Dunkirk
manufacturing facility. Although the Company continues to be in discussions with
Ormet, there can be no assurance that a formal agreement will be entered into on
terms satisfactory to the Company, or at all, or that there will ever be
significant sales of ALUMAGLASS(R).

Decorative Particles

The Company's St. Augustine facility 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. Decorative particles are
also incorporated into countertops and cabinetry. The Company believes that its
proprietary color coating process yields a coating of superior visual quality
and endurance compared to competing products and believes that there is a
potential market for these products.

Performance Aggregates

ALUMAGLASS(R) 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.


                                       4
<PAGE>

Recycled CRT Glass

During fiscal 1998, the Company had engaged in the recycling of CRT glass used
in televisions. In March 1998, the Company entered into a letter agreement with
Dlubak (the "Dlubak Letter Agreement") which outlined the fundamental terms of a
subcontract arrangement. Although the Company and Dlubak have not entered into a
formal contract, the parties have been operating on the basis of such
subcontract arrangement. The Dlubak Letter Agreement provides, among other
things, that (i) the Company will subcontract the processing of its CRT glass to
Dlubak for a five-year period; (ii) the Company will receive royalties of
$20-$28 per ton of glass processed by Dlubak; (iii) Dlubak will purchase from
the Company glass cullet (glass tube pieces) inventory and other waste
materials, (iv) Dlubak has the option to rent certain space at the Company's
Dunkirk facility for processing CRT glass; (v) at the end of the five year
period, the Company is required to sell its glass cullet processing equipment to
Dlubak for one dollar ($1) and at that time Dlubak has the option to purchase
the Dunkirk facility. Under the Dlubak Letter Agreement, Dlubak agreed to assume
the Company's obligations under two promissory notes in the aggregate principal
amount of $250,000 issued by the Company to two of its customers (although the
Company was not released of its obligations thereunder). This agreement was
designed to provide the Company with a nominal positive cash flow for every ton
of CRT material processed by Dlubak at the Dunkirk facility and to reduce the
deferred revenue and disposal liability that had been previously recorded in the
Company's financial statements. Since the Company has ceased operations at
Dunkirk, Dlubak has failed to make installments on the assumed promissory notes
to the two customers. See " Certain Recent Events."

Manufacturing and Recycling Processes

Through October 1998, the Company crushed and screened its abrasives and
performance aggregate products at its Dunkirk facility. The Company utilized its
equipment, principally its post-melting, abrasives finishing equipment, to sort,
clean and/or grind and crush the material into the desired form. The material
was then packaged and shipped to customers. Currently the Company is not
crushing and screening the material but is using its existing inventory to fill
customer's orders.

The Company's St. Augustine facility is used to color coat and package
decorative particles and performance aggregates. The proprietary manufacturing
process consists of applying various pigments and other coating materials in a
thermodynamic process to particles that are purchased locally or supplied by
customers. The material is then packaged on site and shipped to customers.

Research and Development

The Company has temporarily curtailed its research and development efforts until
the Company can achieve an acceptable return on equity for its existing
products. The Company has an on-site laboratory at its St. Augustine facility
where various analyses, tests and other research and development activities can
be conducted. The Company maintains a relationship with the Center for Advanced
Ceramic Technology ("CACT") at Alfred University for any additional research and
development needs. 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. In December 1998, the Company entered into a consulting
agreement with 4C Technologies, Inc. for research and development of new plaster
products on an as needed basis.


                                       5
<PAGE>

Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is anticipated that such efforts will be
focused in the near term on ALUMAGLASS(R) licensing possibilities and expanding
color coating markets for the Company's 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. The use of chemical solvents in many applications has also
decreased due to regulatory changes, particularly regulations which have
resulted in increased disposal costs. Products such as ALUMAGLASS(R), glass
beads and mineral, metallic and plastic abrasives are less affected by such
regulations due to the nature of their composition, the fact that they are
reclaimable for multiple uses, and have a lower quantity for disposal.
ALUMAGLASS(R), for example, does not contain 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 as industrial abrasives.

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

Decorative Particles

The Company believes that there is a large market for decorative particles. 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. While crushed marble, white sand, kaolin or
similar low cost white calcium based materials have traditionally been used as
fillers and expanders, the high cost of coloring agents, pigments and the
process to coat substrates makes it non-economical to color coat large volumes
of these fillers. As a substitute, the construction industry adds small
quantities of previously color coated particles into the fillers. The resulting
mixture, when viewed over a large surface area and from a distance, appears to
have a consistent color or hue.

The Company believes that market acceptance of colored particles is largely a
function of the brilliance


                                       6
<PAGE>

and endurance of the color, which results from the level of translucence or
reflectivity of the substrate. In most applications, the coated surface of a
particle is subject to erosion. Consequently, colored substrates must have
translucent properties in order to maintain their color characteristics with a
translucent or clear particle, in order to ensure that 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 application significantly. Traditionally quartz and high
quality silica sands have been used as substrates to produce translucent colored
particles. The Company believes that its proprietary coating process will
produce a coating of superior endurance and visual appeal.

Performance Aggregates

The Company 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. The Company has the ability,
if necessary, to size its aggregates within narrow specifications for specialty
applications. The Company has only recently begun to explore the use of its
various substrates for this market. 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 because 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 had engaged in the recycling of CRT glass. In March 1998, the
Company subcontracted its CRT glass recycling business to Dlubak and the Company
currently generates only nominal revenues from this arrangement. The Company
does not anticipate that Dlubak will be expanding this business activity because
of the relatively few television manufacturers located in the United States, the
relatively low percentage of CRT glass that becomes waste prior to being
incorporated into televisions and the shipping costs associated with doing
business with manufacturers located at significant distances from the Company.
Currently there is a disagreement with Dlubak for the amounts owed to the
Company, which might result in future litigation.

Dependence on Certain Customers

The Company has a limited number of customers for all its products. For the year
ended June 30, 1999 ("fiscal 1999"), 57.9% of the Company's revenues was derived
from two major customers. Revenue generated from each of these customers
amounted to $382,622 and $265,792, which represents 34.2% and 23.7% of the total
revenue, respectively.

The customer base for abrasives, decorative particles and performance
aggregates, though still limited, is not as concentrated as the recycled CRT
business. In its abrasives business, the Company's main customer, N.T. Ruddock &
Company, accounted for 3.6% of the Company's total revenue, while the Company's
main purchaser of decorative particles, Southern Grouts and Mortars Inc.
("SGM"), accounted for 34.2% of the Company's total revenue.


                                       7
<PAGE>

Sales and Marketing

The Company's abrasive products have been marketed and distributed in the United
States primarily through distributors and limited direct sales efforts by the
Company. 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 currently employs one individual who is dedicated to sales and marketing
and also uses its management team to support the sales and marketing effort. 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(R). Accordingly, the Company plans to explore
joint ventures and other corporate teaming efforts to increase outlets for
ALUMAGLASS(R), 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.

After the termination of the distributor agreement with VANGKOE Industries Inc,
("VANGKOE") (covering decorative particles) in May 1998, the Company initiated a
direct sales and marketing effort which targeted select manufacturers of
swimming pool plasters and decking materials in the Southeastern United States.

Intellectual Property

The Company has been granted 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 Company's 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. These patent applications relate to ALUMAGLASS(R) and to the use of the
Company's products as aggregates in construction materials. The Company's logo
and ALUMAGLASS(R) are registered trademarks.

In connection with the agreement to terminate the distribution agreement with
VANGKOE, the Company purchased the trademarks for CERAMAGLASS(TM) and
CERAMAQUARTZ(TM) from VANGKOE for the sum of $50,000.


                                       8
<PAGE>

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.

The Company's decorative particles and performance aggregates will also face
substantial competitive pressures. The Company believes that Minnesota Mining
and Manufacturing Company ("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 other abrasives. These producers include 3M and Norton/St. Gobain, each with
resources superior to those of the Company. There can be no assurance that the
Company can stay in business in the face of strong competition from various
manufacturers with such advantages.

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 chose 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 used
materials that are not solid wastes and are not subject to RCRA permitting
requirements (as an example, reclaimed characteristically hazardous by-products
or sludges). The Company handled secondary materials in a manner that allows
such materials to qualify 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 stored 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


                                       9
<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.

During fiscal 1999, the Company was carrying a potential environmental liability
on its books which was caused by unprocessed materials at its Dunkirk facility.
This liability was reduced in fiscal 1999 as a result of an agreement that the
Company entered into with Dlubak which, in part, required the removal of all
inventory of unprocessed CRT materials from its Dunkirk facility which was
completed in November 1998. The Company intends to further reduce the liability
if and when it can decrease the quanities of the remaining unprocessed waste
materials on hand. In December, 1998, the Company was notified by NYSDEC that a
remedial plan needs to be submitted regarding the completion of its petroleum
storage tank removal project. The Company submitted its sampling plan and
analysis results to the NYSDEC and received a reply that NYSDEC does not require
any further remedial work at this time.

Employees

As of October 1, 1999, the Company had 12 full-time employees consisting of 9
employees in manufacturing and 3 employees in finance and administration. None
of the Company's employees are subject to a collective bargaining agreement and
the Company has not experienced any work stoppages, nor to the Company's
knowledge, are any threatened.

Certain Recent Events

New Management

There have been a number of management changes. In September 1998, Mr. David R.
Walner who was elected a director in March 1998, resigned as a director. In
October 1998, Stephen R. Archer, who had been hired in August 1998 as Vice
President, Sales and Marketing - Industrial Materials, resigned. In October
1998, William L. Amt and Gary Jellum resigned from their positions as President
and Chief Executive Officer and Vice President of Administration, respectively.
Eckardt C. Beck, who continues to act as the Company's Chairman of the Board,
has been serving as Acting President and Chief Executive Officer of the Company
since October 1998.

Private Placement

On September 24, 1999, the Company sold in a private placement (the "Private
Placement") to accredited investors 4,802,967 shares of Series B Convertible
Preferred Stock (the "Series B Preferred") with a par value of $.001 per share
and a stated value of $0.60 per share. Each share of the Series B Preferred is
convertible into twenty shares of Common Stock at a conversion price of $0.03
per share. The Company accepted $1,115,000 in cash and cancellation of debt and
accrued interest in the amount of $1,767,000


                                       10
<PAGE>

as consideration for the sale of the Series B Preferred. Of the total debt
cancelled in exchange for the Series B Preferred, $1,653,000 was from the Aries
Domestic Fund, L.P. and The Aries Fund, a Cayman Island trust (collectively, the
"Funds"), who converted all of the debt and accrued interest owed to them under
the Senior Secured Line of Credit Agreement (as amended, the "Credit Agreement")
and certain interim financing. See "Certain Relationships and Related
Transactions". The Funds now own shares of Series B Preferred which is
convertible into shares of Common Stock of the Company as stated above.

Other Changes to Indebtedness

Dunkirk was obligated with respect to $1,888,000 outstanding aggregate principal
amount of equipment term notes made by Dunkirk to Key Bank of New York ("Key
Bank") in December 1994 and January 1995, which were guaranteed by the Empire
State Development Corporation/Job Development Authority (the "ESDC"). In July
1997, the ESDC agreed to honor its guarantee of such equipment term loans (in
full) and in December 1997 the ESDC paid such guarantee (in full) and Key Bank
assigned such notes to the ESDC. In connection with the assignment of the notes
to ESDC, the ESDC agreed to defer all interest and principal payments due under
the loans through July 1, 1998 until the maturity date of the notes, with
interest continuing to accrue on such deferred amounts payable at maturity. On
December 2, 1997, the ESDC forgave $500,000 in principal amount of the debt.
Also, the balance of the related debt service fund of $459,000 was applied
against outstanding principal and accrued interest, resulting in a principal
balance (after debt forgiveness) of $1,032,798. On June 22, 1998, the ESDC
agreed to defer principal payments due under the loan through January 1, 1999
until the maturity date of the note. From the cash proceeds of the Private
Placement, the Company paid $600,000 to ESDC in full satisfaction of the
equipment term note assumed from Key Bank with an adjusted principal balance of
$1,183,110 and also another Dunkirk subordinated note due ESDC with a principal
balance of $37,870. In consideration for this payment made by the Company, ESDC
agreed to assign the related security interests to the Company.

Amendment to Certificate of Incorporation

On September 24, 1999, the Company's Certificate of Incorporation was amended to
increase the number of shares of Common Stock it is authorized to issue from 50
million to 200 million.

Illiquid Position

The Company does not currently possess sufficient funds to conduct its business
and satisfy its liabilities. The Company has significant past due payables and
is in default in payment of principal and interest on substantially all of its
indebtedness for borrowed money. The Company is currently seeking additional
financing through the sale of certain equipment located at its Dunkirk facility.
There can be no assurance that the Company will be able to obtain necessary
financing. If the Company is not able to obtain financing, the Company may be
forced to further limit or even cease operations.

Risk Factors

As described in the "Introductory Note," certain statements made herein that are
not historical are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known
and unknown risks and uncertainties. Many factors could cause the actual
results, performance or achievements of the Company to be materially different
from any future statements, including, among others, those described below.


                                       11
<PAGE>

Accumulated Deficit; History of Operating Losses; Going Concern Paragraph in
Auditor's Report

The Company has experienced significant operating losses since its inception.
The Company had an accumulated deficit of approximately $(38,290,000) at June
30, 1999. The Company incurred an operating loss of approximately $(1,638,000)
for the fiscal year ended June 30, 1999, and approximately $(8,442,000) for the
fiscal year ended June 30, 1998. As a result, the Company has experienced a
deficiency in cash flows from operations. Such losses have resulted principally
from limited revenues from operations and costs associated with the development
of the Company's technologies, general and administrative expenses and a number
of large one-time, non-cash charges to operations. The Company expects to incur
a substantial loss for the fiscal year ending June 30, 2000 and to continue to
incur operating losses until such time, if ever, as product sales generate
sufficient revenue to fund the Company's continuing operations. The Company
received an explanatory paragraph in the report of its independent auditor
accompanying its consolidated financial statements for the fiscal years ended
June 30, 1999 and 1998, indicating that there is substantial doubt as to the
ability of the Company to continue as a going concern. No assurance can be given
that the Company will ever achieve profitable operations.

Need for Additional Financing; Possibility of Bankruptcy

The Company is in need of significant additional financing. At June 30, 1999,
the Company had a net working capital deficiency of approximately $5,072,000.
The Company presently has large past due payables and is in default on principal
and interest payments with respect to substantially all of its indebtedness for
borrowed money. The Company's limited cash resources have strained relations
with suppliers and trade creditors and have caused certain suppliers to provide
products and services only on a cash basis. The Company's creditors, whether
lenders or trade creditors, could commence suit to enforce their debts (and
certain creditors have commenced litigation) or could force the Company into
bankruptcy. In the event of a bankruptcy, unless there are assets available
after the satisfaction in full of the claims of creditors, there will be no
recovery by the holders of equity. Furthermore, the Company's default on
indebtedness entitles the lenders to accelerate their debt, liquidate their
collateral and otherwise pursue the rights and remedies available to them
pursuant to applicable law and their loan documents. The Company has no
commitments or other arrangements for any future financing and there can be no
assurance that any debt or equity financing will be available within the needed
time frame. Furthermore, the Company's Certificate of Incorporation and the loan
documents to which the Company is a party restrict its ability to incur
additional debt. Any equity financing will be dilutive to the Company's
stockholders and any debt finances will likely contain restrictive covenants and
additional debt service requirements, which could adversely affect the Company's
operating results. If the Company is not able to obtain additional financing,
the Company may be required to significantly limit or even cease operations.

Substantial Indebtedness; Payment Defaults; Potential Loss of Collateral

At June 30, 1999, the Company had outstanding an aggregate of approximately
$2,514,000 of indebtedness (excluding amounts borrowed under the Line of Credit,
certain interim financing and capital lease obligations), substantially all of
which is secured by the assets of its wholly-owned subsidiary Dunkirk.
Accordingly, the Company is subject to all of the risks associated with
substantial indebtedness, including the risk that cash flow may not be
sufficient to make required payments of principal and interest on indebtedness.
To the extent that substantially all of the Company's assets continue to be
pledged, such assets will not be available to secure additional indebtedness,
which may adversely affect the Company's ability to borrow in the future. Of the
Company's $2,514,000 in indebtedness at June 30, 1999, $1,508,628 was principal
owed to the ESDC. On June 22, 1998, the ESDC agreed to defer principal payments
due under the loans through January 1, 1999 until the maturity date of the
notes. The Company has negotiated with the ESDC and paid on September 24, 1999 a
reduced amount of $600,000 as a payment in full of all amounts owed on two of
the loans which had a principal balance of $1,220,980. The


                                       12
<PAGE>

Company is currently in default with respect to principal and interest payments
on the remaining ESDC loan with a principal balance of $287,648. In the event
that the Company is unable to reach a settlement with the ESDC with respect to
the Company's repayment of debt to the ESDC, ESDC, as a secured party, may be
able to force a sale of the property located at the Dunkirk facility which
secures the debt. In addition, most of the Company's indebtedness is subject to
various covenants. In the event of a default in payment of outstanding
indebtedness (such as currently exists), or in the event of a default arising
out of a violation of any covenants, the Company, APT and/or Dunkirk may lose
all or a portion of its assets and the Company, APT and/or Dunkirk may be forced
to materially reduce its business activities or cease its operations. Certain of
the instruments governing the Company's indebtedness also contain default
provisions relating to insolvency and the inability to pay debts as they become
due. See "Certain Relationships and Related Transactions."

Limited Revenues and Product Sales; Lack of Profitable Business; New Business

The Company presently lacks a profitable business initiative. The Company
commenced recycling CRT glass used in the manufacture of televisions in 1994 and
production of industrial abrasives in 1995. Substantially all of the Company's
limited revenues through fiscal year 1998 were derived from recycling CRT glass;
however, the Company has phased out its CRT recycling operations. Additionally,
the Company has generated only minimal revenues to date from sales of
ALUMAGLASS, its initial industrial abrasive product, which has received limited
acceptance in the marketplace. The Company has recently commenced production of
certain other glass and fired ceramic substrates and decorative particles that
visually embrace structured materials, which were substantially all of the
Company's revenue in fiscal 1999; however, there can be no assurance that these
products will generate significant sales. While attempting to commercialize its
products, the Company is subject to risks inherent in a new business generally,
such as marketing problems, unanticipated problems relating to environmental
regulatory compliance, manufacturing and the competitive environment in which
the Company operates, and additional costs and expenses that may exceed
estimates. There can be no assurance that, even after the expenditure of
substantial funds and efforts, the Company will ever achieve or maintain a
substantial level of sales of its products.

