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

                                    Form 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
                     For the fiscal year ended July 31, 1997

                                       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)

   6203; Alabama Highway; Ringgold, GA                     30736-1067
   -----------------------------------                     ----------
 (Address of principal executive offices)                  (Zip Code)

 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 |_|

On October 1, 1997,  there  were  27,192,961  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.

Tapistron  International,  Inc. (The "Company")  filed a voluntary  petition for
relief  under  chapter 11 of title 11 of the United  Stated Code (the "Code") on
June 21, 1996 (the  "petition  date").  The Company is currently  operating  its
business as a  debtor-in-possession  under the jurisdiction of the United States
Bankruptcy  Court 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 or 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.  Reference is made to Note 16  (Subsequent
Events) of the Company's financial statements.

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 and rugs are significant in Europe,
the Pacific Rim and other countries throughout the world.

    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, and the large creel loads
of yarn required to make a given pattern.


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 is capable of  supporting
manufacturing requirements for the foreseeable future.

Suppliers

    The Company  purchases  the frames for its  existing  CYP machine from 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.

                                      -4-

<PAGE>

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  development  of these  products,  particularly
because many of such  customers  may be  reluctant  to replace or  significantly
modify  their  existing  manufacturing  methods.  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

    Research and  development  activities  are being  conducted by the Company's
in-house  engineering  staff  to  provide  continual  enhancements  to  the  CYP
technology.  It is anticipated  that these in-house efforts will result in major
improvements during the next few years.  Although well underway, it is premature
to discuss the objectives or completion dates.

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

                                      -5-

<PAGE>

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.

Competition to Date
-------------------

    In 1992, the Company faced the inherent  difficulties of the introduction of
a new product that was competing with  traditional  technology in an established
industry. Not only did the machine need to be proven to the carpet industry, but
the product from the machine had to be proven in the marketplace.  Initial sales
to  established   companies  were  promising;   however,   the  year  after  its
introduction  onto the  market,  when  sales  should be  building,  a  premature
announcement  was made of a  revolutionary  second  generation  CYP Machine with
improved  production  speed  -  R&D  which  was  eventually  discontinued.  This
information  dramatically  decreased  the  interest of  potential  buyers in the
current  machine and created a substantial  obstacle to sales  initiatives.  The
result of fewer machine  sales at such an early period in the machine's  history
meant a reduced  chance for the machine to be proven as a production  machine to
carpet  manufacturers,  and less CYP  product  from the machine in the market to
create an interest in the machine and a niche for itself.

Although all of the earlier mentioned  technologies compete with the CYP Machine
in the general  area of  patterned  carpet,  all are  limited by either  pattern
capability or by gauge. CYP product is unique. The closest competitor is another
advanced  patterned  tufting  machine,  the  Colortec  machine,  which  has  the
advantages  of being based on accepted  technology  already in the  industry and
being manufactured by an established tufting machine  manufacturer.  Even so, it
also  had a  much  slower  start  than  anticipated.  Against  even  this  close
competitor though, the CYP Machine with its variable gauge has an advantage. The
overall flexibility of the CYP Machine makes it ideal for the creation of unique
and distinction products which expand the options of the carpet manufacturer.

PATENTS AND PROPRIETARY RIGHTS

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

    The  Company has seven  United  States  patents  and 10 foreign  patents and
anticipates  filing additional patent  applications,  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 July 31,  1997,  the Company had 27 full-time  employees.  The Company
considers its relations with its employees to be satisfactory.

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           40      Vice President of Engineering and Director
  Gary Coulter       51      Corporate Secretary and Director
  Floyd Koegler      54      Vice President and Chief Financial Officer
  J. Darwin Poe      52      President and Chief Executive Officer and Director

                                      -6-

<PAGE>

     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, Corporate Secretary, is also Chairman of the Board and CEO of
Spintek  Technologies  and a partner  of Coulter  and  Davenport  Law Firm.  Mr.
Coulter's experience includes: President, COO and Director of Private Biological
Corporation,  a developer of biological products and treatments for cancer, from
1994 to 1996; CEO of Omega  International,  Inc.,  developer of natural products
for the treatment of AIDS, from 1992 to 1994; and President, COO and Director of
Woodruff  Investment  Co., a  developer,  manager and  financier  of real estate
investments,  from 1986 to 1996. Mr. Coulter received his  undergraduate  degree
from Emory University,  his J.D. degree from the University of Georgia School of
Law, and his L.L.M. in taxation from New York University School of Law.

     FLOYD  KOEGLER has served as a Vice  President  and CFO of Tapistron  since
September  1996.  He is a certified  public  accountant  with an MBA from Brenau
University in Gainsville,  Georgia. He has an extensive  background in corporate
finance,  which includes auditing and financial information analysis for Aladdin
Mills from 1994 until joining  Tapistron.  From 1990 to 1994,  Mr.  Koegler held
controller positions at a Crown  America/Texture-Tex,  Inc. and Citizens Federal
Savings and Loan. In addition, he served as CFO of the fiber spinning operations
of Integrated Products, Inc. In Rome, Georgia and he was a cost analyst for dyes
and chemicals for American Emulsions and Coronet Industries.

     J. DARWIN POE came to  Tapistron  in July 1995 and became  President of the
Company  in  February  1996.  Mr. Poe is a graduate of Auburn University  with a
degree in Textile Engineering and an MBA from Brenau University.  He is also  on
Tapistron's  Board  of Directors and  has  spent his entire  professional career
in the  U.S. textile  industry.  From  1993  to  1995, he  served  as  Technical
Director  of  Prince  Street  Technologies,  and  from  1985  to 1993, he was an
Account  Executive  at Amoco Fabrics and Fibers Company.  Mr. Poe also served as
COO of Desoto Falls, Inc.  Of Dalton,  Georgia,  and has held various management
positions with other  industry  leaders such as the  Bibb Company and West Point
Pepperell.


