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, 1998                                              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
       St. Augustine, Florida                                        32086
(Address of principal executive offices)                           (Zip Code)

                                 (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 |_| No |X|

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, 1998 were $1,897,980. 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
$1,162,106.09 as of March 1, 1999. As of March 1, 1999, the issuer had
outstanding 5,603,045 shares of Common Stock.

                       Documents Incorporated by Reference

None.


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                                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 outsource 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 began to shift
its focus away from industrial abrasives in favor of 


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decorative particles and performance aggregates due to the increased costs of
production for industrial abrasives relative to their market sales price.

Until recently, 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
the reporting period when the Company commenced its subcontracting arrangement
with Dlubak, and such revenues have continued to decrease during the first two
quarters of fiscal 1999.

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 recently relocated its executive offices to 7 San Bartola Drive, St.
Augustine, Florida 32086. The Company's telephone number is (904) 808-0503.

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.


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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 of 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) for further processing 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.


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<PAGE>

Recycled CRT Glass

During the reporting period, 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

During the reporting period, the Company manufactured 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.

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 are
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.

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 


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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 and endurance of the color, which results from the
level of translucence or reflectivity 


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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.

Dependence on Certain Customers

The Company has a limited number of customers for all its products. 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. The Company's principal CRT glass recycling customer, Techneglas,
accounted for 47.1% of the Company's revenues. Techneglas ceased purchasing
recycled CRT glass from the Company during the fourth quarter of fiscal 1998 (as
defined below) as a result of the Company's subcontract with Dlubak.

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 11.6% of the Company's total revenue, while the Company's
main purchaser of decorative particles, VANGKOE Industries, Inc. ("VANGKOE"),
accounted for 10.3% of the Company's total revenue. Because the distributor
agreement with VANKGOE was terminated during 1998, the Company does not
anticipate that VANGKOE will continue to be a major customer. See "Description
of Business - Certain Recent Events." The Company now sells decorative particles
directly to customers.


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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 (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.


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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 uses
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 handles 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 stores materials in an environmentally
sound manner (for example, within the manufacturing building or on a concrete
slab).


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

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

During the year ended June 30, 1998 ("fiscal 1998"), 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 as a result of an
agreement that the Company entered into with Dlubak which, in part, requires the
removal of all inventory of unprocessed CRT materials from its Dunkirk facility.
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 is currently discussing an arrangement with the NYSDEC to
remedy this potential environmental liability.

Employees

As of March 1, 1999, the Company had 14 full-time employees consisting of 9
employees in manufacturing and 5 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 recently. In August 1997, William
L. Amt was hired as President and Chief Executive Officer. In October 1997, Gary
Jellum was hired as Vice President of Administration. In January 1998, Jack D.
Hays, Jr. and Richard H. Hughes resigned their positions as Executive Vice
President of Operations and Marketing and Vice President of Sales and Marketing,
respectively, to pursue other business interests. On March 31, 1998, at the
Company's annual meeting of stockholders, David R. Walner was elected as a
director of the Company. Mr. Walner served as a director until his resignation
in September 1998. 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


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Company's Chairman of the Board, has been serving as Acting President and Chief
Executive Officer of the Company since October 1998.

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

As part of the change in focus of the Company's business, the Company no longer
plans to produce ALUMAGLASS(R) (but may license its patent to a third party for
production). Accordingly, the Company no longer requires use of the glass melter
and associated equipment that were used for the production of ALUMAGLASS(R) at
the Dunkirk facility. The Company ceased operations at the Dunkirk facility in
October 1998 and has been considering the possibility of selling the Dunkirk
assets. In the quarter ended June 30, 1998, the Company adjusted the value of
such assets to reflect their estimated net realizable value. This write-down has
resulted in a $4,913,422 charge to earnings for such quarter, increasing the
Company's loss for such quarter by an equal amount.

VANGKOE Distribution Agreement

In June 1997, the Company terminated its joint venture with VANGKOE and the
parties entered into a distribution agreement (the "Distribution Agreement").
The Distribution Agreement provided for VANGKOE to purchase colored particles
from APT and sell the particles to distributors and other third parties.
Pursuant to the terms of the Distribution Agreement, VANGKOE was the exclusive
distributor of APT's colored particles for swimming pool and other pool-related
markets. APT acted as the exclusive supplier of colored particles to VANGKOE,
subject to APT's continued ability to supply such particles. In order to
maintain its exclusivity as a distributor of APT's colored particles, VANGKOE
was required to meet certain sales targets. In May 1998, the Company and VANGKOE
mutually agreed to terminate the Distribution Agreement. In connection with the
termination, the Company paid $75,000 to VANGKOE and the Company purchased the
trademarks for CERAMAGLASS(TM) and CERAMAQUARTZ(TM) from VANGKOE for the sum of
$50,000. Upon termination of the Distribution Agreement, the Company initiated a
direct sales and marketing effort to selected manufacturers of swimming pool
plasters and decking materials.

Working Capital Line of Credit

On May 8, 1998, the Company entered into a Senior Secured Line of Credit
Agreement (as amended, the "Credit Agreement") with the Aries Domestic Fund,
L.P. and The Aries Fund, a Cayman Island trust (collectively, the "Funds"), two
significant stockholders of the Company. See "Certain Relationships and Related
Transactions." The Credit Agreement provides for a line of credit (the "Line of
Credit") of up to $1,200,000 pursuant to which the Company can draw down up to
$300,000 per month, although draw downs beyond the initial $300,000 are at the
discretion of the Funds. 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%. In connection with the Line
of Credit (including an amendment increasing the amount available thereunder by
$90,000 (discussed below)), the Company issued to the Funds warrants to purchase
an 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 Convertible Preferred
Stock (the "Series A Preferred Stock") on December 8, 1998). Of such warrants,
warrants to purchase 29,850 shares of Common Stock vest upon each $100,000 (or
ratable portion thereof) being drawn under the Credit Agreement. The Line of
Credit matures on the earlier of May 8, 1999 or upon the 


                                       11
<PAGE>

completion of any financing of at least $1,500,000. 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 Funds will be 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 may 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 available thereunder by $90,000, although formal
documentation of the amendment has not been fully executed. As of January 13,
1999, the Company had drawn down the full $1,290,000 available under the Line of
Credit.

On February 22, 1999, the Funds agreed to provide interim financing to the
Company (the "Aries Interim Financing") in the amount of up to $150,000
($135,000 of which has been drawn upon), although formal documentation of the
Aries Interim Financing has not been fully executed. In consideration for the
Aries Interim Financing, the Company agreed that in the event that the Company
is unable to obtain additional financing of at least $1,500,000 by April 1,
1999, the Funds will have the right to, in exchange for their right to repayment
of the Aries 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. In further
consideration for the Aries Interim Financing, the Company agreed to amend the
Line of Credit in order to allow the Funds to have the option to exchange their
full right to payment for 90% of the issued and outstanding shares of APT,
although formal documentation of the amendment has not been fully executed. See
"Certain Relationships and Related Transactions."

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 loans through January 1, 1999
until the maturity date of the notes. The Company is currently negotiating with
the ESDC to reduce the amounts owed to the ESDC in exchange for the Company
paying a reduced amount to the ESDC. Principal and interest payments on the
notes are currently in default.

Amendment to Certificate of Incorporation

Following the Company's annual meeting of stockholders held on March 31, 1998,
the Company's Certificate of Incorporation was amended to increase the
authorized number of common shares to fifty million.


                                       12
<PAGE>

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 other than the Line of Credit. In order to allow
the Company to continue operating in the short term, Eckardt C. Beck, the Acting
President and Chief Executive Officer of the Company, has advanced to the
Company, or has not received accrued compensation of, an aggregate of $190,000,
and the Funds have provided the Aries Interim Financing. The Company is
currently seeking additional financing through a private placement of its equity
securities. There can be no assurance that the Company will be able to obtain
necessary financing. If the Company is not able to obtain immediate 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.

Accumulated Deficit; History of Operating Losses; Going Concern Paragraph in
Auditors' Reports

The Company has experienced significant operating losses since its inception.
The Company had an accumulated deficit of approximately $(35,308,000) at June
30, 1998. The Company incurred an operating loss of approximately $(8,442,000)
for the fiscal year ended June 30, 1998, and approximately $(12,154,000) for the
fiscal year ended June 30, 1997. 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, pretax gains on debt retirement, 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, 1999 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
reports of its independent auditors accompanying its consolidated financial
statements for the fiscal years ended June 30, 1998 and 1997, 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 immediate need of significant additional financing. At June
30, 1998, the Company had a net working capital deficiency of approximately
$4,309,000. 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, other than the Line of Credit. 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


                                       13
<PAGE>

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 financings will
be dilutive to the Company's stockholders and any debt financings 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 and APT

At June 30, 1998, the Company had outstanding an aggregate of approximately
$2,524,000 of indebtedness (excluding amounts borrowed under the Line of Credit
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 $2,524,000 in indebtedness at
June 30, 1998, $1,358,355 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 is currently negotiating
with the ESDC to reduce the amounts owed to the ESDC in exchange for the Company
agreeing to pay a reduced amount to the ESDC. The Company is currently in
default with respect to principal and interest payments on the ESDC loans. 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 equipment 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. As agreed to with the Funds in consideration for additional interim
financing subsequent to fiscal 1998, since the Company has not raised $1,500,000
prior to April 1, 1999, the Funds may convert the Company's existing debt to
them into shares of the Common Stock of the Company or exchange all of such
existing portions of debt for all of the issued and outstanding stock of APT.
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 to date have been 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 


                                       14
<PAGE>

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; 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 carryforwards, the Company cannot be certain at this time whether the loss
carryforwards are usable to offset any of the Company's gains.

