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

   
                                    Form 10-K/A-1
    

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
                     For the fiscal year ended July 31, 1996

                                       or

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
                     For the transition period from ______ to ______

                         Commission file number 0-20309

                          TAPISTRON INTERNATIONAL, INC.
                          -----------------------------
             (Exact name of registrant as specified in its charter)

                Georgia                                    58-1684918
                -------                                    ----------
    (State or other jurisdiction of          (IRS Employer Identification No.)
      incorporation or organization)                                            

                                                           30736-1067
                                                           ----------
      6203; Alabama Highway; Ringgold, GA                   (Zip Code)
      -----------------------------------                 
    (Address of principal executive offices)
                                                         
                                                         
 Registrant's telephone number, including area code:      (706) 965-9300     
                                                          --------------  
Securities registered pursuant to Section 12 (b) of the Act: None

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

        Common Stock, $.0004 Par Value
        Redeemable Warrants


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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K | |

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant,  as of October 25, 1996 was approximately  $315,800.  On October 25,
1996, there were 10,526,295 shares of $.0004 Par Value Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: See part III hereof regarding incorporation
by  reference  from the  registrant's  definitive  proxy  statement  to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934.





<PAGE>




                          TAPISTRON INTERNATIONAL, INC.

                                     PART I

Item 1.  BUSINESS

General

    Tapistron  International,  Inc. (the "Company" or "Tapistron") was organized
for the purpose of  developing  or  acquiring  proprietary  technologies  in the
textile industry and  commercializing  such  technologies on a global basis. The
Company was  incorporated  under the laws of the State of Georgia on February 7,
1986,  under the name of Textile  Corporation of America.  On July 19, 1986, the
Company  exchanged  shares of common stock for all of the  outstanding  stock of
Fabrication Center, Inc. ("FCI") in a transaction  accounted for as a pooling of
interests.  On July 16, 1991,  the name was changed from Textile  Corporation of
America to Tapistron  International,  Inc. All references to the Company include
Fabrication Center, Inc., its wholly owned subsidiary.

    The Company's initial  technology has been the development of a Computerized
Yarn Placement ("CYP") machine,  for producing tufted carpets and rugs in highly
versatile patterns, colors and textures. The Company believes that the potential
market for its technologically  advanced tufting machine lies with manufacturers
that wish to meet the growing  demand for  patterned  products  witnessed in the
commercial  and  residential  floor  covering  markets.  Virtually  all existing
tufting machines, which produce piled products by inserting tufts of yarn into a
primary  backing,  are  limited in their  ability  to  produce a broad  range of
patterned,  multi-colored  and  multi-textured  products.  Most existing weaving
looms,  which  create the  primary  backing in the weaving  process,  require an
extremely time-consuming and labor intensive process to effect pattern and color
changes.  The  Company's CYP machine  requires  only minutes to change  pattern,
color,  texture  and density  combinations.  Because of its  compatibility  with
commercially  available pattern entry systems,  such as those used by many major
textile  manufacturers,  virtually  any  hand-drawn,  painted,  photographed  or
scanned image can be reproduced on the finished tufted product.  The CYP machine
is not in the same  market as, and will not  compete  with,  low end solid color
plain cut pile  carpet  producing  equipment,  but is  designed  to  provide  an
alternative to current methods of producing patterned products.  During the year
ended July 31, 1996, the Company sold one 4.4 meter CYP machine.

Industry

    The textile industry is one of the major industrial  classifications  in the
United  States  economy.  Total annual  dollars  spent in 1995,  based on D.O.C.
office of Textiles and Apparel,  was over $86  billion.  Many of the  individual
segments  within  the  textile  industry  are  themselves   considered  separate
industries.  The  existing  technologies  of the  Company  focus  on the  carpet
industry.










                                       -2-


<PAGE>

Carpet Industry
---------------

    The domestic  carpet  industry as we know it today, is a major subset of the
textile industry and dates back to the development of the tufting machine in the
1950's. While there are a variety of techniques for the production of carpet and
other fabric floor coverings,  the dominant means of production today is machine
tufting. Tufting is a process whereby tufts of yarn are inserted into a sheet of
fabric called a primary backing. The tufts, which are closely spaced to form the
pile, are inserted into the backing by vertical,  reciprocating  needles similar
to those of a conventional  sewing machine.  Modern tufting  machines consist of
one or more rows or "bars" of hundreds of threaded  needles  across the width of
the machine  which  insert the tufts as the  primary  backing is fed through the
machine  beneath the  needle-bars.  The yarn is fed to the needles from cones of
yarn  arranged in racks known as a creel.  The  advantage of machine  tufting is
that it produces  relatively  low-cost,  durable carpet in large production runs
when  compared with hand tufted and hand and machine  woven  products.  However,
because of mechanical and other  limitations  associated  with existing  tufting
technology machinery, tufting offers limited versatility in pattern style.

    During  recent  years,  carpet  manufacturers  in  the  United  States  have
experienced a substantial increase in demand for patterned carpets, particularly
in the  commercial  carpet  market.  During 1988, 23% of the carpet styles being
produced in the United States for the commercial  market (comprised of broadloom
and modular products)  incorporated some sort of pattern.  Currently this figure
has risen to approximately 36%. The residential carpet market has also witnessed
an increased  demand for  patterned  styles.  Furthermore,  industry  statistics
reveal that the demand for patterned  carpets is significant  throughout  Europe
and the Pacific Rim countries.

    There are currently  three  principal  methods of  manufacturing  patterned,
machine-made,  pile-faced floor  coverings.  The first method is the traditional
weaving  process  utilizing  either of two basic types of looms:  the Axminster,
which traces its origins back to the 1800s, or the Wilton,  the dominant weaving
machine used in the United Kingdom and Europe which was first  introduced in the
early 1800s.  A second method  involves  printing or dyeing  finished  carpeting
using  either a jet spray  technique  or flat bed  screening.  The third  method
involves modifications to conventional tufting machinery to produce carpets with
high/low  pile and/or  geometric  patterns.  These  include (i) single or double
shifting needle bars,  which are mechanically  controlled  devices for producing
geometrics and small pattern repeats,  (ii) scroll patterning  attachments which
create  pattern  through  high/low pile  configurations  by varying the speed at
which  yarn is fed into each  needle  and (iii)  individual  controlled  needles
(ICN), a method of creating  pattern by  "over-tufting"  - implanting extra yarn
into a  plain,  previously  tufted  carpet.  An  enhanced  version  of  the  ICN
technology,  the Colortec, is probably the CYP machine's closest competitor. The
range  of  patterns   capable  of  being  produced  by  such   modifications  to
conventional  tufting  machines is  restricted,  however,  because of mechanical
limitations associated with these technologies.  Although the CYP machine is not
in the same market as, and will not compete with,  solid color carpet  producing
equipment,  the Company believes its CYP machine offers numerous advantages over
existing  methods  of  producing  patterned,   machine-made,   pile-faced  floor
coverings in terms of time and cost efficiencies,  versatility of pattern, color
and texture and ease of changing  design  parameters  without the  disadvantages
associated with conventional  methods.  Such  disadvantages  include the limited
pattern  flexibility of existing  tufting  machines and the limited  textures or
density characteristics associated with weaving looms.

Product Overview

The CYP Machine
---------------

    The CYP  machine is a  patented  process  designed  for the  manufacture  of
patterned  tufted floor  coverings with greater  flexibility  than  conventional
tufting  machines  currently  on the  market.  The CYP machine  incorporates  an
innovative technology for computerized yarn placement,  whereby up to six colors
and/or types of yarn per needle are electro-mechanically  selected,  placed into
position within the machine's unique needle configuration and then injected into
a primary backing as directed by a computer utilizing the Company's  proprietary
software.  While the CYP machine needle-bar is stationary from side to side, the
primary  backing can be shifted  laterally  as it is fed  through  the  machine,
enabling  the  machine to  produce  products  with more  tufts per  square  inch
(resulting  in  greater  density)  than any other  mechanical  method  currently
available.

                                       -3-


<PAGE>

    The  Company  believes  its  CYP  machine   technology  will  enable  carpet
manufacturers  to meet the  growing  demand for  patterned  floor  coverings  by
offering them a means of producing  high quality  tufted  carpeting in patterns.
The Company's proprietary technology provides designers and stylists with almost
complete  versatility in styling and  construction  of tufted  fabrics.  The CYP
machine, used in conjunction with commercially  available pattern entry systems,
enables the user to reproduce  almost any scanned image or hand-drawn or painted
pattern and allows the creation of fabrics  incorporating  yarns with  different
textures,  luster  levels and wear  (i.e.  gauge and pile)  characteristics.  In
effect,  the designer or stylist has control of both  aesthetics  and quality in
the creation of the  product,  particularly  in the  critical  areas of pattern,
color and texture.

    A primary advantage of the CYP machine over conventional machine tufting and
weaving methods is the minimal amount of time required to change pattern, color,
texture and construction combinations. Whereas several hours to several days are
required  to  set  up  conventional  machines  to  create  certain  construction
combinations,  affecting a construction  change with a CYP machine requires only
the touching of a computer screen - approximately a thirty second operation. The
touch screen system controls all of the machine's  parameters with the exception
of pile  height,  which is  adjusted  manually.  Set-up of a CYP  machine can be
accomplished  in less time than it takes  competitive  machines  to set up. This
characteristic of the CYP machine allows manufacturers to economically undertake
short  production  runs in order to meet customer needs and  specifications.  It
also  offers a means of  supplying  salespeople  with a wide  variety  of sample
products to meet the particular interests of potential customers within a matter
of days.

    Patterns  in the CYP machine  products  can be created by using a variety of
yarn systems, including  pre-dyed/solution-dyed BCF (bulked continuous filament)
or spun yarn,  rather  than  injecting  color onto an  already  tufted  piece of
carpet.