Limited Sales of ALUMAGLASS; Shutdown of Melter; Uncertain Market Acceptance

To date, the Company has had only minimal sales of ALUMAGLASS. The Company has
shut-down the melter used to manufacture ALUMAGLASS and is currently satisfying
limited orders through existing inventory made from raw materials purchased from
a third party which the Company has processed into finished ALUMAGLASS. If
market demand for ALUMAGLASS warrants further ALUMAGLASS production, the Company
would seek to purchase the raw ALUMAGLASS particles and process the material for
resale to its customers. Although the Company is currently in discussions with
one such source, 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. There can be no assurance that
ALUMAGLASS will ever obtain market acceptance. In addition, the Company has only
recently commenced production of its other glass and fired ceramic materials,
and there can be no assurance that these products will obtain market acceptance.

Cancellation of Indebtedness; Possible Tax Effects

Due to certain debt forgiveness, the Company had a number of significant net
pretax gains during fiscal 1998. These net pretax gains could result in
significant tax obligations. The Company does not have sufficient working
capital to satisfy any such obligations. See "Notes to Consolidated Financial
Statements - Item 2 - Extraordinary Items." While the Company does have certain
loss carry forwards, the Company cannot be certain at this time whether the loss
carry forwards are usable to offset any of the Company's gains.


                                       13
<PAGE>

New Management; Dependence on Key Personnel

The Company is and will be dependent on its key management personnel, Eckardt C.
Beck, Acting President and Chairman of the Board, and John Murchie, Chief
Financial Officer. There can be no assurance that such individuals will be able
to successfully implement the Company's strategies or that such individuals will
remain with the Company. The loss of one or more of these individuals could have
a material adverse effect on the business and operations of the Company. In
addition, the Company will need to attract and retain other qualified
individuals to satisfy its personnel needs. There can be no assurance that the
Company will be successful in retaining its key management personnel or in
attracting and retaining new employees.

Limited Sales and Marketing Experience

The Company has had limited experience in selling and marketing its products.
Furthermore, the Company has assembled only a small sales and marketing
organization. There can be no assurance that the Company will be able to
recruit, train or retain qualified personnel to sell and market its products or
that it will develop a successful sales and marketing strategy. In addition, for
certain applications, the Company has relied on distributors for primary
marketing efforts, which has resulted in only limited sales of ALUMAGLASS. In an
effort to achieve market acceptance of its products, the Company may seek to
enter into joint ventures, licensing or other collaborative arrangements to sell
and market its products. There can be no assurance that any sales and marketing
or other efforts undertaken by the Company will be successful.

Competition

The Company's products and services are subject to substantial competition. See
"Competition" for a detailed description of the competition that the Company
faces.

Dependence on Patents and Proprietary Technology; Risk of Infringement of
Third-Party Patents

The Company's success will depend, in part, on its ability to maintain
protection for its products and manufacturing processes under United States and
foreign patent laws, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. The Company has two issued
U.S. patents and two U.S. patent applications pending. There can be no assurance
that any patent applications will result in issued patents, that any issued
patents will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented or that any rights thereunder will afford
competitive advantages to the Company. Furthermore, there can be no assurance
that others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of the Company's
products and technologies.

Dependence on Environmental Regulation/Regulatory Status of Facilities

Federal, state and local environmental legislation and regulations mandate
stringent waste management and operations practices, which require substantial
capital expenditures and often impose strict liabilities for non-compliance.
Environmental laws and regulations are, and will continue to be, a principal
factor affecting demand for the technology and services being developed or
offered by the Company. Additionally, the Company and its customers operate in a
highly regulated environment and the St. Augustine facility is and any future
facilities may be required to have various Federal, state and/or local
government permits and authorizations, registrations and/or exemptions.

Potential Environmental Liability

The Company's business exposes it to the risk that harmful substances may be
released or escape into the environment from its facilities, processes or
equipment, resulting in potential liability for the resultant


                                       14
<PAGE>

exposures, clean-up or remediation of the release, and/or potential personal
injury associated with the release. Liability for investigation and/or clean-up
and corrective action costs exists under the Comprehensive Environmental
Response, Compensation and Liability Act, the Resource Conversation and Recovery
Act, the New York State Environmental Conservation Law, and the Florida Air and
Water Pollution Control Act. Additionally, the Company is potentially subject to
regulatory liability for the generation, transportation, treatment, storage or
disposal of hazardous waste if it does not act in accordance with the
requirements of Federal or state hazardous waste regulations or facility
specific regulatory determinations, authorizations or exemptions. The Company is
also potentially subject to regulatory liability for releases into the air or
water under the Clean Air Act, the Clean Water Act and analogous state laws and
regulations, and various other applicable Federal or state laws and regulations.

Potential Conflicts of Interest Arising from Certain Related Party Transactions

The Company has entered into consulting agreements with Mr. Beck, and with
certain principal stockholders and affiliates of certain directors and principal
stockholders of the Company, pursuant to which, among other things, certain of
such persons received warrants and pursuant to which certain of such persons
will be entitled to receive success fees upon the completion of certain project
development activities. Such agreements may result in conflicts of interest for
the directors and principal stockholders who are, or whose affiliates are,
parties to such consulting agreements. The Company, however, does not believe
that the existence of such agreements will interfere with the ability of the
Company's directors to discharge their fiduciary duties to the Company's
stockholders. See "Certain Relationships and Related Transactions".

Outstanding Warrants, Options and Convertible Securities

As of October 1, 1999, the Company had outstanding 514,930 shares of Series A
Convertible Preferred Stock convertible into 10,298,600 shares of Common Stock
at a conversion price of $0.50 per share and 4,802,967 shares of Series B
Convertible Preferred Stock convertible into 96,059,340 shares of Common Stock
at a conversion price of $0.03 per share.

Also as of October 1, 1999, the Company had outstanding (i) 18,329,095 warrants
to purchase an aggregate of 18,329,095 shares of Common Stock at exercise prices
ranging from $0.66 to $5.28 per share; (ii) options to purchase an aggregate of
1,052,257 shares of Common Stock at exercise prices ranging from $0.03 to $6.16
per share; and (iii)non-qualified options to purchase 36,293,101 shares of
Common Stock at an exercise price of $0.03 per share (consisting of options to
purchase 18,146,550 shares issued to Mr. Beck, options to purchase 10,434,267
issued to five other directors of the Company, options to purchase 1,360,991
issued to one other officer of the Company and options to purchase 6,351,293
issued to two managers of the Company) which are not part of any of the
Company's option plans. See "Certain Relationships and Related Transactions".
Also, the Company had outstanding warrants to purchase 61,945 shares of Series A
Preferred Stock at a per share exercise price of $9.82. The Company has reserved
an aggregate of 690,000 shares of Common Stock for issuance under the Stock
Option Plans and 710,000 shares of Common Stock under its Long-Term Plan (as
defined below) as of the date of this Report. Holders of such warrants and
options are likely to exercise them when, in all likelihood, the Company could
obtain additional capital on terms more favorable than those provided by such
warrants and options. In addition, the exercise of such warrants and options
could have a material adverse effect on the market price of, and liquidity in
the market for, shares of Common Stock. Further, while these warrants and
options are outstanding, the Company's ability to obtain additional financing on
favorable terms may be adversely affected.


                                       15
<PAGE>

Risks of Penny Stock

The Company's securities are subject to Rule 15g-9 under the Exchange Act, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
an annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by such rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of the holders of the Company's securities
to sell in the secondary market any of such securities.

SEC regulations define a "penny stock" to be any non-NASDAQ equity security that
has a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.

Possible Volatility of Market Price of Common Stock

The market price of the Company's securities, like that of many other of
development stage companies and many emerging companies, has been highly
volatile, experiencing wide fluctuations not necessarily related to the
operating performance of such companies. Factors such as the Company's operating
results, announcements by the Company or its competitors concerning
technological innovations and new products or systems may have a significant
impact on the market price of the Company's securities. In addition, the Company
has recently experienced limited trading volume in its Common Stock.

Possible "Year 2000" Problems

Although the Company believes that its computer systems are fully Year 2000
compliant, it is possible that certain computer systems of the Company's
suppliers and contractors may not accept input of, store, manipulate and output
dates prior to the Year 2000 or thereafter without error or interruption. The
Company is requesting assurances from all software vendors from which it has
purchased or from which it may purchase software that such software will
correctly process all date information at all times. Furthermore, the Company is
querying its suppliers and contractors as to their progress in identifying and
addressing problems that their computer systems will face in correct processing
date information as the Year 2000 approaches. However, there can be no assurance
that the Company will identify all date- handling problems of its suppliers and
contractors in advance of their occurrence, or that the Company will be able to
successfully remedy problems that are discovered. The expense of the Company's
efforts to identify and address such problems, or the expenses or liabilities to
which the Company may become subject as a result of such problems, could have a
material adverse effect on the Company.


                                       16
<PAGE>

Item 2. Description of Properties

The Company owns its 230,000 square foot manufacturing facility in Dunkirk, New
York. Such facility is subject to a first mortgage held by the New York Job
Development Authority securing a promissory note issued to the Chautauqua Region
Industrial Development Corporation, with respect to which approximately $287,648
principal amount was outstanding on June 30, 1999. In addition, such facility is
subject to a second mortgage securing a promissory note issued to the former
owner of the property as part of the purchase price therefor, with respect to
which principal in the amount of approximately $253,638 was outstanding on June
30, 1999.

The Company relocated its headquarters to St. Augustine, Florida, and has
entered into a 20 month lease for approximately 6,100 square feet of executive
office space. The lease will expire in December 1999 and rent for such space is
approximately $3,750 per month. The lease may be extended on a month to month
basis at the option of the leasor. The Company terminated its lease on
approximately 4,700 square feet of office space in Orlando, Florida effective
May 15, 1998.

APT currently leases approximately 21,400 square feet of manufacturing and
warehouse space in St. Augustine, Florida. The leases will expire in February
2000 and rent is approximately $10,400 per month.

In the opinion of the management of the Company, all of the properties described
herein are adequately covered by insurance.

Item 3. Legal Proceedings

In October 1998, the Company received threats of litigation from Stephen Archer,
former Vice-President of Sales and Marketing - Industrial Materials and Gary
Jellum, former Vice President of Administration. Both Mr. Archer and Mr. Jellum
allege that they were constructively terminated by the Company. The Company
believes that the threats of Messrs. Archer and Jellum are without merit and is
prepared to defend itself against any claims made.

On October 22, 1998, MWW/Strategic Communications, Inc., a public relations
firm, filed a demand for arbitration against the Company with the American
Arbitration Association. MWW alleges that the Company owes it professional fees
in the amount of $22,192.86 for services rendered. On May 27, 1999, an
arbitrator awarded $14,947.79 to MWW in full settlement and consideration of all
claims submitted.

In November 1998, Buchanan Ingersoll Professional Corporation filed a complaint
in the Orange County Circuit Court of Florida (the "Circuit Court") against the
Company. Buchanan Ingersoll, which until September 1998 acted as legal counsel
to the Company, alleged that the Company owed it legal fees in the amount of
$192,204.01. On March 11, 1999, the Circuit Court entered a final judgement in
favor of Buchanan Ingersoll in the amount of $197,689.28. On September 24, 1999
the sum of $160,000 was paid to Buchanan Ingersoll in full settlement of the
judgement and the parties executed mutual releases

On or about July 1, 1999 an action was commenced against the Company by The
Hartford in the Circuit Court of Orange County, Florida. The complaint seeks
monetary damages of approximately $56,000 plus prejudgement interest and
attorney's fees. The claims relate to premiums alleged to be owing under certain
insurance policies. The Company has filed a motion to dismiss the action.

The Company is not involved in any other material legal proceedings.


                                       17
<PAGE>

Item 4. Submission of Matters to a Vote of Security Holders

The Company received written consents of the holders of shares (the "Holders")
representing a majority of the voting power of the outstanding Common Stock and
preferred stock approving an increase in the authorized number of shares of
Common Stock from 50,000,000 to 200,000,000 shares. The Company received from
July 9, 1999 through July 15, 1999 written consents from the Holders
representing a total of 9,126,957 shares which represented 83.6% of the Common
Stock on July 15, 1999. The increase in authorized shares was effectuated by
means of a merger pursuant to which a newly formed wholly owned subsidiary of
the Company, CTI Subsidiary Corp. was merged with and into the Company and the
Company's restated certificate of incorporation was amended to effect the
increase in authorized shares.

                                    Part II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's Common Stock had been quoted on the Nasdaq SmallCap Market (the
"SmallCap Market") under the symbol "CTIX" since May 16, 1996, the effective
date of the Company's registration statement relating to its initial public
offering of Common Stock (the "IPO"). On October 23, 1998, the Common Stock was
delisted by Nasdaq and is currently listed on the Pink Sheets(R), a quotation
medium operated by the National Quotation Bureau, LLC (the "Pink Sheets") under
the symbol "CVTL". The following table sets forth, for each of the quarters
indicated, the high and low bid prices per share of Common Stock as quoted on
the SmallCap Market and the over-the-counter market (source, the Nasdaq- Amex
Market Group). The prices shown represent quotations among securities dealers,
do not include retail markups, markdowns or commissions and may not represent
actual transactions.

         Quarter Ended                   High                      Low
       June 30, 1996                    $7.25                     $5.00
       September 30, 1996               $5.00                     $3.375
       December 31, 1996                $3.375                    $2.25
       March 31, 1997                   $2.625                    $1.375
       June 30, 1997                    $3.00                     $1.00
       September 30,1997                $1.75                     $1.3125
       December 31, 1997                $2.00                     $.75
       March 31, 1998                   $1.1875                   $.6875
       June 30, 1998                    $1.375                    $0.625
       September 30, 1998               $1.09375                  $0.15625
       December 31, 1998                $0.3125                   $0.001
       March 31, 1999                   $1.25                     $0.01
       June 30, 1999                    $0.24                     $0.001

As of August 11, 1999, the Company had approximately 871 holders of record of
Common Stock.

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


                                       18
<PAGE>

Recent Sales of Unregistered Securities

There were no unregistered securities sold by the Company during the fiscal year
ended June 30, 1999.

On September 24, 1999, the Company sold pursuant to the Private Placement an
aggregate of 4,802,967 shares of Series B Preferred for which the Company
accepted $1,115,000 in cash and the cancellation of $1,767,000 of debt and
accrued interest. The Series B Preferred was sold pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933, as amended
(the "Securities Act") and Regulation D promulgated thereunder. In connection
with the sale of the Series B Preferred, the Company did not conduct any general
advertisement or solicitation; each purchaser of the Series B Preferred
represented that, among other things, the purchaser was an "accredited investor"
as that term is defined in Regulation D and the purchaser was purchasing the
shares of Series B Preferred for investment and not with a view to
distributions. Appropriate legends were affixed to the certificates representing
the Series B Preferred. The Company has agreed to file, not later than 120 days
following the final closing of the Private Placement, a registration statement
under the Securities Act registering for resale the Common Stock issuable upon
conversion of the Series B Preferred.

Each share of Series B Preferred has a par value of $.001, a stated value of
$0.60 and is convertible into twenty shares of Common Stock at a conversion
price of $0.03 per share. The holders of the Series B Preferred are entitled to
the number of votes equal to the number of shares of Common Stock of the Company
into which such shares of Series B Preferred are convertible, and are entitled
to vote together with the holders of the Series A Convertible Preferred Stock
and the Common Stock.

The holders of the Series B Preferred are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Series B Preferred sold in the Private Placement remains outstanding. The
affirmative vote of the holders of a least two-thirds of the Series B Preferred
will be required for (i) the issuance of securities senior to or on a parity
with the Series B Preferred with respect to dividends, voting or liquidation,
(ii) any alterations to the rights of the Series B Preferred, (iii) a
liquidation, dissolution or sale of substantially all of the assets of the
Company, (iv) the incurrence of over $100,000 of indebtedness (other than
borrowings under working capital lines of credit), and (v) the repurchase of any
of the securities of the Company. In addition, the holders of the Series B
Preferred are entitled to a liquidation preference in an amount per share equal
to $0.81 plus declared and/or accrued but unpaid dividends, if any. Finally, the
holders of the Series B Preferred are entitled to dividends, payable in cash or
in Series B Preferred, at an annual rate of 10% beginning in September 2000. The
Company must pay such dividend prior to any dividend declared on the Common
Stock.

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

Overview

Since inception through June 30, 1999, the Company sustained cumulative losses
of approximately $38,290,000. 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(R) 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, (iv) an extraordinary item from
the gain on debt retirement of approximately $6,425,000 during the fiscal year
ended June 30, 1998, (v) a non-cash charge to operations of approximately


                                       19
<PAGE>

$4,913,000 for the write down of property, plant and equipment held for sale
during the quarter ended June 30, 1998, and (vi) other operating losses
including preferred stock dividends of $3,909,000, of approximately $25,330,000.
The Company will continue to incur losses until such time as revenues are
sufficient to fund its continuing operations.

During fiscal 1999 the Company took a number of steps in an effort to preserve
cash, reduce its costs and increase revenues. Raw material costs are expected to
be reduced through the application of lower cost alternative substrates and
coating materials. Investments in product development have been curtailed in
fiscal 1999 and investments in sales and marketing will be increased for the
year ending June 30, 1999. 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 Dunkirk
facility. The Company is selling decorative particles produced by APT and hopes
to increase revenue from this product line. The Company will also strive to
increase sales of other abrasives and aggregates as it implements new marketing
efforts. Implementation of the Company's business plan, however, is subject to
obtaining the necessary financing.