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

     Reference is made to Note 1 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, 1996
through July 31, 1997, 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 warrants 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 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.


                                                                 High     Low
                                                                 ----     ---
COMMON STOCK

   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  
                                                                                
                                                                                
   1997:  First Quarter (August 1, 1996 - October 31, 1996)        NA      NA   
          Second Quarter (November 1, 1996 - January 31, 1997)     NA      NA   
          Third Quarter (February 1, 1997 - April 30, 1997)        NA      NA   
          Fourth Quarter (May 1, 1997 - July 31, 1997)             NA      NA   
                                                                                
REDEEMABLE WARRANTS                                                             
                                                                                
   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 
                                                                                
   1997:  First Quarter (August 1, 1996 - October 31, 1996)        NA      NA   
          Second Quarter (November 1, 1996 - January 31, 1997)     NA      NA   
          Third Quarter (February 1, 1997 - April 30,  1997)       NA      NA   
          Fourth Quarter  (May 1, 1997 - July 31, 1997)            NA      NA   
                                                                
                                      -8-


<PAGE>

  At October 25, 1997, there were  approximately 400 shareholders of record, and
as of that date, the Company estimates there were approximately 3,000 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, 1997,  1996 and 1995
and the  consolidated  balance  sheet data at July 31, 1997 and 1996 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, 1994,  1993 and 1992 and the  consolidated  balance sheet data at
July 31, 1994,  1993 and 1992 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,
                                 ----------------------------------------------------------------------
                                     1997            1996         1995           1994          1993
                                     ----            ----         ----           ----          ----
<S>                              <C>           <C>             <C>            <C>           <C>        
STATEMENT OF OPERATIONS DATA:
   Sales                         $  3,626,092  $   1,305,499   $ 2,565,544    $ 4,315,060   $ 6,823,721
   Cost of sales                    2,477,302      1,146,717     1,757,793      2,850,422     3,607,182
   Operating expenses:
      Administrative                1,998,245      3,473,581     3,656,532      3,730,194     2,927,558
      Research and development         10,384         23,473     2,405,438      3,529,906       549,660
   Net income (loss)                  316,375    ( 4,478,096)  ( 6,053,175)   ( 5,840,945)       24,961
   Net income (loss) per share            .03    (       .49)  (       .69)   (       .76)         -
   Extraordinary item                    -               .04          -              -             -
   Shares used in computing per               
      share amounts                10,526,295     10,012,390     8,761,117      7,726,018     7,756,556
                                   
                                                            As of July 31,
                                 ----------------------------------------------------------------------
                                     1997            1996         1995           1994          1993
                                     ----            ----         ----           ----          ----
BALANCE SHEET DATA:
Working capital (deficiency)     $    758,111  $   1,084,487  $(   907,020)  $  2,649,245   $ 8,570,445
Total Assets                        5,267,780      4,016,538     9,655,907     10,982,246    14,733,746
Long-term debt                            744          5,060        14,001      1,291,320        50,433      
Accumulated deficit              ( 21,918,100)  ( 22,234,475)  (17,756,379)   (11,703,107)  ( 5,862,162)
Stockholders' equity                  972,449        656,074     4,839,170      7,653,669    13,332,499 
</TABLE>

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

RESULTS OF OPERATIONS

Years Ended July 31, 1997 and July 31, 1996
-------------------------------------------

     Revenues for the year ended July 31, 1997 ("Fiscal  1997") were  $3,626,092
as compared to revenues of $1,305,499  for the year ended July 31, 1996 ("Fiscal
1996").  The increase in revenues is primarily due to the increase in the number
of machines  sold for the year.  The increase in machines sold is a result of an
increased  interest  in  the  patterned  carpet  industry,   improved  operating
efficiencies and continuing enhancements in machine technology.

     Cost of sales for July 31, 1997 were  $2,477,302  as compared to $1,146,717
for July 31, 1996.  The  increase in cost of sales is due to  increased  machine
revenues.  The cost of sales as a percentage of sales decreased to approximately
68% in Fiscal 1997 from 88% in Fiscal 1996.  This  decrease is the direct result
of the increase in the number of machines sold.

                                      -9-

<PAGE>

     Operating  expenses  consist of  administrative  expenses  and research and
development  expenses.  Administrative  expenses  decreased  from  $3,473,581 in
Fiscal 1996 to $1,998,245 in Fiscal 1997, a decrease of approximately  42%. This
decrease  reflects the  allowances  related to obsolete  inventory  and bad debt
expense  recognized in Fiscal 1996.  The remainder of the decrease  relates to a
reduction of legal and other  professional  fees totaling  $499,000.  Management
anticipates  operating  expenses  to  increase  in the future as they expand the
international marketing plan. Furthermore,  the Company expects to spend more on
future  developments  to provide  customers  with the most current  technologies
available.

     Legal,   accounting,   and  other  professional  fees  in  connection  with
reorganization  proceedings  totaled  $793,631.  Interest  expense  decreased to
$30,269 in Fiscal 1997 from  $314,611 in Fiscal 1996.  The decrease was a result
of being able to operate  under court  protection  which  allowed no interest to
accrue on prior debt.

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 was primarily due to the fact that
potential  customers  delayed  placing  orders  due to the  perception  that the
Company did not have sufficient 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 machines
being sold at a lower margin in order to generate cash.

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

     Material  changes in  administrative  expense  include a decrease in salary
expense of $447,798  due to a reduction  in the work force.  Consulting  expense
decreased  $307,371  due  to a  contract  cancellation  by  the  Company.  Other
professional fees increased  $333,077 due to expense of Chapter 11 filing.  Also
included  in  the   administrative   expenses  is  a  $500,000   allowance   for
noncollectible  long-term  receivable 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.  The cost  control  measures  include a reduction in the work
force and cross  training of  employees.  Expenses  such as  telephone  expense,
health  insurance  and  building  maintenance  will be  reduced  due to  overall
down-sizing and changing to a scaled down version of the former contracts.