    The CYP  machine  also  offers  greater  textural  capabilities  than  other
existing carpet manufacturing methods. On a CYP machine, different types of yarn
can be placed in a variety of patterns  according to the designer's  preference.
The resulting  carpet contains a textural design which is not easily  obtainable
by other methods.

    The CYP machine is compatible  with a  commercially  available  computerized
pattern  entry  system.  A typical  pattern  entry system  enables a designer to
create designs or patterns  efficiently on a computer  screen and quickly modify
or  rearrange  colors or other  aspects of the design or pattern.  Such  pattern
entry systems are widely used in the carpet industry.

Manufacturing

The CYP machine
---------------

    The  Company's  facilities  are located in  Ringgold,  Georgia.  The Company
manufactures  the CYP machine at its 50,000 square foot  manufacturing  facility
completed in July 1993. The manufacturing  facility was built to accommodate the
production of four of the existing model CYP machines per month.

Carpet
------

    The Company has discontinued producing high-end patterned carpet for sale to
carpet  distributors.  Currently the Company is  contracting  out orders that it
receives.

                                        -4-


<PAGE>

Suppliers

    The Company has  purchased  the frames for its existing CYP machine from one
of  three  local  tool and die  manufacturers  which  fabricate  the  frames  in
accordance  with Company  specifications.  The Company  purchases the motors and
other various  mechanical  components of the existing CYP machine as custom-made
or stock components from unaffiliated  outside  suppliers.  The Company believes
that  alternative  sources or substitutes of most of the components for both CYP
machines  can  be  developed,  if  necessary.  To  date,  the  Company  has  not
experienced any delays in delivery of components. The Company does not expect to
maintain large  inventories and will generally  order required  components as it
receives customer orders.  Accordingly,  any delay or difficulties in developing
such  alternatives or substitutes  could result in shipment delays,  which would
adversely affect the Company's operations.

Sales, Marketing and Servicing

The CYP Machine
---------------

    The Company intends to market its CYP machines initially to textile industry
concerns  engaged in the  manufacture  of commercial  carpeting and  residential
floor  coverings.  Customers may choose to purchase an entire CYP machine system
from the Company or only certain  components  thereof,  obtaining  the remaining
components (such as the creel, the compressor, or the pattern entry system) from
alternate suppliers.  The purchase price of the CYP machine systems varies based
on the configuration chosen.

    The Company's  ability to market CYP machines  successfully will depend upon
the willingness of potential  customers to incur substantial cost and expend the
time and effort involved in the purchase of these products, particularly because
many of such customers may be reluctant to replace or significantly modify their
existing manufacturing methods. In addition,  installation of a CYP machine may,
in  certain  circumstances,  require  expenditures  by  the  customer  for  site
preparation,  which costs are estimated by the Company to be between $10,000 and
$25,000.  The Company  offers a limited  warranty on the CYP machine  system and
provides   training,   maintenance  and  support  to  customers   following  the
installation of the CYP machine system.

    To date,  the  Company's  marketing  efforts  have  been  focused  primarily
overseas.  However,  the  Company  is  currently  expanding  its  efforts in the
domestic market,  increasingly providing a greater concentration of resources on
the United States.  Marketing  efforts in the United States are conducted by the
Company's  internal  marketing  personnel.   In  the  international  arena,  the
Company's  marketing personnel are assisted by independent agents throughout the
world who represent Tapistron in their respective countries.

Development and Acquisitions

    Limited  research  and  development  activities  are being  conducted by the
Company's  in-house  engineering staff to provide continual  enhancements to the
CYP technology. Expenditures on research and development during the fiscal years
ended July 31,  1994,  1995 and 1996 were  $3,529,906,  $2,405,438  and $23,473,
respectively. The Company completed its prototype CYP machine for the production
of 2.0 meter wide goods in September 1991. The Company developed a 4.4 meter CYP
machine which was commercially  introduced  during April 1993. The Company chose
to discontinue  its development of the next generation CYP machine during fiscal
year ended July 31, 1995.

                                        -5-


<PAGE>

Competition

The CYP Machine
---------------

    The Company  competes with entities  engaged in the design,  development and
marketing  of  equipment  for  the  three  existing   methods  of  manufacturing
machine-made,  patterned  fiber  floor  coverings.  In the  area of  traditional
weaving,  the Company's  product  competes with Axminster and Wilton type looms,
the dominant  manufacturers of which are Crabtree Ltd. of the United Kingdom and
Michel  Van De Wiele of  Belgium,  respectively.  In  addition,  there are other
smaller  national  and  regional  firms which  manufacture  weaving  looms.  CYP
machines  also face  competition  from jet spray dyeing  techniques  such as the
Millitron   process   utilized  by  Milliken  &  Company  and  screen   printing
apparatuses.  CYP  machines  also compete with  technologies  which  enhance the
traditional  pattern tufting  processes,  such as shifting  needle bars,  scroll
patterning attachments, individual controlled needles, and the Colortec machine,
developed  and  marketed  by the  major  U. S.  tufting  machine  manufacturers,
including  Card-Monroe  Corporation,  Cobble Tufting Machine  Company,  Inc. and
Tuftco   Corporation.   All  entities  with  which  the  Company  competes  have
substantially  greater  financial,  manufacturing  and other  resources than the
Company.

    The Company will compete on the basis of pattern, color, texture and density
flexibility  afforded by the CYP  machine  technology.  The CYP  machine  offers
manufacturers  a means of  economically  producing high quality,  machine tufted
floor  coverings in patterns and colors which to date have been  unavailable  or
too  costly to produce  in tufted  carpet.  The  Company  believes  that its CYP
machines will compete favorably with existing manufacturing methods on the basis
of cost  efficiencies  for labor,  materials and space,  rather than price.  CYP
machines offer the advantages of (i) smaller creel means reduced  changeover and
space  requirements;  (ii) simple  set-up and  manipulation  of pattern,  color,
texture  and  construction  at the  machine;  (iii)  short  production  runs and
customized strikeoffs can be done more economically than with other methods; and
(iv) more flexibility for the designer. In addition, because of the minimal time
required to change pattern,  texture,  density and color, the CYP machines allow
for the production of short-run, custom orders to meet customer specifications.

Patents and Proprietary Rights

The CYP Machine
---------------

    The Company has seven United States  patents and 10 foreign  patents and has
filed  additional  patent  applications  for the  United  States  and 16 foreign
countries,  all generally covering the technology  incorporated in the Company's
CYP product.  The Company believes its patents and proprietary  rights have been
and will  continue  to be  important  in enabling  the  Company to compete  with
respect  to the CYP  technology.  Failure to obtain  patents in certain  foreign
countries  may  materially  adversely  affect the  Company's  ability to compete
effectively in certain  international  markets. The Company also relies on trade
secrets that it seeks to protect,  in part, through  confidentiality  agreements
with employees and other parties.

Employees

    As of October 25, 1996, the Company had 27 full-time employees.  The Company
considers its relations with its employees to be satisfactory.

                                        -6-


<PAGE>

Directors and Executive Officers

    The  following  table sets forth the names and  positions  of the  executive
officers and the directors of the Company:

         Name         Age              Position with the Company
        ----         ---              -------------------------
  Kim Amos            39      Vice President of Engineering and Director
  Gary Coulter        50      Vice Chairman
  Robert Culbreth     75      Director
  Floyd Koegler       53      Vice President and Chief Financial Officer
  J. Darwin Poe       51      President and Chief Executive Officer and Director

     KIM  AMOS  started  his  professional  career  in 1983  with  SWI -  Cobble
Division,  a leading  manufacturer of tufting  machinery and peripheral  tufting
equipment. While at Cobble he initially served in electrical engineering,  where
he supported  manufacturing,  customer service,  and special projects.  In later
years he focused on introducing new technologies  into the industry,  which lead
to major tufting machine enhancements. In February 1990 Kim was contacted by the
company to help develop the  Computerized  Yarn Placement  (CYP) Machine and was
instrumental in that effort. He officially joined the company in July, 1990. Kim
now  serves  as Vice  President  of  Operations  and has been a  Director  since
February 1996.

     GARY  COULTER  is  Chairman  of the Board and Chief  Executive  Officer  of
Spintek  Technologies.   Mr  Coulter's  experience  includes:  President,  Chief
Operating Officer, and Director of Private Biological  Corporation,  a developer
of biological  products and treatments for cancer;  Chief  Executive  Officer of
Omega  International,  Inc.,  developer of natural products for the treatment of
AIDS;  President,  Chief Operating Officer,  and Director of Woodruff Investment
Co., a  developer,  manager and  financier  of real estate  investments;  also a
partner  of  Coulter  and  Davenport  Law  Firm.   Mr.   Coulter   received  his
undergraduate degree from Emory University,  his J.D. degree from the University
of Gerogia  School of Law, and his L.L.M.  in taxation from New York  University
School of Law.

     ROBERT CULBRETH  has been a Director of the Company since June 1987. He has
been Secretary-Treasurer of the Skinner Corporation, a West Point, Georgia based
furniture  sales  organization,  since  January  1983. He was a partner with the
national accounting firm of Grant Thornton in Atlanta,  Georgia from 1972, until
he joined the Skinner Corporation.

     FLOYD KOEGLER is a certified public  accountant (CPA) and holds an MBA from
Brenau  University in Gainesville,  Georgia.  He has an extensive  background in
corporate finance,  which includes auditing and financial  information  analysis
for Aladdin Mills and controller  positions at Crown  America/Texture-Tex,  Inc.
and Citizens  Federal  Savings and Loan.  Mr.  Koegler has also served as CFO of
Integrated Products, Inc.'s, Rome Operations.

     J. DARWIN POE has spent his entire  professional career in the U.S. textile
industry. He has held various management positions with industry leaders such as
the Bibb Company,  WestPoint Pepperell,  Amoco Fabrics and Fiber company, and he
was COO of Desoto Falls Inc. of Dalton, Georgia.

