SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-K
(Mark One)

     (X) Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)

     For the fiscal year ended 6/30/97 or

     ( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)

     For the transition period from ________ to ________

     Commission file number 0-9998

                          THE METAL ARTS COMPANY, INC.
             (Exact name of registrant as specified in its charter)

          NEW YORK                                        06-0945588
          --------                                        ----------
(State or other jurisdiction of                          (IRS Employer
incorporation or organization)                           Identification No.)

1 AMERICAN CENTER, GENEVA, NEW YORK                      14456-1188
-----------------------------------                      -------------
 (Address of principal executive offices)                (Zip Code)

                                 (315) 789-2200
--------------------------------------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)

           Securities registered pursuant to Section 12(b) of the Act:

                                                      NAME OF EACH EXCHANGE
         TITLE OF EACH CLASS                          ON WHICH REGISTERED
         -------------------                          -------------------

                  NONE
         -------------------                          -------------------

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

           Securities registered pursuant to Section 12(g) of the Act:

                                      NONE
--------------------------------------------------------------------------------
                                (Title of Class)



--------------------------------------------------------------------------------
                                (Title of Class)

         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports), and (2) has been subject to such


<PAGE>



filing requirements for the past 90 days.  Yes   X     No
                                               ----       ----

        State  the   aggregate   market  value  of  the  voting  stock  held  by
non-affiliates  of the registrant.  The aggregate market value shall be computed
by  reference  to the price at which the stock was sold,  or the average bid and
asked prices of such stock,  as of a specified  date within 60 days prior to the
date of filing. (See definition of affiliate in Rule 405.) $2,757,658 (4,242,551
at $.65 Per share)

        Note. If a determination as to whether a particular  person or entity is
an affiliate cannot be made without involving  unreasonable  effort and expense,
the  aggregate  market value of the common stock held by  non-affiliates  may be
calculated  on the basis of  assumptions  reasonable  under  the  circumstances,
provided that the assumptions are set forth in this form.

                   APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
                   BANKRUPTCY PROCEEDINGS DURING THE PRECEDING
                                   FIVE YEARS:

         Indicate by check mark whether the  registrant  has filed all documents
and reports  required to be filed by Section 12, 13, or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court.

Yes            No
     ----          -----

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS:

         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date.

                        7,407,402 SHARES OF COMMON STOCK
                        --------------------------------
                            PAR VALUE $.01 PER SHARE
                            ------------------------












                                  Page 2 of 44

                         Exhibit Page Appears on Page 43










<PAGE>





                                     PART I

                                ITEM 1. BUSINESS

         Certain  statements  contained  in  this  filing  are  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of 1995, such as statements  relating to financial  results and plans for future
business development activities, and are thus prospective.  Such forward-looking
statements  are subject to risks,  uncertainties  and other  factors which could
cause  actual  results to differ  materially  from future  results  expressed or
implied by such  forward-looking  statements.  Potential risks and uncertainties
include,  but are not limited to,  economic  conditions,  competition  and other
uncertainties  detailed  from  time  to  time in the  Company's  Securities  and
Exchange Commission filings.

GENERAL

         Metal Arts  Company,  Inc.  established  in 1913  ("Metal  Arts" or the
"Company"),  has operated as a holding company.  Except where specific reference
is made in this  Part I to the  individual  operations  of Metal  Arts or its 70
percent owned subsidiary Coating Technology,  Inc.,  references in the Part I to
the  "Company"  are intended to be a reference to the  collective  operations of
Metal Arts and  Coating  Technology.  Coating  Technology  engages  in  contract
electroless nickel,  aluminum anodizing,  electroless nickel and gold plating of
circuit boards and other surface coating and enhancement operations.

         Metal Arts had outstanding liabilities of $1,090,267 as of the close of
Fiscal 1997. A detailed  description  of these  liabilities  is set forth in the
Financial Statements and Supplementary Data annexed as Item 8 to this Form 10-K.
Specific  reference is made to Notes 1 and 5 of these  Financial  Statements for
information concerning specific liabilities.

         On June 30,  1994,  the company  undertook to offer  twenty(20)  of its
$25,000  Principal  Amount 8% Convertible  Subordinated  Debentures due June 30,
1999 ( the  "Debentures").  The Debentures are convertible  into common stock of
the  company at $.75  through  June 30,  1996,  $.95 per share from July 1, 1996
through  June 30,  1988 and $1.25 per share  thereafter,  and grant the holder a
warrant to purchase an equal  number of common  shares at $.85.  As of September
30, 1994,  eleven (11)  Debentures had been  subscribed for a total of $275,000.
The  Debentures  were offered and issued under Section 4.2 of the Securities Act
of 1993 and the rules and regulations thereunder.

         The  proceeds  from the  Debenture  were used to  acquire a new  Patent
Pending  Technology  for the plating of  electroless  nickel on aluminum  and to
commercialize that technology,  initially to the Computer Hard Disk and Aluminum
Automobile Wheel Markets. The Company's  proprietary specialty chemicals consist
of  Microsmooth  TM,  a  patent-pending  aluminum  activator  solution  used  in
conjunction with a proprietary  electroless-nickel bath for plating on aluminum.
Both the products and process are proprietary, rendering a smoother surface with
enhanced  corrosion  protection,  elimination of several toxic chemicals,  while
reducing plating and waste treatment costs.  While conducting lab and pilot line
trials, marketing efforts to the computer memory disk and aluminum wheel markets
were undertaken and continue now. If successful in the U.S., it is the company's
intention to market the technology or license it internationally.

         The  technology  was  acquired for $50,000  cash,  which was paid as of
September 30, 1995. In addition, the seller has received 100,000 shares of Metal
Arts common stock and will receive an  additional  100,000  shares of Metal Arts
common stock upon the issuance of a patent.
                                                        
                                       -3-


<PAGE>




         As a result of this  acquisition,  Metal Arts will become an  operating
company, marketing its proprietary specialty chemicals to end users nationally.

         Compliance with  environmental  laws and regulations has a material and
on-going  impact on the company.  The company must comply and the costs are both
capital and operational. It has a positive impact in that certain companies that
cannot comply are at a disadvantage,  operationally. It has a negative impact in
that the costs of compliance affects capital resources and cash flow. During the
fiscal year 1997,  Coating  Technology  spent  approximately  $14,500 on various
compliance  requirements.  As new  technologies and methods are available to the
company,  additional  capital and  operational  costs will be incurred to comply
with and/or reduce on-going expenses of waste treatment.

THE COMPANY'S MARKETS

         During the past three fiscal years,  substantially all of the company's
sales  were  attributable  to the  operations  of  Coating  Technology.  Coating
Technology provides surface coating services for various regional industries.

                                             FISCAL YEARS (ENDING JUNE 30)

                                         1997            1996             1995
                                         ----            ----             ----

Metal Arts                        $    44,000     $         -    $           -
Coating Technology                  1,613,000       1,630,000        1,573,000
                                   ----------      ----------       ----------

                                   $1,657,000      $1,630,000       $1,573,000
                                   ==========      ==========       ==========

THE COMPANY'S PRODUCTS

         Metal Arts is entering the Specialty chemical  business,  marketing its
new process for plating electroless nickel on aluminum.  The process consists of
Microsmooth  TM, a patent  pending  activator and a proprietary  high-phosphorus
electroless  nickel  formulation,  initially to  manufacturers  of computer hard
disks and aluminum wheels. Coating Technology is engaged in contract electroless
and brite nickel and aluminum anodizing operations.  Coating Technology services
the office products  industry through large,  medium and small metal fabricating
companies who in turn supply  subassemblies  and individual  component  parts to
major office product manufacturers such as Xerox, Kodak, IBM, Cannon and others.
In addition, Coating Technology provides electroless nickel and gold plating for
the circuit board industry.  It also provides other surface  finishes to various
contract customers.

MANUFACTURING OPERATIONS

         Metal Arts'  specialty  chemical  mixing  operations  will initially be
conducted with existing equipment at Coating Technology.

SURFACE COATING OPERATIONS

         Coating  Technology  engages in the Surface  Coatings and  Enhancements
business.  It  is a  leading  regional  Electroless  Nickel  Plater,  a  plating
technique that deposits nickel on metal without the use of an applied electrical
current.  The  process  is used to prevent  corrosion,  enhance  smoothness  and
improve overall surface quality on various metals including aluminum, copper and
steel. As a result of its acquisition of the Aluminum Anodizing assets it is now
a leading regional anodizer.  All surface finishing  operations are conducted at
its facility at 1600 N. Clinton Ave Rochester, NY.
                                                          
                                       -4-


<PAGE>




COMPLIANCE WITH GOVERNMENTAL REGULATIONS

         The company believes that its present operations are in compliance with
the  current  requirements  of OSHA,  EPA and all  applicable  local  and  state
regulations, utilizing an up-to-date waste treatment system.

COMPETITION

         Metal Arts will be competing  initially in the computer memory disk and
aluminum  wheel  markets  where  established,   substantially  larger  companies
dominate.  There are  approximately 20 companies that sell plating  chemicals to
these  markets.  Metal Arts will compete on the basis of an improved  technology
that will  save its  potential  customers  material,  labor and waste  treatment
costs.

         Coating  Technology   competes  with  several  regional  plating  firms
including  two that are larger and  several  of the same or  smaller  size.  The
company competes on the basis of superior service and, in certain instances,  on
the basis of proprietary technology or equipment.

CUSTOMERS

         During the fiscal year ended June 30, 1997,  Coating Technology had two
customers  which  accounted for 26 percent of its sales,  one of which accounted
for 14 percent of its sales.

INVENTORY REQUIREMENTS

         Coating Technology does not maintain an inventory other than its normal
chemical plating and surface finishing solutions which are sourced as needed and
are readily available.

SOURCES OF RAW MATERIALS

         Metal Arts will be able to source all  components  for its  proprietary
electroless  nickel  process,  readily,  from  multiple  sources at  competitive
prices.  The company can  accommodate raw material  requirements  out of current
working  capital  during the  initial  stages of  commercialization.  It will be
necessary  to  enhance  its  working  capital  either  out of cash flow or other
external means if sales increase  substantially.  Coating Technology sources its
raw  materials on regular  trade terms and has the working  capital  required to
sustain current  operations and continue to grow at its current rate.  There are
no rights of return, or extended payment terms for Coating  Technology,  nor are
any anticipated  for Metal Arts.  Coating  Technology  sources all chemicals and
related supplies from local and national companies at competitive prices.