In September 1999, the Company sold in a private placement 4,802,967 shares of
Series B Convertible Preferred Stock ("Series B Preferred") with a par value of
$.001 per share and a stated value $0.60 per share. The Company accepted
$1,115,000 in cash and the cancellation of $1,767,000 of debt including accrued
interest for the sale of the Series B Preferred. From the cash proceeds,
$600,000 was paid to ESDC in full satisfaction of loans having an aggregate
principal balance of $1,221,000. See "Liquidity and Capital Resources". $160,000
was paid in settlement of past due professional services with an accrued
liability of $198,000.

Because 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, 1999, 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, 1999 Compared to Fiscal Year Ended June 30, 1998.

Consolidated revenues for fiscal 1999 were approximately $1,119,000 consisting
primarily of decorative particles and performance aggregates sales of
approximately $912,000, ALUMAGLASS(R) sales of approximately $133,000 and CRT
glass recycling fees and related clean cullet sales of approximately $74,000.
For fiscal 1998 consolidated revenues were approximately $1,898,000 of which
approximately $1,275,000 was derived from CRT glass recycling fees and related
clean cullet sales, approximately $321,000 from sales of ALUMAGLASS(R) and
approximately $302,000 from sales of decorative particles and performance
aggregates. This decrease in revenue of $779,000 is as a result of the decreases
of $1,201,000 in CRT glass recycling fees and related clean cullet sales due to
the Company subcontracting those operations to a third party and of $188,000 in
ALUMAGLASS(R) sales as a result of ceasing operations at the Dunkirk plant in
the second quarter of fiscal 1999. These decreases more than offset the $610,000
increase in sales from decorative particles and performance aggregates due to
fiscal 1999 being normal production compared to fiscal 1998 being a start up of
operations.

Cost of goods sold was approximately $1,251,000 for fiscal 1999 versus
approximately $2,703,000 for the prior fiscal year, representing a decrease of
approximately $1,452,000 when sales decreased by only


                                       20
<PAGE>

$779,000. This was a result of a decrease of $1,842,000 from the ceasing of
operations at the Dunkirk plant and that no depreciation was provided for during
fiscal 1999 on the idle Dunkirk property, plant and equipment. An increase of
$390,000 was caused by the increased level of production in the decorative
particles and performance aggregates business due to increased amount of sales
for that business.

As a result of the above decreases in revenue of $779,000 and in cost of goods
sold of $1,452,000, the Company's gross margin improved by $674,000 to a loss of
$131,000 for fiscal 1999 compared to a loss of $805,000 for fiscal 1998. The
shutdown of operations at the Dunkirk plant and the disposal of unprocessed CRT
material resulted in an improved gross margin of $433,000 while the increased
level of sales and production of decorative particles and performance aggregates
had an improved gross margin of $241,000.

Selling, general and administrative expenses decreased by $1,217,000 to
$1,506,000 for fiscal 1999, as compared to $2,723,000 for fiscal 1998. This
decrease was primarily the result of fiscal 1998 having $664,000 recorded for
the penalty cost for the additional 66,360 shares of Series A Preferred Stock
issued as a result of the delay in registering the shares of Common Stock
underlying the Series A Preferred Stock as described in Note 7 to the Financial
Statements, a decrease of $308,000 in corporate salaries, and a decrease of
$105,000 in compensation expenses relating to capital stock.

A charge against operations of approximately $4,913,000 was recorded in the
fourth quarter of fiscal 1998 to write down the property, plant and equipment at
the Dunkirk plant to its estimated disposal value as a result of the Company's
determination at that time to sell that facility. In September 1999, the Company
leased a portion of its Dunkirk plant and is exploring various alternatives for
the use of the remaining portion of the plant to generate additional revenues.

Interest expense decreased by $75,000 to $477,000 for fiscal 1999 from $552,000
for fiscal 1998. The decrease was primarily attributable to the reduction in
debt from the repayment and forgiveness described below which was partially
reduced by the interest accrued and discount amortized on the debt issued in
1999 and 1998.

The Company recorded an extraordinary item for the gain on debt retirement of
$6,425,000 in fiscal 1998. This resulted from a gain of $5,862,000 on the
retirement of Dunkirk's Chautauqua County Industrial Development Agency Bonds, a
gain of $271,000 for the debt forgiveness granted to the Company by the ESDC and
a gain of $292,000 for the accounts payable forgiveness granted to the Company
by certain of its vendors in negotiated settlements.

Liquidity and Capital Resources

The Company's business is capital intensive. The Company has funded its
operations principally from private debt and equity finances and the proceeds of
the IPO. Presently, the Company has limited revenue, has suffered recurring
losses from operations and has a net capital deficiency. The Company has a need
for financing. Management has implemented operational changes and has
restructured certain debt; however, management cannot predict the success of
these operational changes. These conditions, among others, raise substantial
doubt about the Company's ability to continue as a going concern. These issues
also create an uncertainty as to the recoverability of recorded assets and
satisfaction of liabilities. At June 30, 1999, the Company had approximately
$2,514,000 in principal amount of indebtedness (excluding amounts borrowed under
the Credit Agreement, the interim financing and capital lease obligations) and
net working capital deficiency of approximately $5,072,000. As of June 30, 1999,
the Company had cash and marketable securities of approximately $61,000.

As of June 30, 1999, the Company had approximately $2,514,000 in principal
amount of indebtedness


                                       21
<PAGE>

(excluding amounts borrowed under the Line of Credit, the interim financing and
capital lease obligations), consisting of (i) approximately $1,183,000
outstanding principal amount under the term loan with the ESDC, which bears
interest at the prime rate and is payable in monthly installments through
December 2001 (subject to the deferral through July 1, 1998 described above),
(ii) approximately $627,000 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 indebtedness is secured by liens on its
fixed assets. The Company's indebtedness has been used to finance its facility,
equipment and related capital expenditures. Certain of the agreements related to
such indebtedness contain customary covenants and default provisions. At June
30, 1999, the Company was in violation of certain loan covenants and was in
default in payment of principal and interest, related to the above $2,514,000 in
debt, and as a result all of it has been classified as a current liability at
June 30 1999.

In May 1998, the Company entered into the Credit Agreement for the Line of
Credit (which, as amended, provides for up to $1,290,000 principal amount of
loans) pursuant to which the Company had borrowed $610,000 as of June 30, 1998
and the balance as of January 13, 1999. The borrowings are secured by the
receivables and inventory of the Company and accrue interest at an annual rate
of 12%. In connection with the Line of Credit, as amended, the Company issued to
the lenders warrants to purchase an aggregate of 385,075 shares of Common Stock
at an exercise price of $0.67 (after giving effect to the antidilution
adjustment as of December 8, 1998), subject to vesting as the borrowings
occurred. On February 22, 1999, the Funds provided the interim financing to the
Company in the amount of up to $150,000 ($135,000 of which was borrowed at June
30, 1999 and the balance subsequent to year end). Also on July 7, 1999, the
Funds provided additional financing to the Company in the amount of $20,000.
During the period commencing September 1998 and terminating in February 1999,
Eckardt C. Beck, the Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation,
aggregating $190,000. The loans accrue interest at the rate of 12% per year and
became due on September 1, 1999. See "Certain Relationships and Related
Transactions."

In September 1999, the Company raised $1,115,000 in cash and $1,766,778 in the
form of cancellation of debt and accrued interest in the Private Placement of
4,802,967 shares of the Series B Preferred with a par value of $.001 per share
and a stated value of $0.60 per share. Each share of Series B Preferred is
convertible into twenty shares of Common Stock at a conversion price of $0.03
per share. Commencing twelve months from the closing of the Private Placement,
the holders of the Series B Preferred are entitled to receive dividends payable
in cash or in shares of Series B Preferred stock at the option of the Company at
the rate of 10% per annum.

The Company accepted cash and the cancellation of debt as consideration for the
sale of the Series B Preferred. Of the total proceeds $1,115,000 was in cash and
$1,766,778 was in the form of cancellation of debt and accrued interest. Of the
debt converted, $1,652,778 was from the two significant stockholders of the
Company who converted all of the principal and accrued interest owed to them
under the Credit Agreement, the interim financing of February 22, 1999 and the
July 7, 1999 borrowing.. Also the Acting President and Chief Executive Officer
converted $114,000 of the principal and accrued interest owed to him under the
promissory note dated February 23, 1999. The above debt that was cancelled as
consideration for the sale of the Series B Preferred has been classified as
long-term debt at June 30, 1999.

From the cash proceeds of the Private Placement, $600,000 was paid to ESDC in
full satisfaction of the Dunkirk - Term loan with New York State Job Development
Authority with a $1,183,110 principal balance and the Dunkirk - New York Job
Development Authority (Al Tech) subordinated note with a principal balance of
$37,870. In addition, $160,000 was paid to the Company's former legal counsel in


                                       22
<PAGE>

full settlement of an accrued liability of $197,689 for past due professional
services.

The Company's capital lease payments were approximately $27,000 for the year
ended June 30, 1999 and are estimated to be approximately $15,000 for the fiscal
year ending June 30, 2000, under current commitments. The Company has no other
material commitments for capital expenditures.

The Company received waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal costs of waste material it has
received which cannot be processed through the Company's current processing
methods, net of the amount of deferred revenue recorded with respect to such
materials. The Company records a disposal reserve with respect to materials it
cannot process because it is probable it will incur these costs on the ultimate
disposition of the waste materials. The Company estimates that the disposal
costs for material received by the Company that the Company cannot process, if
and when incurred, will exceed the fees the Company was paid to accept such
materials.

The Company had 843 tons of unprocessed waste materials on hand as of June 30,
1999, compared to 2,035 tons on June 30, 1998. The Company's disposal reserve
was $301,000 as of June 30, 1999, compared to $515,000 at June 30, 1998. The
decrease in unprocessed waste materials on hand, and related decrease in reserve
for disposal, resulted primarily from the reduction in the quantities of
unprocessed waste materials on hand, has been credited against operations.

The Company has federal net operating loss carry forwards that amounted to
approximately $24 million at June 30, 1999, which expire between 2006 and 2019.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of net operating loss carry forwards 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
historical equity finances, the Company's ability to utilize its net operating
loss carry forwards could be severely limited.

Pending Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.

Year 2000 Compatibility

Although the Company believes that its computer systems are fully Year 2000
compliant, it is possible that certain computer systems of the Company's
suppliers and contractors may not accept input of, store, manipulate and output
dates prior to the Year 2000 or thereafter without error or interruption. The
Company is requesting assurances from all software vendors from which it has
purchased or from which it may purchase software that such software will
correctly process all date information at all times. Furthermore, the Company is
querying its suppliers and contractors as to their progress in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the Year 2000 approaches. However, there can be
no assurance that the Company will identify all date handling problems of its
suppliers and contractors in advance of their occurance, or that the Company
will be able to successfully remedy problems that are discovered. The expense of
the Company's efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company.


                                       23
<PAGE>

Item 7. Financial Statements

See Financial Statements annexed.

Item 8. Changes in and Disagreements With Accountants on Accounting and
        Financial Disclosure

None.

                                    PART III

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

Eckardt C. Beck, Douglas M. Costle, Stephen D. Fish, Peter H. Gardner, Alexander
P. Haig, and Irwin M. Rosenthal are the members of the Board of Directors of the
Company.

The Officers of the Company are:

      Eckardt C. Beck          Chairman of the Board, Acting President and Chief
                               Executive Officer

      John G. Murchie          Acting Chief Financial Officer and Controller

      The name, business address, present principal occupation of employment and
five (5) year employment history of each of the directors and executive officers
of the Company are set forth below. All such individuals are citizens of the
United States unless otherwise indicated.


                                       24
<PAGE>

                                                 Position(s) with the Company;
                                                 Principal occupation or
                                                 Employment; Five (5) Year-
Name, Age and Business Address                   Employment History

Eckardt C. Beck (56)                             Mr. Beck has been serving as
                                                 acting President and Chief
Conversion Technologies International, Inc.      Executive Officer of the
7 San Bartola Drive                              Company since October, 1998.
St. Augustine, FL 32086                          Mr. Beck has been a director of
                                                 the Company since February 1995
                                                 and Chairman of the Board since
                                                 February 1997. Mr. Beck also
                                                 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
                                                 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.

Douglas M. Costle (60)                           Mr. Costle was appointed to the
                                                 Company's Board of Directors in
Rural Route #2, Box 480                          October 1997. Mr. Costle has
Woodstock, VT 05091                              been a director of Niagara
                                                 Mohawk Power Corporation, a
                                                 publicly-held utility company,
                                                 since January 1991. 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. Currently, Mr. Costle
                                                 is inactive on medical leave.


                                       25
<PAGE>



Stephen D. Fish (53)                             Mr. Fish was appointed to the
                                                 Company's Board of Directors in
Fish Enterprises                                 October 1997. Mr. Fish has been
302 West Main Street, Suite 155                  President of Fish Enterprises,
Avon, CT 06001                                   a privately-held real estate
                                                 development and management
                                                 company, since 1970. Mr. Fish
                                                 also serves on the Advisory
                                                 Board of Fleet Bank of
                                                 Connecticut.

Peter H. Gardner (33)                            Mr. Gardner has been a director
                                                 of the Company since October
Media Technology Ventures                        1995. Since January 1998, Mr.
1 First Street, Suite 2                          Gardner has been a principal of
Los Altos, CA 94022                              Media Technology Ventures, a
                                                 privately-held venture capital
                                                 firm. From July 1994 through
                                                 December 1997, Mr. Gardner was
                                                 a Vice President of 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 held
                                                 the position of Project Leader
                                                 and Project Scientist at Roy F.
                                                 Weston, Inc., an environmental
                                                 engineering firm, from June
                                                 1990 through August 1993. Mr.
                                                 Gardner was pursuing a graduate
                                                 degree in business
                                                 administration between
                                                 September 1993 and June 1995.

Alexander P. Haig (47)                           Mr. Haig has been a director of
                                                 the Company since May 1996.
Sky Station International                        Since February 1996, Mr. Haig
1824 "R" Street, N.W.                            has been President and Chief
Washington, D.C. 20009                           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 United States and
                                                 foreign countries for marketing
                                                 and sales activities. Prior to
                                                 1988, Mr. Haig was an attorney
                                                 in private practice.


                                       26
<PAGE>

Irwin M. Rosenthal (70)                          Mr. Rosenthal has been a
                                                 director of the Company since
Graham & James LLP                               May 1996. Mr. Rosenthal is an
885 Third Avenue, 21st Floor                     attorney and since 1960 has
New York, N.Y. 10022                             specialized in securities law.
                                                 He is currently a partner at
                                                 Graham & James LLP. Prior to
                                                 July 1998, Mr. Rosenthal was a
                                                 partner at Rubin Baum Levin
                                                 Constant & Friedman. Mr.
                                                 Rosenthal is also a director of
                                                 Magna-Lab, a publicly- traded
                                                 chemical and medical technology
                                                 company. He is also a director
                                                 of Life Medical Sciences, Inc.,
                                                 a publicly-traded medical
                                                 technology company, and
                                                 Echocath, Inc., a
                                                 publicly-traded medical
                                                 technology company.

John G. Murchie (62)                             Mr. Murchie has been the Acting
                                                 Chief Financial Officer of the
Conversion Technology International, Inc.        Company since January 1998, and
7 San Bartola Drive                              Controller since September
St. Augustine, FL 32086                          1997. From February 1995 to
                                                 September 1997, Mr. Murchie was
                                                 the Controller and Chief
                                                 Administrative Officer of
                                                 Dunkirk. From February 1994 to
                                                 February 1995, Mr. Murchie
                                                 worked on a full time basis for
                                                 Dunkirk as a consultant and was
                                                 not otherwise employed. From
                                                 November 1985 to February 1994,
                                                 Mr. Murchie was employed by
                                                 Rich Products Corporation, a
                                                 privately-held food products
                                                 company, in various financial
                                                 positions. Mr. Murchie received
                                                 a B.S. in Business
                                                 Administration from Miami
                                                 University of Ohio.

All directors of the Company are elected by the stockholders, or in the case of
a vacancy, by the directors then in office, to hold office until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified or until their earlier resignation or removal.

Board Committees

The Board of Directors has established four committees - the Audit Committee,
the Compensation Committee, the Fairness Committee and the Nominating Committee.
The Audit Committee oversees the activities of the Company's independent
auditors and reviews the Company's internal accounting procedures and controls.
The Compensation Committee makes recommendations to the Board with respect to
general compensation and benefit levels for employees, determines the
compensation and benefits for the Company's executive officers and administers
the Company's stock option and incentive plans. The Nominating Committee makes
recommendations to the Board with respect to candidates to


                                       27
<PAGE>

fill vacancies on the Board, recommends an appropriate slate of candidates for
election each year, and reviews senior officer candidates. Stockholders wishing
to nominate director candidates for consideration may do so by writing to the
Nominating Committee at the Company at 7 San Bartola Drive, St. Augustine,
Florida, 32086. The Fairness Committee makes recommendations to the Board with
respect to transactions involving relating parties, oversees trading and SEC
compliance procedures and addresses corporate governance issues. The current
members of these Committees are:

Audit Committee: Irwin M. Rosenthal and Douglas M. Costle

Compensation Committee: Peter H. Gardner and Douglas M. Costle

Fairness Committee: Alexander P. Haig and Stephen D. Fish

Nominating Committee: Peter H. Gardner and Douglas M. Costle

Limitation of Liability and Indemnification Matters

The Company's Certificate of Incorporation contains provisions to indemnify its
directors and officers to the fullest extent permitted by Delaware law, and also
includes provisions to eliminate the personal liability of the directors and
officers of the Company and its stockholders to the fullest extent permitted by
Delaware law. Under current law, such exculpation would extend to an officer's
or director's breaches of fiduciary duty, except for (i) breaches of such
person's duty of loyalty, (ii) those instances where such person is found not to
have acted in good faith and (iii) those instances where such person received an
improper personal benefit as a result of such breach.

The Company's bylaws provide that the Company may indemnify any person,
including officers and directors, with regard to any action or proceeding to the
fullest extent permitted under Delaware law.

Section 16(a) Beneficial Ownership Reporting Compliance

The Company knows of no late filings pursuant to Section 16(a) of the Exchange
Act during fiscal 1999..

Item 10. Executive Compensation.