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, 


                                       15
<PAGE>

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 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.
The Company has a potential environmental liability with respect to NYSDEC's
requirement that the Company 


                                       16
<PAGE>

submit a remedial plan for the completion of its petroleum storage tank removal
project at its Dunkirk facility.

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".

Delinquent Periodic and Annual Reports

The Company is not current in its annual and periodic report filings required to
be filed with the Securities and Exchange Commission (the "Commission"). As of
the date of this Report, the Company has not filed any Quarterly Reports on Form
10-QSB required to be filed since the end of fiscal 1998. As a result, investors
do not and may not have access to such information on a timely basis.

Outstanding Warrants and Options

As of March 1, 1999, the Company had outstanding (i) 9,200,462 Redeemable Class
A Warrants to purchase an aggregate of 9,200,462 shares of Common Stock and
Class B Warrants at an exercise price of $2.95 per share and 7,008,058
Redeemable Class B Warrants at an exercise price of $3.93 per share (all of the
Company's outstanding Redeemable Class A Warrants and Redeemable Class B
Warrants are referred to herein as the "Redeemable Warrants"); (ii) options
previously held by D.H. Blair Investment Banking Corp. ("Blair") to purchase up
to 306,700 shares of Common Stock and/or 608,204 Class A Warrants and/or 609,229
Class B Warrants at an exercise price of $6.16 per share of Common Stock, $0.07
per Class A Warrant and $0.07 per Class B Warrant; (iii) options to purchase an
aggregate of 464,877 shares of Common Stock granted under the Company's Stock
Option Plans at a weighted average exercise price of approximately $1.49 per
share; (iv) non-qualified options to purchase 305,000 shares of Common Stock
issued pursuant to the Company's Long-Term Plan (as defined below) at an
exercise price of $0.78 per share (consisting of options to purchase 300,000
shares of Common Stock issued to Mr. Beck and options to purchase 5,000 shares
of Common Stock issued to one other officer of the Company; (v) warrants to
purchase an aggregate of 319,204 shares of Common Stock at a weighted average
exercise price of approximately $4.90 per share issued prior to the IPO (as
defined below); (vi) warrants to purchase an aggregate of 198,863 shares of
Common Stock at a per share exercise price of $0.66 issued in connection with
the 1997 Bridge Loan (as defined below); (vii) warrants to purchase an aggregate
of 385,075 shares of Common Stock at a per share exercise price of $0.67 issued
in connection with the Line of Credit Agreement; and (viii) non-qualified
options to purchase 15,000 shares of Common Stock at an exercise price of $0.78
per share which are not part of any of the Company's option plans. 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 


                                       17
<PAGE>

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.

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


                                       18
<PAGE>

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.

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, 1998. 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 $256,457 was outstanding on June
30, 1998.

The Company recently 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 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. The Company also leases
approximately 700 square feet of space in Winter Park, Florida to be employed as
a sales and marketing office. The lease will expire in February 2000 and the
rent is approximately $1,565 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 June 1998, the Company settled a litigation, Conversion Technologies
International, Inc. v. R.E. Williams and Company, Inc., commenced by the Company
on October 26, 1995 in the Supreme Court of New York, County of Chautauqua,
against a general contractor hired to construct the improved abrasives finishing
area at the Dunkirk facility. Under the terms of the settlement, the Company was
required to pay $75,000, which had been accrued in prior years, and to
relinquish control of certain equipment, such equipment having had a net book
value of $23,231.

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. The matter is scheduled for
an arbitration hearing in April, 1999.


                                       19
<PAGE>

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 owes 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.

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

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

None.

                                     Part II

Item 5. Market for Common Equity and Related Stockholder Matters

The Company's Common Stock 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 (source, the Nasdaq Stock Market). The prices shown
represent quotations among securities dealers, do not include retail markups,
markdowns or commissions and may not represent actual transactions.

           Quarter Ended                  High                       Low
-------------------------------  ----------------------  -----------------------
         June 30, 1996                    $7.25                      $5.00
                                          
         September 30, 1996               $5.00                      $3.375
                                          
         December 31, 1996                $3.375                     $2.25
                                          
         March 31, 1997                   $2.625                     $1.375
                                          
         June 30, 1997                    $3.00                      $1.00
                                          
         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


                                       20
<PAGE>

As of January 28, 1998, the Company had approximately 559 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.

Recent Sales of Unregistered Securities

Except as previously reported, there were no unregistered securities sold by the
Company during the fiscal year ended June 30, 1998.

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

Overview

Since inception through June 30, 1998, the Company sustained cumulative losses
of approximately $35,308,000. 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
$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 expenses, net of revenue,
of approximately $22,348,000. The Company will continue to incur losses until
such time as revenues are sufficient to fund its continuing operations.

The Company has taken a number of recent steps in an effort to preserve cash,
reduce its costs and increase revenues. 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 a private
placement of Series A Preferred Stock which occurred beginning in August 1997.
This forgiveness resulted in a net pretax gain to the Company of approximately
$5,862,000, which is reported as an Extraordinary Item in the Company's
financial statements.

In December 1997, the ESDC, which had previously been assigned approximately
$1,888,000 principal amount of debt plus accrued interest of approximately
$82,000 owed by Dunkirk to Key Bank (in consideration for its payment thereof as
guarantor), 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 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 


                                       21
<PAGE>

to accrue on such deferred amounts and payable monthly beginning July 1998
through December 2001. This forgiveness resulted in a net pretax gain to the
Company of approximately $271,000, which is reported as an Extraordinary Item in
the Company's financial statements. The Company is currently negotiating with
the ESDC regarding an additional debt forgiveness in exchange for a payment by
the Company representing the repayment in full of the balance of the debt. There
can be no assurance that such negotiations will be successful.

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, which is reported as an Extraordinary Item in
the Company's financial statements.

Raw material costs are expected to be reduced through the use of third party
tollers and the application of lower cost alternative substrates and coating
materials. Investments in product development have been curtailed and
investments in sales and marketing will be increased. Manufacturing and
operating overheads have also been reduced through payroll reductions and
savings associated with non-productive equipment and processes that have been
shut-down, such as the Company's Dunkirk facility. The Company has begun to sell
amounts of the 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.

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, 1998, 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, 1998 Compared to Fiscal Year Ended June 30, 1997.

Consolidated revenues for fiscal 1998 were approximately $1,898,000 consisting
primarily of CRT glass recycling fees and related clean cullet sales of
approximately $1,275,000, ALUMAGLASS(R) sales of approximately $321,000 and
decorative particles and performance aggregates sales of approximately $302,000.
For the year ended June 30, 1997 ("fiscal 1997"), the Company had consolidated
revenues of approximately $1,429,000, of which approximately $248,000 was
derived from sales of ALUMAGLASS(R) and $1,181,000 was derived from CRT
recycling fees. This change in revenue during fiscal 1998 primarily reflects the
$302,000 from the decorative particles and performance aggregates business,
which was not operating in fiscal 1997. As a result of the Company's shift in
focus away from the CRT recycling business in favor of decorative particles and
performance aggregates, the Company anticipates that CRT revenue will
significantly decrease in future periods.

Cost of goods sold was approximately $2,703,000 for fiscal 1998 versus
approximately $3,952,000 for the prior fiscal year, representing a decrease of
approximately $1,249,000 despite the increase in revenues of $469,000. This
decrease was caused by a number of factors, including (i) a decrease of
$1,020,000 as a result of discontinuing the melter operations and writing off
the assets associated therewith during the last quarter of fiscal 1997, (ii) a
net 


                                       22
<PAGE>

decrease in the charge to operations of $174,000 for the change in the reserve
for disposal costs for the unprocessed waste materials on hand, (iii) a decrease
of $249,000 due to the reduced level of operations in the abrasives finishing
department, (iv) a decrease of $195,000 from the reduced level of operations in
the CRT glass recycling department due to the Dlubak subcontract agreement, and
(v) an increase of $407,000 from the operations of the decorative particles
business which started production in fiscal 1998.

The Company's gross margin improved by $1,718,000 to a loss of $805,000 for
fiscal 1998 from a loss of $2,523,000 for fiscal 1997 as a result of the
$469,000 increase in revenues and the $1,249,000 decrease in cost of goods sold.