EMPLOYEES

         The company  employs one executive in its Metal Arts  operations and 25
in its Coating Technology operations, none of whom are union members.





                                       -5-


<PAGE>




                               ITEM 2. PROPERTIES

         Coating  Technology  leases  approximately  22,000  square  feet  at an
initial  rental of $2.95 per square foot  escalating  to $4.95 by the end of the
first five year term on September 1, 1996,  which was extended on the same terms
until February 1, 1998. This is a "gross" lease with  responsibility for payment
of utilities.  The Company has signed a ten year lease for approximately  40,000
square  feet of factory and office  space in a superior  building  initially  at
$2.00 per square foot with responsibility for utilities.

         The plant includes surface finishing  machinery and equipment which the
company  believes  are adequate to satisfy the  requirements  of Metal Arts' and
Coating Technology's present and proposed future businesses.

                            ITEM 3. LEGAL PROCEEDINGS

         There are no legal proceedings at the present time.

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

         During the fiscal year ended June 30, 1997, no annual  meeting was held
and no  shareholder  votes took place.  It is  anticipated  that the next annual
meeting will take place in the next few months.

                                     PART II

                  ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES
                         AND RELATED STOCKHOLDER MATTERS

         The   common   shares  of  Metal   Arts   have   been   traded  in  the
over-the-counter  market since its initial public  offering on January 22, 1981,
and are now traded on the NASDAQ "Bulletin Board" under the symbol MTRT.

         The following table sets forth,  for the calendar  quarters  indicated,
the range of high and low bid quotations on the NASDAQ  National  Market System,
as reported by the National Quotation Bureau, Inc.


FISCAL YEAR ENDED JUNE 30, 1996                     HIGH              LOW
-------------------------------                     ----              ---

First Quarter (July - September 1995)                1/2               3/8
Second Quarter (October - December 1995)             1/4               1/8
Third Quarter (January - March 1996)                 1/4               1/8
Fourth Quarter (April - June 1996)                   9/16              5/16

FISCAL YEAR ENDED JUNE 30, 1997
-------------------------------

First Quarter (July - September 1996)                9/16              5/16
Second Quarter (October - December 1996)             7/16              5/16
Third Quarter (January - March 1997)                 5/16              3/16
Fourth Quarter (April - June 1997)                   7/16              5/16


                                       -6-


<PAGE>




FISCAL YEAR ENDED JUNE 30, 1998
-------------------------------

First Quarter (July - September 1997)               7/8               1/2

         For a recent reported  quotation for the company's  common shares,  see
the  cover  page  of  this  Form  10-K.  The  quotations  listed  above  reflect
inter-dealer prices, without retail markup, markdown, or commissions and may not
necessarily represent actual transactions.

         To date, the company has not paid a dividend on its common shares.  The
payment of future  dividends is subject to the company's  earnings and financial
position and such other  factors,  including  contractual  restrictions,  as the
Board of Directors may deem relevant and it is unlikely that  dividends  will be
paid in the foreseeable future.

         As of October 1, 1997, there were  approximately  980 holders of record
of the  common  shares of Metal  Arts,  approximately  20  holders  of record of
warrants  issued (and  extended to October 31, 1997) as part of the 1988 Private
Placement  (23,000  have been  exercised  and 552,000  are left),  one holder of
record of options  issued  pursuant to the Incentive  Stock Option Plan of Metal
Arts and eleven  holders of record of the June 30,  1994  Debentures,  which are
potentially convertible into a total of 366,663 common shares of the company.

         In June,  1995, the Board of Directors of The Metal Arts Company,  Inc.
(the "Company"),  voted to distribute to the Company's  shareholders,  pro rata,
the  Company's  holdings of the common  shares of its then  subsidiary,  Bastian
Company,  Inc.  ("Bastian").  As of June,  1995, the Company held  approximately
356,000  of  the  then  outstanding   400,000  common  shares  of  Bastian,   or
approximately  89% of the then issued and outstanding  common shares of Bastian.
Bastian has advised the Company  that  Bastian  believes it has an  aggregate of
approximately  260 holders of its common shares.  The Company has  approximately
980 holders of its own common shares. The Company's management believes that the
value of the Bastian  common  shares then owned by the  Company,  both as of the
date of the  decision to  distribute  those  shares,  and as of the date of this
Report, was negligible both in the aggregate and on a per share basis.

         Bastian  has  advised  the  Company   that  Bastian  has  not  filed  a
registration  statement with the Securities and Exchange  Commission to register
the Bastian common shares  pursuant to The  Securities  Exchange Act of 1934, as
amended  (the  "1934  Act"),  and has not taken any other  steps to comply  with
federal or state securities  statutes.  As such, since the Company believes that
such registration  under the 1934 Act, and other actions under federal and state
securities  statutes,  may be required prior to the time that the Bastian common
shares are  distributed  to the  Company's  shareholders,  the  Company  has not
completed  the pro rata  distribution  of the Bastian  common  shares  which was
declared in June 1995. Management of the Company is unable to determine when, or
if Bastian will register the Bastian common shares pursuant to the 1934 Act, but
will  further  advise the  Company's  shareholders  at the time that any further
determination  is made with regard to the  distribution  of the  Bastian  common
shares.

         At this  time,  management  of the  Company  believes  that  all of the
Company's  shareholders  have a right to receive their pro rata  distribution of
the Bastian common shares, subject,  however, to the completion of the necessary
1934 Act  registration  being filed and  becoming  effective  and certain  other
securities requirements being fulfilled.



                                       -7-



<PAGE>



                         ITEM 6. SELECTED FINANCIAL DATA





<TABLE>
<CAPTION>

                                              June 30,            June 30,            June 30,            June 30,          June 30,
                                                1997                1996               1995                1994              1993
                                                ----                ----               ----                ----              ----
Results of operations:

<S>                                        <C>               <C>              <C>               <C>              <C>       
Net sales                                   $ 1,656,961         $ 1,629,538         $ 1,573,276         $1,258,500        $1,164,892
Income (loss) before
   cumulative effect of
   accounting changes                       $  (126,307)        $  (147,294)        $  (400,722)        $  131,318        $  249,734
Cumulative effect of
   accounting change                        $      --           $      --           $      --           $  176,400        $     --
Net income (loss)                           $  (126,307)        $  (147,294)        $  (400,722)        $  307,718        $  249,734
Per share:
   Income (loss)
   before cumulative
   effect of accounting
   change                                   $      (.02)        $      (.02)        $      (.05)        $      .02        $      .04
Cumulative effect of
   accounting change                        $      --           $      --           $      --           $      .03        $     --
Net income (loss)                           $      (.02)        $      (.02)        $      (.05)        $      .05        $      .04
Weighted average number
      of common shares
      outstanding                             7,357,402           7,307,402           7,294,002          6,766,352         6,187,602
</TABLE>

Cash dividends paid per common share - No dividends have been paid in the past.

<TABLE>
<CAPTION>

                                                   June 30,           June 30,         June 30,          June 30,          June 30,
                                                    1997               1996             1995              1994              1993
                                                    ----               ----             ----              ----              ----
Balance sheet data:

<S>                                             <C>                 <C>               <C>               <C>               <C>      
Total assets                                    $ 1,064,636         $1,179,263        $1,202,988        $1,009,783        $ 611,636
Total liabilities                               $ 1,090,267         $1,128,587        $1,005,018        $  966,673        $ 957,344
Long-term
   obligations                                  $   606,354         $  660,168        $  646,180        $  588,341        $ 673,946
Minority interest                               $   142,181         $  129,898        $  125,002        $   99,406        $  77,902
Working capital                                 $     5,627         $   59,777        $  172,843        $   54,156        $  29,457
Stockholders' equity
   (deficiency)                                 $   (25,631)        $   50,676        $  197,970        $   43,110        $(345,708)
</TABLE>





                                       -8-


<PAGE>











The following table  illustrates the major  components of consolidated net sales
and net loss:

                                   1997           1996             1995
                                   ----           ----             ----
CONSOLIDATED NET SALES:                     
                                            
      Metal Arts               $   44,000     $         -      $         -
      Coating Technology        1,613,000       1,630,000        1,573,000
                               ----------      ----------       ----------
                                            
                               $1,657,000      $1,630,000       $1,573,000
                               ==========      ==========       ==========
                                           
CONSOLIDATED NET LOSS:

      Metal Arts                $(154,968)      $(158,719)       $(206,584)
      Coating Technology           40,944          16,321           85,319
      Minority Interest           (12,283)         (4,896)         (25,596)
      Discontinued Operations           -               -         (253,861)
                               ----------     -----------        ---------

                                $(126,307)      $(147,294)       $(400,722)
                                =========       =========        =========
























                                       -9-


<PAGE>




            ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         The  following  Management  Discussion  and Analysis  should be read in
conjunction with this entire Form 10-K 1997 Annual Report. Except where specific
reference is made in this Item 7 to the  individual  operations of Metal Arts or
its 70 percent owned subsidiary,  Coating Technology,  references in this Item 7
to the "Company"  are intended to be a reference to the joint  operations of all
of Metal Arts, and Coating Technology.

LIQUIDITY AND CAPITAL RESOURCES

PRIVATE PLACEMENT OF DEBENTURES

         The company  sold, as of September 30, 1994,  eleven  debentures  for a
total of  $275,000.  The  purpose of the  private  placement  was to acquire the
technology for plating electroless nickel on aluminum, complete all research and
development,  conduct  test  trials  with  potential  customers  leading  up  to
commercialization.

NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY FUNDING

         The company signed an agreement with the New York State Energy Research
and Development  Authority (NYSERDA) dated June 22, 1995 for funding of $325,000
for its new technology.  This was done as a part of NYSERDA's  Industrial  Waste
Minimization  Program.  The purpose of the  funding is to provide  money for the
completion of research and development,  test trials,  commercial demonstrations
and  commercialization  of the  technology.  To date, the company has received a
total of $315,000 on this contract.