     Mr.  Poe is a  graduate  of  Auburn  University  with a degree  in  Textile
Engineering and an MBA from Brenau University.

Item 2.  PROPERTIES

     The Company's executive offices and manufacturing operations are located in
an  approximately  50,000  square foot  facility at Alabama  Highway,  Ringgold,
Georgia.  The  building  and  adjacent  land  was  sold  on June  10,  1996 in a
sale-leaseback transaction.

Item 3.  LEGAL PROCEEDINGS

     References  made  to  Note  1  and  Note  18  of  the  Company's  financial
statements.

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

     There were no  matters  submitted  to a vote of  shareholders  through  the
solicitation  of proxies or  otherwise  during  the period  from  August 1, 1995
through July 31, 1996, covered by this report .

                                       -7-


<PAGE>
                                     PART II

Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     On June 24, 1992, the Securities and Exchange Commission declared effective
the Company's  Registration Statement with respect to an initial public offering
of 2,250,000 shares of Common Stock and 2,587,500 Redeemable Warrants (including
337,500  Redeemable  Warrants  exercised under the Underwriter's  over allotment
option). The Company consented to the de-listing of its warranty from the NASDAQ
Stock Market  effective as of August 20, 1996 due to the lack of any significant
trading activity in the warrants and because there were no market makers for the
warrants as required by NASDAQ rules. NASDAQ deleted the Company from the NASDAQ
Stock  Market   effective  August  29,  1996,  as  a  result  of  the  Company's
non-compliance with the quantitative  maintenance criteria for continued listing
on the NASDAQ Stock Market.  The Company's stock will continue to be traded as a
bulletin board stock.  The Common Stock and the Redeemable  Warrants were listed
on NASDAQ under the symbols TAPI/TAPIQ and TAPIW, respectively.

     The following tables set forth, for the periods indicated, the high and low
bid prices for the Company's Common Stock and Redeemable Warrants as reported by
NASDAQ. Prices represent actual transactions, but do not reflect adjustments for
retail markups, markdowns or commissions.

<TABLE>
<CAPTION>

                                                                   High             Low
                                                                   ----             ---
<S>                                                                <C>             <C>
Common Stock

   1994:  First Quarter (August 1, 1993 - October 31, 1993)        $8 3/8          $5 5/8
          Second Quarter (November 1, 1993 - January 31, 1994)      6 1/4           4 3/8
          Third Quarter (February 1, 1994 - April 30, 1994)         5 1/8           1 7/8
          Fourth Quarter (May 1, 1994 - July 31, 1994)              3 1/8           2
                                                                    
   1995:  First Quarter (August 1, 1994 - October 31, 1994)         4 1/2           2 13/32
          Second Quarter (November 1, 1994 - January 31, 1995)      3 7/8           2 1/4
          Third Quarter (February 1, 1995 - April 30, 1995)         3 1/4           1 7/16
          Fourth Quarter (May 1, 1995 - July 31, 1995)              2 1/8           5/8
                                                                    
   1996:  First Quarter (August 1, 1995 - October 31, 1995)         1 3/8           13/16
          Second Quarter (November 1, 1995 - January 31, 1996)      1 1/16          1/4
          Third Quarter (February 1, 1996 - April 30, 1996)           25/32         3/8
          Fourth Quarter (May 1, 1996 - July 31, 1996)                5/8           1/4
                                                                    
Redeemable Warrants

   1994:  First Quarter (August 1, 1993 - October 31, 1993)         2 1/16          1 1/4
          Second Quarter (November 1, 1993 - January 31, 1994)      1 9/16          7/8
          Third Quarter (February 1, 1994 - April 30, 1994)         1 3/16          1/4
          Fourth Quarter (May 1, 1994 - July 31, 1994)              5/8             1/4

   1995:  First Quarter (August 1, 1994 - October 31, 1994)         11/16           3/8
          Second Quarter (November 1, 1994 - January 31, 1995)      1/2             1/4
          Third Quarter (February 1, 1995 - April 30, 1995)         3/8             3/32
          Fourth Quarter (May 1, 1995 - July 31, 1995)              1/4             3/32

   1996:  First Quarter (August 1, 1995 - October 31, 1995)         3/16            3/16
          Second Quarter (November 1, 1995 - January 31, 1996)      3/16            3/16
          Third Quarter (February 1, 1996 - April 30, 1996)         3/16            3/16
          Fourth Quarter (May 1, 1996 - July 31, 1996)              3/16            3/16
</TABLE>

                                        -8-


<PAGE>

  At October 25, 1996, there were  approximately 300 shareholders of record, and
as of that date, the Company estimates there were approximately 1,800 beneficial
owners  holding stock in nominee or "street"  name. The Company has not paid any
cash  dividends  and does  not  anticipate  paying  any  cash  dividends  in the
foreseeable future.


Item 6.  SELECTED FINANCIAL DATA

  The  following  selected  consolidated   financial  data  should  be  read  in
conjunction  with the  consolidated  financial  statements and the notes thereto
included  herein in Item 8. The  consolidated  statement of operations  data set
forth below with respect to the fiscal years ended July 31, 1996,  1995 and 1994
and the  consolidated  balance  sheet data at July 31, 1996 and 1995 are derived
from and are  qualified  by  reference  to, the audited  consolidated  financial
statements  included in Item 8 of this report and should be read in  conjunction
with those financial statements and notes thereto. The consolidated statement of
operations data for the Company set forth below with respect to the fiscal years
ended July 31, 1992 and 1991 and the consolidated balance sheet data at July 31,
1993, 1992 and 1991 are derived from audited  consolidated  financial statements
of the Company, or its predecessor, as the case may be, not included herein.

<TABLE>
<CAPTION>
                                                            Years Ended July 31,
                                    ----------------------------------------------------------------------
                                      1996           1995           1994           1993           1992
                                      ----           ----           ----           ----           ----
<S>                                <C>            <C>            <C>            <C>            <C>   
Statement of Operations Data:
   Sales                           $ 1,305,499    $ 2,565,544    $ 4,315,060    $ 6,823,721    $ 1,404,112
   Cost of sales                     1,146,717      1,757,793      2,850,422      3,607,182        900,968
   Operating expenses:
      Administrative                 3,473,581      3,656,532      3,730,194      2,927,558      1,259,040
      Research and development          23,473      2,405,438      3,529,906        549,660        402,905
   Net income (loss)               ( 4,478,096)   ( 6,053,175)   ( 5,840,945)        24,961    ( 1,220,692)
   Net income (loss) per share     (       .49)   (       .69)   (       .76)         -        (       .22)  
   Extraordinary item                      .04           -              -             -               -
   Shares used in computing per                                                             
      share amounts                 10,012,390      8,761,117      7,726,018      7,756,556      5,476,484 
                                                                                                 

   
                                                               As of July 31,
                                    ----------------------------------------------------------------------
                                      1996           1995           1994           1993           1992
                                      ----           ----           ----           ----           ----
Balance Sheet Data:
Working capital (deficiency)       $ 1,084,487    $(  907,020)   $ 2,649,245   $  8,570,445   $ 13,029,905  
Total Assets                         4,016,538      9,655,907     10,982,246     14,733,746     14,481,717 
Long-term debt                          -              14,001      1,291,320         50,433        594,826 
Accumulated deficit                (22,234,475)   (17,756,379)   (11,703,107)   ( 5,862,162)  (  5,887,123)          
Stockholders' equity                   656,074      4,839,170      7,653,669     13,332,499     13,307,538   
    

</TABLE>

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

Results of Operations

Years Ended July 31, 1996 and July 31, 1995
-------------------------------------------

     Revenues for the year ended July 31, 1996 ("Fiscal  1996") were  $1,305,499
as compared to revenues of $2,565,544  for the year ended July 31, 1995 ("Fiscal
1995") resulting from the sale of one CYP machines in Fiscal 1996 as compared to
two CYP machines in Fiscal 1995.  The decrease is primarily due to the fact that
potential  customers  have delayed  placing  orders  because the Company has had


                                        -9-


<PAGE>
insufficient  cash  to  support  operations  and  technical  support  of the CYP
machines.  Cost of sales  decreased to $1,146,717 in Fiscal 1996 from $1,757,793
in Fiscal 1995 as a result of the decrease in the number of machines sold.  Cost
of sales as a percentage of sales increased to approximately  88% in Fiscal 1996
from 68% in Fiscal 1995.  This increase is the result of CYP looms being sold at
a lower margin in order to generate cash.

     Operating  expenses  consist of  administrative  expenses  and research and
development expenses.  Administrative expenses increased to $3,473,581 in Fiscal
1996 from $3,656,532 in Fiscal 1995, a decrease of approximately 5%.

     Included  in  the  administrative  expenses  is a  $500,000  allowance  for
noncollectible  long-term receivables related to machine sales. Also included in
the  administrative  expenses of Fiscal 1996 and 1995 is a $547,441 and $474,215
allowance for obsolete raw materials  inventory  which  resulted  primarily from
enhancements   to  the   existing  CYP  machine   technology   as  well  as  the
discontinuation  of the new model  CYP  machine.  The  Company  has  implemented
several cost control measures designed to maintain administrative expenses at an
acceptable level.

     Research and development  expenses decreased to $23,473 in Fiscal 1996 from
$2,405,438 in Fiscal 1995, a 99% decrease.  This decrease reflects the Company's
substantially  decreased development activities relating to the new model of the
CYP machine, the enhancement of the existing CYP machine and the discontinuation
of the dye processes.

     Interest  expense  increased  to $314,611  in Fiscal 1996 from  $248,594 in
Fiscal 1995, a 27% increase. This increase is the result of the Company securing
additional short-term financing during Fiscal 1996 which totalled  approximately
$1,351,000.  Interest income decreased to $26,292 in Fiscal 1996 from $40,529 in
Fiscal 1995.