     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 totaled  approximately
$1,351,000.  Interest income decreased to $26,292 in Fiscal 1996 from $42,529 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.

     The results of the forgiveness of debt by two creditors, one for accounting
services  and the  other  for  research  and  development  consulting,  totaling
$420,150 equals the reported  extraordinary item.  Reorganization items totaling
$249,150 are entirely comprised of attorneys' fees paid to two law firms.



                                      -10-


<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

     As of July 31,  1997,  the  Company  had  working  capital of  $758,111,  a
$326,376 decrease from July 31, 1996. This decrease is primarily a result of the
Company's  reduction in  inventory.  As of July 31, 1997,  the Company had total
cash of $27,946,  up from $17,149 at July 31, 1996.  Cash provided by operations
was  $446,248 in 1997  compared to cash used in  operations  of  $1,001,970  and
$3,608,283 in 1996 and 1995, respectively.  Investing activities used $26,756 in
cash during 1997,  compared to cash  provided of  $2,173,085  in 1996,  and cash
consumed  of $564,755  in 1995.  The  proceeds  from the  sale-leaseback  of the
Company's main facility provided  $1,900,000 of investing  proceeds in 1996. The
Company used $408,695 for financing activities in 1997 compared to $1,253,392 in
1996.  Cash provided by financing in 1995 was $3,559,751.  Financing  activities
for 1997 included $1,008,665 of principal payments on debt and $599,970 proceeds
from issuance of debt.  Financing  activities  for 1996  included  $2,372,678 of
principal payments on debt subject to settlement under a plan of reorganization;
and $1,210,495 proceeds from issuance of debt.

     At July 31, 1997,  the Company had $22.8  million of net  operating  losses
available  to offset  future  taxable  income for federal  and state  income tax
purposes.   The  loss  carryforwards  expire  in  various  years  through  2010.
Realization  of  deferred  tax assets  associated  with the net  operating  loss
carryforwards  and  reversals of the  temporary  differences  is dependent  upon
generating   sufficient   taxable   income  prior  to   expiration  of  the  NOL
carryforwards.  Even though the Company has incurred tax losses for seven of the
past nine fiscal years,  management  believes that it is more likely than not it
will generate taxable income  sufficient to realize a portion of the tax benefit
associated with future  deductible  temporary  differences and NOL carryforwards
prior to their  expiration.  This  belief is based upon,  among  other  factors,
changes  in  operations   that  have   occurred   during  the  last  two  years.
Specifically,  cost savings by bringing research and development in house and by
better usage of  just-in-time  inventory  control.  The Company has assessed the
trends  regarding  patterned  carpet  and  with  consideration  of  its  current
marketing strategies,  anticipates a continued improvement in operating results.
Management  believes that a valuation allowance is appropriate given the current
estimates  of future  taxable  income.  If the  Company  is  unable to  generate
sufficient taxable income in the future through operating  results,  an increase
in the  valuation  allowance  will be  required  through  a charge  to  expense.
However, if the Company achieves  sufficient  profitability to utilize a greater
portion of the  deferred  tax asset,  the  valuation  allowance  will be reduced
through a credit to income.

     On June 21, 1996,  the Company  filed a voluntary  petition for  protection
under  Chapter 11 of the  Federal  bankruptcy  code.  The Company was allowed to
continue to operate under the supervision of the bankruptcy  court and was given
a limited  amount of time free from  creditors'  collection  efforts in order to
restructure  its  finances.  The  Company's  First  Amended and Restated Plan of
Reorganization was filed on March 14, 1997 in the U.S. Bankruptcy Court Northern
District,  Atlanta  Division.  On March 28, 1997,  the Company filed the Debtors
Amended and Restated Disclosure Statement.

     As a subsequent  event,  the  Company's  First Amended and Restated Plan of
Reorganization  provided  that the  Company  would do a  private  placement  for
$2,500,000.  As of August 6, 1997,  the private  placement was  completed.  As a
result,  the  bankruptcy  court  confirmed the Plan on August 18, 1997, the Plan
became effective as of August 29, 1997.

     Management  believes the proceeds  from  issuance of the  Company's  common
stock  through the private  placement of $2.5  million,  the  existing  cash and
anticipated  cash  generated from  operations  will be sufficient to satisfy the
Company's future cash requirements

Recently Issued Accounting Standards
------------------------------------

     The Company adopted Statement of Financial  Accounting Standards (SFAS) No.
121,  "Accounting  for the Impairment of Long-Lived  Assets",  at July 31, 1997.
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable  intangibles,  and goodwill related to those assets
to be  held  and  used  and  for  long-lived  assets  and  certain  identifiable
intangibles to be disposed of. This Statement  requires that  long-lived  assets
and  certain  identifiable  intangibles  to be held  and  used by an  entity  be
reviewed for impairment  whenever  events or changes in  circumstances  indicate
that the  carrying  amount of an asset may not be  recoverable.  The adoption of
this accounting standard had no effect on the Company's financial statements.


                                      -11-

<PAGE>

     At July 31,  1997,  the  Company  adopted  SFAS No.  123,  "Accounting  for
Stock-Based  Compensation".  This Statement establishes financial accounting and
reporting  standards for stock-based  employee  compensation  plans. Those plans
include all  arrangements  by which  employees  receive shares of stock or other
equity  instruments  of the  employer  or the  employer  incurs  liabilities  to
employees in amounts based on the price of the  employer's  stock.  Examples are
stock purchase plans,  stock options,  restricted stock, and stock  appreciation
rights.  This Statement also applies to  transactions  in which an entity issues
its equity  instruments to acquire goods or services from  non-employees.  Those
transactions  must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments  issued,  whichever is more
reliably  measurable.  The adoption of this accounting standard had no effect on
the Company's financial statements.