OPERATING ACTIVITIES

         Over the past three fiscal years  Coating  Technology  has shown steady
growth in sales  and  earnings.  Cash  flow,  along  with  term  loans  from the
company's  commercial  bank,  was  adequate  to provide for the  acquisition  of
capital equipment and provide the working capital necessary to run the business.
In addition,  all relevant measures relating to: Debt to Equity;  current ratio;
working capital; and net worth increased.

         Through  the first  quarter  of fiscal  year 1997,  Coating  Technology
operated profitably with sufficient resources to sustain operations.

MICROSMOOTH(TM)

         The Company  initially  applied for a patent on  Microsmooth  (TM), its
proprietary activator for plating electroless nickel on aluminum in March, 1994.
That application was then split into three separate  applications;  the chemical
formula; the process and; the resulting product.

         Subsequently,   and  as  a  result  of  significant   chemical  formula
modifications,  the original formula  application was abandoned and a new patent
application was filed in June, 1997.




                                      -10-


<PAGE>




         On  July  30,  1997  the  Company  entered  into an  exclusive  license
agreement with Alyn Corporation, Inc. for Alyn to use the Microsmooth TM process
on Alyn's Boralyn (R) alternate  computer memory disks. The Company will receive
material  royalties  from  the  Alyn  Corporation  to  retain  Alyn's  exclusive
worldwide  rights to the Microsmooth TM technology on alternate  computer memory
disks.
         If Metal Arts is successful in  commercializing  its new  technology it
will be necessary to raise  additional  capital.  The amount of capital required
will depend on how rapidly market  acceptance might occur. If this does occur it
could result in growth in the  company's  sales and  earnings  over the next few
years. The company will seek, if commercial sales commence,  to raise additional
capital  in the  form of  receivables  financing,  warrant  conversion  or other
investment mechanisms to sustain operations.

                        ITEM 8. FINANCIAL STATEMENTS AND
                               SUPPLEMENTARY DATA





































                                      -11-



<PAGE>












                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
                   -------------------------------------------


Independent Auditors' Report . . . . . . . . . . . . . . . . . . . .       1

Consolidated Balance Sheets at June 30, 1997 and 1996  . . . . . . .   2 - 3

Consolidated Statements of Operations for the years
     ended June 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . .      4

Consolidated Statements of Changes In Stockholders'
     Equity (Deficiency) for the years ended
          June 30, 1997, 1996 and 1995  . . . . . . . . . . . . . . .  5 - 6

Consolidated Statements of Cash Flows for the years
     ended June 30, 1997, 1996 and 1995   . . . . . . . . . . . . . .  7 - 8

Notes to Consolidated Financial Statements . . . . . . . . . . . . .  9 - 19

Financial Schedules:

   II  -  Amounts Receivable from Related Parties and
             Underwriters, Promoters, and Employees
             Other Than Related Parties  . . . . . . . . . . . . . .      20

    V  -  Property, Plant and Equipment  . . . . . . . . . . . . . .      21

   VI  -  Accumulated Depreciation and Amortization of
             Property, Plant and Equipment  . . . . . . . . . . . . .     22

  VII  -  Valuation and Qualifying Accounts and Reserves . . . . . .      23

    X  -  Supplementary Income Statement Information . . . . . . . .      24


All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.




                                      -12-


<PAGE>












                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

The Board of Directors and Stockholders
The Metal Arts Company, Inc. and Subsidiary

We have audited the accompanying  consolidated  balance sheets of The Metal Arts
Company,  Inc.  and  Subsidiary  as of June 30,  1997 and 1996,  and the related
consolidated  financial  statements listed in the accompanying index for each of
the years in the  three-year  period  ended June 30,  1997.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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.

As  described  in Notes 1 and 2 to the  financial  statements,  the  Company has
elected not to consolidate its Bastian and Ocean State  subsidiaries as required
by generally accepted accounting principles.

In our  opinion,  except for the  effects of not  consolidating  its Bastian and
Ocean  State  subsidiaries  as  discussed  in  the  preceding   paragraph,   the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects,  the financial  position of The Metal Arts Company,  Inc. and
Subsidiary  as of June 30, 1997 and 1996,  and the results of their  operations,
changes in their stockholders' equity (deficiency) and their cash flows for each
of the years in the  three-year  period ended June 30, 1997, in conformity  with
generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The financial  schedules listed in the
accompanying index are presented for purposes of additional analysis and are not
a required part of the basic  financial  statements.  Such  information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements  and, in our opinion,  is fairly  stated in all material  respects in
relation to the basic financial statements taken as a whole.






September 2, 1997
                                      -13-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------
<TABLE>
<CAPTION>

                           Consolidated Balance Sheets
                             June 30, 1997 And 1996



                                     ASSETS
                                     ------


Current assets:                                                     1997          1996
                                                                    ----          ----

<S>                                                               <C>          <C>       
      Cash                                                        $   53,241   $  112,215
      Accounts receivable, trade - less allowance for
            uncollectible accounts of $10,000 in 1997
            and 1996 (Notes 5 and 10)                                223,791      207,596
      Due from NYSERDA, current portion (Note 3)                      32,501       25,768
      Due from unconsolidated subsidiary, less allowance for
            uncollectible amount of $100,000 in 1997
            and 1996 (Note 1)                                          2,862        9,000
      Prepaid expenses and other current assets                        8,364       29,519
      Deferred tax asset - less valuation allowance
            of $37,100 in 1997 and $35,000 in 1996
            (Notes 2 and 11)                                          26,600       14,200
                                                                  ----------   ----------
                                                                     347,359      398,298
                                                                  ----------   ----------


Property, plant and equipment (Notes 2, 4 and 5)                     929,629      884,157
      Less:  Accumulated depreciation and amortization               469,469      375,890
                                                                  ----------   ----------
                                                                     460,160      508,267
                                                                  ----------   ----------

Other assets:

      Due from shareholder (Note 16)                                  13,009         --
      Due from NYSERDA, net of current portion (Note 3)                 --         21,303
      Cash value of life insurance                                     7,893        7,893
      Operating rights, net of accumulated amortization of
            $3,350 in 1997 and $2,010 in 1996 (Notes 2 and 8)         16,750       18,090
      Debt issuance costs, net of accumulated amortization of
            $15,931 in 1997 and $10,620 in 1996 (Note 2)              10,622       15,933
      Other assets                                                    30,543       30,479
      Deferred tax asset - less valuation allowance of $309,200
            in 1997 and $557,500 in 1996 (Notes 2 and 11)            178,300      179,000
                                                                  ----------   ----------
                                                                     257,117      272,698
                                                                  ----------   ----------

                                                                  $1,064,636   $1,179,263
                                                                  ==========   ==========

</TABLE>

See accompanying notes to consolidated financial statements.

                                      -14-


<PAGE>



<TABLE>
<CAPTION>

                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
                -------------------------------------------------


Current liabilities:                                                   1997            1996
                                                                       ----            ----

<S>                                                                <C>            <C>        
      Current portion of long-term debt (Note 5)                    $    56,613    $    66,679
      Accounts payable, trade                                           220,809        208,213
      Accrued expenses                                                    8,207          9,412
      Accrued payroll and related taxes                                  21,702         19,725
      Accrued commissions                                                34,401         34,492
                                                                    -----------    -----------
                                                                        341,732        338,521
                                                                    -----------    -----------

Long-term liabilities:

      Long-term debt, net of current portion (Note 5)                   348,332        404,946
      Other long-term liability (Note 6)                                243,222        243,222
      Deferred tax liability (Notes 2 and 11)                            14,800         12,000
                                                                    -----------    -----------
                                                                        606,354        660,168
                                                                    -----------    -----------

Minority interest in subsidiary (Note 9)                                142,181        129,898
                                                                    -----------    -----------

Commitments and contingencies (Notes 12 and 13)

Stockholders' equity (deficiency) (Notes 3, 5, 7 and 8):

      Commonstock - $.01 par value, 15,000,000 shares authorized;
            7,407,402 and 7,307,402 shares issued
            and outstanding in 1997 and 1996, respectively               74,074         73,074
      Paid-in capital in excess of par value                          2,407,188      2,358,188
      Accumulated deficit                                            (2,506,893)    (2,380,586)
                                                                    -----------    -----------
                                                                        (25,631)        50,676
                                                                    -----------    -----------


                                                                    $ 1,064,636    $ 1,179,263
                                                                    ===========    ===========


</TABLE>


                                      -15-


<PAGE>



<TABLE>
<CAPTION>

                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                      Consolidated Statements Of Operations
                For The Years Ended June 30, 1997, 1996 And 1995

                                                       1997         1996           1995
                                                       ----         ----           ----

<S>                                               <C>            <C>            <C>        
Net sales (Note 10)                               $ 1,656,961    $ 1,629,538    $ 1,573,276

Cost of goods sold                                  1,322,482      1,377,353      1,240,208
                                                  -----------    -----------    -----------

Gross profit                                          334,479        252,185        333,068
                                                  -----------    -----------    -----------

Selling, general and administrative expenses          389,006        334,440        284,496
Research and development                               25,063         28,209         28,280
                                                  -----------    -----------    -----------
                                                      414,069        362,649        312,776
                                                  -----------    -----------    -----------

Income (loss) from operations                         (79,590)      (110,464)        20,292
                                                  -----------    -----------    -----------
Other income (expense):

      Allowance for uncollectible advances to
            unconsolidated subsidiary (Note 1)           --             --         (100,000)
      Allowance for uncollectible accounts               --           (6,000)          --
      Interest expense                                (36,947)       (38,547)       (29,292)
      Interest income                                   1,046          2,813          2,535
      Minority interest in income of subsidiary
             (Note 9)                                 (12,283)        (4,896)       (25,596)
                                                  -----------    -----------    -----------
                                                      (48,184)       (46,630)      (152,353)
                                                  -----------    -----------    -----------

Loss before income taxes                             (127,774)      (157,094)      (132,061)