     Loss on  disposal of assets  increased  to  $1,022,505  in Fiscal 1996 from
$592,891 in Fiscal 1995 a 72%  increase.  This increase is the result of sale of
the main  production  facility  building  and  another  facility  at a different
location.

     Reorgainization   items  totalling   $249,150  are  entirely  comprised  of
attorney's  fees  paid to two law  firms  in  connection  with  the  Chapter  11
proceedings.

     The extraordinary  item, gain from extinguishment of debt, is the result of
the  forgiveness of debt by two creditors for  accounting  services and research
and development consulting, totalling $420,150.

Years Ended July 31, 1995 and July 31, 1994
-------------------------------------------

     Revenues for the year ended July 31, 1995 ("Fiscal  1995") were  $2,565,544
as compared to revenues of  $4,315,060  for the year ended July 31, 1994 (Fiscal
1994") resulting from the sale of two CYP machines in Fiscal 1995 as compared to
five CYP machines in Fiscal 1994. The decrease is primarily due to the potential
development  of a new enhanced  model of the CYP machine.  The Company  believes
that potential  customers have delayed placing orders and accepting delivery for
the  existing  CYP  machine  in  anticipation  of  the  new  model,   commercial
introduction  of  which  has  been  discontinued.  Cost of  sales  decreased  to
$1,757,793  in Fiscal  1995 from  $2,850,422  in Fiscal  1994 as a result of the
decrease in the number of machines sold.  cost of sales as a percentage of sales
increased to approximately 68% in Fiscal 1995 from 66% in Fiscal 1994.

     Operating  expenses  consist of  administrative  expenses  and research and
development expenses.  Administrative expenses decreased to $3,656,532 in Fiscal
1995 from $3,730,194 in Fiscal 1994, a decrease of approximately 2%.

     This provision relates primarily to ongoing  negotiations with one customer
resulting from delays in one of the customer's CYP machines becoming operational
and from the Company's  subsequently lowering the sales price of the CYP machine
to other customers.  Also included in the administrative expenses of Fiscal 1995
is a $474,215  allowance for obsolete raw  materials  inventory  which  resulted
primarily from continued  enhancements to the existing CYP machine technology as
well  as the  development  of  the  new  model  CYP  machine.  The  Company  has
implemented  several cost control measures  designed to maintain  administrative
expenses at an acceptable level.

     Research and  development  expenses  decreased to $2,405,438 in Fiscal 1995
from  $3,529,906  in Fiscal 1994, a 32%  decrease.  This  decrease  reflects the
Company's  substantially  decreased  development  activities relating to the new
model of the CYP machine,  the  enhancement  of the existing CYP machine and the
evaluation of the dye processes.  The Company anticipates a substantial decrease
in research  and  development  expenses  during the next  several  months as the
Company further decreases its development activities.
                                      -10-

<PAGE>

     Interest  expense  increased  to $248,594  in Fiscal  1995 from  $55,701 in
Fiscal  1994,  a 346%  increase.  This  increase  is the  result of the  Company
securing  additional  short-term  financing  during  Fiscal 1995 which  totalled
$1,320,000 and interest  related to the mortgages  obtained  during Fiscal 1994.
Interest income decreased to $42,529 in Fiscal 1995 from $50,558 in Fiscal 1994.

Liquidity and Capital Resources

     From its inception  until its initial public offering on June 24, 1992, the
Company's  principal  source of  operating  capital  has been  bank  borrowings,
private  placement  of the  Company's  securities  and loans from the  Company's
principal  stockholders  and affiliated  individuals.  Upon  consummation of the
initial  public  offering on June 24,  1992,  the  Company  received a total net
proceeds of approximately $13,000,000.

   
      As of July 31, 1996, the Company had   working  capital of  $1,084,487,  a
$1,991,507  increase from July 31, 1995.  This increase is primarily a result of
the Company paying off $1,812,051 of current debt. The Company  anticipates that
it will  have to  raise  additional  funds or  restructure  its debt to meet the
projected working capital requirements over the next 12 months.
    

     At July 31, 1996,  the Company had $20.9  million of net  operating  losses
available  to offset  future  taxable  income for federal  and state  income tax
purposes.  The  utilization of the net operating  losses to reduce future income
taxes will depend on the Company's ability to generate sufficient taxable income
prior  to the  expiration  of the net  operating  loss  carryforwards.  The loss
carryforwards expire in various years through 2010.

     The Company filed a voluntary  petition for a Chapter 11 bankruptcy on June
20, 1996. The Company is allowed to continue to operate under the supervision of
the Bankruptcy  Court and is given a limited amount of time free from creditors'
collection  efforts in order to restructure its finances.  The Company's plan of
reorganization  has not been  approved by the  Bankruptcy  Court.  Based on this
uncertainty, Dudley, Hopton-Jones, Sims & Freeman PLLP has qualified their audit
report.

Impact of Inflation

     Management  does not believe that  inflation  has a material  impact on the
Company's results of operations.  Management believes that it is able to reflect
inflationary cost increases in its prices to customers.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information  required under this item is submitted as a separate  section in
this report.

Item  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

None.
                                        PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Item 11. EXECUTIVE COMPENSATION

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     With the exception of a description of the Directors and Executive Officers
of The Registrant  which appears on page 7 herein,  Part III is omitted  because
prior to December  31,1996,  the Company will file a definitive  Proxy Statement
with the  Securities  and Exchange  Commission  pursuant to Regulation 14A which
involves the election of directors.

                                       -11-


<PAGE>



                                     PART IV

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

(a) 1. and 2. LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

       The   following    consolidated   financial   statements   of   Tapistron
International, Inc. are required to be included in Item 8 are listed below:

<TABLE>
<CAPTION>

                                                                                                Page
                                                                                                ----
<S>                                                                                               <C>   
   Report of Independent Auditors                                                                 15

   Consolidated Balance Sheet - July 31, 1996 and 1995                                            17

   Consolidated Statement of Operations - Year Ended July 31, 1996, 1995 and 1994                 19

   Consolidated Statement of Changes in Stockholders' Equity - Year Ended July 31, 1996,
    1995 and 1994                                                                                 20

   Consolidated Statement of Cash Flows - Year Ended July 31, 1996, 1995 and 1994                 21

   Notes to Consolidated Financial Statements                                                     23

   The following  consolidated  financial  statements  schedules are included in Item 14(d):

   Schedule II - Valuation and Qualifying Accounts                                                34

   All other schedules are omitted because the information  required  therein is not  applicable,
or the  information  is given in the financial  statements and notes thereto.

</TABLE>






















                                      -12-



<PAGE>


<TABLE>
<CAPTION>

(a)3.  EXHIBITS
<S>   <C>  
      3.1  - Articles of Incorporation of the Registrant, as amended*
      3.2  - By-Laws of the Registrant*
      3.3  - Amendment to Articles of Incorporation*
      4.1  - Form of Representative's Warrant Agreement relating to Representative's Options*
      4.2  - Form of Warrant Agreement (including form of Redeemable Warrant Certificate)*
      4.3 -  Specimen  Common Stock  Certificate*  10.1 - 1992 Stock Option Plan*
      10.2 - 1989 Stock Option Plan* 10.3 - Lease for Registrant's Facility*
      10.4 - Option  Agreement to Purchase Technology between the Registrant and Ful-Dye, Inc.*
      10.5 - Form of Consulting Agreement with the Representative*
      10.6 - First Exclusive License Agreement with Ful-Dye, Inc.**
      10.8 - Exclusive License Agreement with Ful-Dye, Inc.****
      10.10- Exclusive Sales Representative Agreement with Asahi Trading Co., Ltd.****
      21.1 - List of Subsidiaries*
      27   - Financial Data Schedule - included herewith (Electronic filing only)
</TABLE>


*     Incorporated  by  reference  to the exhibit  with the same number filed in
      connection  with the  Company's  Registration  Statement on Form S-1, File
      Number  33-47759,  declared  effective  by  the  Securities  and  Exchange
      Commission on June 24, 1992.

**    Incorporated  by  reference  to the exhibit  with the same number filed in
      connection  with the Company's Form 10-K filed for the year ended July 31,
      1992.

***   Incorporated  by  reference  to the exhibit  with the same number filed in
      connection  with the Company's Form 10-K filed for the year ended July 31,
      1993.

****  Incorporated  by  reference  to the exhibit  with the same number filed in
      connection  with the Company's Form 10-K filed for the year ended July 31,
      1994.

      (b)  Report on Form 8-K - The  Registrant  did not file a Form 8-K  report
during the last quarter of the period covered by this report.

      (c)  Exhibits.  See (a)3. above.

      (d)  Financial  Statement  Schedules. The response to this portion of Item
14, is submitted under Item 14.(a) 1. and 2. above.

















                                      -13-



<PAGE>







                                   SIGNATURES

     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.

TAPISTRON INTERNATIONAL, INC.


By: /s/ J. Darwin Poe                                 11/15/96   
   ---------------------------------------            -----------------------
   J. Darwin Poe                                      Date
   President and Chief Executive Officer


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

        Signatures                        Title                          Date


       /s/Gary Coulter
       ---------------------       Vice Chairman of the Board      11/15/96
       Gary Coulter

       /s/J. Darwin Poe 
       ---------------------       President and
       J. Darwin Poe               Chief Executive Officer         11/15/96 

       /s/Robert E. Culbreth
       ---------------------       Director                        11/15/96
       Robert E. Culbreth

       Kim Amos 
       ---------------------       Vice President of Engineering   11/15/96
       Kim Amos                    and Director

       Floyd Koegler
       ---------------------
       Floyd Koegler             Chief Financial Officer           11/15/96

















                                       -14-


<PAGE>



                         Report of Independent Auditors



Board of Directors and Stockholders
Tapistron International, Inc.
Ringgold, Georgia


   
We have  audited  the  accompanying  consolidated  balance  sheets of  Tapistron
International, Inc. and subsidiary as of July 31, 1996 and 1995, and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the  years  then  ended.  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.  The
consolidated  statements of operations,  stockholders' equity (deficit) and cash
flows of Tapistron  International,  Inc. and  subsidiary for the year ended July
31, 1994,  were audited by other auditors whose report dated September 16, 1994,
on those financial  statements included an explanatory  paragraph that described
the substantial doubt about the Company continuing as a going concern.
    