Summary Compensation Table

The following summary compensation table sets forth the aggregate compensation
paid or accrued by the Company for the fiscal years ended June 30, 1999, 1998
and 1997 to Eckardt C. Beck, the Company's Acting President and Chief Executive
Officer and who served as the Company's chief executive officer during a portion
of fiscal 1999 and 1998, and William L. Amt, who also served as the Company's
chief executive officer during a portion of fiscal 1999 and 1998 (collectively,
the "Named Executive Officers"). No other executive officer received annual
compensation in excess of $100,000 for fiscal 1999.


                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                                                    Long Term
                                                                                  Compensation
                                                                              Awards        Payouts
                                                                            Securities
                                                              Other         Underlying                         All
   Name and Principal       Fiscal     Salary     Bonus      Annual          Options/        LTIP             Other
        Position             Year        ($)       ($)    Compensation         SARs         Payouts       Compensation
   ------------------       ------     ------     -----   ------------      ----------      -------       ------------
<S>                          <C>      <C>          <C>     <C>             <C>              <C>               <C>
Eckardt C. Beck              1999         --        --     120,000(1)           --                             --
Acting President &           1998         --        --      85,677(1)      300,000(2)                          --
Chief Executive Officer      1997     52,000(1)     --                      10,121(3)                          --
from October 1998 to
date and from June
1997 to August 1997

William L. Amt               1999     44,615(4)     --          --                --                           --
Former President and         1998    146,667(4)     --          --           300,000(2)                        --
Chief Executive Officer      1997         --        --          --                --                           --
from August 1997 to
October 1998
</TABLE>

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

(1)   Mr. Beck has served as Chairman since February 1997, and as Acting
      President and Chief Executive Officer from June 1997 to August 1997 and
      from October 1998 through the present. Compensation represents consulting
      fees pursuant to his Consulting Agreement with the Company. See "Certain
      Relationships and Related Transactions." Mr. Beck currently has accrued
      for his benefit $10,000 per month under the Consulting Agreement.

(2)   Represents options granted in July and August 1997 pursuant to the
      Company's 1996 Long-Term Plan which vest 20% at date of grant and 20% for
      each of the next four years, expire on the seventh anniversary of the
      dates of grant and have an exercise price of $0.78 per share.

(3)   Represents options granted in July and October 1996 pursuant to the
      Company's Non-Employee Plan. All options vest one year from date of grant
      and have an exercise price of $0.78 per share.

(4)   Mr. Amt ceased being an officer of the Company in October 1998.

Option Plans

The Company maintains an Employee Stock Option Plan (the "Employee Plan"), a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan") and a Long
Term Employee Incentive Plan (the "Long-Term Plan"). Under the Employee Plan and
the Non-Employee Plan stock options may be granted at the discretion of the
Board of Directors. Under the Long-Term Plan, stock options, stock awards or
cash awards may be granted at the discretion of the Board of Directors.

The Company has reserved 440,000, 250,000 and 710,000 shares, respectively, of
its Common Stock for issuance upon the exercise of options and awards granted
under the Employee, Non-Employee and Long-Term Plans, respectively. At June 30,
1999, the Company has reserved 1,414,392 shares of Common Stock for the exercise
of all options.

Under the Non-Employee Plan, options to purchase an aggregate of 167,918 shares
are outstanding as of October 1, 1999. These options vest in full one year after
the date of grant and expire ten years from the date of grant.

Under the Employee Plan, options to purchase an aggregate of 257,639 shares are
outstanding as of October 1, 1999. These options 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.

Under the Long-Term Plan, options to purchase an aggregate of 305,000 shares are
outstanding and an additional 90,000 shares have been granted, exercised, and
are outstanding. The options granted under the


                                       29
<PAGE>

Long-Term Plan vest 20% at date of grant and 20% for each of the next four years
and expire on the seventh anniversary of the date of grant.

The Company grants stock options for the Employee Plan and Non-Employee Plan at
exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant.

At the closing of the Private Placement, the Company granted options outside of
the Employee Plan, the Non-Employee Plan and the Long-Term Plan to members of
the Board of Directors and Officers of the Company. See "Certain Relationships
and Related Transactions".

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

The following table sets forth information (on an aggregate basis) concerning
exercises of stock options during fiscal 1999 by each of the Named Executive
Officers and the final year-end value of unexercised options.

<TABLE>
<CAPTION>
                                                                          Number of
                                                                          Securities                      Value of
                                                                          Underlying                     Unexercised
                                                                         unexercised                   "In-the-Money"
                                                                       Options/SARs at                 Options/SARs at
                                                                       Fiscal Year-End               Fiscal Year-End (1)
                                  Shares
                                 Acquired            Value                        Unexercis-                       Unexercis-
     Name                       on Exercise         Realized      Exercisable        Able         Exercisable         Able
     ----                       -----------         --------      -----------        ----         -----------         ----
     <S>                             <C>              <C>           <C>             <C>               <C>              <C>
     Eckardt C. Beck                 --                --           191,338         120,000           $ --             $ --
     William L. Amt                  --                --                --              --           $ --             $ --
</TABLE>

(1)   Calculated based on the difference between the exercise price and the
      closing price of a share of the Common Stock on the over-the-counter
      market on June 30, 1999.

401(k) Plan

The Company established a 401(k) defined contribution plan covering
substantially all employees meeting certain minimum age and service requirements
effective August 1, 1998. The Company's contribution to the plan is determined
by the Board of Directors and is limited to a maximum of 100% of the employee's
contribution and 6% of the Employee's compensation. Contributions made to the
plan for the fiscal year ended June 30, 1999 were $18,913.

Compensation of Directors

In fiscal 1999, directors who were full-time employees of the Company received
no cash compensation for services rendered as members of the Board or committees
thereof. Directors who were not full-time employees of the Company received
reimbursement of out-of-pocket expenses for attendance at Board meetings. Non-
Employee directors received no other compensation for their services as
directors.


                                       30
<PAGE>

Employment and Consulting Arrangements

The Company entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997, August 1997 and July 1998 (as amended,
the "Consulting Agreement") (formal documentation of the July 1998 amendment has
not been fully executed). 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 accrue and/or receive a monthly salary of $10,000
pursuant to the Consulting Agreement until its expiration in August 2000. Mr.
Beck has also received stock options in connection with the Private Placement.
See "Certain Relationships and Related Transactions".

In August 1997, the Company entered into a one-year employment agreement with
William L. Amt which provided for automatic one-year renewal options unless
contrary written notice is given by either party. In October 1998, Mr. Amt
resigned from his position as President and Chief Executive Officer under this
agreement. Under the terms of the employment agreement, which included
confidentiality and non-competition provisions, Mr. Amt received an annual
salary of $160,000, subject to increase at the discretion of the Board. Both the
Company and Mr. Amt had the right to terminate the employment agreement at any
time by providing written notice to the other party. Mr. Amt was granted
non-qualified stock options to purchase 300,000 shares of Common Stock, the
exercise price of which was repriced from $1.375 to $0.78 per share in January
1998. Twenty percent (20%) of such options were vested immediately and twenty
percent (20%) of such options will vest on the first, second, third and fourth
anniversary of the date of issuance. See "Certain Relationships and Related
Transactions."

In January 1998, Jack D. Hays, Jr. and Richard H. Hughes ceased to be executive
officers of the Company. In connection with the termination of their employment
with the Company, each of Mr. Hays and Mr. Hughes entered into a Termination
Agreement with the Company. The Termination Agreements (i) terminate the
Employment Agreements between the Company and Mr. Hays and Mr. Hughes (except
with respect to continued indemnification as former officers of the Company and
confidentiality obligations of Mr. Hays and Mr. Hughes), (ii) provide that Mr.
Hays and Mr. Hughes forfeit all stock options held by them whether or not
vested, (iii) provide that each of them will receive a cash payment of $18,000
in full satisfaction of accrued salary and any other amounts otherwise due under
their Employment Agreements, (iv) contain a release by Mr. Hays and Mr. Hughes
with respect to any and all claims against the Company and (v) require Mr. Hays
and Mr. Hughes to refrain from soliciting any employees of the Company. The
Company has also entered into a Manufacturer's Representative Agreement with an
entity formed and owned by such former officers pursuant to which they will
continue to perform marketing services for the Company. Pursuant to such
Manufacturer's Representative Agreement, such entity was to receive compensation
on a commission basis with respect to its sales of the Company's products. The
Company terminated the Manufacturer's Representative Agreement effective August
1, 1998. See "Certain Relationships and Related Transactions."

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

The following table sets forth, as of October 1, 1999, certain information as to
the stock ownership and voting power of all persons (or groups of persons) known
by the Company to be the beneficial owner of more than five percent (5%) of the
Common Stock, each director of the Company, each of the executive officers
included in the Summary Compensation Table and all directors and executive
officers as a group.


                                       31
<PAGE>

                                      Number of Shares      Percentage of Voting
 Name of Beneficial Owner(1)        Beneficially Owned (2)        Power (3)
 ---------------------------        ----------------------        ---------
Eckardt C. Beck (4)                      10,278,021                  8.6

Peter H. Gardner (5)                        159,754                   *

Alexander P. Haig (6)                       128,537                   *

Douglas M. Costle (7)                       128,416                   *

Stephen D. Fish (8)                       3,487,425                  3.0

Irwin M. Rosenthal (9)                      128,537                   *

John G. Murchie (10)                        490,725                   *

All officers and directors as a          14,801,415                 11.9
   group (7 persons) (11)

Lancaster Investment Partners (12)       10,000,000                  8.8
   500 N. Gulph Road
   Suite 110
   King of Prussia, PA 19406

The Aries Master Fund,                   40,651,591                 35.5
   a Cayman Islands Trust (13)
   787 7th Avenue- 48th Floor
   New York, New York 10019

Aries Domestic Fund, L.P. (14)           17,885,617                 15.6
   787 7th Avenue, 48th Floor
   New York, New York 10019

Porter Partners, L.P. (15)               17,786,680                 15.6
   100 Shoreline, Suite 211B
   Mill Valley, California 94941

P.A.W. Offshore Fund, Ltd. (16)           6,120,000                  5.4
   90 Mees Pierson
   904 East Bay Street
   P.O. Box 55-6233
   Nassau, Bahamas

--------------------
*     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., 7 San Bartola Drive, St.
      Augustine, Florida 32086.

(2)   The number of shares beneficially owned by each person named in the table
      includes shares held by each individual of (i) the Company's Common Stock;
      (ii) the Company's Series A Preferred Stock, as converted into Common
      Stock; (iii) Series A Preferred Stock subject to warrants that are
      presently exercisable, as converted into Common Stock; (iv) the Company's
      Series B Convertible Preferred Stock, as converted into Common Stock; and
      (v) Common Stock subject to options or warrants that are presently
      exercisable or exercisable within 60 days of October 1, 1999.

(3)   Applicable percentage of voting power is based on the 113,922,985 shares
      of Common Stock outstanding as of October 1, 1999. That number is
      comprised of 7,565,045 outstanding shares of Common Stock, 10,298,600
      shares of


                                       32
<PAGE>

      Common Stock issuable upon conversion of 514,930 outstanding shares of
      Series A Preferred Stock and 96,059,340 shares of Common Stock issuable
      upon conversion of 4,802,967 outstanding shares of Series B Convertible
      Preferred Stock. Shares of Series A Preferred Stock and Common Stock
      subject to options and warrants that are presently exercisable or
      exercisable within 60 days are deemed to be beneficially owned by the
      person holding such options and warrants 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)   Includes 13,833 shares of Common Stock held, 224,000 shares of Common
      Stock issuable upon conversion of 11,200 outstanding shares of Series A
      Preferred Stock and 3,800,000 shares of Common Stock issuable upon
      conversion of 190,000 outstanding shares of Series B Convertible Preferred
      Stock. Also includes currently exercisable options to purchase 6,240,188
      shares of Common Stock. Excludes options to purchase 12,217,700 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.

(5)   Includes currently exercisable options to purchase 159,754 shares of
      Common Stock. Excludes options to purchase 236,832 shares of Common Stock
      which are not exercisable within 60 days. Mr. Gardner was formerly an
      Investment Officer at Technology Funding, Inc. ("TFI"), the Managing
      General Partner of Technology Funding Partners III, L.P. ("TFP III") and
      Technology Funding Partners V, an Aggressive Growth Fund, L.P. ("TFVP V").
      Mr. Gardner disclaims beneficial ownership of all securities of the
      Company owned by TFP III and TFVP V.

(6)   Includes currently exercisable options to purchase 128,537 shares of
      Common Stock. Excludes options to purchase 236,832 shares of Common Stock
      which are not exercisable within 60 days.

(7)   Includes currently exercisable options to purchase 128,416 shares of
      Common Stock. Excludes options to purchase 236,832 shares of Common Stock
      which are not exercisable within 60 days.

(8)   Includes 448,000 shares issuable upon conversion of 22,400 shares of
      Series A Preferred Stock and currently exercisable options to purchase
      3,039,425 shares of Common Stock. Excludes options to purchase 6,058,850
      shares of Common Stock which are not exercisable within 60 days.

(9)   Includes currently exercisable options to purchase 128,537 shares of
      Common Stock. Excludes options to purchase 236,832 shares of Common Stock
      which are not exercisable within 60 days.

(10)  Includes currently exercisable options to purchase 490,725 shares of
      Common Stock. Excludes options to purchase 973,966 shares of Common Stock
      which are not exercisable within 60 days.

(11)  Calculation excludes options to purchase 20,197,874 shares of Common Stock
      which are not exercisable within 60 days.

(12)  Includes 10,000,000 shares of Common Stock issuable upon conversion of
      500,000 shares of Series B Convertible Preferred Stock.

(13)  Paramount Capital Asset Management, Inc. ("PCAM") is the Investment
      Manager to The Aries Master 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. Securities held by the Aries Trust
      consist of 1,478,400 shares of Common Stock issuable upon conversion of
      73,920 shares of Series A Preferred Stock, 38,475,700 shares of Common
      Stock issuable upon conversion of 1,923,785 outstanding shares of Series B
      Convertible Preferred Stock, 148,728 shares of Common Stock issuable upon
      exercise of Class A Warrants (includes the Class B Warrants underlying
      such Class A Warrants); 400,903 shares of Common Stock underlying
      additional warrants, and 147,860 shares of Common Stock underlying Series
      A Preferred Stock subject to warrants. In addition, Dr. Rosenwald
      beneficially owns 205,134 shares of the Company's Common Stock and
      warrants to purchase 44,727 shares of the Company's Common Stock.

(14)  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 beneficially

                                       (footnotes continued on next page)


                                       33
<PAGE>

      own all securities of the Company held by the Aries Domestic Fund, L.P.
      Securities held by Aries Domestic Fund, L.P. consist of 761,600 shares of
      Common Stock issuable upon conversion of 38,080 shares of Series A
      Preferred Stock, 16,616,920 shares of Common Stock issuable upon
      conversion of 830,846 outstanding shares of Series B Convertible Preferred
      Stock, 247,882 shares of Common Stock issuable upon exercise of Class A
      Warrants (including the Class B Warrants underlying such Class A
      Warrants); warrants to purchase an additional 183,035 shares of Common
      Stock, and warrants to purchase Series A Preferred Stock which is
      convertible into 76,180 shares of Common Stock. In addition, Dr. Rosenwald
      beneficially owns 205,134 shares of the Company's Common Stock and
      warrants to purchase 44,727 shares of the Company's Common Stock.

(15)  Includes (A) securities held by Porter Partners, L.P. consisting of
      896,000 shares of Common Stock issuable upon conversion of 44,800 shares
      of Series A Preferred Stock and 13,333,340 shares of Common Stock issuable
      upon conversion of 666,667 outstanding shares of Series B Convertible
      Preferred Stock, and (B) securities held by EDJ Limited consisting of
      224,000 shares of Common Stock issuable upon conversion of 11,200 shares
      of Series A Preferred Stock and 3,333,340 shares of Common Stock issuable
      upon conversion of 166,667 outstanding shares of Series B Convertible
      Preferred Stock. Jeffrey H. Porter is the Managing General Partner of
      Porter Partners, L.P. and EDJ Limited. Mr. Porter may be considered a
      beneficial owner of the securities owned by Porter Partners, L.P. and EDJ
      Limited by virtue of his authority to vote and/or dispose of the
      securities held by Porter Partners, L.P. and EDJ Limited. Mr. Porter
      disclaims beneficial ownership of all securities of the Company held by
      Porter Partners, L.P. and EDJ Limited.

(16)  Includes 1,120,000 shares of Common Stock underlying 56,000 shares of
      Series A Preferred Stock and 5,000,000 shares of Common Stock issuable
      upon conversion of 250,000 outstanding shares of Series B Convertible
      Preferred Stock. 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

Item 12. Certain Relationships and Related Transactions.

During the period from September 1998 to February 1999, Eckardt C. Beck, the
Chairman of the Board and Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation
aggregating $190,000, which loans were represented by that certain Promissory
Note dated February 23, 1999. The loans accrue interest at the rate of 12% per
year and are due upon demand but in no event later than September 1, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Mr. Beck converted $114,000 of
principal and accrued interest into Series B Preferred Stock on September 24,
1999.

For a description of the terms of the Consulting Agreement between the Company
and Mr. Beck, see "Executive Compensation - Employment and Consulting
Arrangements".

On May 8, 1998, the Company entered into the Credit Agreement with the Funds,
two significant stockholders of the Company. The Credit Agreement provided for a
line of credit (the "Line of Credit") of up to $1,200,000 pursuant to which the
Company could draw down up to $300,000 per month, although draw downs beyond the
initial $300,000 were at the discretion of the Funds. The Line of Credit was
secured by the receivables and inventory of the Company and its subsidiaries.
Amounts borrowed under the Line of Credit accrued interest at an annual rate of
12%. The Line of Credit matured on the earlier of May 8, 1999 or upon the
completion of any financing of at least $1,500,000. The Credit Agreement
contained customary covenants and default provisions. In addition, upon an Event
of Default (as defined in the Credit Agreement), but only after a 60-day cure
period, the Funds were entitled to appoint a majority of the Company's Board of
Directors. In addition, upon an Event of Default, but only after a 90-day cure
period, the Funds could convert any outstanding principal amount plus interest,
into shares of Common Stock of the Company at the then fair market value of the
Common Stock. As of December 15, 1998, the Line of Credit was amended to
increase the amount up to $1,290,000. As of January 13, 1999, the Company had
drawn down all amounts under the Line of Credit.