Provision for income taxes (Note 11)                   (1,467)        (9,800)        14,800
                                                  -----------    -----------    -----------

Loss from continuing operations                      (126,307)      (147,294)      (146,861)

Loss from discontinued operations (net of
      income taxes of $732) (Note 1)                     --             --         (253,861)
                                                  -----------    -----------    -----------

Net loss for the year                             $  (126,307)   $  (147,294)   $  (400,722)
                                                  ===========    ===========    ===========

Earnings per share of common stock (Note 2):

      Loss from continuing operations             $      (.02)   $      (.02)   $      (.02)
      Loss from discontinued operations                  --             --             (.03)
                                                  -----------    -----------    -----------

      Net loss                                    $      (.02)   $      (.02)   $      (.05)
                                                  ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                      -16-


<PAGE>



<TABLE>
<CAPTION>

                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

     Consolidated Statements Of Changes In Stockholders' Equity (Deficiency)
                For The Years Ended June 30, 1997, 1996 And 1995



                                                  COMMON STOCK
                                                  ------------                 PAID-IN                                   TOTAL   
                                             NUMBER                          CAPITAL IN                              STOCKHOLDERS 
                                               OF                             EXCESS OF           ACCUMULATED           EQUITY    
                                             SHARES          AMOUNT           PAR VALUE             DEFICIT          (DEFICIENCY) 
                                             ------          ------           ---------             -------          ------------ 
                                                                                                                                  
                                                                                                                                  
<S>                                       <C>             <C>               <C>                  <C>                  <C>       
Balance at June 30, 1994                    7,280,602       $72,806           $2,342,376           $(2,372,072)         $  43,110 
                                                                                                                                  
Exercise of warrants                           23,000           230               13,570                     -             13,800 
                                                                                                                                  
Shares issued in payment of expenses            3,800            38                2,242                     -              2,280 
                                                                                                                                  
Property dividend (Note 1)                       --            --                      -               539,502            539,502 
                                                                                                                                  
Net loss for the year                            --            --                      -              (400,722)          (400,722)
                                            ---------       -------       --------------          ------------          --------- 
                                                                                                                                  
Balance at June 30, 1995                    7,307,402        73,074            2,358,188            (2,233,292)           197,970 
                                                                                                                                  
Net loss for the year                            --            --                      -              (147,294)          (147,294)
                                            ---------       -------       --------------          ------------          --------- 
                                                                                                                                  
Balance at June 30, 1996                    7,307,402        73,074            2,358,188            (2,380,586)            50,676 
                                                                                                                                  
Shares issued in payment of liabilities       100,000         1,000               49,000                     -             50,000 
                                                                                                                                  
Net loss for the year                            --            --                      -              (126,307)          (126,307)
                                            ---------       -------       --------------          ------------          --------- 
                                                                                                                                  
Balance at June 30, 1997                    7,407,402       $74,074           $2,407,188           $(2,506,893)         $ (25,631)
                                            =========       =======           ==========           ===========          ========= 
                                                                                     


</TABLE>





See accompanying notes to consolidated financial statements.

                                      -17-


<PAGE>






<TABLE>
<CAPTION>

                   THE METAL ARTS COMPANY, INC AND SUBSIDIARY
                   ------------------------------------------

                      Consolidated Statements Of Cash Flows
                For The Years Ended June 30, 1997, 1996 And 1995

                                                                     1997         1996         1995
                                                                   ---------    ---------    ---------
Cash flows from operating activities:

<S>                                                                <C>          <C>          <C>       
      Net loss for the year                                        $(126,307)   $(147,294)   $(400,722)
      Adjustments to reconcile net loss to net cash
         provided by (used for) operating activities:

      Rent expense offset against advances to
         unconsolidated subsidiary                                     6,000        6,000         --
      Bad debt expense                                                  --          6,000         --
      Allowance for uncollectible advances to
         unconsolidated subsidiary                                      --           --        100,000
      Stock issued in payment of expenses                               --           --          2,280
      Depreciation and amortization                                  100,230       94,508       82,405
      Deferred income taxes                                           (8,900)     (11,400)      (5,400)
      Minority interest in income of subsidiary                       12,283        4,896       25,596
      Loss from discontinued operations                                 --           --        253,861
      Change in operating accounts:
            Accounts receivable                                       (1,625)      59,597      (38,606)
            Prepaid expenses                                          21,155      (19,826)      (3,118)
            Other assets                                                 (64)     (12,524)     (41,618)
            Accounts payable                                          56,596       72,854      (18,492)
            Accrued expenses                                          (1,205)        (116)       1,227
            Accrued payroll and related taxes                          1,977       (7,992)       7,819
            Accrued commissions                                          (91)        (478)      (4,394)
                                                                   ---------    ---------    ---------

      Net cash provided by (used for) operating activities            60,049       44,225      (39,162)
                                                                   ----------   ---------    ---------

Cash flows from investing activities:
      Repayments from (advances to) unconsolidated
         subsidiary                                                      138      (15,000)      (8,858)
      Capital expenditures                                           (45,472)     (56,007)    (118,025)
      Advances to shareholder                                        (13,009)        --           --
                                                                   ---------    ---------    ---------

      Net cash used for investing activities                         (58,343)     (71,007)    (126,883)
                                                                   ---------    ---------    ---------

Cash flows from financing activities:
      Issuance of common stock                                         6,000         --         13,800
      Proceeds from long-term debt                                      --        100,000      250,000
      Payments on long-term debt                                     (66,680)     (39,595)     (32,512)
                                                                   ---------    ---------    ---------

      Net cash provided by (used for) financing activities           (60,680)      60,405      231,288
                                                                   ---------    ---------    ---------

See accompanying notes to consolidated financial statements.

                                      -19-


<PAGE>









                                                                      1997         1996         1995
                                                                      ----         ----         ----


Net increase (decrease) in cash                                       (58,974)     33,623       65,243
                                                                                             
Cash at beginning of year                                             112,215      78,592       13,349
                                                                    ---------    --------     --------
                                                                                             
Cash at end of year                                                 $  53,241    $112,215     $ 78,592
                                                                    =========    ========     ========
                                                                                             
                                                                                             
Supplemental disclosure of cash flow information:                                            
                                                                                             
      Cash paid during the year for:                                                         
                                                                                             
            Interest                                                $  38,076    $ 37,458     $ 22,019
                                                                    =========    ========     ========
                                                                                             
            Income taxes                                            $   1,849    $ 29,209     $ 24,520
                                                                    =========    ========     ========
                                                                                             
                                                                                             
Supplemental schedule of non-cash investing and                                              
   financing activities:                                                                     
                                                                                             
      Issuance of common stock:                                                              
                                                                                             
            Value of stock issued                                   $  50,000    $   --       $ 16,080
            Payment of liabilities                                    (44,000)       --           --
            Payment of expenses                                          --          --         (2,280)
                                                                    ---------    --------     --------
                                                                                             
            Cash received from issuance of                                                   
               common stock                                         $   6,000    $   --       $ 13,800
                                                                    =========    ========     ========
                                                                                           

</TABLE>












                                      -20-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

1.    BUSINESS DESCRIPTION
      --------------------

      The Company and its 70% owned subsidiary,  Coating  Technology,  Inc., are
      primarily  engaged in the  surface  coatings  and  enhancements  business.
      Customers,  substantially  all of  whom  are  manufacturers,  are  located
      primarily in Western, New York.

      Prior to June 30, 1995, the Company owned 89% of The Bastian Company, Inc.
      (Bastian) and 100% of Ocean State Enameling,  Inc. (Ocean State).  On June
      7,  1995,  the  Company's  Board  of  Directors  approved  the sale of the
      Company's  interest in Ocean State at its  original  investment  amount of
      $500 to Bastian.  In addition,  the spin-off of Bastian,  in the form of a
      stock  dividend  to the  Company's  stockholders  of record as of June 30,
      1995,  was  approved.  As of  September  2, 1997,  Bastian has not filed a
      registration  statement  with the  Securities  and Exchange  Commission to
      register the Bastian common shares pursuant to the Securities Exchange Act
      of  1934.   Therefore,   the  Company  has  not  completed  the  pro  rata
      distribution of the Bastian common shares and, as such,  Bastian and Ocean
      State are still technically subsidiaries of the Company.

      The  Company has  recorded  the  spin-out  as though it has been  formally
      consummated.  Accordingly,  retained earnings was increased by $539,502 in
      1995,  representing the carrying value of the investment on June 30, 1995.
      (See Note 2)

      Following is a summary of consolidated  net  liabilities and  consolidated
      results of operations of The Bastian  Company,  Inc. and  subsidiary as of
      June 30, 1995 and for the year then ended:

            Accounts receivable                              $  193,603
            Inventory                                            71,411
            Property, plant and equipment (net)                 291,797
            Other assets                                            770
            Goodwill                                            262,246
                                                             ----------

            Total assets                                        819,827
                                                             ----------

            Accounts payable                                    203,976
            Notes payable                                       217,792
            Other current liabilities                           837,561
            Long-term debt                                      100,000
                                                             ----------

            Total liabilities                                 1,359,329
                                                             ----------

            Net liabilities                                     539,502

            Property dividend                                  (539,502)
                                                             ----------

            Net liabilities of discontinued operations    $           -
                                                          =============

                                      -21-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

1.    BUSINESS DESCRIPTION (continued)

            Sales and other revenue                             $1,466,388
            Cost and expenses                                    1,616,406

            Loss before income taxes                              (150,018)
            Income taxes                                               732

            Net loss                                              (150,750)
            Income eliminated upon consolidation                  (103,111)

            Loss from discontinued operations                   $ (253,861)
                                                                ==========

            As of June 30, 1997,  the Company was owed $102,862 from Bastian for
            advances.  The Company has a second  security  interest in virtually
            all of the assets in  Bastian.  Due to the  financial  condition  of
            Bastian,    the   Company    reserved    $100,000    for    possible
            uncollectibility.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      a)    PRINCIPLES OF CONSOLIDATION

            The consolidated  financial  statements  include the accounts of the
            Company and its 70% owned subsidiary,  Coating Technology,  Inc. All
            material intercompany items have been eliminated in consolidation.