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
SFAS No. 128,  "Earnings Per Share",  which establishes  standards for computing
and presenting  earnings per share. This Statement  simplifies the standards for
computing  earnings  per share  previously  found in APB  Opinion  No.  15.  The
adoption of this  Statement is required in fiscal year ending July 31, 1998. The
Company anticipates that the impact of adoption will be immaterial.

     In June  1997,  the FASB  issued  SFAS No.  130,  "Reporting  Comprehensive
Income".  This  Statement  establishes  standards  for  reporting and display of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial statements.  The adoption of this Statement is required in fiscal year
ending July 31, 1998. The Company  anticipates  that the impact of adoption will
be immaterial.

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, 1997, the Company will file a definitive  Proxy  Statement
with the  Securities  and Exchange  Commission  pursuant to Regulation 14A which
involves the election of directors.






                                      -12-

<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

<TABLE>
<CAPTION>

                                                                                             Page
                                                                                             ----
<S>                                                                                            <C>
      The   following    consolidated    financial   statements   of   Tapistron
International, Inc. are required to be included in Item 8 are listed below:

   Report of Independent Auditors                                                              16

   Consolidated Balance Sheets - July 31, 1997 and 1996                                        17

   Consolidated Statements of Operations - Year Ended July 31, 1997, 1996 and 1995             19

   Consolidated Statements of Changes in Stockholders' Equity - Year Ended July 31, 1997,
   1996 and 1995                                                                               20

   Consolidated Statements of Cash Flows - Year Ended July 31, 1997, 1996 and 1995             21

   Notes to Consolidated Financial Statements                                                  23

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

   Schedule I - Valuation and Qualifying Accounts                                              33

   Consolidated Pro Forma Balance Sheet (Unaudited)                                            34

   Note to Consolidated Pro Forma Balance Sheet (Unaudited)                                    36

</TABLE>


   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.



























                                      -13-

<PAGE>

(a) 3.  EXHIBITS

      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


*     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.

















                                      -14-

<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                                    10-27-97           
   ------------------------------------------         -----------------     
   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
--------------------------      Corporate Secretary and Director      10-27-97
       Gary Coulter

   /s/ J. Darwin Poe
--------------------------        President, Chief Executive
       J. Darwin Poe                Officer and Director              10-27-97

   /s/  Kim Amos 
--------------------------       Vice President of Engineering
        Kim Amos                       and Director                   10-27-97

 /s/ Floyd S. Koegler, Jr. 
--------------------------
   Floyd S. Koegler, Jr.          Chief Financial Officer             10-27-97






























                                      -15-

<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, 1997 and 1996, and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
each of the three years in the period  ended July 31, 1997.  These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable  assurance about whether the  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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the  period  ended July 31,  1997,  in  conformity  with  generally  accepted
accounting principles.



                                       DUDLEY, HOPTON-JONES, SIMS & FREEMAN PLLP

Birmingham, Alabama
September 26, 1997

















                                      -16-

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

                           CONSOLIDATED BALANCE SHEETS

                             July 31, 1997 and 1996

                                     ASSETS
<TABLE>
<CAPTION>

                                                                       1997         1996
                                                                       ----         ----
<S>                                                                 <C>          <C>       
CURRENT ASSETS
     Cash and cash equivalents                                      $   27,946   $   17,149
     Receivables, net of allowance of $39,905 as of July 31, 1997
        and 1996, respectively                                         720,740      119,872
     Note receivable                                                   350,000      600,000
     Inventory                                                       1,231,002    2,082,495
     Prepayments                                                       102,453       20,707
     Deferred income taxes                                             100,000         --   
                                                                    ----------   ----------

            Total current assets                                     2,532,141    2,840,223
                                                                    ----------   ----------

PROPERTY AND EQUIPMENT, NET                                            564,324      877,269
                                                                    ----------   ----------
OTHER ASSETS
     Long-term receivables, net allowance of $500,000  as of
         July 31, 1997 and 1996, respectively                             --           --
     Patents and patent license                                        263,068      286,160
     Deferred income taxes                                           1,900,000         --
     Other                                                               8,247       12,886
                                                                    ----------   ----------

            Total other assets                                       2,171,315      299,046
                                                                    ----------   ----------




            TOTAL                                                   $5,267,780   $4,016,538
                                                                    ==========   ==========
</TABLE>




















The accompanying notes are an integral
part of these financial statements.
                                      -17-

<PAGE>

<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY


                                                                 1997            1996
                                                                 ----            ----
<S>                                                         <C>             <C>      
CURRENT LIABILITIES
     Short-term debt                                        $       --      $  1,028,687
     Current portion of long-term debt                             4,315           4,729
     Accounts payable                                            178,068          33,970
     Accrued expenses                                            655,621         408,350
     Customer deposits                                           936,026         280,000
                                                            ------------    ------------


            Total current liabilities                          1,774,030       1,755,736
                                                            ------------    ------------
LIABILITIES SUBJECT TO SETTLEMENT UNDER
     REORGANIZATION PROCEEDINGS                                2,520,557       1,599,668
                                                            ------------    ------------

LONG-TERM DEBT                                                       744           5,060
                                                            ------------    ------------
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 shares issued                   4,233           4,233
     Additional paid-in-capital                               22,899,108      22,899,108
     Accumulated deficit                                     (21,918,100)    (22,234,475)
     Treasury stock - 55,518 shares outstanding as of
        July 31, 1997 and 1996, at cost                          (12,792)        (12,792)
                                                            ------------    ------------

            Total stockholders' equity                           972,449         656,074
                                                            ------------    ------------

            TOTAL                                           $  5,267,780    $  4,016,538
                                                            ============    ============