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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Tapistron  International,  Inc. and subsidiary as of July 31, 1996 and 1995, and
the results of their  operations and their cash flows for the period then ended,
in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the Company will continue as a going  concern.  As discussed in the notes to the
consolidated  financial  statements,  the Company has sustained recurring losses
from operations which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to this matter are also described in
the notes to the consolidated  financial statements.  The consolidated financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.



                                      DUDLEY, HOPTON-JONES, SIMS & FREEMAN  PLLP
Birmingham, Alabama
November 1, 1996













                                      -15-



<PAGE>








                           REPORT OF INDEPENDENT AUDITORS



Board of Directors and Stockholders
Tapistron International, Inc.
Chattanooga, Tennessee


We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders' equity (deficit) and cash flows of Tapistron  International,  Inc.
for the year ended July 31, 1994. 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 audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of operations and cash flows of
Tapistron,  International,  Inc. and subsidiary for the year ended July 31, 1994
in conformity with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
the Company will continue as a going  concern.  As discussed in the notes to the
consolidated  financial  statements,  the Company has sustained recurring losses
from operations which raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to this matter are also described in
the notes to the consolidated  financial statements.  The consolidated financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


                                              JOSEPH DECOSIMO AND COMPANY

Chattanooga, Tennessee
September 16, 1994













                                       -16-


<PAGE>


                         TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                           CONSOLIDATED BALANCE SHEETS

                             July 31, 1996 and 1995
<TABLE>
<CAPTION>


                                     ASSETS


                                                                            1996         1995
                                                                            ----         ----
<S>                                                                    <C>          <C>   
CURRENT ASSETS
   Cash and cash equivalents                                           $   17,149   $   99,426
   Receivables, net of allowances of $39,905 as of
        July 31, 1996 and $200,000 as of July 31, 1995, respectively      119,872      447,969
   Note receivable                                                        600,000      450,000
   Inventory                                                            2,082,495    2,801,175
   Prepayments                                                             20,707       97,146
                                                                       ----------   ----------

         Total current assets                                           2,840,223    3,895,716
                                                                       ----------   ----------

PROPERTY AND EQUIPMENT, NET                                               877,269    4,771,302
                                                                       ----------   ----------

OTHER ASSETS
   Long-term receivables, net of $500,000 allowance as of
         July 31, 1996                                                       --        500,000
   Noncompete agreements                                                     --         11,545
   Patents and patent license                                             286,160      293,525
   Other                                                                   12,886      183,819
                                                                       ----------   ----------


         Total other assets                                               299,046      988,889
                                                                       ----------   ----------




         TOTAL                                                         $4,016,538   $9,655,907
                                                                       ==========   ==========

</TABLE>

The accompanying notes are an integral
part of these financial statements

                                                        -17-
  


<PAGE>


                                LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                1996           1995
                                                                                ----           ----
<S>                                                                       <C>             <C> 
CURRENT LIABILITIES
   Short-term debt                                                        $  1,028,687    $    832,273
   Current portion of long-term debt                                             4,729       1,812,051
   Accounts payable                                                             33,970       1,498,757
   Accrued expenses                                                            408,350         374,655
   Customer deposits                                                           280,000         285,000
                                                                          ------------    ------------

        Total current liabilities                                            1,755,736       4,802,736
                                                                          ------------    ------------

LIABILITIES SUBJECT TO SETTLEMENT UNDER
     REORGANIZATION PROCEEDINGS                                              1,599,668            --
                                                                          ------------    ------------

LONG-TERM DEBT                                                                   5,060          14,001
                                                                          ------------    ------------

COMMITMENTS AND CONTINGENCIES                                                     --              --   

STOCKHOLDERS' EQUITY
   Preferred stock - $.001 par value - 2,000,000 shares authorized;
     no shares issued and outstanding                                             --              --   
   Common stock - $.0004 par value - 100,000,000 shares authorized;
               and 10,581,813 outstanding as of July 31, 1996, and
                9,681,813 outstanding as of July 31, 1995, respectively          4,233           3,873
   Additional paid-in capital                                               22,899,108      22,604,468
   Accumulated deficit                                                     (22,234,475)    (17,756,379)
   Treasury stock - 55,518 shares outstanding as of
     July 31, 1996 and 1995, at cost                                           (12,792)        (12,792)
                                                                          ------------    ------------

        Total stockholders' equity                                             656,074       4,839,170
                                                                          ------------    ------------

        TOTAL                                                             $  4,016,538    $  9,655,907
                                                                          ============    ============
</TABLE>





















The accompanying notes are an integral
part of these financial statements

                                                     -18-



<PAGE>


                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                For the Years Ended July 31, 1996, 1995 and 1994


                                          1996           1995           1994
                                          ----           ----           ----

SALES                                 $ 1,305,499    $ 2,565,544    $ 4,315,060

COST OF SALES                           1,146,717      1,757,793      2,850,422
                                      -----------    -----------    -----------

        Gross profit                      158,782        807,751      1,464,638
                                      -----------    -----------    -----------

OPERATING EXPENSES
   Administrative expenses              3,473,581      3,656,532      3,730,194
   Research and development                23,473      2,405,438      3,529,906
                                      -----------    -----------    -----------
                                        3,497,054      6,061,970      7,260,100
                                      -----------    -----------    -----------

OPERATING LOSS                         (3,338,272)    (5,254,219)    (5,795,462)
                                      -----------    -----------    -----------

OTHER INCOME (EXPENSE)
   Interest expense                      (314,611)      (248,594)       (55,701)
   Interest income                         26,292         42,529         50,558
   Loss on disposal of assets          (1,022,505)      (592,891)       (40,340)
                                      -----------    -----------    -----------

        Other income (expense)         (1,310,824)      (798,956)       (45,483)
                                      -----------    -----------    -----------

Loss before reorganization items
    and extraordinary item             (4,649,096)    (6,053,175)    (5,840,945)

REORGANIZATION ITEMS                     (249,150)          --             --
                                      -----------    -----------    -----------

Loss before extraordinary item         (4,898,246)          --             --

EXTRAORDINARY ITEM
   Gain from extinguishment of debt       420,150           --             --
                                      -----------    -----------    -----------

NET INCOME (LOSS)                     $(4,478,096)   $(6,053,175)   $(5,840,945)
                                      ===========    ===========    ===========
                                                    
EARNINGS PER SHARE
   Loss before extraordinary item     $     ( .49)   $     ( .69)   $     ( .76)
   Extraordinary item                         .04           --            --    
                                       -----------    -----------    -----------
                                                                                
        Net (loss)                    $     ( .45)   $     ( .69)   $     ( .76)
                                      -----------    -----------    -----------
Weighted average number of shares
 outstanding                           10,012,390      8,761,117      7,726,018
                                      ===========    ===========    ===========
 

The accompanying notes are an integral
part of these financial statements

                       -19-


<PAGE>

                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

   
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
    

                For the Years Ended July 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>


                                           Common Stock
                                       -------------------     Paid-in     Accumulated    Treasury
                                         Shares    Amount      Capital        Deficit      Stock         Total
                                         ------    ------      -------        -------      -----         -----
<S>                                    <C>         <C>      <C>           <C>            <C>         <C>         
BALANCE - July 31, 1993                7,693,463   $ 3,077  $ 19,204,376  $( 5,862,162)  $( 12,792)  $ 13,332,499
   Exercise of stock options              25,000        10        89,240          -           -            89,250
   Exercise of warrants                   18,550         8        72,857          -           -            72,865
   Net loss                                 -           -           -      ( 5,840,945)       -       ( 5,840,945)
                                      ----------   -------  ------------   ------------  ---------   ------------
                                     
BALANCE - July 31, 1994                7,737,013     3,095    19,366,473   (11,703,107)   ( 12,792)     7,653,669    
   Issuance of new shares              1,944,800       778     3,237,995          -           -         3,238,773 
   Other R/E transaction                    -           -           -      (        97)       -               (97) 
   Net loss                                 -           -           -      ( 6,053,175)       -       ( 6,053,175)
                                       ---------   -------  ------------   ------------  ---------   ------------

BALANCE - July 31, 1995                9,681,813     3,873    22,604,468   ( 17,756,379)  (  12,792)    4,839,170
   Issuance of new shares                900,000       360       294,640           -           -          295,000
   Net loss                                 -           -             -    (  4,478,096)      -       ( 4,478,096) 
                                        ----------   -------  ------------  -------------  ----------  -----------
                                                                                                             
       
BALANCE - July 31, 1996               10,581,813  $  4,233  $ 22,899,108  $( 22,234,475) $(  12,792) $    656,074         
                                      ==========  ========  ============  =============  ==========  ============         
                                                                                                                                   
</TABLE>
                                 
                                 
                                 
                                 
                                 
                                  