Selling, general and administrative expenses decreased by $1,195,000 to
$2,724,000 for fiscal 1998, as compared to $3,919,000 for fiscal 1997. This
decrease was primarily the result of a $1,523,000 decrease in professional fees
and financial printing costs relating to the proposed merger with Octagon, Inc.,
which was terminated at the end of fiscal 1997 and a $316,000 decrease in
salaries and related fringe costs. These decreases were partially offset by a
$664,000 cost recorded for the value of the Series A Preferred Stock issued to
purchasers who took part in the private placement thereof.

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 to sell that facility. In the comparable quarter of the prior
fiscal year a charge against operations of approximately $5,712,000 was recorded
to write down fixed assets to their estimated fair market value for processes
which had been shut down and no longer were viable for the foreseeable future.

Interest expense decreased by $725,000 to $552,000 for fiscal 1998 from
$1,277,000 for fiscal 1997. The decrease was primarily attributable to a
$841,000 decrease in interest expense due mainly to the reduction in debt from
the repayment and forgiveness described in the above overview section, offset by
a $98,000 charge from the amortization of discount on notes payable issued in
fiscal 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 the Company by the ESDC and a
gain of $292,000 for the accounts payable forgiveness granted 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 financings 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 is also in
default on principal and interest payments with respect to substantially all of
its outstanding indebtedness for borrowed money other than indebtedness under
the Line of Credit. The Company has an immediate 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 


                                       23
<PAGE>

June 30, 1998, the Company had approximately $2,524,000 in principal amount of
indebtedness (excluding amounts borrowed under the Line of Credit and capital
lease obligations) and net working capital deficiency of approximately
$4,309,000. As of June 30, 1998, the Company had cash and marketable securities
of approximately $168,000.

In August, September and December 1997, the Company raised net proceeds of
$4,523,302 (after deducting the placement agent's commissions and
non-accountable expense allowance and other transaction expenses) from a private
placement of Series A Preferred Stock. An aggregate of 553,000 shares of Series
A Preferred Stock were issued. In April 1998, an additional 66,360 shares of
Series A Preferred Stock were issued to the purchasers of the private placement
as described in Note 7 to the Financial Statements. Each share of Series A
Preferred Stock is currently convertible into twenty shares of 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). Of
the net proceeds, $1,620,000 was used to redeem the IDA Bonds and $500,000 plus
accrued interest was used to repay the 1997 Bridge Loan (as defined below), with
the remainder used for general working capital purposes, including accrued
payables.

In July 1997, the ESDC was assigned approximately $1,888,000 outstanding
principal amount of term loans (plus accrued interest) owed by Dunkirk to Key
Bank. In December 1997, the ESDC 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 resulting in a principal balance of $1,032,798. ESDC 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 and payable monthly beginning July
1998 through December 2001. The Company is currently in payment default on
amounts owed to ESDC.

In July and August 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 1997 Bridge Loan was repaid,
together with accrued interest at the rate of 12% per annum, out of the proceeds
of the Series A Preferred Stock private placement. In connection with the 1997
Bridge Loan, the Company issued to the Funds warrants to purchase 198,863 shares
of Common Stock at an exercise price equal to $0.66 per share (after giving
effect to anti-dilution adjustments resulting from the sale of the 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). See "Certain Relationships and Related
Transactions."

In September 1997, the $8,000,000 principal amount of the IDA Bonds were retired
in exchange for a cash payment of $1,620,000 and the balance of the related debt
service reserve fund of $194,000.

As of June 30, 1998, the Company had approximately $2,524,000 in principal
amount of indebtedness (excluding amounts borrowed under the Line of Credit 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 $637,000 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 


                                       24
<PAGE>

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.

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 during the first and second quarters of fiscal 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. As of January 13, 1999, the Company had
borrowed an additional $90,000 under the Line of Credit and the Credit Agreement
was amended to reflect the increased borrowing, although formal documentation of
the amendment has not been fully executed. On February 16, 1999, the Funds
provided the Aries Interim Financing to the Company in the amount of up to
$150,000 ($135,000 of which has been drawn upon), although formal documentation
of the Aries Interim Financing has not been fully executed. 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 are due upon demand but in
no event later than September 1, 1999. See "Certain Relationships and Related
Transactions."

The Company's capital lease payments were approximately $49,000 for the year
ended June 30, 1998 and are estimated to be approximately $27,000 and $16,000
for the fiscal years ending June 30, 1999 and 2000, respectively, under current
commitments. The Company has no other material commitments for capital
expenditures.

The Company receives waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal costs of waste material it has
received which cannot be processed through the Company's current processing
methods, net of the amount of deferred revenue recorded with respect to such
materials. The Company is continually attempting to refine existing processes to
increase yields and/or develop new processes for the waste materials on hand
which have not been able to be processed. 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 2,035 tons of unprocessed waste materials on hand as of June 30,
1998, compared to 6,732 tons on June 30, 1997. The Company's disposal reserve
was $515,000 as of June 30, 1998, compared to $713,000 at June 30, 1997. The
decrease in unprocessed waste materials on hand, and related decrease in reserve
for disposal, resulted primarily from applying certain manual and "off-line"
processing efforts to certain types of unprocessed CRT glass which were
processed and then purchased by a customer of the Company. Such decreases in the
reserve have been credited against operations.


                                       25
<PAGE>

The Company has federal net operating loss carryforwards that amounted to
approximately $20 million at June 30, 1998, which expire between 2006 and 2013.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of net operating loss carryforwards is limited if there has
been a change in control (ownership) of the Company. Although a comprehensive
evaluation has not yet been performed, it is likely that due to historical
equity financings, as well as currently contemplated equity financings, the
Company's ability to utilize its net operating loss carryforwards 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 is effective for periods beginning after
June 15, 1999. Historically, the Company has not entered into derivative
contracts. Accordingly, FAS 133 is not expected to affect the Company's
financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. Neither FAS 130 nor FAS 131 is expected to
have a material effect on the Company's financial statements.

Year 2000 Compatibility

The Company is working to resolve the potential impact of the Year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs or
computer-assisted systems that recognize a date using "00" as the year 1900
rather than the Year 2000 could result in errors or systems failures. It is also
possible that certain computer systems or software products of the Company's
suppliers and contractors may not be year 2000 compatible. 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 and other technological systems will face in
correctly processing date information as the Year 2000 approaches. The Company
has not completed its assessment, but currently believes that costs of
addressing this issue will not have a material adverse impact on the Company's
financial position. However, if the Company and third parties upon which it
relies are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company. In order to assure that this does not
occur, the Company plans to devote all resources required to resolve any
significant Year 2000 issues in a timely manner.


                                       26
<PAGE>

Item 7. Financial Statements

See Financial Statements annexed.

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

As previously reported on Form 8-K, on June 10, 1998, the Company and Ernst &
Young LLP, the Company's then independent auditors, mutually agreed to terminate
their relationship. In connection with its audits for each of the two years in
the period ended June 30, 1997 and in the subsequent interim periods, there were
no disagreements with Ernst & Young LLP on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures
which, if not resolved to the satisfaction of Ernst & Young LLP, would have
caused Ernst & Young LLP to make reference to the matter in their report. Ernst
& Young LLP's report on the Company's financial statements for each of the two
years in the period ended June 30, 1997, contained no adverse opinion or
disclaimer of opinion and was not modified or qualified as to uncertainty, audit
scope or accounting principles, except that Ernst & Young LLP's report on the
Company's consolidated financial statements for the fiscal year ended June 30,
1997 included an explanatory paragraph that the Company had generated only
minimal revenue, incurred significant losses and had a working capital
deficiency and stockholders' deficiency, which conditions raised substantial
doubt about the company's ability to continue as a going concern. Such report
also stated that the financial statements did 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.

In August 1998, the Company engaged BDO Seidman, LLP, to serve as the Company's
independent auditors. The decision to change accountants was recommended by the
Audit Committee of the Company's Board of Directors and such recommendation was
approved by the Company's Board of Directors.

                                    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


                                       27
<PAGE>

      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.

                                         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 acting as President
Conversion Technology                    and Chief Executive Officer of the     
  International, Inc.                    Company since October, 1998. Mr. Beck  
7 San Bartola Drive                      has been a director of the Company     
St. Augustine, FL 32086                  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 (59)                   Mr. Costle was appointed to the
Rural Route #2, Box 480                  Company's Board of Directors in October
Woodstock, VT 05091                      1997. Mr. Costle has 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.

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


                                       28
<PAGE>

                                         Bank of Connecticut.

Peter H. Gardner (32)                    Mr. Gardner has been a director of the
Media Technology Ventures                Company since October 1995. Since
1 First Street, Suite 2                  January 1998, Mr. Gardner has been a
Los Altos, CA 94022                      principal of 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 (46)                   Mr. Haig has been a director of the
Sky Station International                Company since May 1996. Since February
1824 "R" Street, N.W.                    1996, Mr. Haig has been President and
Washington, D.C. 20009                   Chief Operating Officer of Sky Station
                                         International Inc., a privately-held
                                         telecommunications company. Mr. Haig
                                         has served since 1988 as a principal
                                         and legal counsel to Worldwide
                                         Associates, Inc., a privately-held
                                         business adviser to both United States
                                         and foreign countries for marketing and
                                         sales activities. Prior to 1988, Mr.
                                         Haig was an attorney in private
                                         practice.