In connection with the Line of Credit, as amended, the Company issued to the
Funds warrants to purchase an


                                       34
<PAGE>

aggregate of 385,075 shares of Common Stock at an exercise price equal to $0.67
per share (after giving effect to antidilution adjustments resulting from a
reset of the conversion price of the Company's Series A Preferred Stock on
December 8, 1998). Of such warrants, warrants to purchase 29,850 shares of
Common Stock vested upon each $100,000 (or ratable portion thereof) that was
drawn under the Credit Agreement.

On February 22, 1999, the Company having drawn down an aggregate of $1,290,000
on the Line of Credit, in default on its interest payments due thereunder and in
need of financing, entered into a series of agreements with the Funds which
amended the Line of Credit Agreement and the notes evidencing the amounts drawn
down on the Line of Credit. Under such amendments, if the Company failed to
raise an aggregate of $1,500,000 by April 1, 1999, the Funds could accelerate
the amounts due under the Line of Credit Agreement and exercise its repayment
right by requiring the Company to repay such amount by delivering either (i) the
amount of shares of Common Stock equal to the principal and interest due under
the Line of Credit or (ii) 90% of the shares of the common stock of APT.
Contingent upon the Company raising an aggregate of $1,500,000 by April 1, 1999,
the Funds delayed their right to payment of principal and interest under the
Line of Credit until September 1, 1999 or the completion of finances by the
Company raising an aggregate of $2,790,000. In addition, on February 22, 1999,
in exchange for a working capital loan of up to the amount of $150,000, the
Company delivered an unsecured convertible promissory note (the "Convertible
Note") in the amount of $150,000 in favor of the Funds due on September 1, 1999
and bearing interest at the rate of 12% per annum. Under the Convertible Note,
upon either an event of default or the inability of the Company to raise
$1,500,000 by April 1, 1999, the Funds could (i) convert the debt into the
amount of shares of Common Stock equal to the principal and interest due under
the Convertible Note or (ii) exchange the debt for 10% of the shares of common
stock of APT. The Funds also agreed that the right to payment for the
Convertible Note and the amounts drawn down on the Line of Credit would be
subordinated to the right of payment under loans aggregating $190,000 made to
the Company by Mr. Beck during 1998 and 1999.Also on July 7, 1999, the Funds
provided additional financing to the Company in the amount of $20,000.

On September 24, 1999, the Company sold in a Private Placement 4,802,967 shares
of the Series B Preferred with a par value of $.001 per share and a stated value
of $0.60 per share. The Company accepted $1,115,000 in cash and $1,767,000 in
cancellation of debt and accrued interest as consideration for the sale of the
Series B Preferred. Included in the cancellation of debt was $1,653,000 from the
Funds who converted all of the debt and accrued interest owed under the Credit
Agreement and the Aries Interim Financing and thereby canceling all of the
remaining debt obligations to the Funds including the rights to convert debt
plus interest into shares of Common Stock of the Company and/or shares of APT.
Also the Funds have agreed to allow the Company to repurchase their shares of
Series B Preferred at a rate per share of the underlying Common Stock of $0.03
per share during the first year from the date of closing of the Private
Placement, $0.04 per share during the second year from such date and $0.05 per
share during the third year from such date.

As part of the Private Placement, Mr. Beck purchased 190,000 shares of the
Series B Preferred for cancellation of debt and accrued interest of $114,000,
Lancaster Investment Partners purchased 500,000 shares of Series B Preferred for
$300,000 cash, The Aries Master Fund purchased 1,923,785 shares of Series B
Preferred for cancellation of debt and accrued interest of $1,154,271, Aries
Domestic Fund, L.P. purchased 830,846 shares of Series B Preferred for
cancellation of debt and accrued interest of $498,508, Porter Partners, L.P. and
EDJ Limited purchased 833,334 shares of Series B Preferred for $500,000 cash,
and P.A.W. Offshore Fund, Ltd. purchased 250,000 shares of Series B Preferred
for $150,000 cash in the Private Placement.

From the cash proceeds of the Private Placement, the Company paid $600,000 to
ESDC in full satisfaction of the equipment term note assumed from Key Bank with
an adjusted principal balance of $1,183,110 and also another Dunkirk
subordinated note due ESDC with a principal balance of $37,870. In consideration
for this payment made by the Company, ESDC agreed to assign the loans and
related security interests (the "Security Interests") to the Company. The
Company has agreed to give a security interest in the Security Interests to


                                       35
<PAGE>

Messrs. Beck and Fish and Graham & James LLP (the "G & J Security Interest") to
secure indebtedness owing to them.

Also on September 24, 1999, upon the consummation of the Private Placement, the
Company granted 36,293,101 non-qualified stock options (such options being after
issuance equal to 20% of the outstanding shares of Common Stock of the Company
on a fully diluted basis) at an exercise price of $0.03 per share (the
conversion price of the Common Stock in the Private Placement). Such options
vest one-third upon grant, one-third on the first anniversary of the date of
grant and one-third on the second anniversary of the date of grant and to expire
on the tenth anniversary of the date of grant. Of these options granted, Mr.
Beck was granted 18,146,550, Mr. Fish was granted 9,073,275, Messrs Costle,
Gardner, Haig and Rosenthal were each granted 340,248 and Mr. Murchie was
granted 1,360,991.

In July and August of 1997, the Company borrowed from the Funds an aggregate of
$500,000 (the "1997 Bridge Loan") which was used by the Company for general
working capital purposes. On September 8, 1997, the Company repaid the 1997
Bridge Loan together with accrued interest at the rate of 12% per annum, and in
connection therewith, the Company issued to the Funds warrants to purchase
198,863 shares of Common Stock at an exercise price equal to $0.66 (after giving
effect to antidilution adjustments resulting from the sale of Series A Preferred
Stock, the issuance of the additional shares of Series A Preferred Stock in
April 1998, and the reset of the conversion price of the Series A Preferred
Stock on December 8, 1998).

In August 1997, the Company entered into a one-year employment agreement with
William L. Amt which provided for automatic one-year renewal options unless
contrary written notice is given by either party. In October 1998, Mr. Amt
resigned from his position as President and Chief Executive Officer under this
agreement. Under the terms of the employment agreement, which included
confidentiality and non-competition provisions, Mr. Amt received an annual
salary of $160,000, subject to increase at the discretion of the Board. Both the
Company and Mr. Amt had the right to terminate the employment agreement at any
time by providing written notice to the other party. Mr. Amt was granted
non-qualified stock options to purchase 300,000 shares of Common Stock, the
exercise price of which was repriced from $1.375 to $0.78 per share in January
1998. Mr. Amt's options expired in connection with his resignation from the
Company. See "Executive Compensation-Employment and Consulting Arrangements."

In January 1998, Jack D. Hays, Jr. and Richard H. Hughes, formerly executive
officers of the Company, ceased to be employed with the Company. In connection
with the termination of their employment with the Company, each of Mr. Hays and
Mr. Hughes entered into a Termination Agreement with the Company. The
Termination Agreements (i) terminate the Employment Agreements between the
Company and Mr. Hays and Mr. Hughes (except with respect to continued
indemnification as former officers of the Company and confidentiality
obligations of Mr. Hays and Mr. Hughes), (ii) provide that Mr. Hays and Mr.
Hughes forfeit all stock options held by them whether or not vested, (iii)
provide that each of them will receive a cash payment of $18,000 in full
satisfaction of accrued salary and any other amounts otherwise due under their
Employment Agreements, (iv) contain a release by Mr. Hays and Mr. Hughes with
respect to any claims against the Company and (v) require Mr. Hays and Mr.
Hughes to refrain from soliciting any employees of the Company. The Company also
entered into a marketing and sales representative agreement (the "Manufacturer's
Representative Agreement") with Engineered Product Sales Associates, a company
formed and owned by Messrs. Hays and Hughes. Pursuant to such Manufacturer's
Representative Agreement, such entity was to receive commission payments based
on sales at various levels. The Company terminated the Manufacturers'
Representation Agreement effective August 1, 1998. See "Executive Compensation
-Employment and Consulting Arrangements."

On December 8, 1997, the Company consummated the final closing of a private
placement of the Company's Series A Preferred Stock. The Company sold an
aggregate of 553,000 shares of Series A Preferred Stock in the private
placement. Each share of Series A Preferred Stock is currently convertible into
twenty shares of


                                       36
<PAGE>

Common Stock (after giving effect to an anti-dilution adjustment resulting from
the reset of the conversion price of the Series A Preferred Stock on December 8,
1998). PCAM acted as placement agent for the private placement and received an
aggregate placement fee of $497,700, and an aggregate expense allowance of
$232,700. In addition, the Company granted to PCAM, and/or its designees,
warrants to purchase 61,945 shares of Series A Preferred Stock at an exercise
price equal to $9.82 per share (after giving effect to an anti-dilution
adjustment resulting from the reset of the conversion price of the Series A
Preferred Stock on December 8, 1998). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

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

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

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

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

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

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

Also on January 27, 1998, Messrs. Murchie and Jellum were each granted stock
options to purchase 100,000 shares of Common Stock at an exercise price of
$0.78. Thirty-three percent (33%) of such options vest on the first, second and
third anniversary of the date of issuance. Mr. Jellum's options expired in
connection with the termination of his employment with the Company in October
1998.


                                       37
<PAGE>

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

Irwin M. Rosenthal, a director of the Company, is a partner of Graham & James
LLP, special counsel to the Company. As of September 30, 1999, the Company is
indebted to Graham & James LLP for legal fees in excess of $323,000 for which
the Company has agreed to give a security interest. See also "Executive
Compensation Compensation of Directors" and "Security Ownership of Certain
Beneficial Owners and Management."

Item 13. Exhibits, List and Reports on Form 8-K.

(a) Exhibits

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

2.1*              Agreement and Plan of Reorganization dated August 16, 1994,
                  among the Company, CTI Acquisition Corporation, Dunkirk and
                  certain stockholders of Dunkirk listed on the signature pages
                  thereto

3.1*              Amended and Restated Certificate of Incorporation of the
                  Company

3.2**             Certificate of Designation of Series A Convertible Preferred
                  Stock

3.2.1             Certificate of Designation of Series B Convertible Preferred
                  Stock

3.3*              By-laws of the Company

3.4****           Certificate of Amendment to the Restated Certificate of
                  Incorporation of the Company

3.5               Certificate of Merger of CTI Subsidiary Corp. With and Into
                  the Company and Agreement and Plan of Merger between the
                  Company and CTI Subsidiary Corp..

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

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

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

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

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


                                       38
<PAGE>

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

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

10.18*            Project Development Assistance Agreement dated July 13, 1995,
                  among the Company, Technology Funding Partners III, L.P. and
                  Technology Funding Venture Partners V, An Aggressive Growth
                  Fund, L.P.

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

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

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

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

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

10.26*            Series A Preferred Stock Purchase Agreement dated as of May 5,
                  1995, among the Company, Technology Funding Partners 111, L.P.
                  and Technology Funding Venture Partners V, An Aggressive
                  Growth Fund, L.P.

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

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

10.29**           Form of Placement Agent Warrant.

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

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

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

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

10.34***          Senior Secured Line of Credit Agreement dated as of May 8,
                  1998 by and among Aries Domestic Fund, L.P., The Aries Fund,
                  Dunkirk, APT and the Company


                                       39
<PAGE>

10.34.1           Form of Senior Secured Notes issued to The Aries Master Fund
                  aggregating $910,000 in principal amount.

10.34.2           Form of Senior Secured Notes issued to the Aries Domestic
                  Fund, L.P. aggregating $380,000 in principal amount

10.35****         Security Agreement dated as of May 8, 1998 among the Company,
                  Dunkirk, APT and Paramount Capital Asset Management, Inc.

10.36****         Subsidiary Guarantee dated as of May 8, 1998 by Dunkirk and
                  APT in favor of The Aries Fund and Aries Domestic Fund, L.P.

10.37****         Promissory Note dated as of February 23, 1999 issued by the
                  Company in favor of Eckardt C. Beck

10.38****         Termination Agreement dated as of January 1, 1998 by and
                  between the Company and Jack D. Hays, Jr.

10.39****         Termination Agreement dated as of January 1, 1998 by and
                  between the Company and Richard H. Hughes

10.40****         Consulting Agreement dated December 22, 1998 by and between
                  the Company and 4C Technologies, Inc.

10.41****         Amendment dated as of May 8, 1998 to the Technology Purchase
                  Agreement dated as of June 30, 1997 by and between APT and
                  VANGKOE

10.42****         Termination Agreement dated as of May 8, 1998 by and between
                  APT and VANGKOE

10.43****         Materials Bill of Sale Agreement dated as of May 8, 1998 by
                  and between the Company and VANGKOE

10.44****         Ceramaglass Trademark & Intellectual Property Agreement dated
                  as of May 8, 1998 by and between the Company and VANGKOE

10.45****         Ceramaquartz Trademark & Intellectual Property Agreement dated
                  As of May 8, 1998 by and between the Company and VANGKOE

10.46****         Letter Agreement of the Company dated March 11, 1998 with
                  Dlubak

10.47****         Lease dated April 1, 1998 by and between 312 Industrial Park
                  and the Company

10.48****         Lease dated April 1, 1998 by and between Willard Park Inc. and
                  the Company

10.49****         Manufacturer Representative Agreement dated as of January 1,
                  1998 by and between the Company and Engineered Products Sales
                  Associates

10.50****         Manufacturer Representative Termination Agreement dated as of
                  January 1, 1998 by and between the Company and Engineered
                  Products Sales Associates

10.51             Form of Subscription Agreement between the Company and various
                  Subscribers of the Series B Convertible Preferred Stock.


                                       40
<PAGE>

10.52.1           Form of Convertible Promissory Note issued by the Company in
                  favor of The Aries Master Fund aggregating $109,500 in
                  principal amount.

10.52.2           Form of Convertible Promissory Note issued by the Company in
                  favor of the Aries Domestic Fund, L.P. aggregating $60,500 in
                  principal amount.

10.53             Lease dated September 17, 1999 by and between Dunkirk
                  International Glass & Ceramics Corp. And Red Wing Company,
                  Inc.

11                Statement of Computation of Net Loss Per Share

21**              Subsidiaries of the Company

27                Financial Data Schedule for the year ended June 30, 1999

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

**                Incorporated by reference to the exhibits to the Company's
                  Annual Report on form 10-KSB for fiscal 1997.

***               Incorporated by reference to the exhibits to the Company's
                  Annual Report on form 10-QSB for the quarterly period ended
                  March 31, 1998.

****              Incorporated by reference to the exhibit to the Company's
                  Annual Report on form 10-KSB for fiscal 1998.

All other Exhibits filed herewith.

(b) Reports on Form 8-K

None.


                                       41
<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.

      Dated: November 2, 1999        Conversion Technologies International, Inc.


                                     By:  /s/ Eckardt C. Beck
                                          -------------------
                                          Eckardt C. Beck
                                          Acting President and Chief Executive
                                          Officer

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

<TABLE>
<CAPTION>
           Signature                              Title                               Date
           ---------                              -----                               ----
      <S>                                  <C>                                   <C>
      /s/Eckardt C. Beck                   Acting President, Chief               November 2, 1999
      ---------------------------          Executive Officer and Director
      Eckardt C. Beck                      (principal executive officer)

      /s/ John G. Murchie                  Acting Chief Financial Officer        November 2, 1999
      ---------------------------          and Controller (principal
      John G. Murchie                      accounting officer)

      /s/ Eckardt C. Beck                  Chairman of the Board                 November 2, 1999
      ---------------------------
      Eckardt C. Beck

      /s/ Stephen D. Fish                  Director                              November 2, 1999
      ---------------------------
      Stephen D. Fish

      /s/ Peter H. Gardner                 Director                              November 2, 1999
      ---------------------------
      Peter H. Gardner

      /s/ Alexander P. Haig                Director                              November 2, 1999
      ---------------------------
      Alexander P. Haig

      ---------------------------          Director
      Douglas M. Costle

      /s/Irwin M. Rosenthal, Esq.          Director                              November 2, 1999
      ---------------------------
      Irwin M. Rosenthal, Esq.
</TABLE>


                                       42
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S>                                                                                         <C>
Report of Independent Auditors .....................................................        F-2

Consolidated Balance Sheets of Conversion Technologies International, Inc. and
       Subsidiaries as of June 30, 1999 and June 30, 1998 ..........................        F-3

Consolidated Statements of Operations of Conversion Technologies International, Inc,
       and Subsidiaries for the years ended June 30, 1999 and June 30, 1998 ........        F-4

Consolidated Statements of Stockholders' Deficiency of Conversion Technologies
       International, Inc. and Subsidiaries for the years ended June 30, 1999
       and June 30, 1998 ...........................................................        F-5

Consolidated Statements of Cash Flows of Conversion Technologies International, Inc.
       and Subsidiaries for the years ended June 30, 1999 and June 30, 1998 ........        F-6

Notes to Consolidated Financial Statements .........................................        F-8
</TABLE>


                                      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 as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' deficiency
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 as of June 30, 1999 and 1998,
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 deficit, stockholders' deficiency, and is in default in
payment of substantially all of its debt. 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.