</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>

                                                             1997            1996           1995
                                                             ----            ----           ----
<S>                                                     <C>             <C>             <C>         
SALES                                                   $  3,626,092    $  1,305,499    $  2,565,544

COST OF SALES                                              2,477,302       1,146,717       1,757,793
                                                        ------------    ------------    ------------

            Gross profit                                   1,148,790         158,782         807,751
                                                        ------------    ------------    ------------

OPERATING EXPENSES
     Administrative expenses                               1,998,245       3,473,581       3,656,532
     Research and development                                 10,384          23,473       2,405,438
                                                        ------------    ------------    ------------
                                                           2,008,629       3,497,054       6,061,970

OPERATING LOSS                                              (859,839)     (3,338,272)     (5,254,219)
                                                        ------------    ------------    ------------
OTHER INCOME (EXPENSE)
     Interest expense                                        (30,269)       (314,611)       (248,594)
     Interest income                                             114          26,292          42,529
     Loss on disposal of assets                                 --        (1,022,505)       (592,891)
                                                        ------------    ------------    ------------

            Other income (expense)                           (30,155)     (1,310,824)       (798,956)

Loss before reorganization items, income tax
     benefit and extraordinary item                         (889,994)     (4,649,096)     (6,053,175)

REORGANIZATION ITEMS                                        (793,631)       (249,150)           --   
                                                        ------------    ------------    ------------

Loss before income tax benefit and extraordinary item     (1,683,625)     (4,898,246)     (6,053,175)

INCOME TAX BENEFIT                                        (2,000,000)           --              --
                                                        ------------    ------------    ------------

            Income (loss) before extraordinary tem           316,375      (4,898,246)     (6,053,175)

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

NET INCOME (LOSS)                                       $    316,375    $ (4,478,096)   $ (6,053,175)
                                                        ============    ============    ============

EARNINGS PER SHARE
     Income (loss) before extraordinary item            $       0.03    $      (0.49)   $      (0.69)
     Extraordinary item                                         --              0.04            --

            Net income (loss)                           $       0.03    $      (0.45)          (0.69)
                                                        ------------    ------------    ------------

Weighted average number of shares outstanding           $ 10,526,295    $ 10,012,390    $  8,761,117
                                                        ============    ============    ============

</TABLE>



The accompanying notes are an integral
part of these financial statements.
                                      -19-


<PAGE>


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

                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                           For the Years Ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>


                                 Common Stock             
                           -------------------------     Paid-in        Accumulated      Treasury
                             Shares         Amount       Capital          Deficit         Stock         Total
                             ------         ------       -------         -------         -----         -----
<S>                         <C>          <C>          <C>            <C>              <C>           <C>          
BALANCE  - 8-1-94            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 - 7-31-95            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 - 7-31-96           10,581,813        4,233     22,899,108      ( 22,234,475)   ( 12,792)        656,074
    Issuance of new shares       -              -           -                -              -              -
    Net income                   -              -           -                316,375        -            316,375 
                            ----------   ----------   ------------   ---- ----------  --- ------   ------------- 

BALANCE - 7-31-97           10,581,813   $    4,233   $ 22,899,108   $  ( 21,918,100) $ ( 12,792)  $     972,449 
                            ==========   ==========   ============   ==== ==========  === ======   ============= 

</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
                        For the Years Ended July 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>


                                                                   1997           1996           1995
                                                                   ----           ----           ----
<S>                                                            <C>            <C>            <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income (loss)                                         $   316,375    $(4,478,096)   $(6,053,175)
     Adjustments to reconcile net income (loss) to net
        cash provided by (used in) operating activities:
            Depreciation and amortization                          207,934        414,992        484,315
            Loss on sales of property, plant and equipment            --        1,022,504        592,891
            Issuance of stock in lieu of compensation                 --          145,000           --
            Changes in operating assets and liabilities:
                Decrease (increase) in receivables                (350,868)       328,097       (369,731)
                Decrease (increase) in prepayments                 (81,746)        76,439         93,782
                Decrease in inventory                            1,014,763      1,009,497        453,448
                Decrease in long-term receivables                     --          500,000           --
                Decrease in other assets                             1,644        170,933           --
                Decrease in noncompete agreements                     --           11,545         23,091
                (Increase) in notes receivable                        --         (150,000)          --
                (Increase) in deferred income taxes             (2,000,000)          --             --
                Increase in accounts payable and
                   accrued expenses                                391,369        123,060        982,096
                Increase (decrease) in accounts payable and
                   accrued expenses, which are subject to
                   settlement under a plan of reorganization       290,751       (170,941)          --
                Increase (decrease) in customer deposits           656,026         (5,000)       185,000
                                                               -----------    -----------    -----------

                   Net cash provided by (used in) operating
                   activities                                      446,248     (1,001,970)    (3,608,283)
                                                               -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
     Proceeds from sales of property and equipment                    --        2,187,500        201,250
     Capital expenditures and retirements                          (15,407)          --         (560,805)
     Payment for patents                                           (11,349)       (14,415)       (67,575)
     Investment in other assets                                       --             --         (137,625)
                                                               -----------    -----------    -----------

                   Net cash provided by (used in) investing
                   activities                                      (26,756)     2,173,085       (564,755)
                                                               -----------    -----------    -----------
</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
                           For the Years Ended July 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>

                                                                   1997           1996           1995
                                                                   ----           ----           ----
<S>                                                            <C>            <C>            <C>         
CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from issuance of debt                                599,970      1,210,495      1,320,000
     Principal payments of debt                                 (1,008,665)      (381,809)      (998,926)
     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
                                                               -----------    -----------    -----------