            The consolidated financial statements do not include the accounts of
            its 89% owned  subsidiary,  The Bastian  Company,  Inc. and its 100%
            owned  subsidiary,  Ocean  State  Enameling,  Inc.,  as  required by
            generally accepted accounting principles.  The Company believes that
            not consolidating these subsidiaries  provides for a more meaningful
            presentation of continuing operations. (See Note 1)

      b)    USE OF ESTIMATES

            The preparation of financial statements in conformity with generally
            accepted accounting principles requires management to make estimates
            and  assumptions  that  affect  the  reported  amounts of assets and
            liabilities  and disclosure of contingent  assets and liabilities at
            the date of the  financial  statements  and the reported  amounts of
            revenues and expenses  during the reporting  period.  Actual results
            could differ from those estimates.

      c)    REVENUE RECOGNITION

            The Company  records its revenues and expenses on the accrual  basis
            of  accounting.  Revenues  are  recognized  on the  date  goods  are
            shipped.

                                      -22-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      d)    PROPERTY, PLANT AND EQUIPMENT

            Property,  plant and equipment are carried at cost.  Depreciation is
            computed on the straight-line method over a period of 5 to 39 years.
            Accelerated methods are used for tax purposes by Coating Technology,
            Inc.

      e)    OPERATING RIGHTS

            During 1995,  the Company  acquired the rights to a new  technology,
            which is a new process for plating  electroless  nickel on aluminum.
            These operating  rights are being amortized using the  straight-line
            method over 15 years.

      f)    DEBT ISSUANCE COSTS

            Debt  issuance  costs are being  amortized  using the  straight-line
            method over the term of the related debt instrument, five years.

      g)    INCOME TAXES

            Income  taxes  are  provided  for the tax  effects  of  transactions
            reported in the financial  statements and consist of taxes currently
            due plus deferred taxes related primarily to differences between the
            bases of  certain  assets  and  liabilities  for  financial  and tax
            reporting.  The  deferred  taxes  represent  the  future  tax return
            consequences of those differences, which will either be taxable when
            the assets and liabilities are recovered or settled.

      h)    EARNINGS PER SHARE

            Earnings  per common  share were  computed by dividing net income by
            the weighted  average  number of shares of common stock  outstanding
            during the year.  Options to purchase common stock have a negligible
            effect on earnings per share.

3.    DUE FROM NYSERDA

      On June 22, 1995, the Company  entered into an agreement with the New York
      State Energy Research and Development Authority (NYSERDA). Under the terms
      of the  agreement,  NYSERDA shared in the cost to develop a new technology
      by paying  $325,010,  which  represented  59.8% of the actual  development
      costs.  NYSERDA paid the Company 90% of its 59.8% share upon receipt of an
      invoice  for a  progress  payment.  Final  payment  shall  be  made  after
      completion  of work and  receipt  of the final  report.  The  Company  has
      recorded $325,010 of reimbursements from NYSERDA through June 30, 1997.


                                      -23-

<PAGE>





                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

3.    DUE FROM NYSERDA (continued)

      In  accordance  with the  agreement,  the Company is  obligated  to pay to
      NYSERDA 2% of sales of the new technology to New York State  manufacturers
      and 4% of  sales  to  non-New  York  State  manufacturers.  The  Company's
      obligation to make payments to NYSERDA shall  commence upon the earlier of
      the two following events; 1) sales exceed $500,000; 2) two years after the
      Company's receipt of final payment under the contract.

      NYSERDA possesses certain rights to contract data and certain  liquidation
      or dissolution preferences pursuant to the contract.

4.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consists of the following:  
     
                                                  1997                1996
                                                  ----                ----

            Leasehold improvements               $ 28,784           $ 28,784
            Machinery and equipment               827,891            794,998
            Furniture and fixtures                 72,954             60,375
                                                ---------          ---------

                                                 $929,629           $884,157
                                                 ========           ========

      Depreciation and  amortization  expense for each of the three years in the
      period ended June 30, 1997 was $93,579, $87,858 and $76,425, respectively.

5.    LONG-TERM DEBT

      Long-term debt consists of the following:               1997        1996
                                                              ----        ----

      8%  convertible  subordinated  debentures due and    $275,000     $275,000
      payable  on June 30,  1999.  The  debentures  are
      subordinated    to    the    Company's     senior
      indebtedness.   See   Note   8   for   conversion
      provisions.


      Note  payable  secured  by  specific   equipment.     53,333        80,000
      Interest accrues at 5%. Principal,  in the amount
      of  $26,667,   plus   interest  is  payable  each
      December through 1998.



      Installment  note payable in monthly  payments of     66,666        86,667
      $1,667, plus interest at prime plus 1.5%, through
      October  2000.  The note is  secured by a general
      lien  on  equipment,   accounts   receivable  and
      inventory and is  guaranteed by the  stockholders
      of Coating Technology, Inc.




                                      -24-


<PAGE>





                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

5.    LONG-TERM DEBT (continued)                            1997       1996
      --------------                                        ----       ----

      Installment  note payable in monthly  payments of
      $1,667,  plus interest at prime plus 2%,  through
      December  1997.  The note is secured by a general
      lien  on  equipment,   accounts   receivable  and
      inventory and is  guaranteed by the  stockholders
      of Coating Technology, Inc.                           9,946     29,958
                                                          -------   --------
                                                          404,945    471,625
      Less:  Current portion                               56,613     66,679
                                                        ---------   --------

      Long-term debt, net of current portion             $348,332   $404,946
                                                         ========   ========

      The aggregate  maturities  for all long-term  borrowings for the next four
      fiscal years as of June 30, 1997 are as follows:

                       1998                  $  56,613
                       1999                    321,666
                       2000                     20,000
                       2001                      6,666
                                             ---------
                                              $404,945
                                              ========
                               
      The installment note in the amount of $9,946 requires certain  restrictive
      covenants of which Coating Technology, Inc. was in compliance.

6.    OTHER LONG-TERM LIABILITY

      The Company entered into a partnership (Sunshine Bullion Co.) on September
      1, 1981.

      The Company  incurred a liability  to certain  vendors  relating to silver
      price fluctuations during the period of time that Sunshine Bullion Co. was
      operating.  The Company has denied  responsibility for these amounts.  The
      vendors  obtained  a  judgement  against  the  Company  in  1983,  but  no
      collection effort has been made since that time.

7.    INCENTIVE STOCK OPTION PLAN

      The  Company  has an  incentive  stock  option  plan  for  key  employees,
      reserving 850,000 shares of common stock for issuance upon the exercise of
      options  granted under the plan.  The options expire 10 years from date of
      grant (5 years for  grantees  who hold 10% or more of the  Company  voting
      power)  and are  exercisable  one year  from  the  date of the  grant on a
      cumulative  basis at the rate of 25% of the total number of shares covered
      by the grant.  As of June 30,  1997,  options on 435,000  shares have been
      exercised at $.06 per share;  options on 150,000  shares at $.06 per share
      are  outstanding and  exercisable  and expire in December,  1997;  leaving
      options on 265,000 shares available under the plan.

                                      -25-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

8.    COMMON STOCK AND STOCK WARRANTS

      In December  1988,  the Company sold 575,000 $.01 par value common  shares
      and warrants to purchase  575,000  additional  common shares.  The selling
      price was $.50 per newly issued share.  The warrants were  exercisable for
      two years at $.60 per common share.  The sale of common stock and warrants
      was made by means of a private placement.  The 575,000 newly issued shares
      constituted  the minimum  offering  under terms of the private  placement.
      552,000  warrants were  outstanding  as of June 30, 1997.  The Company has
      extended the exercise period for these warrants to October 31, 1997.

      During  the year ended  June 30,  1995,  the  Company  issued  convertible
      subordinated  debentures.  These  debentures are redeemable by the Company
      upon at least 30 days notice at any time after December 30, 1995, and will
      be  convertible  into  common  shares of the  Company.  The holders of the
      debentures may convert the debentures into common shares of the Company at
      any time prior to 5:00 pm on June 30, 1999. The  conversion  price is $.75
      per share through June 30, 1996,  $.95 per share from July 1, 1996 through
      June 30, 1998, and $1.25 per share thereafter.

      Accompanying  each $25,000  debenture is a  non-detachable  warrant.  Each
      non-detachable  warrant enables the holder to purchase up to an additional
      33,333  shares at an exercise  price of $.85 per share.  The  warrants can
      only be exercised coincidentally with the conversion of the debenture.

      The Company  also has an  outstanding  warrant to purchase  60,000  common
      shares at $.06 per share.  The warrant was issued in  connection  with the
      purchase of equipment in 1994 and expires October 31, 1997.

      During the year ended June 30, 1995,  the Company  acquired the  operating
      rights to a new  chemical  process.  As part of the  purchase  price,  the
      Company was obligated to issue 100,000  common shares upon the transfer of
      clear  title to certain  patent  pending  rights  and  receipt of $.06 per
      share. An additional  100,000 common shares must be issued when the patent
      is accepted.  Also,  300,000  common  shares must be issued based upon the
      Company attaining  certain sales levels of the new chemical  process.  All
      common  shares  issued under this  agreement  require  payment of $.06 per
      share.

9.    MINORITY INTEREST

      Coating  Technology,  Inc. is in the  business of  electroless  nickel and
      aluminum anodizing  operations.  The accounts of Coating Technology,  Inc.
      for  the  years  ended  June  30,  1997  and  1996  are  included  in  the
      consolidated  financial  statements of the Company with  recognition  of a
      minority interest representing the 30% interest owned by another party.