Irwin M. Rosenthal (70)                  Mr. Rosenthal was appointed as a
Graham & James LLP                       director of the Company in May 1996.
885 Third Avenue, 21st Floor             Mr. Rosenthal is an attorney and since
New York, N.Y. 10022                     1960 has 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 serves as Secretary and as a
                                         director of Magar Inc. a private
                                         investment firm ("Magar"), of which he
                                         is a principal stockholder. 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 


                                       29
<PAGE>

                                         company and Echocath, Inc., a
                                         publicly-traded medical technology
                                         company.

John G. Murchie (61)                     Mr. Murchie has been the Acting Chief  
Conversion Technology                    Financial Officer of the Company since 
   International, Inc.                   January 1998, and Controller since     
7 San Bartola Drive                      September 1997. From February 1995 to  
St. Augustine, FL 32086                  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 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


                                       30
<PAGE>

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.

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, 1998, 1997
and 1996 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 1998, and William L. Amt, who also served as the Company's chief
executive officer during a portion of fiscal 1998 (collectively, the "Named
Executive Officers"). No other executive officer received annual compensation in
excess of $100,000 for fiscal 1998.

<TABLE>
<CAPTION>
                                                                                 Long Term
                                                                                Compensation
                                                                            Awards          Payouts
                                                                    ---------------------   -------
                                                        Other       Securities Underlying                  All
     Name and          Fiscal     Salary     Bonus      Annual             Options/          LTIP         Other
Principal Position      Year        ($)       ($)    Compensation            SARs           Payouts    Compensation
------------------     ------     ------     -----   ------------   ---------------------   -------    ------------
<S>                     <C>     <C>           <C>     <C>                 <C>               <C>            <C>
Eckardt C. Beck         1998        --        --      85,677(1)           300,000(2)                        --
Acting President        1997     52,000(1)    --                           10,121(3)                        --
& Chief Executive       1996      12,000      --                                                            --
Officer from June       
1997 to August          
1997                    

William L. Amt          1998    146,667(4)    --          --              300,000(2)                        --
Former President        1997        --        --          --                  --                            --
and Chief               1996        --        --          --                  --                            --
Executive Officer
</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.

                                              (footnotes continued on next page)


                                       31
<PAGE>

(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,
1998, the Company has reserved 1,414,392 shares of Common Stock for the exercise
of all options granted.

Under the Non-Employee Plan, options to purchase an aggregate of 167,918 shares
are outstanding as of March 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 296,959 shares are
outstanding as of March 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 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.

Repricing of Options

In January 1998, the Board of Directors of the Company determined that the
purposes of the Non-Employee and the Long Term Plans were not being adequately
achieved with respect to those employees and directors holding options that were
exercisable above current market value and that it was essential to the best
interests of the Company and the Company's shareholders that the Company retain
and motivate such employees and directors. The Board concluded that such
retention was particularly important given the Company's financial situation at
that time and that a cost-effective approach to retention and motivation was
required. The Board further determined that it would be in the best interests of
the Company and the Company's shareholders to provide such optionees the
opportunity to exchange their above market value options for options exercisable
at the current market value. Accordingly, on January 27, 1998, the Company


                                       32
<PAGE>

reduced the exercise price of certain options granted under the Non-Employee
Plan for 21,580 shares (11,338 for Mr. Beck, 5,121 for Mr. Haig, and 5,121 for
Mr. Rosenthal) to $0.78 per share from exercise prices ranging from $3.125 to
$5.00 per share. Additionally, the Company reduced the exercise price of all
options granted under Long-Term Plan for 600,000 shares (300,000 for each of
Messrs. Beck and Amt) to $0.78 per share from an exercise price of $1.375 per
share.

Option/SAR Grants in Last Fiscal Year

The following table sets forth the options granted to the Named Executive
Officers during the fiscal 1998.

Stock Option Tables

                   Number of     Percent of Total
                   Securities      Options/SARs
                   Underlying       Granted to
                  Options/SARs     Employees in    Exercise or Base   Expiration
Name              Granted(1)      Fiscal Year(1)     Price ($/Sh)        Date
---------------   ------------   ----------------  ----------------   ----------
Eckardt C. Beck    300,000(2)         28.9%             $1.375          7/22/04
William L. Amt     300,000(3)         28.9%             $1.375          8/1/04

----------
(1)   The Company granted options to purchase an aggregate of 1,037,500 shares
      of Common Stock during fiscal 1998.

(2)   Granted on July 22, 1997 pursuant to the Company's Long-Term Plan which
      vest 20% at date of grant and 20% for each of the next four years and
      expires on the seventh anniversary of the date of grant. On January 27,
      1998 the exercise price was reduced to $0.78 per share. Options not vested
      at time of resignation are forfeited pursuant to option terms.

(3)   Granted on August 1, 1997 pursuant to the Company's Long-Term Plan which
      vest 20% at date of grant and 20% for each of the next four years and
      expires on the seventh anniversary of the date of grant. On January 27,
      1998 the exercise price was reduced to $0.78 per share. Options not vested
      at time of resignation are forfeited pursuant to option terms.

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
each exercise of stock options during fiscal 1998 by each of the Named Executive
Officers and the final year-end value of unexercised options. The table reflects
options exercisable within 60 days of the date of this Report.

<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 (2)
                                                 ------------------------   -------------------------
                       Shares
                      Acquired        Value                    Unexercis-                 Unexercis-
Name              on Exercise(1)   Realized(1)   Exercisable      Able      Exercisable      Able
---------------   --------------   -----------   -----------   ----------   -----------   -----------
<S>                     <C>            <C>         <C>          <C>           <C>             <C>    
Eckardt C. Beck         --             --          131,338      180,000       $24,659         $33,795
William L. Amt          --             --          120,000      180,000       $22,530         $33,795
</TABLE>

(1)   As of the date of this Report, none of the Named Executive Officers have
      exercised any of their options.
(2)   Calculated based on the difference between the exercise price and the
      closing price of a share of the Common Stock on the Nasdaq Small Cap
      Market on June 30, 1998.


                                       33
<PAGE>

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. No contributions were made
to the plan for the fiscal years ended June 30, 1998 and 1997.

Compensation of Directors

In fiscal 1998, 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.
Pursuant to the Non-Employee Plan, the Company issued to non-employee directors
options to purchase an aggregate of 135,000 shares of Common Stock during fiscal
1998. Options for 40,000 shares vested at grant date, 45,000 shares vest one
year from grant date, and 25,000 vest on each of the following two anniversary
grant dates and contain exercise prices of between $0.781 and $1.875 per share.
Non-Employee directors received no other compensation for their services as
directors.

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.

In June 1997, the Company entered into a consulting agreement with Harvey
Goldman (the "Goldman Consulting Agreement"), former Vice-Chairman, President
and Chief Executive Officer of the Company, which terminated his prior
employment agreement with the Company and contains mutual releases for any
claims under such prior agreement. Pursuant to the Goldman Consulting Agreement,
Mr. Goldman has agreed to, among other things, assist the Company in project
development, strategic planning and such other activities as shall be reasonably
requested by the Board of Directors and within Mr. Goldman's areas of expertise.
Mr. Goldman was entitled to receive a monthly consulting fee of $10,000 pursuant
to the Goldman Consulting Agreement through June 1998. In the event that the
Company fails to pay the consideration due under the Goldman Consulting
Agreement, Mr. Goldman retains all rights that he had under his prior agreement
with respect to termination. 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. 


                                       34
<PAGE>

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. See Option/SAR
Grants in Last Fiscal Year." 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."


                                       35
<PAGE>

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

The following table sets forth, as of March 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.

<TABLE>
<CAPTION>
                                               Number of Shares     Percentage of Voting
Name of Beneficial Owner(1)                 Beneficially Owned(2)         Power(3)
---------------------------                 ---------------------   --------------------
<S>                                               <C>                       <C>
Eckardt C. Beck(4)                                  369,171                 2.1

Peter H. Gardner(5)                                  46,338                  *

Alexander P. Haig(6)                                 15,121                  *

Douglas M. Costle(7)                                 15,000                  *

Stephen D. Fish(8)                                  463,000                 2.6

Irwin M. Rosenthal(9)                                15,121                  *

John G. Murchie(10)                                  36,063                  *

All officers and directors as a group (7 
  persons)(11)                                      959,814                 5.3

Technology Funding Venture Partners V, An   
   Aggressive Growth Fund, L.P.(12)               1,547,266                 8.4

The Aries Fund,
   a Cayman Islands Trust(13)
   787 7th Avenue
   48th Floor
   New York, New York 10019                       2,175,891                11.7

Aries Domestic Fund, L.P.(14)
   787 7th Avenue, 48th Floor
   New York, New York 10019                       1,268,697                 6.9

Porter Partners, L.P.(15)
    100 Shoreline, Suite 211B
    Mill Valley, California 94941                   896,000                 5.0

P.A.W. Offshore Fund, Ltd.(16)
   90 Mees Pierson
   904 East Bay Street
   P.O. Box 55-6233
   Nassau, Bahamas                                1,120,000                 6.3
</TABLE>

----------
* 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; and (iv) Common
      Stock subject to options or warrants that are presently exercisable or
      exercisable within 60 days of March 31, 1999.