                   Net cash provided by (used in) financing
                   activities                                     (408,695)    (1,253,392)     3,559,751
                                                               -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS                                                    10,797        (82,277)      (613,287)
        Cash and cash equivalents - beginning of year               17,149         99,426        712,713
                                                               -----------    -----------    -----------
        Cash and cash equivalents - end of year                $    27,946    $    17,149    $    99,426
                                                               ===========    ===========    ===========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW
     INFORMATION
        Cash paid for interest                                 $    19,569    $    34,532    $   252,471
                                                               ===========    ===========    ===========

SUPPLEMENTAL DISCLOSURES OF NONCASH
     INVESTING AND FINANCING ACTIVITIES
        Equipment reclassified to inventory                    $   163,270    $   290,817    $      --


</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 21, 1996 (the  "petition  date").  The Company is currently  operating  its
business as a  debtor-in-possession  under the jurisdiction of the United States
Bankruptcy  Court 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 a question about the Company's 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 is anticipating  increased sales, as marketing efforts are increased
and as customers  regain  confidence in the financial  stability of the Company.
The  Company  has  been  focused  on   establishing   and   improving   customer
relationships,  and ongoing  research and  development  projects are building on
current proven CYP technology at a steady pace.

Immediate  emphasis  will be placed on  actively  promoting  the  machine in the
domestic  market,  which  will be handled by the  Company's  internal  sales and
marketing  department.  The primary  markets outside the U.S. are in the Pacific
Rim and  Europe,  and  foreign  sales  efforts  will be  maintained  by  outside
representatives.

Due to a number of domestic CYP Machine installations over the past three years,
CYP product has been able to find some market areas for which it is well suited,
the primary one being commercial/hospitality  broadloom. This market, along with
the rug market and residential broadloom, will be prime applications for the CYP
Machine.  The CYP  Machine is not in the same market  with  low-end  solid color
carpet tufting machines,  and our focus will continue to be on the manufacturers
of high-end carpet, which is a value-added product market. So, as there has been
an increasing trend toward product  differentiation in the carpet industry,  the
future is  continually  looking  brighter  for this  machine  and for  patterned
tufting in general.

The Company filed a plan of  reorganization on March 14, 1997, which was amended
on July 18, 1997. (See Note 16 - Subsequent events).

                                      -23-

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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  exploration  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.

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.

Earnings (Net Loss) Per Share
-----------------------------
Earnings (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.
                                      -24-

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Certain Significant Estimates
-----------------------------
At July 31, 1997,  the Company had  significant  deferred tax assets  related to
operating losses available for carryforward. These deferred tax assets have been
recorded under the guidelines of SFAS No. 109,  Accounting for Income Taxes,  on
the premise that future  taxable income will more likely than not be adequate to
realize future tax benefits of the available net operating  loss  carryforwards.
Under tax  regulations,  realization  of tax benefits per period will be limited
and full  realization  will  depend on future  taxable  income  over a number of
years.

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 judgments 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.
                                      -25-

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

Disclosures About Fair Values of Financial Instruments - Continued
------------------------------------------------------------------
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.

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

Inventory consists of the following components:

                                                       1997             1996   
                                                       ----             ---- 
                                                                                
Raw materials                                     $   437,215       $ 1,413,531
Work in process                                       793,788         1,636,530
Finished goods                                           --              11,090
                                                  -----------       -----------
                                                    1,231,003         3,061,151
Allowance for obsolete inventory                         --            (978,656)
                                                  -----------       -----------

                                                  $ 1,231,003       $ 2,082,495
                                                  ===========       ===========




The Company recognized a loss related to obsolete inventory of $-0- for the year
ended July 31, 1997 and $504,441 for the year ended July 31, 1996.





                                      -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>

                                            1997                       1996
                                    -----------------------     -----------------------                                         
                                                Accumulated                Accumulated    
                                     Cost       Depreciation      Cost     Depreciation 
                                     ----       ------------      ----     ------------ 
<S>                                 <C>          <C>            <C>          <C>   
  Office furniture, fixtures and                                                        
   equipment                        $ 501,435    $382,696       $ 501,435    $ 306,490  
  Machinery and equipment             826,956     383,060        1,167,365     490,114  
  Vehicles                             16,914     15,224           16,914       11,841  
                                    ----------   --------       ----------   ---------
                                    $1,345,305   $780,980       $1,685,714   $ 808,445  
                                    ==========   ========       ==========   =========  

Depreciation  expense totaled  $462,534  for 1995,  $390,125 for 1996 and $171,642 for
1997.
</TABLE>

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

Accounts payable and accrued expenses consist of the following:

                                                          1997           1996 
                                                          ----           ---- 
                                                                              
  Trade accounts payable                              $ 178,069      $  33,970
  Reserve for product warranties                         10,000         10,000
  Other                                                 645,621        398,350
                                                      ---------      ---------
                                                                              
                                                      $ 833,690      $ 442,320
                                                      =========      =========

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                                                $  1,742,982
  Unsecured term notes                                                 777,575
                                                                  ------------
  Total liabilities subject to settlement under
    reorganization proceedings                                    $  2,520,557
                                                                  ============

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.
                                      -27-

<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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
$50,941 for 1995, $52,442 for 1996 and $244,143 for 1997.

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

<TABLE>
<CAPTION>

Long-term debt consists of the following:                                  1997        1996    
                                                                           ----        -----                  
<S>                                                                       <C>        <C>     
  9.3% Promissory note, maturing in January 2002, payable $1,200                             
   annually, unsecured and subject to settlement under a plan of                             
   reorganization                                                         $  -       $ 4,869 
                                                                          -------    -------
  5.8% Promissory note, maturing September 9, 1998, payable $375                             
   monthly including interest, collateralized by equipment                  5,060      9,788 
                                                                            5,060     14,657
  Less:  Current portion                                                    4,316      4,729 
                                                                                             
     Current portion subject to settlement under a plan of reorganization    -           748 
                                                                          -------    -------
                                                                                             
                                                                          $   744    $ 9,180 
                                                                          =======    ======= 

Aggregate maturities of long-term debt for the five years subsequent to July 31,
1997, are as follows:

  July 31, 1998                                                                      $ 4,316
  July 31, 1999                                                                          744
  July 31, 2000                                                                          -
  July 31, 2001                                                                          -
  July 31, 2002                                                                          -
  Thereafter                                                                             -

As of July 31, 1996 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 $248,594 for 1995, $314,611 for 1996 and $30,269 for 1997.

