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

                                   FORM 10-KSB

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


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

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

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

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


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


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

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

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

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

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

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the  registrant  was required to file such reports) and (2) has been
subject to such filing requirements for past 90 days.

                          Yes  X                    No
                              ---                     ---

<PAGE>

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

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

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

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

                       DOCUMENTS INCORPORATED BY REFERENCE

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


                                       2
<PAGE>

                                     PART I


ITEM 1.  BUSINESS

Overview
--------

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

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

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


                                       3
<PAGE>

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

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

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


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

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

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


                                       4
<PAGE>

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


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

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


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

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


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

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


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

In June 1997, the Company terminated its joint venture with VANGKOE  Industries,
Inc. ("VANGKOE") by purchasing for nominal consideration  VANGKOE's 50% interest
in APT, located in St. Augustine,  Florida. APT was organized by the Company and
VANGKOE for the purpose of applying color  coatings in a proprietary  process to
create decorative particles.  Pursuant to the termination of such joint venture,
APT  became  a  wholly-owned  subsidiary  of  the  Company,  APT  purchased  the
proprietary color coating process used to manufacture the particles from VANGKOE
for $135,000 (and a contingent payment of $30,000 based on certain  


                                       5
<PAGE>

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


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

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


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

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


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

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


                                       6
<PAGE>

PRODUCTS
--------

Abrasives
---------

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

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


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

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


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

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


                                       7
<PAGE>

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


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

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

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


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

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

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

The  Company  recycles  CRT glass  through  two  processing  lines.  The process
involves  extracting  pieces  of  CRT  glass  of  less  than a  specified  size,
separating panel glass from funnel glass on a primary processing line,  cleaning
and removing coatings on the glass and batching the funnel glass and panel glass
for resale back to customers.  This process is repeated for CRT glass  fragments
too small for the primary  line by  identical  processing  through a second line
designed  to handle


                                       8
<PAGE>

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


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

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

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


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

Abrasives
---------

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

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


                                       9
<PAGE>

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


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

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

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

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


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

The  Company  also  believes  that  there  is a  large  market  for  performance
aggregates.  Materials such as plasters,  mortars, terrazzo, flooring tiles, and
other  ceramic  or  cement  based  mixtures   require   fillers,   expanders  or
particulates  that will add consistency or texture for functional  purposes.  If
needed,  the  Company  has the  ability  to size its  aggregates  within  narrow
specifications  for  specialty  applications.  Although  the  Company  has  only
recently begun to explore the use of its various substrates for this market, the
Company's  ALUMAGLASS product


                                       10
<PAGE>

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


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

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


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

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


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

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

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


                                       11
<PAGE>

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

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

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


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

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


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

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


                                       12
<PAGE>

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

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

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


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

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

To maximize market  acceptance of the Company's  manufacturing  technology,  the
Company has chosen to focus its initial  efforts on the development of recycling
processes,  materials  and  products  which  are  most  likely  to  qualify  for
exemptions  or favorable  regulatory  treatment.  For example,  the Company uses
materials  that are not solid  wastes  and are not  subject  to RCRA  permitting
requirements (for example, reclaimed characteristically hazardous by-products or
sludges).  The 


                                       13
<PAGE>

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

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

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


Employees
---------

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


ITEM 2.   PROPERTIES

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

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

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


                                       14
<PAGE>

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


ITEM 3.   LEGAL PROCEEDINGS

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


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

None.


                                     PART II


ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

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


                                       15
<PAGE>

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

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

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


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

Overview
--------

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

Although the Company has not yet achieved profitability, the Company has taken a
number of  recent  steps in an effort to  preserve  cash,  reduce  its costs and
increase  revenues.  In late  fiscal  1997 and early  fiscal  1998,  the Company
obtained a new management team that includes senior  executives with significant
experience in the engineering,  construction and marketing  fields. As discussed
elsewhere, the Company's long-term debt has been reduced through the redemption,
at a discount, of the IDA Bonds, reducing interest expense and cash required for
principal  repayments  significantly  and,  with  respect to the Key Bank loans,
renegotiated  debt to defer  payments  until  maturity which defers the required
cash outlays.  Raw material costs will be reduced through the use of third party
tollers and the application of lower cost alternative substrates. Investments in
product  development  have been curtailed and investments in sales and


                                       16
<PAGE>

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

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

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


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

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

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

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


                                       17
<PAGE>

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

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

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

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

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

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

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

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


                                       18
<PAGE>

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


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

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

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

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

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

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

In July 1997,  ESDC agreed to honor its  guarantee of  approximately  $1,888,000
outstanding  principal  amount  of term  loans  owing by the  Company's  Dunkirk
subsidiary  to Key Bank,  and ESDC is in the process of assuming  from Key Bank,
and Key Bank is  assigning  to ESDC,  such  loans.  ESDC has agreed to defer all
interest  and  principal  payments due under the loans  through


                                       19
<PAGE>

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

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

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


                                       20
<PAGE>

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

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

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

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

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

                                       21
<PAGE>

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

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

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


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

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


ITEM 7.   FINANCIAL STATEMENTS

See Financial Statements annexed.


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

None.


                                    PART III


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


ITEM 13.   EXHIBITS AND REPORTS ON FORM 8-K

(a)   1.   Financial Statements and Schedules

           See Financial Statements annexed.