                                BDO Seidman, LLP
October 7, 1999


                                      F-2
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      JUNE 30,
                                                                               1999              1998
                                                                           -----------------------------
<S>                                                                        <C>              <C>
ASSETS
Cash and cash equivalents                                                  $     60,954     $    168,483
Accounts receivable, less allowance for doubtful accounts of $68,146
 and $18,000                                                                    104,350          258,990
Inventories                                                                     283,029          466,062
Prepaid expenses and other current assets                                       156,701           94,596
                                                                           -----------------------------
Total current assets                                                            605,034          988,131

Property, plant and equipment:
   Land                                                                          75,000               --
   Building and improvements                                                    675,000               --
   Machinery and equipment                                                    1,022,053          702,614
                                                                           -----------------------------
                                                                              1,772,053          702,614
Less accumulated depreciation                                                  (269,841)        (148,057)
                                                                           -----------------------------
                                                                              1,502,212          554,557
Property, plant and equipment held for sale at estimated disposal value              --        1,000,000
Other assets, less accumulated amortization of $123,346 and $97,811             106,398          132,783
                                                                           -----------------------------
                                                                           $  2,213,644     $  2,675,471
                                                                           =============================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Notes payable                                                              $    121,915     $         --
Accounts payable                                                              1,495,153        1,102,394
Reserve for disposal                                                            301,000          515,000
Accrued expenses                                                                994.559          394,163
Investment tax credit payable                                                   235,000          235,000
Current portion of capital lease obligations                                     14,688           23,965
Current portion of long-term debt                                             2,514,496        2,524,255
                                                                           -----------------------------
Total current liabilities                                                     5,676,811        4,794,777

Capital lease obligations, less current portion                                      --           15,235
Long-term debt, less current portion                                          1,528,085          502,000

Stockholders' deficiency:
   Series A Convertible Preferred Stock, $.001 par value,
         authorized 880,000 shares, issued and outstanding
         545,830 and 613,280 shares                                                 546              614
   Common Stock, $.00025 par value, authorized 50,000,000
         shares, issued and outstanding 6,947,045
         and 5,600,545 shares                                                     1,737            1,400
   Additional paid-in capital                                                33,353,485       32,876,274
   Unearned stock compensation                                                  (57,246)        (207,000)
   Accumulated deficit                                                      (38,289,774)     (35,307,829)
                                                                           -----------------------------
Total Stockholders' deficiency                                               (4,991,252)      (2,636,541)
                                                                           -----------------------------
                                                                           $  2,213,644     $  2,675,471
                                                                           =============================
</TABLE>

See accompanying notes.


                                      F-3
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                 Year ended June 30,
                                                                1999            1998
                                                            ---------------------------
<S>                                                         <C>             <C>
Revenue
   Product sales                                            $ 1,103,965     $ 1,535,159
   Recycling fees                                                15,517         362,821
                                                            ---------------------------
Total revenue                                                 1,119,482       1,897,980

Cost of goods sold                                            1,250,762       2,703,441
                                                            ---------------------------

Gross loss on sales                                            (131,280)       (805,461)

Selling, general and administrative expenses                  1,506,241       2,723,462
Write down of property plant and equipment held for sale             --       4,913,422
                                                            ---------------------------

Loss from operations                                         (1,637,521)     (8,442,345)

Interest expense                                               (477,019)       (552,300)
Interest income                                                   3,550          82,316
Other income                                                      5,242         246,051
                                                            ---------------------------

Loss before extraordinary item                               (2,105,748)     (8,666,278)

Extraordinary item - gain on debt retirement                         --       6,425,004
                                                            ---------------------------

Net loss                                                     (2,105,748)     (2,241,274)

Preferred stock dividends                                    (1,182,102)     (3,032,318)
                                                            ---------------------------
Net loss applicable to Common Stock                         $(3,287,850)    $(5,273,592
                                                            ===========================

Basic Loss Per Common Share:
   Loss before extraordinary item                           $     (0.64)    $     (2.44)
   Extraordinary item                                                --            1.34
                                                            ---------------------------
   Net Loss applicable to Common Stock                      $     (0.64)    $     (1.10)
                                                            ===========================
Weighted average number of common shares outstanding          5,133,200       4,804,427
                                                            ===========================
</TABLE>

See accompanying notes.


                                      F-4
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
                   YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998

<TABLE>
<CAPTION>
                                                                   Series A Preferred Stock
                                                       ---------------------------------------------

                                                                                         Additional
                                                         Number                            Paid-In
                                                       of Shares         Amount            Capital
                                                       ---------------------------------------------
<S>                                                    <C>           <C>                <C>
Balance at July 1, 1997                                     --       $         --       $         --

     Issuance of series A preferred stock              619,360                620          5,186,283

     Series A preferred stock converted
       into Common Stock                                (6,080)                (6)           (60,794)

     Stock compensation                                     --                 --                 --

     Common stock warrants granted to
       Lenders                                              --                 --                 --

     Common stock options granted to
       Employees and directors                              --                 --                 --

     Dividend attributable to beneficial                    --
       conversion feature of convertible
       preferred stock                                      --                 --          3,032,318

     Net Loss                                               --                 --                 --
                                                       ---------------------------------------------

Balance at June 30, 1998                               613,280       $        614       $  8,157,807

     Series A Preferred Stock converted into
       Common Stock                                    (67,450)               (68)        (1,018,910)

     Stock compensation                                     --                 --                 --

     Common Stock options canceled                          --                 --                 --

     Dividend attributable to beneficial
       conversion feature of convertible
       preferred stock                                      --                 --            876,197

     Preferred Stock dividends                              --                 --           (305,905)

     Net Loss                                               --                 --                 --
                                                       ---------------------------------------------
Balance at June 30, 1999                               545,830       $        546       $  7,709,189
                                                       =============================================
<CAPTION>
                                                               Common Stock
                                                 ----------------------------------------
                                                                                                                          Total
                                                                            Additional     Unearned                    Stockholders'
                                                   Number                    Paid-In        Stock       Accumulated       Equity
                                                 of Shares     Amount        Capital     Compensation      Deficit     (Deficiency)
                                                 -----------------------------------------------------------------------------------
<S>                                              <C>         <C>             <C>            <C>            <C>            <C>
Balance at July 1, 1997                          5,539,745   $   1,385    $ 24,186,932   $(116,369) -   $(30,034,237)  $ (5,962,289)

     Issuance of series A preferred stock               --          --              --             --             --      5,186,903

     Series A preferred stock converted
       into Common Stock                            60,800          15          60,785             --             --             --

     Stock compensation                                 --          --              --        116,369             --        116,369

     Common stock warrants granted to
       Lenders                                          --          --         205,600             --             --        205,600

     Common stock options granted to
       Employees and directors                          --          --         265,150       (207,000)            --         58,150

     Dividend attributable to beneficial
       conversion feature of convertible
       preferred stock                                  --          --              --             --     (3,032,318)

     Net Loss                                           --          --              --             --     (2,241,274)    (2,241,274)
                                                 ----------------------------------------------------------------------------------

Balance at June 30, 1998                         5,600,545   $   1,400    $ 24,718,467   $   (207,000)  $(35,307,829)  $ (2,636,541)

     Series A Preferred Stock converted into
       Common Stock                              1,346,500         337       1,018,641             --             --             --

     Stock compensation                                 --          --              --         56,942             --         56,942

     Common Stock options canceled                      --     (92,812)         92,812             --             --

     Dividend attributable to beneficial
       conversion feature of convertible
       preferred stock                                  --          --              --             --       (876,197)            --

     Preferred Stock dividends                          --          --              --             --             --       (305,905)

     Net Loss                                           --          --              --             --     (2,105,748)    (2,105,748)
                                                 ----------------------------------------------------------------------------------
Balance at June 30, 1999                         6,947,045   $   1,737    $ 25,644,296   $    (57,246)  $(38,289,774)  $ (4,991,252)
                                                 ==================================================================================
</TABLE>

See accompanying notes


                                      F-5
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Year ended June 30,
                                                                               -----------------------------
Operating activities                                                               1999             1998
                                                                               -----------       -----------
<S>                                                                            <C>               <C>
Net loss                                                                       $(2,105,748)      $(2,241,274)
Adjustments to reconcile net loss to net cash
   used in operating activities:
    Depreciation expense                                                           138,455           817,928
    Amortization expense                                                            25,535            39,543
    Amortization of discount on notes payable                                      108,000            97,600
    Bad debt expense                                                                53,691                --
    Loss on disposal of equipment                                                       --            22,857
    Extraordinary item                                                                  --        (6,425,004)
    Write-off of impaired inventory                                                 80,180
    Write-down of property, plant and equipment                                         --         4,913,422
    Stock compensation expense                                                      56,942           174,519
    Changes in operating assets and liabilities:
         (Increase) decrease in accounts receivable                                100,949          (112,765)
         Decrease in inventories                                                   102,853            54,998
         (Increase) decrease in prepaid expenses and other current assets          (62,105)           93,929
         (Increase) decrease in other assets                                           850           (57,016)
         Decrease in deferred revenue                                                   --          (491,944)
         (Decrease) increase in accounts payable, reserve for
           disposal and other accrued expenses                                     473,250          (968,423)
                                                                               -----------       -----------
Net cash used in operating activities                                           (1,027,148)       (4,081,630)

Investing activities
Capital expenditures                                                               (87,321)         (372,572)
Proceeds from disposals of equipment                                                 1,211             3,590
                                                                               -----------       -----------
Net cash used in  investing activities                                             (86,110)         (368,982)

Financing activities
Issuance of notes payable                                                        1,062,778         1,110,000
Payment of notes payable                                                           (22,778)         (500,000)
Decrease in restricted assets                                                           --           675,285
Principal payments on long-term debt                                                (9,759)       (2,142,476)
Principal payments under capital lease obligations                                 (24,512)          (35,709)
Issuance of series A preferred stock, net of offering costs                             --         5,186,903
                                                                               -----------       -----------
Net cash provided by  financing activities                                       1,005,729         4,294,003
                                                                               -----------       -----------

Decrease in cash and cash equivalents                                             (107,529)         (156,609)
Cash and cash equivalents at beginning of period                                   168,483           325,092
                                                                               -----------       -----------
Cash and cash equivalents at end of period                                     $    60,954       $   168,483
                                                                               ===========       ===========
</TABLE>

See accompanying notes.


                                      F-6
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                  Year ended June 30,
                                                                              --------------------------
                                                                                 1999            1998
                                                                              ----------      ----------
<S>                                                                           <C>             <C>
Supplemental disclosure of cash flow information
Interest paid                                                                 $   74,297      $  528,875
                                                                              ==========      ==========

Supplemental disclosure of non cash transactions
Issuance of warrants in connection with bridge notes                                  --          76,000

Issuance of warrants in connection with line of credit                                --         129,600

Preferred stock converted into common stock                                    1,018,978          60,800

Discount on stock options granted to employees and directors                          --         205,150

Compensation charged for modification in exercise price of
 director stock options                                                               --          60,000

Amortization of discount on series A preferred stock                             876,197       3,032,318

Reclassification of property, plant and equipment held for sale to
  property, plant and equipment                                                1,000,000              --

Reclassification of property, plant and equipment to property, plant and
equipment held for sale                                                               --       1,000,000

Dividends accrued on Series A Preferred Stock                                    305,905              --
</TABLE>

See accompanying notes.


                                      F-7
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  June 30, 1999

1. Organization

Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing and processing various substrates and advanced
materials. These substrates and materials include (i) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (ii) 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 was 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 and
manufacturing and processing 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.

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. The Company does not
currently possess sufficient funds to conduct its business and satisfy its
liabilities. The Company has significant past due payables and is in default in
payment of principal and interest on substantially all of its indebtedness for
borrowed money. On September 24, 1999(see Note 11), the Company sold in a
Private Placement 4,802,967 shares of Series B Convertible Preferred Stock for
which the Company accepted $1,115,000 in cash and the cancellation of $1,767,000
of debt including accrued interest. From the cash proceeds, $600,000 was paid to
Empire State Development Corporation ("ESDC") in full satisfactions of loans
with principal balances of $1,220,980. This conversion and pay-off of debt
totaling $2,987,980 of the Company's total debt of $4,164,496 will significantly
reduce interest expense which was approximately $477,000 for the year ended June
30, 1999. In September 1999, the Company leased a portion of its vacant Dunkirk
plant and is exploring various alternatives for the use of the remaining portion
of the plant to generate additional revenues. Also in September 1999 the Company
entered into a distribution agreement with a major building products supplier
for the sale and distribution of decorative particles for the pool industry
which could significantly increase that business.

Although management believes that as a result of the above Private Placement
that occured subsequent to year end and if all of the foregoing courses of
action are achieved, it 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 all of these plans and eliminating the substantial doubt as to its
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.


                                      F-8
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 ("Dunkirk")
and Advanced Particle Technologies, Inc. (APT). 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 effect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Revenue Recognition

With respect to revenue from product sales, including products created from
processed waste materials, revenue is recognized only upon shipment of products
to customers. The Company in fiscal 1998 derived most of its revenue from fees
charged to accept waste materials and from the sale of its products. With
respect to revenue from fees charged to accept waste materials, the Company
initially recorded the fees it received for accepting waste materials for
processing as deferred revenue. After the materials had been processed into
finished goods inventory or sold after preliminary processing, the deferred
revenue was recognized as fee revenue based upon the amount of finished goods
inventory produced (by tonnage), valued at the fee charged for accepting the
waste material.

For the year ended June 30, 1999, 57.9% of the Company's revenue was derived
from two major customers. Revenue generated from each of these customers
amounted to $382,622 and $265,792, which represents 34.2% and 23.7% of total
revenue, respectively.

For the year ended June 30, 1998, 69.0% of the Company's revenue was derived
from three major customers. Revenue generated from each of those customers
amounted to $893,747, $219,958 and $196,431, which represents 47.1%, 11.6% and
10.3% of total revenue, respectively.

Reserve for Disposal

Dunkirk, a wholly-owned subsidiary of the Company, began accepting waste
materials (primarily CRT glass) in early 1994. Upon accepting the waste
materials, Dunkirk established a reserve for the probable disposal and cleanup
costs for the unprocessed waste materials on hand in the event the conversion
processes being developed were not successful. To date, the Company has disposed
of 2,357 tons of the waste materials, which it had not been able to process, of
which 1,137 tons were disposed of during the year ended June 30, 1998 and 1,220
tons were disposed of during the year ended June 30, 1999. The amount of
unprocessed waste materials on hand was 843 tons at June 30, 1999 and 2,035 tons
at June 30, 1998. From July 1, 1997 to June 30, 1998, the Company decreased the
reserve by approximately $198,000, from $713,000 to $515,000. From July 1, 1998
to June 30, 1999, the


                                      F-9
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Company reduced the reserve by approximately $214,000 from $515,000 to $301,000.
The decreases in the reserve, which resulted from reductions in the quantities
of unprocessed waste materials on hand, have been credited against operations.
The Company intends to adjust the reserve for disposal if and when it can
further reduce the quantities of unprocessed waste materials on hand.

Inventories

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

Inventories consisted of the following:

                                                          June 30,
                                                  1999               1998
                                                  ----               ----
      Raw Materials                            $ 35,562           $125,409
      Work-in-process                            20,707            147,291
      Finished goods                            226,760            193,362
                                               --------           --------
                                               $283,029           $466,062
                                               ========           ========

Impairments

Assets are evaluated for impairment when events change or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets are written
down to fair value.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

                                                   June 30,
                                            1999              1998
                                            ----              ----
Private placement expenses                $ 98,561          $     --
Prepaid insurance, real estate
taxes and other expenses                    39,779            53,605
Other                                       18,361            40,991
                                          --------          --------
                                          $156,701          $ 94,596
                                          ========          ========


                                      F-10
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciation and amortization
are 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. The estimated useful lives of the assets are as
follows:

               Buildings and Improvements      5 to 31 1/2 years
               Machinery and Equipment         2 to 10 years

In October of 1998, the Company ceased operations at the Dunkirk plant and
decided to dispose of all the property, plant and equipment at that facility and
was actively searching for a buyer. In the fourth quarter of 1998, pursuant to
FAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company had adjusted those assets to their
estimated net realizable value. This resulted in a write down of land and
building and improvements during fiscal 1998 of approximately $716,000 to
$750,000 and machinery and equipment of approximately $4,197,000 to $250,000
resulting in a combined estimated disposal value of $1,000,000, which had been
classified as held for sale on the accompanying consolidated balance sheet at
June 30, 1998.

On September 17, 1999 the Company leased a portion of the Dunkirk plant and is
currently exploring various alternatives for the use of the remaining portion.
Also the Company is planning to sell a minor portion of the equipment that it
does not anticipate will be used in planned future operations of the facility.
As a result of the Company abandoning its plans to dispose of the facility and
its plans to resume operations, the remaining carrying value of land; $75,000,
building and improvements; $675,000 and machinery and equipment of $206,588 were
classified as property, plant and equipment at June 30, 1999. Since the above
assets were idle, no depreciation was provided for during fiscal 1999.

Cash Equivalents

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

Other Assets

Other assets include deferred financing costs, trademarks and security deposits
for rental property. Deferred financing costs relate to various loan agreements
which have been capitalized and are being amortized over the term of the loans
(See Note 3). Trademarks are carried at cost and amortized on a straight-line
basis over the estimated useful life of the trademarks.


                                      F-11
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Accrued Expenses

Accrued expenses consisted of the following:

                                                                 June 30,
                                                            1999          1998
                                                          ----------------------
            Accrued interest                              $477,075      $182,353
            Accrued dividends                              305,905            --
            Accrued payroll taxes and employee benefits     65,919        72,420
            Accrued audit and tax fees                      66,000        66,000
            Accrued salaries and wages                      25,794        44,482
            Accrued royalties                               36,319        11,372
            Accrued other                                   17,547        17,536
                                                          --------      --------
                                                          $994,559      $394,163
                                                          ========      ========
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.

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.


                                      F-12
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Extraordinary Items

In September 1997, the holders of Dunkirk's $8,000,000 Chautauqua County
Industrial Development Agency Solid Waste Disposal Facility Bonds (the "IDA
Bonds") retired the IDA Bonds in exchange for a cash payment of $1,620,000 and
the balance of the related debt service reserve fund of $194,000. The cash
payment was made utilizing proceeds from the private placement discussed in Note
7 below. The Company also wrote off approximately $324,000 of deferred financing
costs relating to such debt. This forgiveness resulted in a net pretax gain to
the Company of approximately $5,862,000, which is reported as an Extraordinary
Item for the year ended June 30, 1998.