</TABLE>


                                      -28-

<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 summarized 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 
   Granted                                           -                 -        
   Exercised                                         -                 -        
   Expired                                           -                 -        
  Outstanding as of July 31, 1997                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.
                                      -29-

<PAGE>

                          TAPISTRON INTERNATIONAL, INC.
                             (Debtor-in-Possession)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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. (See Note 16 - Subsequent Events.)

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 and 1997. (See
Note 16 - Subsequent Events.)

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, 1997,  the Company was indebted to this
shareholder in the amount of $614,000 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.

                                      -30-

<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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.

During the year ended July 31, 1997, no related party transactions occurred.

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

The following table summarizes the sales of the Company:

                                         1997            1996           1995    
                                         ----            ----           ----    
                                                                                
  North America                       $1,041,189      $1,200,322     $1,659,928 
  Asia                                    56,739          24,822         32,432
  Pacific Rim                          1,783,241          58,854         38,226
  Europe                                 744,923          21,501        834,958
                                      ----------      ----------     ----------
                                                                               
     Total sales                      $3,626,092      $1,305,499     $2,565,544
                                      ==========      ==========     ==========


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

Substantially  all sales were made to two  customers  during the year ended July
31, 1995,  two customers  during the year ended July 31, 1996 and four customers
during the year ended July 31, 1997.

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:
                                                     
                                                          1997           1996  
                                                          ----           ----   
                                                                     
  Deferred tax assets                                                           
   Accounts receivable                                $   16,000     $   16,000 
   Inventory                                              -              96,000 
   Accrued expenses and reserves                          12,683         14,000 
   Net operating loss carryforward                     8,642,000      8,006,000 
   Valuation allowance                                (6,670,683)    (8,132,000)
                                                      ----------     ----------
                             
  Net deferred tax assets                             $2,000,000     $   -      
                                                      ==========     ==========

As of July 31,  1997,  the  Company  had net  operating  loss  carryforwards  of
approximately  $22,869,000  available to offset future taxable income which will
expire in various years through 2011.

                                      -31-

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Realization  of  deferred  tax assets  associated  with the net  operating  loss
carryforwards  and  reversals of the  temporary  differences  is dependent  upon
generating   sufficient   taxable   income  prior  to   expiration  of  the  NOL
carryforwards.  Even though the Company has incurred tax losses for seven of the
past nine fiscal years,  management believes that it is more likely than not, it
will generate taxable income  sufficient to realize a portion of the tax benefit
associated with future  deductible  temporary  differences and NOL carryforwards
prior to their  expiration.  This  belief is based upon,  among  other  factors,
changes in operations that have occurred during the last two years Specifically,
cost savings by bringing  Research and  Development in house and by better usage
of just-in-time inventory control. The Company has assessed the trends regarding
patterned  carpet and with  consideration of its current  marketing  strategies,
anticipates a continued  improvement in operating results.  Management  believes
that a valuation  allowance is appropriate given the current estimates of future
taxable income. If the Company is unable to generate  sufficient  taxable income
in the future through operating  results,  increases in the valuation  allowance
will be required through a charge to expense.  However,  if the Company achieves
sufficient profitability to utilize a greater portion of the deferred tax asset,
the valuation allowance will be reduced through a credit to income.

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

The  Company's  plan  of  reorganization  was  confirmed  by the  United  States
Bankruptcy   Court  on  August  18,  1997.  As  provided  for  in  the  plan  of
reorganization,  the Company  has  received  the  $2,500,000  proceeds  from the
Regulation D offering.  $500,000 of the proceeds  will be applied to satisfy the
Class 7 claims (as  indicated in the plan of  reorganization)  and the remaining
proceeds will be applied to provide  operating  capital for the  continuation of
the Company's  business.  Upon confirmation of the plan of  reorganization,  all
outstanding stock options are cancelled; all redeemable warrants are modified to
reduce the exercise price to $1.00 and the exercise period is extended to August
31, 2000. As provided by the Plan, all Class 8 claims  (convenience  class) have
been paid in full.

NOTE 17 - ASSETS SUBJECT TO LIENS
---------------------------------

The Company has pledged two of its CYP  machines as  collateral  on two customer
deposits.  These machines are currently included in  work-in-process  inventory.
The machines pledged and the related deposit balances are as follows:

                                Collateral's Work-In      
         Collateral              Process Book Value        Deposit Book Balance
         Description            as of July 31, 1997        as of July 31, 1997  
         -----------            -------------------        -------------------  
                                                                                
    4.4Meter CYP Machine               445,000                    200,000       
    4.4 Meter CYP Machine              445,000                    200,000       
                                                                                

The  Company has pledged one of its notes  receivable  as  collateral  on a note
payable.  This  pledge was  subsequently  assigned as  collateral  on an accrued
expense.  The note pledged and other  related  accrued  expense  balances are as
follows:


        Collateral            Collateral's Book Value   Accrued Expense Balance
        Description            as of July 31, 1997        as of July 31, 1997  
        -----------           -----------------------   -----------------------
                                                                         
      Note receivable                 300,000                    125,263        

                                      -32-

<PAGE>

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

                                   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, 1997            $ 39,905      $   -        $   -       $ 39,905 
                                      --------      ----------   --------    --------

Allowance for Obsolete Inventory                                                       
--------------------------------                                                       
                                                                                       
  Year ended July 31, 1997            $978,656      $   -        $978,656    $   -     
                                      --------      ----------   --------    --------
                                                                                       