      2.   Exhibits

           See Exhibits annexed.

(b)   Reports on Form 8-K

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

                                       

                                       22
<PAGE>



                                   SIGNATURES

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


                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.



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




                                       23
<PAGE>
                                       

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

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


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


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


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


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


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


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


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


                                       

                                       24
<PAGE>



                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES


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


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

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

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

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

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

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


                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



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


We have  audited the  accompanying  consolidated  balance  sheets of  Conversion
Technologies International, Inc. and Subsidiaries (Company) at June 30, 1997 and
1996,  and the related  consolidated  statements  of  operations,  stockholders'
equity and cash flows for the years then ended.  These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  Conversion
Technologies International, Inc. and Subsidiaries at June 30, 1997 and 1996, and
the  consolidated  results of their operations and cash flows for the years then
ended in conformity with generally accepted accounting principles.

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



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


                                      F-2
<PAGE>

<TABLE>
<CAPTION>

                               Conversion Technologies International, Inc.
                                             and Subsidiaries

                                       Consolidated Balance Sheets

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


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

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

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

          LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

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

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

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


                                         See accompanying notes.
</TABLE>

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

                   Conversion Technologies International, Inc.
                                and Subsidiaries

                      Consolidated Statements of Operations


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

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

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

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

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

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

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

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

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

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

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


                            See accompanying notes.


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

                                         Conversion Technologies International, Inc.
                                                       and Subsidiaries

                                       Consolidated Statements of Stockholders' Equity

                                         Years ended June 30, 1997 and June 30, 1996



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

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




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

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

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




                                                   See accompanying notes.


                                                             F-5
</TABLE>

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

                              Consolidated Statements of Cash Flows


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

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

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

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

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


                                     See accompanying notes.
</TABLE>


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


                   Consolidated Statements of Cash Flows (continued)


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

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


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



                                See accompanying notes.
</TABLE>


                                      F-7
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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


                                      F-8
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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


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

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

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

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


                                      F-9
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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


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

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


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

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

Inventories consisted of the following:

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

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


                                      F-10
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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


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

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


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

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


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

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


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

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


                                      F-11
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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


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

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


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

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


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

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


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

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


                                      F-12
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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


3.  Debt
    ----

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

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

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

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

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

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


                                      F-13
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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


                                      F-14
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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

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

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


                                      F-15
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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


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

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

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


                                      F-16
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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


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

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

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


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

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


                                      F-17
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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

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

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

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

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

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


                                      F-18
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

In connection  with the IPO,  740,559  shares of the Company's  common stock and
options to purchase 71,923 shares of Common Stock (the "Escrow Securities") were
deposited into escrow by the holders thereof. The Escrow Securities will only be
released from escrow when the Company  attains  certain  earnings  levels or the
market price of the Company's common stock achieves certain levels. These Escrow
Securities are subject to cancellation if such conditions are not achieved.

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


                                      F-19
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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

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

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

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


                                      F-20
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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

<TABLE>
<CAPTION>
                                    Options Outstanding                    Options Exercisable
                                      at June 30, 1997                       At June 30, 1997
                               -----------------------------------    ----------------------------
                                                  Weighted Average
                 Number of     Weighted Average   Contractual Life    Number of   Weighted Average
Range             Shares       Exercise Price         (Years)           Shares      Exercise Price
                 ---------     ----------------   ----------------    ---------   ----------------
     
<S>               <C>                <C>               <C>              <C>           <C>  
$3.125             50,000           $3.13             10.00
$4.40-$5.00       177,410            4.40              6.39             75,557        $4.40
                  -------                                               ------
TOTAL             227,410           $4.12              7.18             75,557        $4.40
                  =======                                               ======
</TABLE>

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


                                      F-21
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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

                                             1997               1996
                                             ----               ----

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

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


                                      F-22
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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


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

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

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

<TABLE>
<CAPTION>

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

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


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

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

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


                                      F-23
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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


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

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

The New York State Job  Development  Authority  (JDA) issued its guaranties (the
"Guaranties)") in favor of Key Bank of New York ("Key Bank") with respect to two
promissory  notes (the "term loans")  issued by Dunkirk and payable to the order
of Key Bank.  The JDA has agreed to exercise its option under the 


                                      F-24
<PAGE>

                   CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1997


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

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

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

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

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


                                      F-25
<PAGE>

                                  EXHIBIT INDEX


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

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

    3.1*       Amended and Restated Certificate of Incorporation of the Company

    3.2        Certificate  of  Designation  of Series A  Convertible  Preferred
               Stock

    3.3*       By-laws of the Company

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

    4.2*       Form of Underwriter's Unit Purchase Option

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

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

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

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

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

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

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

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

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

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

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

   10.9*       Form of Indemnification Agreement

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


<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                     - 2 -
<PAGE>

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

   10.27       Form  of Placement  Agency Agreement between  the  Company and   
               Placement Agent
               
   10.28       Form of  Subscription  Agreement  between the Company and various
               subscribers of Series A Preferred Stock

   10.29       Form of Placement Agent Warrant

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

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

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

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

   11.0        Statement of Computation of Net Loss Per Share

   21          Subsidiaries of the Company

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


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

All other Exhibits filed herewith.


                                     - 3 -