In December 1997, the Empire State Development Corporation / JDA (the "ESDC"),
which had previously assumed approximately $1,888,000 of debt plus accrued
interest of approximately $82,000 owed by Dunkirk to Key Bank of New York ("Key
Bank"), granted the Company a debt forgiveness of $500,000. Also, the balance of
the related debt service reserve fund of approximately $459,000 was applied
against the outstanding principal and accrued interest. ESDC has also agreed to
defer all interest payments due under the loan through July 1, 1998 and to defer
all principal payments due under the loan through January 1, 1999 with interest
continuing to accrue on such deferred amounts payable monthly beginning July
1998 through December 2001. This forgiveness resulted in a net pretax gain to
the Company of approximately $221,000 ($0.05 per share), which is reported as an
Extraordinary Item for the year ended June 30, 1998.

During fiscal 1998, the Company also negotiated various settlements with certain
of its vendors. These settlements resulted in the vendors forgiving
approximately $292,000 in accounts payable which resulted in a pretax gain to
the Company of the same amount that is reported as an Extraordinary Item for the
year ended June 30, 1998.

To the extent that Dunkirk is deemed to be insolvent immediately prior to any of
these debt forgiveness by an amount which equals or exceeds the amount of debt
forgiveness, the Company will not recognize taxable income from such
forgiveness; however, certain of Dunkirk's tax attributes (such as net operating
loss carry forwards ("NOLs") would be subject to reduction and would not be
available to offset future income from operations, if any. For this purpose, the
amount of insolvency is defined to be the excess of Dunkirk's liabilities over
the fair value of its assets. An independent appraisal of the fair value of
Dunkirk's assets has not been completed at this time to determine Dunkirk's
solvency; however, the Company believes that Dunkirk was insolvent at the time
of forgiveness, and accordingly has not recorded a tax provision on the
Extraordinary Item. If Dunkirk is deemed to be solvent immediately prior to the
time of the forgiveness, the Company will recognize taxable income for the debt
forgiveness in its tax year ending June 30, 1998. The amount of such income may
be offset by NOLs, subject to possible limitations as discussed in Note 8. Even
if sufficient NOLs were available to offset such taxable income after such
limitations, the Company may be subject to alternative minimum tax.


                                      F-13
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. Summary of Significant Accounting Policies (continued)

Net Loss Per Common Share

Basic net loss per common share is based on the net loss attributable to common
stockholders for the year, divided by the weighted average number of common
shares outstanding during the year (excluding 740,559 common shares that were
deposited into escrow in connection with the Company's initial public offering).
Potential common shares have not been included since their effect would be
antidilutive. Common shares that could be potentially dilutive include 1,054,817
stock options, 29,376,661 warrants and 10,916,600 shares underlying the Series A
Preferred Stock, after giving effect to the reset of the conversion price of the
Series A Preferred Stock (see Note 7) and any shares issued upon the conversion
of the amounts borrowed plus interest under the Line of Credit and interim
financing (see Note 4) which, subsequent to year end, were converted into Series
B Convertible Preferred Stock (see Note 11).

Fair Value of Financial Instruments

Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 1999. The
respective carrying value of certain on balance sheet financial instruments
approximated their fair values. These financial instruments include cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses.
The fair value of the Company's long-term debt is estimated based upon the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
value approximates the fair value of the debt.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.

Reclassifications

Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.


                                      F-14
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Debt

Long-term debt consists of the following obligations as of June 30, 1999 and
1998:

<TABLE>
<CAPTION>
                                                                                                 June 30,
                                                                                          1999            1998
                                                                                          ----            ----
    <S>                                                                                <C>             <C>
    Company - Notes payable under a Senior Secured Line of Credit
      Agreement and the interim financing agreement dated February 22, 1999
      with two stockholders which were converted subsequent to year end into
      Series B Convertible Preferred Stock (see Notes 4 and 11)                        $1,425,000      $  502,000

    Company - Portion of note payable to the Acting President and Chief
      Executive Officer which was converted subsequent to year end into
      Series B Convertible  Preferred Stock (see Notes 4 and 11)                          103,085              --

    Dunkirk-Chautauqua Region Industrial Development Corporation
      (CRIDA) mortgage note collateralized by a mortgage on real property,
      payable interest only through December 1, 1998 and beginning January
      1, 1999 in monthly installments of $4,880 including interest at a variable
      rate (6% at June 30, 1999) through October 1, 2004. Repayment is
      guaranteed by the Company                                                           287,648         287,648

    Dunkirk-Term loan with the New York State Job Development Authority (JDA)
      payable interest only through December 1, 1998 and beginning January 1,
      1999 in monthly installments of $29,308 including principal and interest
      at the prime rate (7.75% at June 30, 1999) through December 27, 2001. A
      portion of this loan was paid off and the
      remaining balance forgiven subsequent to year end (see Note 11)                   1,183,110       1,183,110

    Dunkirk- Subordinated mortgage note collateralized by a mortgage on real
      property, payable in monthly installments of $4,956 including interest
      at 10% through January 21, 2004                                                     253,638         256,457

    Dunkirk-Chautauqua County Industrial Development Agency (CCIDA) subordinated
      note payable in monthly payments of $1,485 including interest at 7% and was
      due 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                                                                        12,984          17,163
</TABLE>


                                      F-15
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Debt (continued)

<TABLE>
<CAPTION>
                                                                          June 30
                                                                      1999        1998
                                                                      ----        ----
    <S>                                                              <C>         <C>
    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          35,457      38,218

    Dunkirk-New York Job Development Authority (Al Tech)
       subordinated note payable interest only through
       December 1, 1998 and beginning January 1, 1999 in
       monthly payments of $4,296 including interest at 5%
       through September 1, 1999. The note contains various
       restrictive covenants, is guaranteed by the Company and
       by the former Dunkirk president and is collateralized by
       a subordinated security interest in certain equipment         37,870      37,870
</TABLE>


                                      F-16
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. Debt (continued)

<TABLE>
<CAPTION>
                                                                                                    June 30
                                                                                              1999            1998
                                                                                              ----            ----
    <S>                                                                                    <C>             <C>
    Dunkirk-Subordinated unsecured debt from various electronic companies; 0I-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%
      (9.75% at June 30, 1999) 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, 1999) 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         703,789
                                                                                          ----------      ----------

    Total Debt                                                                             4,042,581       3,026,255

    Less Current Maturities                                                                2,514,496       2,524,255
                                                                                          ----------      ----------

                                                                                          $1,528,085      $  502,000
                                                                                          ==========      ==========
</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. At June 30, 1999 and 1998, the Company was in
violation of certain loan covenants and was in default in payment of principal
and interest, related to the above debt, and as a result all of the above
Dunkirk debt has been classified as a current liability at June 30, 1999 and
1998. The above Company notes payable which were converted subsequent to year
end into Series B Convertible Preferred Stock have been classified as long term
debt at June 30, 1999 and 1998.


                                      F-17
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Notes Payable

In July and August of 1997 the Company borrowed and repaid from two significant
stockholders of the Company a total of $500,000 for working capital purposes,
and in connection therewith, issued warrants to purchase 198,863 shares of
Common Stock at an exercise price equal to $0.66 (after giving effects to
antidilution adjustments resulting from the sale of Series A Preferred Stock,
the issuance of the additional shares of Series A Preferred Stock and the reset
of the conversion price of the Series A Preferred Stock described in Note 7).
These Common Stock warrants were valued at $76,000 in accordance with the
provisions of FAS 123. This amount was recorded as debt discount and was
amortized in fiscal 1998.

On May 8, 1998, the Company entered into a Senior Secured Line of Credit
Agreement (the "Credit Agreement") with two significant stockholders of the
Company. The Credit Agreement provided for a line of credit (the "Line of
Credit") of up to $1,200,000 pursuant to which the Company could draw down up to
$300,000 per month, although draw downs beyond the initial $300,000 draw would
be at the discretion of the lenders. The Line of Credit is secured by the
receivables and inventory of the Company and its subsidiaries. Amounts borrowed
under the Line of Credit accrue interest at an annual rate of 12%. As of
December 15, 1998, the Line of Credit was amended to increase the amount
available thereunder by $90,000. The Line of Credit, as amended, matures on the
earlier of September 1, 1999 or the completion of any financing of at least
$2,790,000. At June 30, 1998, the Company had borrowed $610,000 under the Credit
Agreement and as of January 13, 1999 had borrowed the full $1,290,000 that was
available.

The Credit Agreement contains customary covenants and default provisions. In
addition, upon an Event of Default (as defined in the Credit Agreement), but
only after a 60-day cure period, the lenders were entitled to appoint a majority
of the Board of Directors. In addition, upon an Event of Default, but only after
a 90-day cure period, the lenders could convert any outstanding principal amount
plus interest, into shares of Common Stock of the Company at the then fair
market value of the Common Stock.

In addition, the Company issued to the lenders warrants to purchase an aggregate
of 385,075 shares of Common Stock at an exercise price equal to $0.67 (the
closing price of the Common Stock on the date of issuance after adjustment for
the reset of the conversion price of the Series A Preferred Stock described in
Note 7.), subject to vesting. Of such warrants, warrants to purchase 29,850
shares of Common Stock vested with respect to each $100,000 (or ratable portion
thereof) that was drawn under the Credit Agreement. These Common Stock warrants
were valued at $129,600 in accordance with the provisions of FAS 123 and this
amount was recorded as debt discount during fiscal 1998. This has resulted in an
effective interest rate of approximately 20% and 29% on the Line of Credit at
June 30, 1999 and 1998, respectively. The Line of Credit included an unamortized
debt discount of $108,000 at June 30, 1998 which was fully amortized in fiscal
1999..

On February 22, 1999, the same two significant stockholders of the Company
agreed to provide interim financing to the Company in the amount of up to
$150,000 of which $135,000 was borrowed at June 30, 1999 and the balance
subsequent to year end. In consideration for the interim financing, the Company


                                      F-18
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Notes Payable (continued)

agreed that in the event that the Company was unable to obtain additional
financing of at least $1,500,000 by April 1, 1999, the lenders had the right to,
in exchange for their right to repayment of the interim financing, convert any
outstanding principal amount plus interest, into either (i) shares of Common
Stock of the Company at the then fair market value of the Common Stock or (ii)
shares of APT equal to 10% of the issued and outstanding shares of the Common
Stock of APT. The lendors also agreed to subordinate their notes to February 23,
1999 and June 26, 1999 notes totaling $225,000 discussed below. In further
consideration for the interim financing, the Company agreed to amend the Credit
Agreement in order to allow the lenders to have the option to exchange their
full right to payment for 90% of the issued and outstanding shares of APT.

During the period from September 1998 to February 1999, the acting President and
Chief Executive Officer of the Company, provided loans to the Company or did not
receive accrued compensation aggregating $190,000, which loans are represented
by a promissary note dated February 23, 1999. The loans accrue interest at the
rate of 12% per year and are due upon demand but in no event later than
September 1, 1999.

At June 30, 1999 and 1998 the amounts borrowed under the Credit Agreement and
the interim financing and $103,085 of the promissory note dated February 23,
1999 which were converted subsequent to June 30, 1999 into Series B Convertible
Preferred Stock have been classified as long term debt(see Notes 4 and 11).

On June 26, 1999, a director of the Company, loaned the Company $35,000 which
accrues interest at the rate of 12% per year and is due upon demand but not
later than September 1, 1999.

5. Restricted Assets

Dunkirk had a debt service reserve fund equivalent to 10% of the solid waste
disposal facility bonds plus interest which was required to be deposited in
escrow. In September 1997, the balance of the debt service reserve fund of
approximately $424,000 was used to retire the bonds (see Note 2), including
$230,000 of accrued interest on the bonds.

Dunkirk also had an additional debt service reserve fund deposited in escrow as
required by the ESDC. In December 1997, the balance of the debt service reserve
fund of approximately $459,000 was applied against the outstanding principal and
accrued interest due on the related debt (see Note 2).


                                      F-19
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. Commitments and Contingencies

Litigation

July 1999 an insurance company filed a complaint for premiums alleged to be
owing under certain insurance policies for approximately $56,000 and the Company
has filed a motion to dismiss the action.

In addition to the above matters and in the normal course of conducting its
business, the Company is involved in various other litigation. The Company is
not a party to any litigation or governmental proceeding which its management
believes could result in any judgments or fines against it that would have a
material adverse affect on the Company's financial position, liquidity or
results of operations.

Lease Agreements

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,
                                                        1999               1998
                                                        ----               ----
Machinery and equipment                               $353,545          $353,545
Less accumulated amortization                          344,394           321,039
                                                      --------          --------
                                                      $  9,151          $ 32,506
                                                      ========          ========

Lease amortization of $23,355 and $31,714 for the years ended June 30, 1999 and
1998, respectively, is included in cost of goods sold.

Future minimum lease payments required under operating leases together with the
present value of the net minimum lease payments for capitalized leases as of
June 30, 1999 are as follows:

                                                       Capitalized    Operating
                                                          Leases       Leases
                                                          ------       ------

      June 30,
      2000                                               $ 14,986     $125,349
      2001                                                     --        4,011
      2002                                                     --        1,337
                                                         ---------------------
      Total net minimum lease payments                     14,986     $130,697
                                                                      ========
      Less amount representing interest                       298
                                                         --------
      Present value of net minimum lease payments        $ 14,688
                                                         ========

Total rent expense of the Company for the periods ended June 30, 1999 and 1998
was $206,995 and $238,372, respectively.


                                      F-20
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consulting Agreement

The Company entered into a Consulting Agreement with the Acting President to
assist the Company in strategic planning, business development, investor
relations, fund raising and such other activities as shall be reasonably
requested by the Board. Fees will accrue under the Agreement at $10,000 per
month until its expiration in August 2000.

7. Capital Stock

In connection with the Company's May 16, 1996 initial public offering, 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 by June 30, 2000. 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.

In August, September and December of 1997, the Company sold 553,000 shares of
Series A Preferred Stock, with a par value of $.001 per share and a stated value
of $10 per share, under a placement agency agreement for the private placement
of the Series A Preferred Stock. The net proceeds to the Company were $4,523,302
after deducting the placement agent commissions and expenses and other
transaction expenses. Each share of Series A Preferred Stock is convertible into
twenty shares of common stock at a conversion price of $0.50 per share after
giving effect to anti-dilution adjustments resulting from the reset of the
conversion price of the Series A Preferred Stock on December 8, 1998. Commencing
in December 1998, the holders of the Series A Preferred Stock are entitled to
receive dividends payable in cash, or at the option of the Company, in
additional shares of Series A Preferred Stock at the rate of 10% per annum. The
affirmative vote of the holders of at least two-thirds of the Series A Preferred
Stock is required for the issuance of senior securities, the incurrence of
indebtedness, the repurchase of securities and certain other restrictions. The
placement agent received a cash commission of 9% and a non-accountable expense
allowance of 4% of the gross proceeds. The placement agent also received
warrants, which expire in June, 2008, to purchase 61,945 shares of the Company's
Series A Preferred Stock at an exercise price of $9.82 per share (after giving
effect to antidilution adjustments resulting from the issuance of the additional
shares of Series A Preferred Stock on April 10,1998).

The Series A Preferred Stock is convertible at a discount on various dates
beginning April 10, 1998 through January 10, 1999. As a result, a Series A
Preferred Stock dividend of $757,997 ($.11per Common Share) has been recorded
for year ended June 30, 1999 and a dividend of $2,605,503 ($.54 per Common
share) has been recorded for year ended June 30, 1998 for the difference between
the discounted conversion price of the Series A Preferred Stock and the fair
market value of the Company's Common Stock at the time of issuance. The Series A
Preferred Stock also contains a reset provision under which the conversion price
in effect immediately prior to the date that is 12 months after the final
closing date of the issuance and sale of the Series A Preferred Stock (the
"Reset Date") shall be adjusted and reset effective as of the Reset Date if the
average closing bid price of the Common Stock for the twenty (20) consecutive
trading days


                                      F-21
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Capital Stock (continued)

immediately preceding the Reset Date is less than 135% of the then applicable
conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the
conversion price shall be reduced to be equal to the greater of (A) the 12-month
trading price divided by 1.35, or (B) 50% of the then applicable conversion
price. As a result of this reset feature, a Series A Preferred Stock dividend of
$118,200 ($.02 per Common Share) has been recorded for the year ended June 30,
1999 and a dividend of $426,816 ($.09 per Common share) has been recorded for
the year ended June 30, 1998 for the difference between the discounted
conversion price as reset and the fair market value of the Company's Common
Stock at the time of issuance. This reset feature resulted in the conversion
price of the Series A Preferred Stock being adjusted to $0.50 per share of
Common Stock on December 8, 1998.

Pursuant to the terms of the private placement agreement, the Company was
required to register the shares of Common Stock underlying the Series A
Preferred Stock within 90 days of the final closing of the private placement.
Those shares of Common Stock were not registered within 90 days of the final
closing, and accordingly, the Company issued an additional 66,360 shares of
Series A Preferred Stock (convertible into 1,327,200 shares of Common Stock) to
the purchasers of the private placement on April 10, 1998. These shares were
valued at $663,600 (the fair value of the Series A Preferred Stock) and were
recorded in selling, general and administrative expenses in fiscal 1998. As of
June 30, 1999, the holders of the Series A Preferred Stock had converted 73,530
shares of Series A Preferred Stock into 1,407,300 shares of Common Stock.

At June 30, 1999, the Company had the following Common Stock purchase warrants
outstanding after giving effect to anti dilution provisions of the warrant
agreements and adjusted as a result of the reset of the conversion price of the
Series A Preferred Stock described above:

<TABLE>
<CAPTION>
                             Number of
                        Underlying Shares      Exercise Price       Expiration Date

      <S>                     <C>                <C>             <C>
      Class A Warrants          9,200,462            $2.95       May 16 & June 7, 2001
      Class B Warrants          7,008,058            $3.93       May 16 & June 7, 2001
      Lenders' Warrants           198,863            $0.66       July 21, 2002
           (see Note 4)
      Lenders' Warrants           385,075            $0.67       May 8, 2003
           (see Note 4)
      Others                      319,204        $4.40-$5.28     May 5, 2000-May 5, 2005
                               ----------
                               17,111,662
                               ==========
</TABLE>

At June 30, 1999, all of the warrants were exercisable. Upon exercise of the
Class A Warrants, the purchaser receives one share of Common Stock and one new
Class B Warrant.