                                      -26-


<PAGE>



                                      
                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

9.    MINORITY INTEREST (continued)

      Summarized balance sheet data of Coating  Technology,  Inc. as of June 30,
      1997 and 1996 is as follows:


                                                   1997              1996
                                                   ----              ----

            Current assets                       $276,000          $318,000
            Property and equipment, net           451,000           497,000
            Other assets                           54,000            10,000
                                                ---------         ---------

                                                 $781,000          $825,000
                                                 ========          ========

            Current liabilities                  $223,000          $251,000
            Long-term liabilities                  88,000           144,000
                                                ---------          --------
                                                  311,000           395,000
            Shareholders' equity                  470,000           430,000
                                                 --------          --------

                                                 $781,000          $825,000
                                                 ========          ========

      Summarized income statement data of Coating Technology, Inc. for the years
      ended June 30, 1997, 1996 and 1995 is as follows:

                                         1997          1996            1995
                                         ----          ----            ----

            Revenues                 $1,613,000    $1,629,000      $1,573,000
            Costs and expenses        1,572,000     1,613,000       1,488,000
                                     ----------    ----------      ----------

            Net income              $    41,000   $    16,000     $    85,000
                                    ===========   ===========     ===========

      Depreciation expense for Coating Technology, Inc. for the years ended June
      30,  1997,  1996  and 1995  amounted  to  $91,303,  $86,081  and  $76,326,
      respectively.

      Capital expenditures for Coating Technology, Inc. for the years ended June
      30,  1997,  1996 and 1995  amounted  to  $45,472,  $48,922  and  $115,249,
      respectively.

10.   SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK

      During the year ended June 30,  1997,  Coating  Technology,  Inc.  had two
      customers who, in the aggregate, accounted for 26% of consolidated sales.

      During the year ended June 30,  1996,  Coating  Technology,  Inc.  had two
      customers who, in the aggregate, accounted for 21% of consolidated sales.

      During the year ended June 30,  1995,  Coating  Technology,  Inc.  had one
      customer who accounted for 13% of consolidated sales.


                                      -27-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

10.   SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK (continued)

      Coating Technology, Inc. grants credit to its customers, substantially all
      of whom are  manufacturers  located  in  Western  New  York.  Two  Coating
      Technology,  Inc. customers  comprised 21% of accounts  receivable at June
      30, 1997. One Coating  Technology,  Inc customer comprised 10% of accounts
      receivable at June 30, 1996.

11.   INCOME TAXES

      Provision for income taxes was determined as follows:

                                              1997          1996          1995
                                              ----          ----          ----

Loss before income taxes                    $(127,774)   $(157,094)   $(132,061)
Loss eliminated upon consolidation               --           --       (103,111)
Excess tax depreciation                        (1,565)     (26,926)     (45,924)
State income tax                               (2,833)      (1,600)      (6,700)
Minority interest in income of subsidiary      12,283        4,896       25,596
Net operating loss of Metal Arts              124,588      152,267      205,853
Allowance for doubtful accounts                  --          6,000      100,000
Other                                          53,337       22,480       21,418
                                            ---------    ---------    ---------

Federal taxable income                      $  58,036    $      23    $  65,071
                                            =========    =========    =========

Federal statutory income tax                $   9,509    $       3    $  11,268
Federal alternative minimum tax (credit)       (4,901)          (3)       2,292
State income tax                                2,833        1,600        6,700
Other                                              (8)        --            (60)
Deferred                                       (8,900)     (11,400)      (5,400)
                                            ---------    ---------    ---------

Provision for income taxes                  $  (1,467)   $  (9,800)   $  14,800
                                            =========    =========    =========

      Financial  Accounting  Standards Board  Statement of Financial  Accounting
      Standards No. 109 (FASB 109),  "Accounting for Income Taxes" requires that
      an asset be recorded for the expected  realizable  value of net  operating
      loss carryforwards and tax credits and a corresponding valuation allowance
      for the amount of tax benefits not expected to be realized.

      The Company has recorded a deferred tax asset of $204,900  reflecting  the
      benefit of net operating  loss  carryforwards  and  investment  tax credit
      carryforwards.  Realization is dependent on generating  sufficient taxable
      income prior to expiration of the net operating  loss and  investment  tax
      credit  carryforwards.  Although  realization  is not assured,  management
      believes  it is more likely  than not that all of the  deferred  tax asset
      will  be  realized.  The  amount  of the  deferred  tax  asset  considered
      realizable,  however,  could be reduced in the near term if  estimates  of
      future taxable income during the carryforward period are reduced.


                                      -28-


<PAGE>



                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------
                    Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

11.   INCOME TAXES (continued)

      At June 30, 1997,  the Company had available net operating  loss deduction
      carryforwards for Federal income tax purposes which expire as follows:

                          1998                     $  697,000
                          2001                          8,000
                          2003                        160,000
                          2009                          8,000
                          2010                        206,000
                          2011                        152,000
                          2012                        125,000
                                                  -----------
                                                   $1,356,000
                                                   ==========


      Coating  Technology,  Inc.  has  approximately  $72,200  of New York State
      investment tax credit carryforwards that expire in various years from 1999
      to 2007 and  Federal  and New York State  alternative  minimum  tax credit
      carryforwards of approximately $5,600.

      Deferred income taxes consist of:                   1997          1996
                                                          ----          ----

            Assets:
                 NOL carryforward                      $ 514,700     $ 697,200
                 Federal tax credit carryforwards          1,800        37,500
                 NYS tax credit carryforwards             76,500        95,200
                 Allowance for doubtful accounts           2,200         2,200
                 Less: Valuation allowance              (346,300)     (592,500)
                                                       ---------     ---------

                      Net deferred tax assets            248,900       239,600

            Liabilities:
                 Depreciation                            (58,800)      (58,400)
                                                      ----------    ----------

                                                       $ 190,100     $ 181,200
                                                       =========     =========

      Deferred taxes are classified as current or non-current,  depending on the
      classification  of the  assets  and  liabilities  to  which  they  relate.
      Deferred taxes arising from temporary  differences that are not related to
      an asset or liability are classified as current or  non-current  depending
      on the periods in which the temporary differences are expected to reverse.
      The net deferred tax asset is presented on the balance sheet as follows:
<TABLE>

          <S>                                                              <C>            <C>      
            Net current deferred tax asset - Metal Arts                     $ 26,600       $  14,200
            Net long-term deferred tax asset - Metal Arts                    178,300         179,000
            Net long-term deferred tax liability - Coating Technology        (14,800)        (12,000)
                                                                            ---------       ---------

                                                                            $190,100        $181,200
                                                                            ========        ========
</TABLE>

                                      -29-


<PAGE>



                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   ------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

12.   COMMITMENTS

      Coating  Technology,  Inc. had a lease agreement  through August 31, 1996.
      This lease has been  extended  until  January 31, 1998. In addition to the
      seven monthly rental payments of $8,709, Coating Technology,  Inc. is also
      responsible for its own utilities and general maintenance.

      During  1997,  the Coating  Technology  entered  into a new ten year lease
      agreement for its new  manufacturing  and office space. The lease requires
      28 monthly  rental  payments of $5,958,  beginning  September 1, 1997. The
      annual rent as of January 1, 2000, and each January 1st thereafter,  shall
      be increased by the  percentage  increase in the consumer  price index for
      the previous  calendar year,  but in no event,  more than three percent in
      any  year.  In  addition,  the  Company  is also  responsible  for its own
      utilities.

      Effective   July  1,  1995,  the  Company  rents  office  space  from  its
      unconsolidated subsidiary on a month-to-month basis for $500 per month.

      Consolidated  rent expense for each of the years ended June 30, 1997, 1996
      and 1995 was approximately $111,000, $109,000 and $92,000, respectively.

      During the year ended June 30,  1995,  the Company  entered into a royalty
      agreement in  conjunction  with the purchase of the operating  rights to a
      new chemical  process.  The agreement  requires  royalty payments of 2% of
      gross sales of the new  chemical  process  throughout  the former  owner's
      lifetime. As of June 30 ,1997, no royalties were due under this agreement.

      In  addition,  the  Company  entered  into a  licensing  agreement  for an
      existing chemical process.  The agreement requires licensing fees equal to
      50% of the Company's net profit on sales of this process.
      As of June 30, 1997, no fees were due under this agreement.

13.   CONTINGENCIES

      The Company is the  guarantor of debt owed to the City of Geneva,  N.Y. by
      its  unconsolidated  subsidiary,  Bastian,  in the  approximate  amount of
      $280,000. Bastian is currently in default on its debt payments to the City
      of Geneva.

      Bastian  has  incurred  substantial  losses  in  recent  years  and  has a
      deficiency of  stockholders'  equity.  Although Bastian has taken steps to
      return to profitability,  it is at least reasonably  possible that Bastian
      will not become  profitable  in the near  future.  If not, the Company may
      become  responsible for repayment of at least a portion of the amount owed
      to the City of Geneva. As of June 30, 1997, the Company has not recorded a
      liability relating to this contingency in its financial statements.




                                      -30-


<PAGE>




                                      
                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   Notes To Consolidated Financial Statements
                          June 30, 1997, 1996 And 1995

14.   BENEFIT PLAN

      During 1996,  Coating  Technology,  Inc.  started a salary  reduction plan
      pursuant  401(k) of the  Internal  Revenue  Code that covers all  eligible
      employees.  Employees are eligible for participation in the plan after the
      completion  of six months of service  and  attainment  of age  twenty-one.
      Under  terms of the  plan,  the  Company  contributes  up to 1.25% of each
      participant's   compensation.    Also,   Coating   may   make   additional
      contributions  to the plan at its discretion.  Coating's  contributions to
      the plan amounted to $3,135 in 1997 and $2,807 in 1996.

15.   SUBSEQUENT EVENT

      On July 31, 1997, the Company entered into an exclusive  license agreement
      with a  manufacturer  to  sell  its  "Microsmooth"  process.  The  Company
      received a $25,000  development  advance and a $25,000  initial  exclusive
      license  fee.  The Company is not  permitted  to issue any other  licenses
      until January 1, 1998 or until the process is perfected,  whichever  comes
      later.

      If the process is  perfected  and  approved by the  licensee,  the Company
      shall be entitled to royalty  payments  based upon sales by the  licensee.
      Minimum royalty payments amount to $150,000 per year.

16.   TRANSACTIONS WITH RELATED PARTIES

      Amounts due from shareholder do not bear interest,  are unsecured and have
      no fixed repayment terms.





