                                              (footnotes continued on next page)


                                       36
<PAGE>

(3)   Applicable percentage of voting power is based on the 17,863,645 shares of
      Common Stock outstanding as of March 31, 1999. That number is comprised of
      5,603,045 outstanding shares of Common Stock and 12,260,600 shares of
      Common Stock issuable upon conversion of 613,030 outstanding shares of
      Series A 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 and 224,000 shares of Common
      Stock issuable upon conversion of 11,200 outstanding shares of Series A
      Preferred Stock. Also includes currently exercisable options to purchase
      131,338 shares of Common Stock. Excludes options to purchase 180,000
      shares of Common Stock which are not exercisable within 60 days. The
      address of such stockholder is 6345 NW 26th Terrace, Boca Raton, Florida
      33496.

(5)   Includes currently exercisable options to purchase 46,338 shares of Common
      Stock. Excludes options to purchase 10,000 shares of Common Stock which
      are not exercisable within 60 days. Mr. Gardner was formerly an Investment
      Officer at Technology Funding, Inc. ("TFI"), the Managing General Partner
      of Technology Funding Partners III, L.P. ("TFP III") and Technology
      Funding Partners V, an Aggressive Growth Fund, L.P. ("TFVP V"). Mr.
      Gardner disclaims beneficial ownership of all securities of the Company
      owned by TFP III and TFVP V.

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

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

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

(10)  Includes currently exercisable options to purchase 36,063 shares of Common
      Stock. Excludes options to purchase 67,667 shares of Common Stock which
      are not exercisable within 60 days.
(11) Calculation does not include securities held by Mr. Goldman or Mr. Pappas
     who are no longer directors or officers of the Company. Calculation
     excludes options to purchase 297,667 shares of Common Stock which are not
     exercisable within 60 days.

(12)  Includes (A) securities held by TFVP V consisting of (i) 207,547 shares of
      Common Stock, (ii) 176,400 shares of Common Stock issuable upon conversion
      of 8,820 shares of Series A Preferred Stock, (iii) shares of Common Stock
      issuable upon exercise of 371,822 Class A Warrants (includes the Class B
      Warrants underlying such Class A Warrants), and (iv) 51,884 shares of
      Common Stock underlying additional warrants, and (B) securities held by
      TFP III consisting of (i) 69,180 shares of Common Stock, (ii) 529,200
      shares of Common Stock issuable upon conversion of 26,460 shares of Series
      A Preferred Stock, (iii) shares of Common Stock issuable upon exercise of
      123,940 Class A Warrants (includes the Class B Warrants underlying such
      Class A Warrants) and (iv) 17,293 shares of Common Stock underlying
      additional warrants.

(13)  Paramount Capital Asset Management, Inc. ("PCAM") is the Investment
      Manager to The Aries Fund, a Cayman Islands Trust (the "Aries Trust").
      Lindsay A. Rosenwald, M.D. is President and sole shareholder of PCAM. PCAM
      and Dr. Rosenwald may be considered to beneficially own the securities
      owned by the Aries Trust by virtue of their authority to vote and/or
      dispose of the securities. 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, shares of Common Stock issuable upon exercise
      of 148,728 Class A Warrants (includes the Class B Warrants underlying such
      Class A Warrants); 400,903 shares of Common Stock underlying


                                       37
<PAGE>

      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 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, shares of
      Common Stock issuable upon exercise of 247,882 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 896,000 shares of Common Stock underlying 44,800 shares of Series
      A Preferred Stock. Jeffrey H. Porter is the Managing General Partner of
      Porter Partners, L.P. Mr. Porter may be considered a beneficial owner of
      the securities owned by Porter Partners, L.P. by virtue of his authority
      to vote and/or dispose of the securities held by Porter Partners, L.P. Mr.
      Porter disclaims beneficial ownership of all securities of the Company
      held by Porter Partners, L.P.

(16)  Includes 1,120,000 shares of Common Stock underlying 56,000 shares of
      Series A 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 are 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."

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

The Company entered into the Credit Agreement with the Funds, two significant
stockholders of the Company. See "Description of Business- Certain Recent
Events." The Credit Agreement provides for the Line of Credit of up to
$1,200,000 pursuant to which the Company can draw down up to $300,000 per month,
although draw downs beyond the initial $300,000 are at the discretion of the
Funds. 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%. The Line of Credit matures on the earlier of
May 8, 1999 or upon the completion of any financing of at least $1,500,000. 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 Funds will be 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 may 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. 


                                       38
<PAGE>

As of December 15, 1998, the Line of Credit was amended to provide for a line of
credit of up to $1,290,000, although formal documentation of the amendment has
not been fully executed. 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 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). See "Description of Business-
Certain Recent Events." Of such warrants, warrants to purchase 29,850 shares of
Common Stock vest upon each $100,000 (or ratable portion thereof) being 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, although formal documentation of the agreements has
not been fully executed. Under such amendments, if the Company fails to raise an
aggregate of $1,500,000 by April 1, 1999, the Funds may 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 financings by the Company
raising an aggregate of $2,790,000. In addition, on February 16, 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. See "Description of Business - Certain Recent Events."

In July and August of 1997, the Funds advanced to the Company and 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). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

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


                                       39
<PAGE>

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. See Option/SAR Grants in Last Fiscal Year." Mr. Amt's options expired in
connection with his resignation from the Company. See "Executive
Compensation-Employment and Consulting Arrangements."

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


                                       40
<PAGE>

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.

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 


                                       41
<PAGE>

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.

The Company, TFP III and TFVP V entered into a Series A Preferred Stock Purchase
Agreement in May 1995 with respect to a prior series of preferred stock. The
agreement, as amended in December 1995, provides that the Company will (i) use
its best efforts to nominate a designee of TFI to the Board of Directors and
(ii) sell shares of stock and grant options to employees, officers, directors
and consultants only pursuant to Board approved plans and agreements containing
three-year vesting provisions (except in the case of sales of stock or grants of
options to new employees where the Board determines otherwise for valid business
reasons). Such covenants terminate upon the earlier of (a) May 1999 and (b) such
time as TFP III and TFVP V cease to hold approximately 18,270 shares of Common
Stock in the aggregate. At March 1, 1999, TFP III and TFVP V collectively hold
1,547,266 shares of Common Stock (which includes Series A Preferred Stock and
warrants to purchase shares of Common Stock).

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

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

The Minimum Pretax Income amounts shall (i) be calculated exclusive of any
extraordinary earnings or any charges to income resulting from release of the
Escrow Securities and (ii) be increased proportionately, with certain
limitations, in the event additional shares of the Common 


                                       42
<PAGE>

Stock or securities convertible into, exchangeable for or exercisable into the
Common Stock are issued. The Closing Price amounts set forth above are subject
to adjustment in the event of any stock splits, reverse stock splits or other
similar events.

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

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

Irwin M. Rosenthal, a director of the Company, is a partner of Graham & James
LLP, special counsel to the Company. The Company is indebted to Graham & James
LLP for legal fees in excess of $190,000. See also "Executive Compensation -
Compensation of Directors" and "Security Ownership of Certain Beneficial Owners
and Management."


                                       43
<PAGE>

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

3.3*        By-laws of the Company

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

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

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

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

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

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

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

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

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

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

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

                                       44
<PAGE>

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

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

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

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

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

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

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

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

10.18*      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.

                                       45
<PAGE>

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

10.35       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 Eckhardt 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

                                       46
<PAGE>

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

11          Statement of Computation of Net Loss Per Share

21**        Subsidiaries of the Company

27          Financial Data Schedule for the year ended June 30, 1998

*           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.

All other Exhibits filed herewith.

(b) Reports on Form 8-K

The Company filed Current Reports on Form 8-K on June 1, 1998 and June 10, 1998
relating to the Company's outsourcing agreement with Dlubak and the change in
the Company's independent auditor, respectively.

                                       47
<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: March __, 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.

       Signature                            Title                       Date
       ---------                            -----                       ----

/s/ Eckardt C. Beck           Acting President, Chief Executive   March __, 1999
---------------------------   Officer and Director (principal
Eckardt C. Beck               executive officer)             
                              
                              
/s/ John G. Murchie           Acting Chief Financial Officer and  March __, 1999
---------------------------   Controller (principal accounting
John G. Murchie               officer)

/s/ Eckardt C. Beck           Chairman of the Board               March __, 1999
---------------------------
Eckardt C. Beck

/s/ Stephen D. Fish           Director                            March __, 1999
---------------------------
Stephen D. Fish

/s/ Peter H. Gardner          Director                            March __, 1999
---------------------------
Peter H. Gardner

/s/ Alexander P. Haig         Director                            March __, 1999
---------------------------
Alexander P. Haig

/s/ Douglas M. Costle         Director                            March __, 1999
---------------------------
Douglas M. Costle

/s/ Irwin M. Rosenthal, Esq.  Director                            March __, 1999
---------------------------
Irwin M. Rosenthal, Esq.