In addition to the warrants listed above and in connection with the initial
public offering, the Company sold for a nominal fee on May 16, 1996 to the
Underwriter the option to purchase up to 306,700 shares of Common Stock at an
exercise price of $6.16 and/or 608,204 Class A Warrants at an exercise price of
$.07


                                      F-22
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Capital Stock (continued)

and/or 609,229 Class B Warrants at an exercise price of $.07, all of which
expire on May 16, 2001. After purchase the Class A Warrants will be exercisable
at a price of $2.95 per share of Common Stock and the Class B Warrants will be
exercisable at a price of $3.93 per share of Common Stock, subject to adjustment
to protect against dilution.

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 250,000 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 generally 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 January 27, 1998, the Company reduced the exercise price of certain
options granted under the Non-Employee Plan for 21,580 shares to $0.78 per share
from exercise prices ranging from $3.125 to $5.00 per share.

The following table summarizes the activity in options under the Employee and
Non-Employee Plans:

                                                                Weighted Average
                                             Number of Shares    Exercise Price
      Employee Plan Options
      Outstanding at July 1, 1997                 169,080             4.40
        Granted at market value                   272,500              .78
        Granted below market value                 20,000             1.38
        Canceled                                  (41,946)            4.40
                                                  -------
        Outstanding at June 30, 1998              419,634             1.91
        Granted above market value                 25,000              .03
        Canceled                                 (184,435)            1.90
                                                  -------
        Outstanding at June 30, 1999              260,199             1.73
                                                  =======

      Non-Employee Plan Options
      Outstanding at July 1, 1997                  58,330             3.32
        Granted at market value                   135,000              .94
        Canceled                                  (25,412)            3.41
                                                  -------
      Outstanding at June 30, 1998
      and June 30, 1999                           167,918             1.08
                                                  =======


                                      F-23
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Capital Stock (continued)

                                   Options Outstanding       Options Exercisable
                                     at June 30, 1999         at June 30, 1999
                                  ----------------------------------------------
                                              Weighted
                                  Weighted     Average                  Weighted
                                   Average    Remaining                  Average
                       Number     Exercise   Contractual     Number     Exercise
          Range       of Shares    Price     Life (Years)   of Shares    Price
      --------------------------------------------------------------------------
      $0.03-$0.781     306,580     $0.720        7.1         159,912     $0.664
      $1.375-$1.875     40,000     $1.625        6.6          40,000     $1.625
      $3.125-$5.00      81,537     $4.245        4.1          74,034     $4.229
                       -------                               -------
      TOTAL            428,117     $1.476        6.5         273,946     $1.767
                       =======                               =======

Of the total options outstanding under the plans, 273,946 and 198,123 were
exercisable at June 30, 1999 and 1998, respectively.

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 was recognized) to two former
officers of the Company under the Plan which shares vested on January 1, 1998.
Effective in July 1997, the Company issued a total of 600,000 options at an
exercise price of $1.375 to two officers of the Company which vest 20% at date
of grant and 20% for each of the next four years. On January 27, 1998, the
Company reduced the exercise price of these options to $0.78 and granted a total
of 10,000 options at an exercise price of $0.78 to two other officers of the
Company which vest one-third on each of the first three anniversaries of the
date of grant. In October 1998, options for a total of 305,000 shares were
canceled upon the resignation of two officers of the Company. All options
granted under the Plan expire on the seventh anniversary of the dates of grant.

On January 27, 1998, the Company granted non-qualified options to purchase
15,000 shares of its Common Stock at an exercise price of $0.78 per share to a
former director which were vested at the date of grant and expire on the tenth
anniversary of the date of grant. These options are not part of the Employee
Plan, Non- Employee Plan or the 1996 Long-Term Employee Incentive Plan.

The Company recorded $265,150 in compensation costs during fiscal 1998 in
connection with the issuance of non-employee plan options, employee plan options
issued below market and the


                                      F-24
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Capital Stock (continued)

modification of option terms, $207,000 and 57,246 of this amount is included in
unearned stock compensation at June 30, 1998 and 1999..

At June 30, 1999, the Company has reserved 1,414,392 shares of Common Stock for
the exercise of all options granted.

The Company's Board of Directors authorized an increase of the authorized number
of common shares to 50 million shares, which was approved by the Company's
stockholders at the Company's Annual Meeting held on March 31, 1998.

The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related interpretations in accounting for options issued to employees.
Accordingly, no compensation cost has been recognized for options granted to
employees at exercise prices, which equal or exceed the market price of the
Company's Common Stock at the date of grant. Options granted at exercise prices
below market prices are recognized as compensation cost measured as the
difference between market price and exercise price at the date of grant.

Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation", requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's employee stock options had been determined in accordance with the fair
market value based on the method prescribed in FAS 123. The Company estimates
the fair value of each stock option at the date of grant by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield, an expected life of 7.0 years for fiscal 1998
and 10.0 years for fiscal 1999, expected volatility of 55% for fiscal 1998 and
411% for fiscal 1999, and a risk- free interest rate of 6% for fiscal 1998 and
5.4% for fiscal 1999.

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 1999 and 1998 is amortized to expense over the options' vesting period.
The weighted-average fair value of options granted during fiscal years 1999 and
1998 were $0.00 and $0.85, respectively. The Company's pro forma information
follows:


                                      F-25
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Capital Stock (continued)

                                               1999                1998
                                          --------------------------------

      Pro Forma net loss                  $  (3,238,652)     $  (5,640,041)
      Pro Forma loss per common share     $       (0.63)     $       (1.17)

8. Income Taxes

There was no income tax expense/benefit for the Company for the years ended June
30, 1999 and 1998.

Following is a reconciliation of the expected income tax benefit to the amount
based on the U.S. statutory rate of 34% for the years ended June 30, 1999 and
1998:

<TABLE>
<CAPTION>
                                                        For the year ended June 30,
                                                           1999            1998
                                                           ----            ----
      <S>                                                <C>            <C>
      Income tax benefit based on U.S. statutory rate    $(854,392)     $(890,712)
      Current year addition to the valuation allowance     854,392        890,712
                                                         ------------------------
      Provision for income taxes                         $      --      $      --
                                                         ========================
</TABLE>

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

                                                            June 30,
                                                      1999              1998
                                                 ------------------------------
      Deferred tax assets:
          Reserve for disposal                   $    120,400      $    206,000
          Start-up costs                                8,977            87,661
          Property, plant and equipment             1,816,613         2,400,544
          Allowance for doubtful accounts              27,258             7,200
          Accruals                                    177,180           166,620
          Stock options and warrants                  120,476            57,500
          Net operating loss carryforward           9,821,435          8312,424
                                                 ------------------------------
      Total deferred tax assets                    12,092,339        11,237,949

      Valuation allowances                        (12,092,339)      (11,237,949)
                                                 ------------------------------
      Net deferred tax assets                    $         --      $         --
                                                 ==============================


                                      F-26
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. Income Taxes (continued)

The Company's valuation allowance increased by approximately $854,000 for the
year ended June 30,1999 which represents the effect of changes to the temporary
differences and net operating losses. The Company has recorded a valuation
allowance to state its deferred tax assets at estimated net realizable value due
to the uncertainty related to realization of these assets through future taxable
income.

At June 30,1999, the Company has approximately $24 million of net operating loss
carry forwards, which expire between 2006 and 2019. The Tax Reform Act of 1986
enacted a complex set of rules (Section 382) limiting the potential utilization
of net operating loss carry forwards 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% stockholders" 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 current shifts in ownership (the
Series A Preferred Stock Offering), the Company's ability to utilize its net
operating loss carry forwards could be severely limited.

9. Employee Benefit Plan

The Company established a 401(K) defined contribution plan covering
substantially all employees meeting certain minimum age and service requirements
effective August 1, 1998. The Company's contribution to the plan is determined
by the Board of Directors and is limited to a maximum of 100% of the employee's
contribution and 6% of the Employee's compensation. Contributions made to the
plan for the fiscal year ended June 30, 1999 were $18,913, no contributions were
made for the fiscal year ended June 30, 1998

10. Industry Segments

The Company's operations are classified into two business segments; decorative
particles and performance aggregates ("particles") and industrial abrasives and
recycling cathode ray tube glass ("abrasives and CRT").

The particle segment manufacturers, processes and markets decorate particles
that visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring and 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 abrasives and CRT segment manufactures, processes and markets industrial
abrasives which can be used for surface cleaning and preparation applications
such as in cleaning steel structures, railcars, aircraft parts, and equipment.
During the two years ended June 30, 1999, the Company continued to shift its
focus away from industrial abrasives in favor of decorative particles and
performance aggregates due to the increased costs of production for industrial
abrasives relative to their market sales price. The Company was also engaged in
recycling CRT glass produced in the manufacture of televisions for resale to
television manufacturers and others. In March 1998 the Company agreed to
subcontract its recycling operations which has resulted in a decrease in CRT
revenues in calendar 1998 and no revenue in 1999.


                                      F-27
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table shows revenues and operating income (loss) and other
financial information by segment as of and for the years ended June 30, 1999 and
1998:

                                                       1999             1998
                                                   ----------------------------

      Revenue

         Particles                                 $   916,441      $   286,265

         Abrasives and CRT                             203,041        1,611,715
                                                   ----------------------------
                                                   $ 1,119,482      $ 1,897,980
                                                   ============================

      Operating Income (Loss)

         Particles                                 $  (574,803)     $  (733,650)

         Abrasives and CRT                              30,618       (5,363,986)

         Corporate Expenses                         (1,093,336)      (2,344,709)
                                                   ----------------------------
                                                   $(1,637,521)     $(8,442,345)
                                                   ============================

      Depreciation and Amortization

         Particles                                 $   129,805      $    99,454

         Abrasives and CRT                              22,199          750,149

         Corporate Expenses                             11,986            7,868
                                                   ----------------------------
                                                   $   163,990      $   857,471
                                                   ============================
      Interest Income

         Particles                                 $        --      $        --

         Abrasives and CRT                                 939           39,578

         Corporate Expenses                              2,611           42,738
                                                   ----------------------------
                                                   $     3,550      $    82,316
                                                   ============================


                                      F-28
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                        <C>            <C>
Interest Expense

   Particles                                               $      772     $       --

   Abrasives and CRT                                          207,998        436,600

   Corporate                                                  268,249        115,700
                                                           -------------------------
                                                           $  477,019     $  552,300
                                                           =========================

Write Down of Property Plant & Equipment Held for Sale

         Particles                                         $       --     $       --

         Abrasives and CRT                                         --      4,913,422

         Corporate                                                 --             --
                                                           -------------------------
                                                           $       --     $4,913,422
                                                           =========================

Extraordinary Item - Gain on Debt Retirement

         Particles                                         $       --     $       --

         Abrasives and CRT                                         --      6,133,385

         Corporate                                                 --        291,619
                                                           -------------------------
                                                           $       --     $6,425,004
                                                           =========================

Identifiable Assets

   Particles                                               $  911,812     $  909,618

   Abrasives and CRT                                        1,144,203      1,646,888

   Corporate                                                  157,629        118,965
                                                           -------------------------
                                                           $2,213,644     $2,675,471
                                                           =========================

Capital Expenditures

   Particles                                               $   76,227     $  250,687

   Abrasives and CRT                                            4,269         41,863

   Corporate                                                    6,825         80,022
                                                           -------------------------
                                                           $   87,321     $  372,572
                                                           =========================
</TABLE>


                                      F-29
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. Subsequent Events

In September 1999, the Company sold in a private placement 4,802,967 shares of
Series B Convertible Preferred Stock with a par value of $.001 per share and a
stated value of $0.60 per share. Each share of Series B Convertible Preferred
Stock is convertible into twenty shares of Common Stock at a conversion price of
$0.03 per share. Commencing twelve months from the closing of the private
placement, the holders of the Series B Convertible Preferred Stock are entitled
to receive dividends payable in cash or in Series B Convertible Preferred Stock
at the option of the Company, at the rate of 10% per annum.

The Company accepted cash and the cancellation of debt as consideration for the
sale of the Series B Convertible Preferred Stock. Of the total proceeds,
$1,115,000 was in cash and $1,766,778 was in the form of cancellation of debt
and accrued interest. Of the debt converted, $1,652,778 was from the two
significant stockholders of the Company who converted all of the debt and
accrued interest owed to them under the Credit Agreement and interim financing
agreement. Also the Acting President and Chief Executive Officer converted
$114,000 of the debt and accrued interest owed to him under the promissory note
dated February 23, 1999. (See Notes 3 and 4)

The two significant stockholders have agreed to give the Company an option to
repurchase their shares of Series B Convertible Preferred Stock at a rate per
share of the equivalent Common Stock of $0.03 per share during the first year
from the date of closing of the private placement, $0.04 per share during the
second year from such date and $0.05 per share during the third year from such
date

From the cash proceeds of the private placement, $600,000 was paid to Empire
State Development Corporation in full satisfaction of the Dunkirk - Term loan
with the New York State Job Development Authority with a $1,183,110 principal
balance and the Dunkirk - New York Job Development Authority (Al Tech)
subordinated note with a principal balance of $37,870. In addition $160,000 was
paid to the Company's former legal counsel in settlement of an accrued liability
of $197,689 for past due professional services. The forgiveness of debt will be
reflected as an extraordinary gain in the Company's fiscal 2000 first quarter
results

On September 24, 1999, the Company's Certificate of Incorporation was amended to
increase the number of shares of Common Stock it is authorized to issue from 50
million to 200 million.


                                      F-30
<PAGE>

                                  EXHIBIT INDEX

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

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

3.1*              Amended and Restated Certificate of Incorporation of the
                  Company

3.2**             Certificate of Designation of Series A Convertible Preferred
                  Stock

3.2.1             Certificate of Designation of Series B Convertible Preferred
                  Stock

3.3*              By-laws of the Company

3.4****           Certificate of Amendment to the Restated Certificate of
                  Incorporation of the Company

3.5               Certificate of Merger of CTI Subsidiary Corp. With and Into
                  the Company and Agreement and Plan of Merger between the
                  Company and CTI Subsidiary Corp..

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

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

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

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

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

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

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

10.18*            Project Development Assistance Agreement dated July 13, 1995,
                  among the Company, Technology Funding Partners III, L.P. and
                  Technology Funding Venture Partners V, An Aggressive Growth
                  Fund, L.P.

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

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

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

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

<PAGE>

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

10.26*            Series A Preferred Stock Purchase Agreement dated as of May 5,
                  1995, among the Company, Technology Funding Partners 111, L.P.
                  and Technology Funding Venture Partners V, An Aggressive
                  Growth Fund, L.P.

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

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

10.29**           Form of Placement Agent Warrant.

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

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

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

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

10.34***          Senior Secured Line of Credit Agreement dated as of May 8,
                  1998 by and among Aries Domestic Fund, L.P., The Aries Fund,
                  Dunkirk, APT and the Company

10.34.1           Form of Senior Secured Notes issued to The Aries Master Fund
                  aggregating $910,000 in principal amount.

10.34.2           Form of Senior Secured Notes issued to the Aries Domestic
                  fund, L.P. aggregating $380,000 in principal amount.

10.35****         Security Agreement dated as of May 8, 1998 among the Company,
                  Dunkirk, APT and Paramount Capital Asset Management, Inc.

10.36****         Subsidiary Guarantee dated as of May 8, 1998 by Dunkirk and
                  APT in favor of The Aries Fund and Aries Domestic Fund, L.P.

10.37****         Promissory Note dated as of February 23, 1999 issued by the
                  Company in favor of Eckardt C. Beck

10.38****         Termination Agreement dated as of January 1, 1998 by and
                  between the Company and Jack D. Hays, Jr.

10.39****         Termination Agreement dated as of January 1, 1998 by and
                  between the Company and Richard H. Hughes

10.40****         Consulting Agreement dated December 22, 1998 by and between
                  the Company and 4C Technologies, Inc.

10.41****         Amendment dated as of May 8, 1998 to the Technology Purchase
                  Agreement dated as of June 30, 1997 by and between APT and
                  VANGKOE

10.42****         Termination Agreement dated as of May 8, 1998 by and between
                  APT and VANGKOE

<PAGE>

10.43****         Materials Bill of Sale Agreement dated as of May 8, 1998 by
                  and between the Company and VANGKOE

10.44****         Ceramaglass Trademark & Intellectual Property Agreement dated
                  as of May 8, 1998 by and between the Company and VANGKOE

10.45****         Ceramaquartz Trademark & Intellectual Property Agreement dated
                  As of May 8, 1998 by and between the Company and VANGKOE

10.46****         Letter Agreement of the Company dated March 11, 1998 with
                  Dlubak

10.47****         Lease dated April 1, 1998 by and between 312 Industrial Park
                  and the Company

10.48****         Lease dated April 1, 1998 by and between Willard Park Inc. and
                  the Company

10.49****         Manufacturer Representative Agreement dated as of January 1,
                  1998 by and between the Company and Engineered Products Sales
                  Associates

10.50****         Manufacturer Representative Termination Agreement dated as of
                  January 1, 1998 by and between the Company and Engineered
                  Products Sales Associates

10.51             Form of Subscription Agreement between the Company and various
                  Subscribers of the Series B Convertible Preferred Stock.

10.52.1           Form of Convertible Promissory Note issued by the Company in
                  favor of The Aries Master Fund aggregating $109,500 in
                  principal amount.

10.52.2           Form of Convertible Promissory Note issued by the Company in
                  favor of the Aries Domestic Fund, L.P. aggregating $60,500 in
                  principal amount.

10.53             Lease dated September 17, 1999 by and between Dunkirk
                  International Glass & Ceramics Corp. And Red Wing Company,
                  Inc..

11                Statement of Computation of Net Loss Per Share

21**              Subsidiaries of the Company

27                Financial Data Schedule for the year ended June 30, 1999

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

**                Incorporated by reference to the exhibits to the Company's
                  Annual Report on form 10-KSB, fiscal 1997.

***               Incorporated by reference to the exhibits to the Company's
                  Annual Report on form 10-QSB for the quarterly period ended
                  March 31, 1998.

****              Incorporated by reference to the exhibits to the Company's
                  Annual Report on form 10-KSB, fiscal 1998.

All other Exhibits filed herewith.