The accompanying notes are an integral
part of these financial statements

                                                           -20-



<PAGE>

                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    Years Ended July 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                                             1996           1995           1994
                                                             ----           ----           ----
<S>                                                      <C>            <C>            <C>    
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                              $(4,478,096)   $(6,053,175)   $(5,840,945)
   Adjustments to reconcile net loss to
     net cash used by operating activities:
        Depreciation and amortization                        414,992        484,315        439,449
        Loss on sales of property, plant & equipment       1,022,504        592,891           --
        Loss on impairment of assets                            --             --          118,340
        Provision for loss on accounts receivable               --             --          700,000
        Provision for obsolete inventory                        --             --          300,000
        Issuance of stock in lieu of compensation            145,000           --             --   
        Changes in operating assets and liabilities:
          Decrease (increase) in receivables                 328,097       (369,731)      (188,494)
          Decrease (increase) in prepayments                  76,439         93,782       (132,939)
          Decrease (increase) in inventory                 1,009,497        453,448        (65,710)
          Decrease (increase) in long-term receivables       500,000           --             --   
          Decrease (increase) in other assets                170,933           --             --   
          Decrease (increase) in noncompete
            agreements                                        11,545         23,091           --   
          Increase (decrease) in accounts payable and
            accrued expenses                                 123,060        982,096       (138,229)
          Increase (decrease) in accounts payable and
            accrued expenses, which are subject to
            settlement under a plan of reorganization       (170,940)          --             --
          Increase (decrease) in notes receivable           (150,000)          --             --
          Increase (decrease) in customer deposits            (5,000)       185,000         50,000
                                                         -----------    -----------    -----------
             Net cash provided by (used in) operating
               activities                                 (1,001,970)    (3,608,283)    (4,758,528)
                                                         -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES

   Proceeds from sales of property & equipment             2,187,500        201,250           --   
   Capital expenditures and retirements                         --         (560,805)      (938,155)
   Payment for patents                                       (14,415)       (67,575)       (22,180)
   Investment in other assets                                   --         (137,625)       (13,838)
                                                         -----------    -----------    -----------

             Net cash provided by (used in) investing
                activities                                 2,173,085       (564,755)      (974,173)
                                                         -----------    -----------    -----------
</TABLE>









The accompanying notes are an integral
part of these financial statements

                                                           -21-


<PAGE>

<TABLE>
<CAPTION>

                                                             1996           1995           1994
                                                             ----           ----           ----
<S>                                                      <C>            <C>            <C>    

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of debt                          1,210,495      1,320,000      2,327,500
   Principal payments of debt                               (381,809)      (998,926)       (87,893)
   Proceeds from issuance of debt which is subject
     to settlement under a plan of reorganization            140,600           --             --   
   Principal payments of debt which is subject
     to settlement under a plan of reorganization         (2,372,678)          --             --   
   Proceeds from issuance of common stock                    150,000      3,238,677        162,115
                                                         -----------    -----------    -----------

             Net cash provided by (used in) financing

              activities                                  (1,253,392)     3,559,751      2,401,722
                                                         -----------    -----------    -----------



NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
     Cash and cash equivalents - beginning of year           (82,277)      (613,287)    (3,330,979)
     Cash and cash equivalents - end of year                  99,426        712,713      4,043,692
                                                         -----------    -----------    -----------
                                                         $    17,149    $    99,426    $   712,713
                                                         ===========    ===========    ===========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW
   INFORMATION
     Cash paid for interest
                                                         $    34,532    $   252,471    $    40,441
                                                         ===========    ===========    ===========
</TABLE>




















The accompanying notes are an integral
part of these financial statements

                                                           -21-


<PAGE>






                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED

                    Years Ended July 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                                             1996               1995              1994
                                                             ----               ----              ----
<S>                                                    <C>                <C>                <C>    
SUPPLEMENTAL DISCLOSURES OF NONCASH
   INVESTING AND FINANCING ACTIVITIES
     Equipment financed by note payable                $       -          $       -          $      19,658
                                                         ============       ============       ===========
     Property and equipment in accounts payable        $       -          $       -          $      12,273
                                                         ============       ============       ===========
     Equipment received as payment of receivables      $       -          $       -          $     510,714
                                                         ============       ============       ===========
     Equipment exchanged as payment of liabilities     $       -          $       -          $      27,849
                                                         ============       ============       ===========
     Equipment reclassified to inventory               $    290,817       $        -         $          -
                                                         ============       =============      ===========
       Inventory reclassified to equipment             $       -          $       -          $     280,207
                                                         ============       =============      ===========
     Inventory received as payment of receivables      $       -          $       -          $     700,000
                                                         ============       =============      ===========  

                                                                                                      
</TABLE>

































The accompanying notes are an integral
part of these financial statements

                                                           -22-



<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1 - REORGANIZATION AND LEGAL MATTERS
-----------------------------------------

      Tapistron  International,  Inc. (the "Company") filed a voluntary petition
for relief under  chapter 11 of title 11 of the United  States Code (the "Code")
on June 20, 1996 (the "petition date").  The Company is currently  operating its
business as a  debtor-in-possession  under the jurisdiction of the United States
Bankruptcy  Code  for the  Northern  District  of  Georgia  (the  "Court").  The
Company's  liabilities  as  of  the  petition  date  are  generally  subject  to
settlement in a plan of reorganization, which must be voted on by certain of its
creditors  and  confirmed  by the Court.  Until a  reorganization  plan has been
confirmed,  the Company is prevented from making payments on  pre-petition  debt
unless  permitted by the Code or approved by the Court.  Certain  contracts  and
leases  existing at the  petition  date have been  rejected or assumed  with the
approval  of the Court.  The  Company  continues  to review all other  unexpired
pre-petition  executory contracts and leases to determine whether they should be
assumed or rejected.  Parties  affected by the rejection of contracts and leases
may file claims against the Company.
      The  consolidated  financial  statements  have been prepared  assuming the
Company will  continue as a going  concern,  which  contemplates  continuity  of
operations and the realization of assets and the  satisfaction of liabilities in
the normal course of business.  The chapter 11 filing,  the Company's  leveraged
financial structure,  and recurring net losses raise substantial doubt about its
ability to continue as a going concern.  A plan of reorganization may materially
change the amounts reported in the consolidated  financial  statements (which do
not give effect to adjustments to the carrying  values of assets and liabilities
which  may be  necessary  as a  consequence  of a plan of  reorganization).  The
continuation  of the Company's  business as a going concern is contingent  upon,
among other things,  the ability to (1) formulate a plan of reorganization  that
will be  confirmed  by the  Court,  (2)  achieve  satisfactory  levels of future
profitable  operations,   (3)  maintain  adequate  financing,  and  (4)  provide
sufficient cash from operations to meet future obligations.
      The Company has the exclusive right to file plans of reorganization in the
chapter 11 case until  October  21,  1996.  The  Company  may  request a further
extension  of time to file such plans.  Extensions  of time are often sought and
granted  in  chapter  11 cases  of this  size and  complexity.  There  can be no
assurance, however, that an extension will be granted.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

The  significant   accounting  policies  and  practices  followed  by  Tapistron
International, Inc. (the "Company") and its subsidiary are as follows:

Description of Business
-----------------------
The  Company  is  in  the  business  of  developing  or  acquiring   proprietary
technologies in the textile  industry.  To date, the Company's efforts have been
focused  on  the  continued   development,   production  and  marketing  of  the
computerized  yarn  placement  (CYP)  machine  and the  development  of a second
technology involving the dyeing of textile materials.

Principles of Consolidation
---------------------------
The consolidated  financial  statements  include the accounts of the Company and
its wholly-owned  subsidiary,  Fabrication Center, Inc. ("FCI"). All significant
intercompany accounts and transactions have been eliminated in consolidation.


                                       -23-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash and Cash Equivalents
-------------------------
The Company  considers  all highly  liquid  debt  instruments  purchased  with a
maturity of three months or less to be cash  equivalents.  The Company maintains
at various financial  institutions  cash and cash equivalent  accounts which may
exceed federally insured amounts at times.

Inventory
---------
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.

Property and Equipment
----------------------
Property  and  equipment  are  stated  at cost.  Expenditures  for  repairs  and
maintenance  are charged to expense as incurred and additions  and  improvements
that  significantly  extend  the lives of assets are  capitalized.  Upon sale or
other retirement of depreciable property, the cost and accumulated  depreciation
are  removed  from the related  accounts  and any gain or loss is  reflected  in
operations.  Depreciation  is provided using the  straight-line  method over the
estimated useful lives of the depreciable assets.

Intangible Assets
-----------------
Intangible  assets are stated at their unamortized cost and are amortized on the
straight-line  method over their estimated  useful lives.  The estimated  useful
lives of the  Company's  noncompete  agreements  range from 2 to 9 years and the
estimated useful lives of the Company's  patents and licenses range from 7 to 17
years.

Net Loss Per Share
------------------
Net loss per share is computed  using the weighted  average  number of shares of
common stock outstanding.

Revenue Recognition
-------------------
Sales and related cost of sales are recognized primarily at the time of shipment
of the product.  Sales and cost of sales may be  recognized  when the product is
complete and ready for shipment if the customer requests the Company to hold the
product and there are no  uncertainties as to the consummation of the sale. Upon
recognition  of sales,  a  reserve  for  estimated  warranty  and other  related
expenses  is  established.  The  reserve  is  periodically  evaluated  as to its
adequacy for the anticipated expenses to be incurred during the limited warranty
period.

Income Taxes
------------
Income  taxes are  computed  based on the  provisions  of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Deferred
tax assets and liabilities  are recognized for the estimated  future tax effects
attributed to temporary differences between the book and tax bases of assets and
liabilities and for carryforward  items. The measurement of current and deferred
tax assets and liabilities is based on enacted tax law.  Deferred tax assets are
reduced,  if necessary,  by a valuation allowance for the amount of tax benefits
that may not be realized.

Use of Estimates
----------------
The  preparation  of the  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 the
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.

                                      -24-

<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Reclassifications
-----------------
Certain  reclassifications  have been made in the previously  reported financial
statements  to make prior year amounts  comparable to those of the current year.
Such  reclassifications  had no  effect  on  previously  reported  net  loss  or
shareholders' equity.