                                       48
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                          INDEX TO FINANCIAL STATEMENTS

Reports of Independent Auditors .............................................F-2

Consolidated Balance Sheets of Conversion Technologies 
       International, Inc. and Subsidiaries as of June 30, 1998 
       and June 30, 1997 ....................................................F-4

Consolidated Statements of Operations of Conversion Technologies 
       International, Inc, and Subsidiaries for the years ended 
       June 30, 1998 and June 30, 1997 ......................................F-5

Consolidated Statements of Stockholders' Equity (Deficiency) of 
       Conversion Technologies International, Inc. and Subsidiaries 
       for the years ended June 30, 1998 and June 30, 1997 ..................F-6

Consolidated Statements of Cash Flows of Conversion Technologies 
       International, Inc. and Subsidiaries for the years ended 
       June 30, 1998 and June 30, 1997 ......................................F-7

Notes to Consolidated Financial Statements ..................................F-9


                                      F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Conversion
Technologies International, Inc. and Subsidiaries (Company) as of June 30, 1998,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the year 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 audit.

We conducted our audit 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 audit provides 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, 1998, and the
consolidated results of their operations and cash flows for the year 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 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.

October 23, 1998, except for                           BDO Seidman, LLP 
  Notes 1 and 3 which are dated 
  March 24, 1999


                                      F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheet of Conversion
Technologies International, Inc. and Subsidiaries (Company) at June 30, 1997,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for the year 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

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

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

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


                                      F-3
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                      JUNE 30,
                                                                                1998            1997
                                                                          ----------------------------
<S>                                                                       <C>             <C>         
ASSETS
Cash and cash equivalents                                                 $    168,483    $    325,092
Accounts receivable, less allowance for doubtful accounts of $18,000           258,990         146,225
Inventories                                                                    557,292         521,060
Prepaid expenses and other current assets                                       94,596         188,525
                                                                          ----------------------------
Total current assets                                                         1,079,361       1,180,902

Property, plant and equipment:
     Land                                                                           --          75,000
     Building and improvements                                                      --       1,578,293
     Machinery and equipment                                                   702,614       6,713,599
     Construction in progress                                                       --          29,500
                                                                          ----------------------------
                                                                               702,614       8,396,392
Less accumulated depreciation                                                 (148,057)     (1,456,610)
                                                                          ----------------------------
                                                                               554,557       6,939,782
Property, plant and equipment held for sale at estimated disposal value      1,000,000
Other assets, less accumulated amortization of $97,811 and $135,786            132,783         446,929
Restricted assets
     Project fund                                                                   --             158
     Debt service reserve funds                                                     --         869,153
                                                                          ----------------------------
                                                                          $  2,766,701    $  9,436,924
                                                                          ============================

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Notes payable                                                             $    502,000    $         --
Accounts payable                                                             1,193,624       1,711,212
Deferred revenue                                                                    --         491,944
Reserve for disposal                                                           515,000         713,100
Accrued expenses                                                               394,163         858,447
Investment tax credit payable                                                  235,000         235,000
Current portion of capital lease obligations                                    23,965          35,495
Current portion of long-term debt                                            2,524,255         530,258
                                                                          ----------------------------
Total current liabilities                                                    5,388,007       4,575,456

Capital lease obligations, less current portion                                 15,235          39,414
Long-term debt, less current portion                                                --      10,784,343

Stockholders' deficiency:
     Series A Convertible Preferred Stock, $.001 par value,
         authorized 880,000 shares, issued and outstanding
         613,280 shares at June 30, 1998                                           614              --
     Common Stock, $.00025 par value, authorized 50,000,000
         and 25,000,000 shares, issued and outstanding 5,600,545
         and 5,539,745 shares                                                    1,400           1,385
     Additional paid-in capital                                             32,876,274      24,186,932
     Unearned stock compensation                                              (207,000)       (116,369)
     Accumulated deficit                                                   (35,307,829)    (30,034,237)
                                                                          ----------------------------
Total Stockholders' deficiency                                              (2,636,541)     (5,962,289)
                                                                          ----------------------------
                                                                          $  2,766,701    $  9,436,924
                                                                          ============================
</TABLE>

See accompanying notes.


                                      F-4
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                             Year ended June 30,
                                                            1998             1997
                                                       ------------    ------------
<S>                                                    <C>             <C>         
Revenue
     Product sales                                     $  1,535,159    $    945,871
     Recycling fees                                         362,821         483,137
                                                       ----------------------------
Total revenue                                             1,897,980       1,429,008

Cost of goods sold                                        2,703,441       3,952,374
                                                       ----------------------------

Gross loss on sales                                        (805,461)     (2,523,366)

Selling, general and administrative expenses              2,723,462       3,918,726
Write down of property, plant and
     equipment held for sale                              4,913,422              --
Write-off of plant and equipment                                 --       5,711,567
                                                       ----------------------------
 
Loss from operations                                     (8,442,345)    (12,153,659)

Interest expense                                           (552,300)     (1,277,310)
Interest income                                              82,316         226,505
Other income                                                246,051         349,295
                                                       ----------------------------

Loss before extraordinary item                           (8,666,278)    (12,855,169)

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

Net loss                                                 (2,241,274)    (12,855,169)

Preferred stock dividends                                (3,032,318)             --
                                                       ----------------------------

Net loss applicable to Common Stock                    $ (5,273,592)   $(12,855,169)
                                                       ============================

Basic Loss Per Common Share:
     Loss before extraordinary item                    $      (2.44)   $      (2.69)
     Extraordinary item                                        1.34              --
                                                       ----------------------------
     Net Loss applicable to Common Stock               $      (1.10)   $      (2.69)
                                                       ----------------------------

Weighted average number of common shares outstanding      4,804,427       4,773,311
                                                       ============================
</TABLE>

See accompanying notes.


                                      F-5
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDER EQUITY (DEFICIENCY)
                   YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997

<TABLE>
<CAPTION>
                                      Series A Preferred Stock                                   Common Stock
                                  -------------------------------------------   -------------------------------------------
                                                                                                                           
                                                                   Additional                                   Additional 
                                       Numbers                       Paid-In          Number                      Paid-In  
                                     of Share         Amount         Capital        of Shares        Amount       Capital  
                                  -------------------------------------------   -------------------------------------------
<S>                                  <C>         <C>             <C>                <C>         <C>            <C>         
Balance at July 1, 1996                    --    $         --    $         --       5,449,745   $      1,362   $ 23,905,705

     Issuance of common stock              --              --              --          90,000             23             --

     Stock compensation                    --              --              --              --             --        281,227

     Net loss                              --              --              --              --             --             --
                                  -------------------------------------------   -------------------------------------------

Balance at June 30, 1997                   --              --              --       5,539,745          1,385     24,186,932

     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)         60,800             15         60,785

     Stock compensation                    --              --              --              --             --             --

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

     Common stock options
     granted to employees and
     directors                             --              --              --              --             --        265,150

     Preferred stock dividends             --              --       3,032,318              --             --             --

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

Balance at June 30, 1998              613,280    $        614    $  8,157,807       5,600,545   $      1,400   $ 24,718,467
                                  ===========================================   ===========================================

<CAPTION>
                                                                     Total      
                                                                  Stockholders' 
                                 Unearned Stock    Accumulated       Equity     
                                  Compensation       Deficit      (Deficiency)  
                              -----------------------------------------------   
<S>                              <C>             <C>             <C>            
Balance at July 1, 1996          $         --    $(17,179,068)   $  6,727,999   
                                                                                
     Issuance of common stock              --              --              23   
                                                                                
     Stock compensation              (116,369)             --         164,858   
                                                                                
     Net loss                              --     (12,855,169)    (12,855,169)  
                              -----------------------------------------------   
                                                                                
Balance at June 30, 1997             (116,369)    (30,034,237)     (5,962,289)  
                                                                                
     Issuance of series A
     preferred stock                       --              --       5,186,903   
                                                                                
     Series A preferred stock
     converted into common                                                      
     stock                                 --              --              --   
                                                                                
     Stock compensation               116,369              --         116,369   
                                                                                
     Common stock warrants  
     granted to lenders                    --              --         205,600   
                                                                                
     Common stock options     
     granted to employees and 
     directors                       (207,000)             --          58,150   
                                                                                
     Preferred stock dividends             --      (3,032,318)             --   

     Net Loss                              --      (2,241,274)     (2,241,274)  
                              -----------------------------------------------   
                                                                                
Balance at June 30, 1998         $   (207,000)   $(35,307,829)   $ (2,636,541)  
                              ===============================================   
</TABLE>