                                      -31-


<PAGE>





                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                      SCHEDULE II - AMOUNTS RECEIVABLE FROM
                        RELATED PARTIES AND UNDERWRITERS,
               PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES

                For The Years Ended June 30, 1997, 1996 And 1995


                     BALANCE AT                                        BALANCE
                     BEGINNING               AMOUNTS     AMOUNTS       AT END
NAME OF DEBTOR       OF YEAR     ADDITIONS   COLLECTED   WRITTEN OFF   OF YEAR
--------------       -------     ---------   ---------   -----------   -------

June 30, 1997

      N/A            $   --     $   --       $   --      $   --       $  --    
                     ========   ========     ========    ========     =======
                                                                    
June 30, 1996                                                       
                                                                    
      N/A            $   --     $   --       $   --      $   --       $  --
                     ========   ========     ========    ========     =======
                                                                    
June 30, 1995                                                       
                                                                    
      N/A            $   --     $   --       $   --      $   --       $  --
                     ========   ========     ========    ========     =======
                                                                  
























                                      -32-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

                   SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT

                For The Years Ended June 30, 1997, 1996 And 1995




                               BALANCE AT                            BALANCE
                                BEGINNING   ADDITIONS                AT END
CLASSIFICATION                   OF YEAR     AT COST   RETIREMENTS   OF YEAR
--------------                   -------     -------   -----------   -------


June 30, 1997

      Leasehold improvements    $ 28,784   $   --       $   --       $ 28,784
      Machinery and equipment    794,998     32,893         --        827,891
      Furniture and fixtures      60,375     12,579         --         72,954
                                --------   --------     --------     --------
                                                                     
                                $884,157   $ 45,472     $   --       $929,629
                                ========   ========     ========     ========
                                                                     
June 30, 1996                                                        
                                                                     
      Leasehold improvements    $ 26,052   $  2,732     $   --       $ 28,784
      Machinery and equipment    759,582     35,416         --        794,998
      Furniture and fixtures      42,516     17,859         --         60,375
                                --------   --------     --------     --------
                                                                     
                                $828,150   $ 56,007     $   --       $884,157
                                ========   ========     ========     ========
                                                                     
June 30, 1995                                                        
                                                                     
      Leasehold improvements    $ 24,027   $  2,025     $   --       $ 26,052
      Machinery and equipment    662,358     97,224         --        759,582
      Furniture and fixtures      23,740     18,776         --         42,516
      Artwork and dies           196,358       --        196,358         --
                               --------    --------     --------     --------
                                                                     
                                $906,483   $118,025     $196,358     $828,150
                                ========   ========     ========     ========
                                                                   










                                      -33-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY

           SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
                          PROPERTY, PLANT AND EQUIPMENT

                For The Years Ended June 30, 1997, 1996 And 1995


                                             ADDITIONS
                                BALANCE AT  CHARGED TO                 BALANCE
                                 BEGINNING   COSTS AND                 AT END
CLASSIFICATION                   OF YEAR     EXPENSES    RETIREMENTS   OF YEAR
--------------                   -------     --------    -----------   -------

June 30, 1997

      Leasehold improvements     $ 11,348    $  2,983    $   --      $ 14,331
      Machinery and equipment     336,107      80,124        --       416,231
      Furniture and fixtures       28,435      10,472        --        38,907
                                 --------    --------    --------    --------

                                 $375,890    $ 93,579    $   --      $469,469
                                 ========    ========    ========    ========

June 30, 1996

      Leasehold improvements     $  8,606    $  2,742    $   --      $ 11,348
      Machinery and equipment     259,542      76,565        --       336,107
      Furniture and fixtures       19,884       8,551        --        28,435
                                 --------    --------    --------    --------

                                 $288,032    $ 87,858    $   --      $375,890
                                 ========    ========    ========    ========

June 30, 1995

      Leasehold improvements     $  6,103    $  2,503    $   --      $  8,606
      Machinery and equipment     190,795      68,747        --       259,542
      Furniture and fixtures       14,709       5,175        --        19,884
      Artwork and dies            196,358        --       196,358        --
                                 --------    --------    --------    --------

                                 $407,965    $ 76,425    $196,358    $288,032
                                 ========    ========    ========    ========











                                      -34-


<PAGE>




                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

         SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                For The Years Ended June 30, 1997, 1996 And 1995

<TABLE>
<CAPTION>


                                              ADDITIONS
                                BALANCE AT    CHARGED TO                     BALANCE
                                 BEGINNING    COSTS AND                      AT END
DESCRIPTION                       OF YEAR     EXPENSES       DEDUCTIONS      OF YEAR
-----------                       -------     --------       ----------      -------
Allowance for doubtful
accounts - deducted from
accounts and notes receivable
in the balance sheet

<S>                            <C>         <C>             <C>           <C>     
           June 30, 1997         $110,000    $       --      $     --      $110,000
                                 ========    ============    ==========    ========
                                 
                                 
           June 30, 1996         $104,000    $      6,000    $     --      $110,000
                                 ========    ============    ==========    ========
                                 
                                 
           June 30, 1995         $  4,000    $    100,000    $     --      $104,000
                                 ========    ============    ==========    ========
                               


</TABLE>






                                      -35-


<PAGE>





                   THE METAL ARTS COMPANY, INC. AND SUBSIDIARY
                   -------------------------------------------

             SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION

                For The Years Ended June 30, 1997, 1996 And 1995



ITEM                                 CHARGED TO COSTS AND EXPENSES
----                                 -----------------------------

                                      1997        1996       1995
                                      ----        ----       ----

Maintenance and repairs              $71,181    $66,478    $26,740
                                     =======    =======    =======

Depreciation and amortization
      of intangible assets, pre-
      operating costs and similar
      deferrals                      $ *        $ *        $ *
                                     =======    =======    =======

Taxes, other than payroll and
      income taxes                   $ *        $ *        $ *
                                     =======    =======    =======

Royalties                            $ *        $ *        $ *
                                     =======    =======    =======

Advertising costs                    $ *        $ *        $ *
                                     =======    =======    =======



* Less than 1% of total sales








                                      -36-


<PAGE>



          ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      During the two most recent fiscal years, there have been no changes in, or
disagreements with, accountants on accounting and financial disclosures.

                                     PART II

           ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  directors  and  executive  officers  of Metal Arts are listed  below,
followed by a brief  description of their  business  experience for at least the
last five years.  These  persons also hold officer and director  positions  with
Coating Technology.

NAME                        AGE                 POSITIONS WITH METAL ARTS
----                        ---                 -------------------------
                         
Stanley J. Dahle            60                  President,
                                                Chief Executive Officer and
                                                Director
                         
Albert A. Cauwels           63                  Secretary and Director
                         
Geoffrey A. Rich            48                  Director
                       
     STANLEY J. DAHLE has been President of Metal Arts since  October,  1981 and
Chairman  since 1990.  He was Executive  Vice  President of Metal Arts since its
inception  in June,  1976,  until  October,  1981.  Mr. Dahle has also served in
various  other offices for Metal Arts since its  inception.  He is a director of
Coating Technology.

     ALBERT A. CAUWELS became a director of Metal Arts in June,  1984 and serves
as Secretary. He is a director of Coating Technology, Inc.

     GEOFFREY  A.  RICH has been  President  of  Coating  Technology  since  its
inception in 1989 and Chief Executive Officer since 1995. He has been a director
of Metal Arts since December, 1990.

     None of Metal Arts'  Directors is a Director of any company with a class of
securities registered pursuant to Section 12 of the Securities & Exchange Act of
1934, as amended,  or of any company registered under the Investment Company Act
of 1940, as amended.  There is no family  relationship  among any members of the
Board of Directors or the Executive  Officers or significant  employees of Metal
Arts.  The Board of Directors  met 6 times during the fiscal year ended June 30,
1997. At the present time, the company has no Audit,  Compensation or Nominating
Committees.  All Directors and Executive  Officers have been elected to serve as
Directors and Executive  Officers until the next annual meeting of  shareholders
of Metal Arts or until their  successors have been elected and qualified.  There
are no arrangements or understandings  between any Director or Executive Officer
and any other persons pursuant to which any such Directors or Executive Officers
was or is to be selected as a Director or nominee for Director.





                                      -37-


<PAGE>



                         ITEM 11. EXECUTIVE COMPENSATION

     The  aggregate  direct  remuneration  accrued  and paid by  Metal  Arts and
Coating Technology, during the fiscal year ended June 30, 1997, to each of Metal
Arts' Officers and Directors whose aggregate  remuneration exceeded $50,000, and
to all  Directors  and  Officers  of Metal Arts as a group,  is set forth in the
following table.

                                                        CASH AND CASH-EQUIVALENT
                                                                FORM OF 
                                                             REIMBURSEMENT
                                                             -------------

                                            SALARIES,
                                             FEES,            SECURITIES OR
                                           DIRECTOR'S           PROPERTY,
                                             FEES,              INSURANCE
NAME OF INDIVIDUAL                         COMMISSIONS          BENEFITS OR
OR NUMBER OF            CAPACITIES IN         AND            REIMBURSEMENTS,
PERSONS IN GROUP       WHICH SERVED (1)      BONUSES        PERSONAL BENEFITS
----------------       ----------------      -------        -----------------


Stanley J. Dahle        President,           $ 95,000           $  5,000
                        CEO, and
                        Director

Albert A. Cauwels       Secretary and        $    -0-           $    -0-
                        Director

Geoffrey A. Rich        Director             $ 80,000           $  5,000

All Officers and        All Officers         $175,000           $ 10,000
Directors as a          and Directors
group (3) persons       as a group

OTHER COMPENSATION

     There  was no other  compensation  of any  kind  paid to the  officers  and
directors  during  fiscal year 1997.  No executive  earned more than $100,000 of
total  compensation.  There  is no  executive  committee  and  all  compensation
decisions  are  made by the  Board of  Directors.  There  were no loans  made to
officers,  no directors fees and no long term compensation  arrangements.  There
were no  outstanding  stock option grants to officers at year end.  There are no
employment agreements.