Disclosures About Fair Values of Financial Instruments
------------------------------------------------------
In the year ended July 31,  1996,  the Company  adopted  Statement  of Financial
Accounting  Standards  No.  107,  Disclosures  about  Fair  Value  of  Financial
Instruments  (SFAS  107),  which  requires  companies  to  disclose  fair  value
information about certain financial instruments.  SFAS 107 defines fair value as
the quoted  market  prices for those  instruments  that are  actively  traded in
financial markets.  In cases where quoted market prices are not available,  fair
values are estimated using present value or other valuation techniques. The fair
value estimates are made at a specific point in time,  based on available market
information and judgements about the financial instrument,  such as estimates of
timing and amount of expected  future cash flows.  Such estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's  entire  holdings of a particular  financial  instrument,  nor do they
consider the tax impact of the realization of unrealized gains or losses.

In many cases, the fair value estimates cannot be substantiated by comparison to
independent  markets,  nor can the  disclosed  value be  realized  in  immediate
settlement of the instrument.

SFAS 107 excludes certain  financial  instruments,  particularly  trade accounts
receivable and payable, from its disclosure requirements.

The fair values of cash and cash equivalents  approximate their carrying amounts
as  reflected  in the  balance  sheet due to their  short-term  availability  or
maturity.

The fair  values of notes  receivable  approximate  their  carrying  amounts  as
reflected in the balance sheet due to interest rates that are similar to current
rates.

The fair values of notes  payable also  approximate  their  carrying  amounts as
reflected in the balance sheet due to interest rates that are similar to current
rates.

NOTE 3 ORGANIZATION
-------------------

The Company was incorporated on February 7, 1986, under the laws of the State of
Georgia under the name Textile Corporation of America. The Company was formed to
acquire FCI and to develop or acquire  proprietary  technologies  in the textile
industry.  On July 29, 1986, the Company  exchanged  2,800,426  shares of common
stock  for all of the  outstanding  stock  of FCI  having  a net  book  value of
$342,608  in a  transaction  accounted  for as a pooling of  interests.  FCI was
organized  on  August  19,  1981,  under the laws of the  State of  Georgia  and
commenced  operations  on August 1,  1983.  FCI was  formed  for the  purpose of
engaging in the research, development, production and marketing of a CYP machine
for the  manufacturing  of rugs and  carpets.  On July 16, 1991,  the  directors
changed  the name of the  Company to  Tapistron  International,  Inc.  Reference
herein to the  "Company"  includes  Tapistron  International,  Inc. and FCI. The
Company was a development  stage  enterprise until January 1992 when the Company
realized revenues from the sale of its first CYP machine.


                                       -25-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 - INVENTORY
------------------

Inventory consists of the following components:

                                               1996                1995
                                                ----                ----

   Raw materials                           $   1,413,531       $   1,627,755
   Work in process                             1,636,530             977,580
   Finished goods                                 11,090             670,055
                                           -------------       -------------
                                               3,061,151           3,275,390
   Allowance for obsolete inventory          (  978,656)         (  474,215)
                                           -------------       -------------

                                           $   2,082,495       $   2,801,175
                                           =============       =============

The Company  recognized a loss related to obsolete inventory of $504,441 for the
year ended July 31, 1996, and $174,215 for the year ended July 31, 1995.

It is reasonably  possible that the estimate of allowance for obsolete inventory
will change within the next year.




 


























                                      -26-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 5 - PROPERTY AND EQUIPMENT
-------------------------------

Property and equipment consists of the following major classifications:

<TABLE>
<CAPTION>

                                                    1996                           1995
                                                    ----                           ----
                                                        Accumulated              Accumulated
                                              Cost     Depreciation    Cost      Depreciation
                                           ----------   ----------   ----------   ----------
<S>                                        <C>          <C>          <C>          <C>     
Land                                       $     --     $     --     $  801,161   $     --
Building and improvements                        --           --      2,514,515      162,222
Leasehold improvements                           --           --          3,043        3,043
Office furniture, fixtures and equipment      501,435      306,490      586,934      284,485
Machinery and equipment                     1,167,365      490,114    1,652,207      345,266
Vehicles                                       16,914       11,841       16,914        8,457
                                           ----------   ----------   ----------   ----------
                                           $1,685,714   $  808,445   $5,574,774   $  803,473
                                           ==========   ==========   ==========   ==========
                                                        

Depreciation  expense totaled $389,667 for 1994,  $462,534 for 1995 and $390,125 for 1996.

</TABLE>


NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
----------------------------------------------

Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>

                                                                          1996       1995
                                                                          ----        ----
<S>                                                                  <C>         <C>        
   Trade accounts payable                                            $   33,970  $ 1,498,757
   Reserve for product warranties                                        10,000       25,000
   Other                                                                498,350      349,655
                                                                     ----------  -----------

                                                                     $  442,320  $ 1,873,412
                                                                     ==========  ===========
</TABLE>












                                       -27-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




 






NOTE 7 - LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS:
----------------------------------------------------------------------------

If it is probable  that the  collateral  value related to  pre-petition  secured
liabilities exceeds the amount of the obligation,  such liabilities are included
in short-term debt.

The remainder of the  pre-petition  liabilities  (including  situations where it
cannot be  determined  whether the  collateral  value  exceeds the amount of the
obligation) are:

                                                                  June 21, 1996
                                                                  -------------

   Accounts Payable                                               $   1,366,572
   Unsecured Term Notes                                                 216,458
   Accrued Expenses (including accrued interest on debt
    at time of filing)                                                   16,759
                                                                  -------------
   Total liabilities subject to settlement under
    reorganization proceedings                                    $   1,609,577
                                                                  =============

A plan of  reorganization  may  materially  change the amount and terms of these
pre-petition liabilities.

The portions of debt contractually due within one year following each respective
balance  sheet date are not  classified  in  current  liabilities  because  such
amounts will be settled under a plan of reorganization.

A  portion  of the  Company's  work-in-process  inventory  is  encumbered  under
prepetition short-term debt agreements.

NOTE 8 - LEASES
---------------

In June, 1996, the Company  completed the refinancing of its main facility under
a  sale/leaseback  arrangement.  The facility was sold for $1.9  million,  $1.86
million of which was used to pay off the  existing  mortgage.  The Company  then
entered into an  operating  lease for a term of five years.  The lease  requires
minimum annual rental payments of $302,500 in 1997,  $317,625 in 1998,  $333,506
in 1999,  $350,182 in 2000,  and $303,877 in 2001. The Company has the option to
purchase the property at any time during the lease term.

The Company also leases  office space,  warehouse  space,  and  equipment  under
short-term  operating leases.  Rental expense under all operating leases totaled
$80,734 for 1994, $50,941 for 1995 and $52,442 for 1996.


                                      -28-



<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - DEBT
-------------

Long-term debt consists of the following:

<TABLE>
<CAPTION>

                                                                           1996          1995
                                                                           ----          ----
<S>                                                                      <C>           <C>   
   7.2% Promissory note, maturing in January 1996, payable $2,600
         monthly including interest, collateralized by treasury stock    $    -        $  15,280
                                                                                                   
   9.3% Promissory note, maturing in January 2002, payable $1,200                                  
         annually, unsecured and subject to settlement under                                       
         a plan of reorganization                                            4,869         5,553
                                                                                                   
   10%  Promissory note, maturing June 1, 1996, interest only payable                              
         through December 1994, monthly principal and interest                                     
         payments of $120,114 payable beginning January 1996,                                      
         collateralized by real property                                      -        1,792,243
                                                                                                      
   5.8% Promissory note, maturing September 9, 1998, payable $375                                     
         monthly including interest, collateralized by equipment             9,788        12,976
                                                                         ---------     ---------
                                                                            14,657     1,826,052
   Less:  Current portion                                                    4,729     1,812,051
                                                                                                      
          Current portion subject to settlement                                                       
            under a plan of reorganization                                     748             
                                                                         ---------     ---------  
                                                                         $   9,180     $  14,001
                                                                         =========     =========
                                                                                                          
 
Aggregate maturities of long-term debt for the five years subsequent to July 31, 1996, are as follows:

     July 31, 1997                                                                     $   5,477
     July 31, 1998                                                                         5,133
     July 31, 1999                                                                         1,638
     July 31, 2000                                                                           976
     July 31, 2001                                                                         1,067
       Thereafter                                                                            366

Short-term debt consists of a line of credit  agreement  bearing interest at 10% and various promissory
notes bearing interest at rates varying from 6% to 13%. A significant  portion  of the short-term  debt
is collateralized by CYP Loom machines.

Interest  expense  on debt  totaled  $55,701  for  1994,  $248,594  for 1995 and $314,611 for 1996.

</TABLE>


                                               -29-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - STOCK OPTIONS
-----------------------

In April 1992, the Company adopted the 1992 qualified employee stock option plan
(the "1992  Plan") which  provided for the granting of options to employees  for
the  purchase of up to 350,000  shares of common stock of the Company at a price
not less  than  fair  market  value on the date the  options  are  granted.  The
shareholders of the Company  subsequently  approved an increase in the number of
shares  available  for  issuance  under  the  1992  Plan  to  1,350,000  shares.
Previously,  the Company had a qualified  employee  stock option plan (the "1989
Plan") which  provided for the granting of options to employees for the purchase
of approximately  210,000 shares of which options for approximately 192,500 have
been granted.  The 1989 Plan was terminated  with the adoption of the 1992 Plan.
In addition,  the Company has, at various times,  granted options outside of the
Plan to employees and non-employees.