Allowance for Uncollectible Long-                                                      
---------------------------------                                                      
Term Receivables                                                                       
----------------                                                                       
                                                                                       
  Year ended July 31, 1997            $500,000      $   -        $   -       $500,000  
                                      --------      ----------   --------    --------
                                      
</TABLE>
  
  
  










 


















                                      -33-

<PAGE>

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

                         CONSOLIDATED PRO FORMA BALANCE SHEET
                                      (Unaudited)

                                     July 31, 1997

                                        ASSETS

<TABLE>
<CAPTION>
                                                                Pro Forma         
                                                 Historical    Adjustments          Pro Forma       
                                               Balance Sheet   (See Note A)        Balance Sheet   
                                               -------------   ------------        -------------   
<S>                                           <C>              <C>                 <C>            
CURRENT ASSETS                                                                                     
  Cash and cash equivalents                   $    27,946      $ 2,500,000  (a)    $              
                                                                  (500,000) (f)     2,027,946     
  Receivables, net of allowance of $39,905        720,740                             720,740       
  Notes receivable                                350,000                             350,000      
  Inventory                                     1,231,002                           1,231,002     
  Prepayments                                     102,453                             102,453      
  Deferred income taxes                           100,000                             100,000 
                                                ---------                           ---------
                                                                                                  
     Total current assets                       2,532,141                           4,532,141
     
                                                                                                  
PROPERTY AND EQUIPMENT, NET                       564,324                             564,324      
                                                                                                  
OTHER ASSETS                                                                                      
  Long-term receivables, net of allowance                                                         
   of $500,000                                      -                                   -             
  Patents and patent license                      263,068                             263,068      
  Other                                             8,247                               8,247      
  Deferred income taxes                         1,900,000                           1,900,000     
                                                ---------                           ---------
                                                                                                  
     Total other assets                         2,171,315                           2,171,315     
                                                ---------                           ---------
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
                                                                                                  
     TOTAL                                     $5,267,780                          $7,267,780     
                                               ==========                          ==========     
                                                                                 
</TABLE>







See Note to Consolidated Pro Forma Balance Sheet.

                                      -34-

<PAGE>

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

                      CONSOLIDATED PRO FORMA BALANCE SHEET
                                   (Unaudited)

                                  July 31, 1997

                      LIABILITIES AND STOCKHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                Pro Forma         
                                                 Historical    Adjustments          Pro Forma       
                                               Balance Sheet   (See Note A)        Balance Sheet   
                                               -------------   ------------        -------------   
<S>                                           <C>              <C>                 <C>      
CURRENT LIABILITIES                           
  Current portion of long-term debt           $     4,315      $                   $     4,315    
  Accounts payable                                178,068                              178,068    
  Accrued expenses                                655,621       (225,000)(c)                      
                                                                (150,000)(d)           280,621    
  Customer deposits                               936,026                              936,026    
                                              -----------                           ----------
     Total current liabilities                  1,774,030                            1,399,030   
                                                                                                  
LIABILITIES SUBJECT TO SETTLEMENT                                                                 
  UNDER REORGANIZATION PROCEEDINGS              2,520,557       (613,894)(b)                      
                                                                (150,000)(e)                      
                                                                (500,000)(f)         1,256,663   
                                                                                                  
LONG-TERM  DEBT                                      744                                   744    
                                                                                                  
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;  10,581,813 issued; pro                                                    
   forma issued 34,841,108                         4,233           6,667 (a)                      
                                                                   1,637 (b)                      
                                                                     600 (c)                      
                                                                     400 (d)                      
                                                                     400 (e)            13,937    
  Additional paid-in capital                   22,899,108      2,493,333 (a)                      
                                                                 612,257 (b)                      
                                                                 224,400 (c)                      
                                                                 149,600 (d)                      
                                                                 149,600 (e)        26,528,298  
Accumulated deficit                           (21,918,100)                         (21,918,100) 
Treasury stock -  55,518 shares outstanding,                                                      
  at cost                                     (    12,792)                         (    12,792)   
                                              -----------                           ----------

     Total stockholders' equity                   972,449                            4,611,343   
                                              -----------                           ----------
                                                                                                 
     TOTAL                                   $  5,267,780                         $  7,267,780   
                                             ============                         ============   
</TABLE>






                                      -35-

<PAGE>

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

                  NOTE TO CONSOLIDATED PRO FORMA BALANCE SHEET
                                   (Unaudited)


NOTE A - Plan of Reorganization Adjustments
-------------------------------------------

The  Company's  plan  of  reorganization  was  confirmed  by the  United  States
Bankruptcy Court on August 18, 1997.

The plan of  reorganization  requires the Company to issue 24,259,295  shares of
common stock which will dilute current equity interests.

The following  adjustments  when applied to the historical  balance sheet of the
Company will give the effect of the plan of reorganization.

(a)  To record issuance of 16,666,667 shares of Tapistron's common stock at $.15
     per share.

(b)  To record settlement of class 6 claims,  including discharge of $613,894 in
     return for the issuance of Tapistron's  common stock at the rate of 1 share
     for every $.15 of allowed claim (4,092,628 sh.).

(c)  To record  settlement of allowed class 4 claims,  including  discharge of a
     $225,000  administrative  claim in return  for the  issuance  of  1,500,000
     shares of Tapistron's common stock.

(d)  To record settlement of allowed administrative claim of Ameristar Insurance
     Services,  Inc., including discharge of $150,000 in return for the issuance
     of 1,000,000 shares of Tapistron's common stock.

(e)  To record  issuance of  1,000,000  shares of  Tapistron's  common  stock in
     partial payment of allowed class 7 claims, at the rate of $.15 per share.

(f)  To record initial cash payment of allowed class 7 claims, including prorata
     distribution of cash in the amount of $500,000.

















                                      -36-