See accompanying notes        


                                      F-6
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       Year ended June 30,
                                                                 ----------------------------
Operating activities                                                 1998            1997
                                                                 ------------    ------------
<S>                                                              <C>             <C>          
Net loss                                                         $ (2,241,274)   $(12,855,169)
Adjustments to reconcile loss to net cash
     used in operating activities:
       Depreciation expense                                           817,928       1,036,416
       Amortization expense                                            39,543          54,514
       Amortization of discount on notes payable                       97,600              --
       Loss on disposal of equipment                                   22,857              --
       Extraordinary item                                          (6,425,004)
       Write-down of property, plant and equipment                  4,913,422       5,711,567
       Write-off of inventories                                            --          96,752
       Stock compensation expense                                     174,519         164,858
       Changes in operating assets and liabilities:
         (Increase) decrease in accounts receivable                  (112,765)        196,989
         (Increase) in inventories                                    (36,232)       (280,076)
         Decrease in prepaid expenses and other current assets         93,929          17,459
         (Increase) decrease in other assets                          (57,016)         35,204
         Decrease in deferred revenue                                (491,944)        (65,963)
         (Decrease) increase in accounts payable, reserve for
           disposal and other accrued expenses                       (877,193)        723,173
                                                                 ------------    ------------
Net cash used in operating activities                              (4,081,630)     (5,164,276)

Investing activities
Sale of marketable securities                                              --       2,009,632
Capital expenditures                                                 (372,572)     (1,051,159)
Proceeds from disposals of equipment                                    3,590              --
                                                                 ------------    ------------
Net cash (used in) provided by investing activities                  (368,982)        958,473

Financing activities
Increase in deferred finance costs                                         --          (3,500)
Issuance of notes payable                                           1,110,000              --
Payment of notes payable                                             (500,000)             --
Issuance of long-term debt                                                 --           8,282
Decrease in restricted assets                                         675,285         472,005
Principal payments on long-term debt                               (2,142,476)       (412,681)
Principal payments under capital lease obligations                    (35,709)        (72,698)
Issuance of series A preferred stock, net of offering costs         5,186,903              --
Issuance of common stock                                                   --              23
                                                                 ------------    ------------
Net cash provided by (used in) financing activities                 4,294,003          (8,569)
                                                                 ------------    ------------

Decrease in cash and cash equivalents                                (156,609)     (4,214,372)
Cash and cash equivalents at beginning of period                      325,092       4,539,464
                                                                 ------------    ------------
Cash and cash equivalents at end of period                       $    168,483    $    325,092
                                                                 ============    ============
</TABLE>

See accompanying notes.


                                      F-7
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                   Year ended June 30,
                                                               -----------------------
                                                                  1998         1997
                                                               ----------   ----------
<S>                                                            <C>          <C>       
Supplemental disclosure of cash flow information
Interest paid                                                  $  528,875   $1,320,882
                                                               ==========   ==========

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                        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           --

Discount on series A preferred stock issued                     3,032,318           --
</TABLE>

See accompanying notes.


                                      F-8
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

                                  June 30, 1998

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

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

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 other than the Line of Credit. In order to allow the Company to
continue operating in the short term, the Acting President and Chief Executive
Officer of the Company, has advanced to the Company, or has not received accrued
compensation of, an aggregate of $190,000, and the Company has borrowed
additional funds on a short term basis from the issuers of the Line of Credit.
The Company is currently seeking additional financing through a private
placement of its equity securities. There can be no


                                      F-9
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

1. Organization (continued)

assurance that the Company will be able to obtain necessary financing. If the
Company is not able to obtain immediate financing, the Company may be forced to
further limit or even cease operations. In view of the foregoing, there is
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the realization of assets and liquidation of liabilities
that might be necessary should the Company be unable to continue as a going
concern.

In fiscal 1999, three officers of the Company resigned from the new management
team, which had been engaged in late fiscal 1997 and fiscal 1998. The Company's
remaining management team has initiated a plan to close-out the operations at
Dunkirk and sell the Dunkirk facility, renegotiate and pay-off creditors,
continue the reduction of manufacturing and operating overheads, put together a
new management team, and, if the above is successful, raise new capital from
alternate sources. Although management believes if the foregoing course of
action is 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 these plans and eliminating the substantial doubt as to its ability
to continue as a going concern.

2. Summary of Significant Accounting Policies

Basis of Presentation

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

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

Revenue Recognition

The company derives most of its revenue from fees charged to accept waste
materials and from the sale of its products. With respect to revenue from fees
charged to accept waste materials, the Company initially records the fees it
receives for accepting waste materials for processing as deferred revenue. After
the materials have been processed into finished goods inventory or sold after
preliminary processing, the deferred revenue is recognized as fee revenue based
upon the


                                      F-10
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

amount of finished goods inventory produced (by tonnage), valued at the fee
charged for accepting the waste material. With respect to revenue from product
sales, including products created from processed waste materials, revenue is
recognized only upon shipment of products to customers.

For the 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. For the year ended June 30, 1997, 61.2% of
the Company's revenue was derived from two major customers. Revenue generated
from each of these customers amounted to $621,830 and $252,686, which represents
43.5% and 17.7% of total revenue, respectively.

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 1,137 tons of the waste materials, which it had not been able to process, all
of which was disposed of during the year ended June 30, 1998. The amount of
unprocessed waste materials on hand was 2,035 tons at June 30, 1998 and 6,732
tons at June 30, 1997. From July 1, 1996 to June 30, 1997, the Company decreased
the reserve by approximately $24,000, from $737,000 to $713,000. From July 1,
1997 to June 30, 1998, the Company reduced the reserve by approximately $198,000
from $713,000 to $515,000. 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.


                                      F-11
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Inventories (continued)

Inventories consisted of the following:

                                                              June 30,
                                                      1998                1997
                                                    --------            --------

Raw Materials                                       $216,639            $ 61,949

Work-in-process                                      147,291             111,961

Finished goods                                       193,362             347,150
                                                    --------            --------

                                                    $557,292            $521,060
                                                    ========            ========

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

During the first and second quarters of fiscal 1999, the Company ceased
operations at the Dunkirk plant and decided to dispose of all the property,
plant and equipment at that facility and is 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
has adjusted those assets to their estimated net realizable value. This resulted
in a write down of land and building and improvements 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 has been
classified as held for sale on the accompanying consolidated balance sheet at
June 30, 1998.


                                      F-12
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Property, Plant and Equipment (continued)

During fiscal 1997, the Company experienced reduced levels of revenue and
increased costs. Also in fiscal 1997, the Company shut down its melter and
certain related equipment which it does not intend to use in the foreseeable
future, and accordingly, the Company has adjusted these asset values to their
estimated fair value which was determined to be zero as it is estimated that the
cost to disassemble, transport and reassemble the melter and peripheral
equipment would approximate any remaining fair value of those assets. As a
result, the Company has taken a charge in the fourth quarter of 1997 pursuant to
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" in the amount of $5,711,567.

Cash Equivalents

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

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.

Accrued Expenses

Accrued expenses consisted of the following:

                                                                 June 30,
                                                            1998          1997
                                                          --------      --------
Accrued interest                                          $182,352      $170,088
Accrued payroll taxes and employee benefits                 72,420       118,144
Accrued audit and tax fees                                  66,000       100,000
Accrued salaries and wages                                  44,482        72,295
Accrued litigation and legal expenses                           --       219,621
Accrued severance payment                                       --        90,000
Accrued technology purchase                                     --        60,000
Accrued other                                               28,909        28,299
                                                          --------      --------
                                                          $394,163      $858,447
                                                          ========      ========

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


                                      F-13
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Income Taxes (continued)

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. The net amount of $331,547 is included in
"Other Income" during the fiscal year ended June 30, 1997.

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.

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.

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.

To the extent that Dunkirk is deemed to be insolvent immediately prior to any of
these debt forgivenesses by an amount which equals or exceeds the amount of debt
forgiveness, the Company will not recognize taxable income from such
forgiveness; however, certain of


                                      F-14
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

Extraordinary Item (continued)

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

Net Loss Per Common Share

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
requirements of Statement 128.

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 1,519,252
stock options, 29,376,661 warrants and 12,323,900 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).

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, 1998. 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 market value of the debt.


                                      F-15
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (continued)

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 is effective for periods beginning after
June 15, 1999. Historically, the Company has not entered into derivative
contracts. Accordingly, FAS 133 is not expected to affect the Company's
financial statements.