   
The following table summarizes option activity:
                                                 Number of       Option Price
                                                   Shares          Per Share
                                                -----------      --------------
 Outstanding as of July 31, 1991                   554,062       $2.14 - $3.57
      Granted                                      545,528       $5.00 - $6.75
      Exercised                                   ( 86,470)          $3.57
      Expired                                     ( 17,512)          $3.57
                                                -----------      
 Outstanding as of July 31, 1992                   995,608       $3.57 - $6.75
      Exercised                                   (209,605)          $3.57
      Expired                                       (3,500)          $5.00
                                               ------------ 
 Outstanding as of July 31, 1993                   782,503       $2.14 - $3.57
      Granted                                    1,513,000       $2.75 - $7.125
      Exercised                                    (25,000)          $3.57
      Expired                                     (248,000)      $6.75 - $7.125
                                               -----------  
 Outstanding as of July 31, 1994                 2,022,503       $2.75 - $7.125
      Granted                                      111,000      $1.875 - $2.625
      Exercised                                      -                 -
      Expired                                     (141,500)     $2.750 - $7.125
                                              ------------ 
 Outstanding as of July 31, 1995                 1,992,003      $1.875 - $7.125
      Granted                                      600,000      $ .50  - $ .87
      Exercised                                      -                 -
      Expired                                        -                 -
                                              ------------
 Outstanding as of July 31, 1996                 2,592,003      $ .50  - $7.125
                                              ============
    
             
 Exercisable                                     2,592,003         
                                              ============                
                                                                 

Options  outstanding  as of July 31, 1991,  for the purchase of 86,049 shares of
the Company's  common stock were exercised during April 1992 by the surrender of
28,502 shares of the Company's common stock.

Options  outstanding  as of July 31, 1992, for the purchase of 209,605 shares of
the  Company's  common  stock  were  exercised  by and  the  subscription  notes
receivable  were paid by the surrender of 95,649 shares of the Company's  common
stock.



                                       -30-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In connection  with the initial  public  offering on June 23, 1992,  the Company
issued representative's options to purchase up to an aggregate of 225,000 shares
of the Company's  common stock and 225,000 warrants at an initial purchase price
of $11.138 per share of the Company's common stock and $.165 per  non-redeemable
warrant.  These options are exercisable from June 24, 1993 through  September 3,
2003. The non-redeemable warrants issuable upon exercise of the representative's
options are not subject to redemption  by the Company.  The options also contain
provisions  providing for  adjustment of the exercise  price upon  occurrence of
certain  events,  including  the  issuance  of shares  of common  stock or other
securities convertible into or exercisable for shares of common stock at a price
per share less than the exercise  price or the market  price,  recapitalization,
reclassification,  stock  dividend,  stock split,  stock  combination or similar
transactions.  The representative's  options have not been included in the above
table.

NOTE 11 - WARRANTS
------------------

During the year ended July 31, 1992, the Company issued  redeemable  warrants to
purchase  2,587,500 shares of common stock of the Company at a purchase price of
$8.10 per share,  exercisable  from June 24, 1993 through June 23, 1997.  During
the year ended July 31, 1992,  the Company  issued  warrants to purchase  45,049
shares of common  stock of the  Company at $3.93 per share and 34,727  shares at
$5.50 per share expiring at various dates through December 1994. During the year
ended July 31, 1994, warrants for the purchase of 18,550 shares of the Company's
common stock at a purchase  price of $3.93 were  exercised  and warrants for the
purchase of 26,499 shares of the Company's  common stock at a purchase  price of
$3.93 expired. During the year ended July 31, 1995, warrants for the purchase of
50,000  shares at an  exercise  price of $1.00  were  issued,  warrants  for the
purchase of 34,727 shares at an exercise price of $5.50 expired, and no warrants
were exercised during the year. Warrants for the purchase of 2,637,500 shares of
the Company's common stock remain outstanding as of July 31, 1996.

NOTE 12 - RELATED PARTY TRANSACTIONS
------------------------------------

During the three years ended July 31, 1996, the Company borrowed various amounts
from a principal  shareholder  and former director of the Company and his family
members,  who are also  shareholders.  The shareholder was a director during the
year ended July 31, 1996. As of July 31, 1996,  the Company was indebted to this
shareholder in the amount of $625,000 through a line of credit agreement bearing
interest at 10%.

During the year ended July 31 1996, the Company expensed $219,000 in consulting,
legal, and administrative fees owed to a principal shareholder.  The Company was
also  indebted to this  shareholder's  law firm for  $174,000  for legal fees in
association with the reorganization.

During the year ended July 31, 1994, the Company  contracted with an engineering
consulting firm, whose Chief Executive Officer and President was also a director
of the  Company,  to  develop a new model of the CYP  machine.  During the years
ended  July  31,  1994,  1995,  and  1996  the  Company  incurred  approximately
$2,733,000, $2,643,000, and $0, respectively, in fees to this firm.

During the year ended July 31, 1996,  consulting  fees of $50,000 were paid to a
capital company whose Chairman is a former director of the Company.  Also during
the year ended July 31, 1996, $50,000 was borrowed from this capital company.

                                      -31-




<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



During the year ended July 31, 1996, the Company borrowed  approximately $16,000
from an officer  of the  Company.  The amount was also paid back to the  officer
during the year.

During the year ended July 31,  1996,  200,000  shares of the  Company's  common
stock were issued to two former directors in consideration for services rendered
to the Company.

NOTE 13 - DOMESTIC AND EXPORT SALES
-----------------------------------

The following table summarizes the sales of the Company:

                                        1996              1995            1994
                                        ----              ----            ----

North America                       $1,200,322       $1,659,928       $1,627,510
Asia                                    24,822           32,432          787,550
Pacific Rim                             58,854           38,226        1,900,000
Europe                                  21,501          834,958             --
                                    ----------       ----------       ----------

    Total sales                     $1,305,499       $2,565,544       $4,315,060
                                    ==========       ==========       ==========


NOTE 14 - MAJOR CUSTOMERS
-------------------------

Substantially  all sales were made to five customers  during the year ended July
31, 1994,  two customers  during the year ended July 31, 1995, and two customers
during the year ended July 31, 1996.

NOTE 15 - INCOME TAXES
----------------------

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the  tax  bases  of  those  assets  and  liabilities.  Significant
components of the Company's deferred tax liabilities and assets are as follows:

                                                         1996           1995
                                                         ----           ----
   Deferred tax assets
     Accounts receivable                            $    16,000     $    80,000
     Inventory                                           96,000          96,000
     Accrued expenses and reserves                       14,000          15,000
     Net operating loss carryforward                  8,006,000       6,341,000
     Valuation allowance                             (8,132,000)     (6,527,000)
                                                    -----------     -----------
                                                           --             5,000
   Deferred tax liabilities
     Intangible assets
                                                           --             5,000
   Net deferred tax assets and liabilities          -----------     -----------
 
                                                    $     --       $     --
                                                    ===========     ===========


                                       -32-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






As of July 31,  1996,  the  Company  had net  operating  loss  carryforwards  of
approximately  $21,186,000  available to offset future taxable income which will
expire in various years through  2011. A valuation  allowance of $8,132,000  has
been recognized  primarily to offset the related  deferred tax assets due to the
uncertainty of realizing the benefit of the loss carryforwards.

NOTE 16 - SUBSEQUENT EVENTS
---------------------------

As of August 29, 1996,  the  Company's  stock has been  delisted from the NASDAQ
National Market. The Company's warrants were delisted as of August 20, 1996.

NOTE 17 - GOING CONCERN
-----------------------

As shown in the  accompanying  financial  statements,  the Company has  incurred
recurring  losses from  operations and, as a result,  has experienced  cash flow
problems.  These factors raise  substantial doubt about the company's ability to
continue  as a going  concern.  The  Company's  ability to  continue  as a going
concern is dependent  first on its ability to raise  additional  capital to meet
its immediate  working  capital  requirements  and  ultimately on its ability to
obtain  profitable  operating  results.  Management  intends to raise additional
capital through either the placement of a debt or equity offering.

NOTE 18 - COMMITMENTS AND CONTINGENCIES
---------------------------------------

The  Company is a party to a number of legal  actions  arising  in the  ordinary
course of its business.  In management's opinion, the Company has adequate legal
defenses and/or insurance coverage respecting each of these actions and does not
believe that they will materially  affect the Company's  operations or financial
position.  All  litigation  was  stayed  on  June  21,  1996  by  virtue  of the
commencement of the bankruptcy case.

NOTE 19 - ASSETS SUBJECT TO LIENS
---------------------------------

The  Company  has  pledged  three of its CYP  machines  as  collateral  on three
short-term  notes  payable.  Two of these  machines  are  currently  included in
work-in-process  inventory,  and one machine is included  in fixed  assets.  The
machines pledged and the related note balances  (including accrued interest) are
as follows:

          Collateral          Collateral's Book Value     Loan's Book Balance
          Description           as of July 31, 1996        as of July 31, 1996
    ----------------------     -------------------------   -------------------

    2.0 Meter CYP Machine           $ 195,079                   $ 155,209
    4.4 Meter CYP Machine             228,739                     629,961
    4.4 Meter CYP Machine             411,609                     252,622







                                       -33-


<PAGE>
                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






                                   SCHEDULE I
                        VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>

                                                             Additions
                                             Balance at     Charged to                      Balance
                                              Beginning      Cost and                       at End
                                               of Year       Expenses     Deductions        of Year
                                               -------       --------     ----------        -------
<S>                                        <C>            <C>            <C>             <C>    
Allowance for Doubtful Accounts
-------------------------------

   Year Ended July 31, 1996                $    200,000   $      -       $    160,095    $    39,905
                                             ==========    ===========     ==========     ==========
                                                          

Allowance for Obsolete Inventory
--------------------------------

   Year ended July 31, 1996                $    474,215   $    547,440   $     42,999    $   978,656
                                             ==========    ===========    ===========     ==========
                                                                      
                                                                      
Allowance for Uncollectible Long-Term                      
-------------------------------------
Receivables                             
-----------                             
                                                                      
   Year ended July 31, 1996                                           
                                           $      -        $   500,000   $      -         $  500,000 
                                            ==========     ===========    ===========     ==========


</TABLE>








                                       -34-