                                      -38-


<PAGE>



<TABLE>
<CAPTION>

OPTION EXERCISE AND VALUE TABLE
                                                            NUMBER OF
                                                           SECURITIES               IN-THE-MONEY
                                                           UNDERLYING               OPTIONS/SARS
                            SHARES                         UNEXERCISED                AT FISCAL
                           ACQUIRED         VALUE         OPTIONS/SARS             YEAR-END ($)***
                          ON EXERCISE    REALIZED***        AT FISCAL             EXERCISABLE (E) /
NAME                          (#)            ($)          YEAR-END (#)            UNEXERCISABLE (U)
                                                        EXERCISABLE (E) /
                                                        UNEXERCISABLE (U)
-----------------------------------------------------------------------------------------------------
<S>                          <C>            <C>              <C>                     <C>
Stanley J. Dahle             -0-             -0-              -0-                       -0-

Albert A. Cauwels            -0-             -0-              -0-                       -0-

Geoffrey A. Rich             -0-             -0-              -0-                       -0-

<FN>

(1) These capacities include the capacities in which each such individual served
Metal Arts and Coating  Technology as officers and directors as set forth in the
preceding table in Item 10 of this Form 10-K.
</FN>
</TABLE>

         Non-Management  directors are paid a fee of $250 per meeting  attended.
There are no such  directors  at this time.  During the past fiscal  year,  fees
aggregating  $-0- were paid.  Directors who are also full time employees are not
paid director's fees.

            OFFICER COMPENSATION FOR THE PRECEDING THREE FISCAL YEARS

                        SECURITIES OR
                     PROPERTY, INSURANCE
                         BENEFITS OR
                           FISCAL         DIRECTORS FEES,       REIMBURSEMENTS
NAME                        YEAR      COMMISSIONS & BUSINESS   PERSONAL BENEFITS
----                        ----      ----------------------   -----------------

Stanley J. Dahle            1997          $95,000                $5,000
                            1996           85,650                 5,000
                            1995           80,000                 5,000

Albert A. Cauwels           1997              -0-                   -0-
                            1996              -0-                   -0-
                            1995              -0-                   -0-

Geoffrey A. Rich            1997           80,000                 5,000
                            1996           73,400                 5,000
                            1995           73,750                 5,000

STOCK OPTION PLAN

         On March 3, 1982,  Metal Arts  adopted an  incentive  stock option plan
(the "Plan" or the "Stock Option Plan") pursuant to Section 422A of the Internal
Revenue  Code.  Under the Plan,  as amended,  Metal Arts' Board of Directors may
grant options to key employees  (including  executive officers of Metal Arts) to
purchase up to an aggregate 850,000 common shares.


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<PAGE>



         Such  options  expire 10 years  from the date of the grant (but must be
exercised  within 5 years of the date of grant for  grantees who hold 10 percent
or more of the common shares) and are  exercisable one year from the date of the
grant on a  cumulative  basis at the rate of 25 percent  of the total  number of
common shares subject to the option granted.  Options must be granted at no less
than fair market  value (but not less than 110 percent of fair market  value for
grantees  who hold 10 percent or more of the common  shares).  During the Fiscal
Year ended June 30, 1997, no options were  exercised.  Remaining is an option by
Mr.  Charlson to purchase  150,000  common  shares at $.06 per share.  There are
currently  available  under the plan 265,000  common  shares for future  grants.
Metal Arts'  management  believes  that the  availability  of the Plan,  and the
grants of the  options,  will enable the  Company to attract  and hold  valuable
employees by providing them with incentives to foster growth.

            ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                                 AND MANAGEMENT

         The following table sets forth  information as of October 1, 1997, with
respect to all directors,  officers,  and persons who are known by Metal Arts to
be the beneficial  owners of more than five percent (5%) of the common shares of
Metal Arts. The common shares are the only voting  securities of Metal Arts. All
persons listed below have sole voting and investment power with respect to their
common shares unless otherwise indicated.


         NAME AND ADDRESS OF           AMOUNT BENEFICIALLY        PERCENT
         BENEFICIAL OWNER                   OWNED                OF CLASS
         ----------------                   -----                --------

         Stanley J. Dahle                 1,419,000(a)              20
         81 Country Club Drive
         Rochester, New York

         Clifford W. Charlson               753,000(b)              10
         987 East Avenue
         Rochester, New York

         Albert A. Cauwels                    486,551               6.8
         28 Franklin Street
         Phelps, New York

         Geoffrey A. Rich                     225,000               3.2
         2856 Gildersleeve Road
         Walworth, New York

         All officers and directors
         as a group (3) persons             2,130,551               30

(a)      Includes 102,000 shares owned by Mr. Dahle's wife and children of which
         Mr. Dahle disclaims any beneficial ownership.

(b)      Includes 18,000 common shares owned by Mr. Charlson's children of which
         Mr. Charlson disclaims any beneficial interest. Includes 150,000 common
         shares  covered by an option to purchase  150,000 common shares at $.06
         per share issued in December 1987.


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<PAGE>




         As noted,  Metal  Arts  owns 70  percent  of  Coating  Technology,  and
therefore, Coating Technology is considered to be a subsidiary of Metal Arts. No
member of management of Metal Arts owns any common shares of Coating Technology.
No one person other than Metal Arts owns in the aggregate in excess of 5 percent
of the common shares of Coating Technology, except Geoffrey A. Rich, who owns 30
percent of the common shares of Coating Technology.




                                     PART IV

         ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
                                    FORM 8-K

(a) The  following  documents  are filed as a part of this Form 10-K 1997 Annual
Report:

1 and 2.  Consolidated  Financial  Statements  and  Schedules.  (See  "INDEX  TO
FINANCIAL STATEMENTS AND SCHEDULES.")

3.  (See "INDEX TO EXHIBITS.")















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<PAGE>



                                    SIGNATURE

         Pursuant to the  requirements of Section 13 or 15 (d) 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.

                                         THE METAL ARTS COMPANY, INC.




Date:  10-10-97                          By:   /s/STANLEY J. DAHLE
                                               Stanley J. Dahle
                                               President and
                                               Chief Executive Officer




Date:  10-10-97                          By:   /s/ALBERT A. CAUWELS
                                               Albert A. Cauwels
                                               Secretary and Director


         Pursuant to the  requirement  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
---------                 -----                            ----

                          Chairman, President
                          Chief Executive Officer          10-10-97
/s/STANLEY J. DAHLE       and Director
Stanley J. Dahle





/s/ALBERT A. CAUWELS      Secretary and Director           10-10-97
Albert A. Cauwels





/s/GEOFFREY A. RICH       Director                         10-10-97
Geoffrey A. Rich


                                      -42-


<PAGE>



EXHIBITS

3(a)     Certificate of  Incorporation  of Registrant  and  Amendments  thereto.
         (Filed as Exhibits 2 (a-c, e) to Registration  Statement No. 2-69789-NY
         (the "Registration Statement") and incorporated herein by reference.)

3(a)(1)  Certificate  of  Amendment  to  the  Certificate  of  Incorporation  of
         Registrant as approved at the 1989 Annual Meeting.

3(b)     By-laws  of  Registrant.  (Filed as  Exhibit  2(d) to the  Registration
         Statement and incorporated herein by reference.)

4(a)     Secured  Promissory  Note dated  November  30,  1992,  between  Coating
         Technology  and M&T Bank.  (Filed as Exhibit 4(i) to the company's Form
         10-K for the year  ended  June 30,  1993  and  incorporated  herein  by
         reference.)

4(b)     Secured  Promissory  Note dated  December  10,  1993,  between  Coating
         Technology  and M&T Bank.  (Filed as Exhibit 4(j) to the company's Form
         10-K for the year  ended  June 30,  1994  and  incorporated  herein  by
         reference.)

10(a)    Lease agreement dated September 1, 1991, between John Albiston, William
         B. Mendick,  Andrew Gallina and Raymond C. Shaheen,  as Landlords,  and
         Coating  Technology  as Tenant,  relating to its facility in Rochester,
         New York.  (Filed as Exhibit 10(a) to the  company's  Form 10-K for the
         year ended June 30, 1992, and incorporated herein by reference.)

10(b)    The  company's   Stock  Option  Plan,  as  approved  by  the  company's
         shareholders on March 3, 1982. (Filed as Exhibit 10(b) to the company's
         Form 10-K for the year ended July 3, 1982, and  incorporated  herein by
         reference.)

10(c)    First  amendment to the  Incentive  Stock Option Plan of the Metal Arts
         Company, Inc., approved at the 1989 Annual Meeting of shareholders.

10(d)    Asset purchase agreement between Coating Technology and Rochester Steel
         Treating Works,  Inc. dated December 22, 1993.  (Filed as Exhibit 10(d)
         to the company's 10-K for the year ended June 30, 1994 and incorporated
         herein by reference.)

10(e)    Option  Agreement  between  the  company  and LeKem  Inc.,  and Richard
         Feagins  dated  February  28,  1994.  (Filed  as  Exhibit  10(e) to the
         company's  Form 10-K for the year ended June 30, 1994 and  incorporated
         herein by reference.)

10(f)    Agreement  between  Metal Arts  Company  and the New York State  Energy
         Research and  Development  Authority,  dated June 22,  1995.  (Filed as
         Exhibit  10(f) to the  company's  Form 10-K for the year ended June 30,
         1995, and incorporated herein by reference.)

10(g)    Lease  agreement  dated  February  19,  1997  between  O'Brien and Gere
         Property Development,  Inc. as Landlord and Coating Technology, Inc. as
         Tenant relating to its new facility at 800 St. Paul St., Rochester, New
         York.  (Filed as exhibit  (g) to the  Company's  Form 10-K for the year
         ended June 30, 1997, and incorporated herein by reference.)

11       Description of computation of per share earnings.  (See Note 2 of Notes
         to Consolidated Financial Statements of the Metal Arts Company, Inc.)


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<PAGE>




22.      Subsidiaries.  The  subsidiaries  of  the  company  and  the  state  of
         incorporation are as follows:

         a.      Coating Technology incorporated in the State of New York.

         b.       Metal Arts Acquisitions, Inc. incorporated in the State of New
                  York.

                 (b)   Reports on Form 8-K:
                       8-K dated November 23, 1994
                       8-K dated June 9, 1995

                 (c)   See Item 14(a) (3), above.

                 (d)   See Item 14(a) (2), above.










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