In June 1997, the Financial Account Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130") and No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 130 establishes standards for reporting and
displaying comprehensive income, its components and accumulated balances. FAS
131 establishes standards for the way that public companies report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. Both FAS 130 and FAS 131 are effective for periods
beginning after December 15, 1997. Neither FAS 130 nor FAS 131 are expected to
have a material effect on 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-16
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

Long-term debt consists of the following obligations as of June 30, 1998 and
1997:

<TABLE>
<CAPTION>
                                                                                          June 30,
                                                                                      1998         1997
                                                                                      ----         ----
<S>                                                                                <C>          <C>       
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,
    1998) through October 1, 2004. Repayment is guaranteed by the Company          $  287,648   $  304,432

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 (8.50% at June 30, 1998) through December 27, 2001. Collateral
    for this loan is a first purchase money lien on the Company's machinery and
    equipment, and repayment is guaranteed by the Company and by the former
    Dunkirk president                                                               1,183,110    1,887,871

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                                                      256,457      288,516

Dunkirk-Chautauqua County Industrial Development Agency (CCIDA) subordinated
    note payable in monthly payments of $1,485 including interest at 7% through
    June 1, 1999. The note contains various restrictive covenants, is guaranteed
    by the former Dunkirk president and is collateralized by a subordinated
    security interest in certain machinery and equipment                               17,163       33,170
</TABLE>


                                      F-17
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

3. Debt (continued)

<TABLE>
<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                                             38,218       48,727

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       48,096

Dunkirk-Chautauqua County Industrial Development Agency solid waste disposal
    facility bonds payable in quarterly payments of interest only through
    September 1, 1998 at a rate of 11.5%. In September 1997, the holders of
    these bonds retired them in exchange for a cash payment of $1,620,000 and
    the balance of the related debt service reserve fund of $194,000. (see Note
    2)                                                                                      0    8,000,000
</TABLE>


                                      F-18
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

3. Debt (continued)

<TABLE>
<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%
    (10.50% at June 30, 1998) 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, 1998) 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                                                                          2,524,255    11,314,601

Less Current Maturities                                                             2,524,255       530,258
                                                                                   ----------   -----------

                                                                                   $       -0-  $10,784,343
                                                                                   ==========   ===========
</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, 1998, the Company was in violation of
certain loan covenants, related to the above debt, and as a result all of the
above debt has been classified as a current liability at June 30, 1998.

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.


                                      F-19
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

4. Notes Payable (continuted)

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 provides for a line of credit (the "Line of
Credit") of up to $1,200,000 pursuant to which the Company can draw down up to
$300,000 per month, although draw downs beyond the initial $300,000 draw will be
at the discretion of the lenders. At June 30, 1998, the Company had borrowed
$610,000 under the Credit Agreement. 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%. The Line of
Credit matures on the earlier of May 8, 1999 or the completion of any financing
of at least $1,500,000. Subsequent to year end the Company has fully drawn down
the remaining amounts available under the Line of Credit.

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 will be 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 may 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 vest with respect to each $100,000 (or ratable portion
thereof) 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. This has resulted in an effective interest rate
of approximately 29% on the Line of Credit. The Line of Credit includes an
unamortized debt discount of $108,000 at June 30, 1998.

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 ($419,963 at June 30, 1997).

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 a debt service reserve fund of $449,190 at June 30, 1997,
including interest, 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-20
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

6. Commitments and Contingencies

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,
                                                         1998             1997
                                                         ----             ----
Machinery and equipment                                $353,545         $353,686
Less accumulated amortization                           321,039          289,382
                                                       --------         --------
                                                       $ 32,506         $ 64,304
                                                       ========         ========

Lease amortization of $31,714 and $72,637 for the years ended June 30, 1998 and
1997, 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, 1998 are as follows:

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

June 30,
1999                                                      $26,899       $203,537
2000                                                       15,572        125,349
2001                                                           --          4,011
2002                                                           --          1,337
                                                          -------       --------
Total net minimum lease payments                           42,471       $334,234
                                                                        ========
Less amount representing interest                           3,271
                                                          -------
Present value of net minimum lease payments               $39,200
                                                          =======

Total rent expense of the Company for the periods ended June 30, 1998 and 1997
was $238,372 and $73,674, respectively.

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.


                                      F-21
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

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. 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).

Since the Series A Preferred Stock is convertible at a discount, a Series A
Preferred Stock 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
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


                                      F-22
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

7. Capital Stock (continued)

conversion price. As a result of this reset feature, a Series A Preferred Stock
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, 1998, the holders of the Series A Preferred Stock had converted 6,080
shares of Series A Preferred Stock into 60,800 shares of Common Stock.

At June 30, 1998, the Company had the following Common Stock purchase warrants
outstanding after giving effect to antidilution 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 (see
        Note 4)                  198,863             $0.66          July 21, 2002
Lenders' Warrants (see
        Note 4)                  385,075             $0.67          May 8, 2003
Others                           319,204          $4.40-$5.28       May 5, 2000-May 5, 2005
                             -----------
                              17,111,662
                             ===========
</TABLE>

At June 30, 1998, 16,908,405 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 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


                                      F-23
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

7. Capital Stock (continued)

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, 1996                   69,623                  4.40
  Granted                                    148,000                  4.40
  Canceled                                   (48,543)                 4.40
                                            --------
Outstanding at June 30, 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
                                            ========

Non-Employee Plan Options
Outstanding at July 1, 1996                    7,483                  4.40
  Granted                                     50,847                  3.16
                                            --------
Outstanding at June 30, 1997                  58,330                  3.32
  Granted at market value                    135,000                   .94
  Canceled                                   (25,412)                 3.41
                                            --------
Outstanding at June 30, 1998                 167,918                  1.08
                                            ========


                                      F-24
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

7. Capital Stock (continued)

<TABLE>
<CAPTION>
                                       Options Outstanding              Options Exercisable
                                        at June 30, 1998                 at June 30, 1998
                                     ---------------------------      -----------------------
                                                     Weighted
                                     Weighted         Average                        Weighted
                                     Average         Remaining                       Average
                       Number        Exercise       Contractual        Number        Exercise
Range                 of Shares       Price         Life (Years)      of Shares       Price
-----                 ---------       -----         ------------      ---------       -----
<S>                    <C>            <C>               <C>            <C>           <C>   
$0.781                 409,080        $0.781            7.5            61,580        $0.781
$1.375-$1.875           40,000        $1.625            7.6            20,000        $1.375
$3.125-$5.00           138,472        $4.308            4.9           116,543        $4.291
                       -------                                        -------
TOTAL                  587,552        $1.670            6.9           198,123        $2.906
                       =======                                        =======
</TABLE>

Of the total options outstanding under the plans, 198,123 and 75,557 were
exercisable at June 30, 1998 and 1997, 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. 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-25
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

7. Capital Stock (continued)

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

At June 30, 1998, 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 7.9 years for fiscal 1997, expected volatility of 55% for fiscal 1998 and
78% for fiscal 1997, and a risk-free interest rate of 6%.

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 to employees in 1998 and 1997 is amortized to expense over the options'
vesting period. The weighted-average fair value of options granted during fiscal
years 1998 and 1997 were $0.85 and $2.79, respectively. The Company's pro forma
information follows:


                                      F-26
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

7. Capital Stock (continued)

                                                    1998                1997
                                                    ----                ----

Pro Forma net loss                            $   (5,640,041)    $  (13,127,518)
Pro Forma loss per common share               $        (1.17)    $        (2.75)

8. Income Taxes

There was no income tax expense/benefit for the Company for the years ended June
30, 1998 and 1997.

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, 1998 and
1997:

                                                     For the year ended June 30,
                                                         1998           1997
                                                         ----           ----

Income tax benefit based on U.S. statutory rate      $  (890,712)   $(4,370,758)
Current year addition to the valuation allowance         890,712      4,370,758
                                                     -----------    -----------
Provision for income taxes                           $        --    $        --
                                                     ===========    ===========

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

                                                             June 30,
                                                      1998               1997
                                                      ----               ----

Deferred tax assets:
   Deferred revenue                              $         --      $    196,778
   Reserve for disposal                               206,000           285,240
   Start-up costs                                      87,661            57,334
   Fixed assets                                     2,400,544         1,422,000
   Allowance for doubtful accounts                      7,200                --
   Accruals                                           166,620                --
   Stock options and warrants                          57,500                --
   Tax loss carryforward                            8,312,424         8,228,700
                                                 ------------      ------------
Total deferred tax assets                          11,237,949        10,190,052

Valuation allowances                              (11,237,949)      (10,190,052)
                                                 ------------      ------------
Net deferred tax assets                          $         --      $         --
                                                 ============      ============


                                      F-27
<PAGE>

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                   Notes to Consolidated Financial Statements

8. Income Taxes (continued)

The Company's valuation allowance increased by approximately $1,000,000 for the
year ended June 30,1998 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, 1998, the Company has approximately $20 million of net operating
loss carryforwards, which expire between 2006 and 2013. The Tax Reform Act of
1986 enacted a complex set of rules (Section 382) limiting the potential
utilization of net operating loss carryforwards in periods following a corporate
"ownership change". In general, an ownership change is deemed to occur if the
percentage of stock of a loss corporation owned (actually, constructively and,
in some cases, deemed) by one or more "5% 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
Preferred Stock Offering), the Company's ability to utilize its net operating
loss carryforwards 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. No contributions were made
to the plan for the fiscal years ended June 30, 1998 and 1997.


                                      F-28
<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

3.3 *       By-laws of the Company

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.18*      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

<PAGE>

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

10.35       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 Eckhardt 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
<PAGE>

11          Statement of Computation of Net Loss Per Share

21**        Subsidiaries of the Company

27          Financial Data Schedule for the year ended June 30, 1998

*   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.

All other Exhibits filed herewith.