<PAGE>

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934, for the Quarter Ended December 31, 1996.
                                       or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934, for the Transition Period from ________ to ________

                          Commission file number 1-9748
         -------------------------------------------------------------

                        AMERICAN FILM TECHNOLOGIES, INC.
         -------------------------------------------------------------
               (Exact name of registrant as specified its charter)

                  Delaware                      23-2359277
         -------------------------------------------------------------
         (State or other juridiction of   (IRS Employer Identification
         incorporation or organization)    Number)

                 4105 Sorrento Valley Blvd., San Diego, CA 92121
         -------------------------------------------------------------
                    (Address of principal executive offices)

                Registrant's telephone number including area code
                                 (619) 623-0830
         -------------------------------------------------------------

         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 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 
                              -----           -----

         As of February 4, 1997, there were 73,400,644 shares of common stock
outstanding.
<PAGE>



                          PART 1. FINANCIAL INFORMATION

                        American Film Technologies, Inc.
                      Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
                                                             December 31,            June 30,
                                                                     1996                1996
                                                             ------------         -----------
                                                              (unaudited)
<S>                                                          <C>                   <C>
Assets

Current Assets:
  Cash                                                           $247,025            $338,669
  Other current assets                                            236,256             106,254
                                                               ----------          ----------
Total current assets                                              483,281             444,923

Equipment and software, at cost, net                              397,606             444,459
Film library, net                                                 262,500             337,500
Reorganization value in excess of identifiable assets, net      5,847,035           6,017,772
                                                               ----------          ----------
                                                               $6,990,422          $7,244,654
                                                               ==========          ==========

Liabilities and stockholders' equity:
Current Liabilities:
  Notes payable:
     Current portion of long-term notes payable                  $405,307                  $0
     Other loans                                                  173,176              31,357
  Accounts payable and accrued expenses                           449,868             480,471
  Accrued compensation                                            150,204             220,058
                                                               ----------          ----------
Total current liabilities                                       1,178,555             731,886
                                                               ----------          ----------

Long-term notes payable                                         1,215,921           1,634,404
                                                               ----------          ----------
Total liabilities                                               2,394,476           2,366,290

Stockholders' equity:
Preferred stock, $.001 par value:
     Authorized shares - 10,000,000 at December 31, 1996 and
     June 30, 1996: issued and outstanding shares 0 at
     December 31, 1996 and  June 30, 1996                               0                   0
Common stock, $.002 par value:
     Authorized shares - 90,000,000 at December 31, 1996 and
     June 30, 1996: issued and outstanding shares 73,400,644
     at December 31, 1996 and 69,567,310 at June 30, 1996         146,802             139,135
Capital in excess of par value                                  7,831,785           7,264,453
Deferred compensation                                            (960,000)         (1,080,000)
Accumulated deficit                                            (2,422,641)         (1,445,224)
                                                               ----------          ----------
Total stockholders' equity                                      4,595,946           4,878,364
                                                               ----------          ----------
                                                               $6,990,422          $7,244,654
                                                               ==========          ==========
</TABLE>

See accompanying notes.

                                        1
<PAGE>



                        American Film Technologies, Inc.
                 Condensed Consolidated Statements of Operations

                                   (Unaudited)
<TABLE>
<CAPTION>


                                   For the Three months ended December 31, 1996 and     For the Six months ended December 31, 1996
                                   December 31, 1995                                    and December 31, 1995

                                       Successor        Successor     Predecessor          Successor        Successor   Predecessor
                                         Company          Company         Company            Company          Company       Company
                                    ------------     ------------    ------------       ------------     ------------   -----------
                                                      October 17,      October 1,                         October 17,       July 1,
                                                          1995 to         1995 to                             1995 to       1995 to
                                    December 31,     December 31,     October 16,       December 31,     December 31,   October 16,
                                            1996             1995            1995               1996             1995          1995
                                    ------------     ------------    ------------       ------------     ------------   -----------
<S>                                  <C>                <C>             <C>                <C>            <C>           <C>
Revenues:

  Distribution revenues                       $0               $0              $0                 $0               $0            $0
                                    ------------     ------------    ------------       ------------     ------------   -----------
                                               0                0               0                  0                0             0

Expenses:

  Compensation and benefits -
    administrative and officers          100,818           37,133         229,670            200,418           37,133       263,829
  General and administrative             219,076          253,213          20,280            435,838          253,213        97,108
  Interest expense, net                   30,774           14,137           6,353             61,748           14,137        33,132
  Depreciation and amortization          139,707          113,447               0            279,414          113,447       238,273
  Reorganization items:
    Fresh start adjustments                    0                0      (6,326,258)                 0                0    (6,326,258)
    Professional fees                          0                0          16,500                  0                0        65,430
    U.S. Trustee fees                          0                0               0                  0                0         1,250
                                    ------------     ------------    ------------       ------------     ------------   -----------
                                         490,375          417,930      (6,053,455)           977,418          417,930    (5,627,236)
                                    ------------     ------------    ------------       ------------     ------------   -----------
Net income/(loss)                      ($490,375)       ($417,930)     $6,053,455          ($977,418)       ($417,930)   $5,627,236
                                    ============     ============    ============       ============     ============   ===========

Net income/(loss) per share               ($0.01)          ($0.01)          $0.19             ($0.01)          ($0.01)        $0.17
                                    ============     ============    ============       ============     ============   ===========

Shares used in per share computation  72,567,311       69,557,310      32,232,802         71,178,421       69,557,310    32,232,802
                                    ============     ============    ============       ============     ============   ===========
</TABLE>

See accompanying notes.



                                        2

<PAGE>

                        American Film Technologies, Inc.
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                              Successor            Successor       Predecessor
                                                                Company              Company           Company
                                                           ------------         ------------      ------------
                                                             Six months          October 17,           July 1,
                                                                  ended              1995 to           1995 to
                                                           December 31,         December 31,       October 16,
CASH FLOWS FROM OPERATION ACTIVITIES:                              1996                 1995              1995
                                                           ------------         ------------      ------------
<S>                                                         <C>                 <C>                 <C>
Net income/(loss)                                             ($977,418)           ($417,930)       $5,627,236
Adjustments to reconcile net income (loss) to net cash
  (used) by operating activities:
    Depreciaiton and amortization                               279,414              113,447           238,273
    Amortization of deferred compensation                       120,000
    Fresh start adjustments                                                                         (6,326,258)
    Change in estimate to Liabilities subject to compromise 
    Changes in assets and liabilities:
        Restricted cash                                               0                    0            15,322
        Other current assets                                   (130,002)            (109,764)           86,913
        Accounts payable and accrued expenses                  (100,457)          (1,039,757)          210,651
        Adjustment to long-term notes payable                                         55,729
        Adjustment to Reorganization value in excess of
           identifable asset account                                                 (65,150)
                                                           ------------         ------------      ------------
Net cash (used) by operating activities                        (808,463)          (1,463,425)         (147,863)

Cash Flows From Investing Activities:
                                                                      -                    -                 -
Net cash provided (used) by investing activities                      0                    0                 0

Cash Flows From Financing Activities:
    Principal payments on notes payable - bank                        0             (348,385)         (250,000)
    Principal payments on notes payable - other                 (65,025)            (332,503)
    Proceeds from notes payable - other                         206,844              101,263           503,000
    Proceeds from common stock subscriptions                                                         2,960,200
    Proceeds from sale of common stock                          575,000
                                                           ------------         ------------      ------------
Net cash provided (used) by financing activities                716,819             (579,625)        3,213,200

Net increase (decrease) in cash                                 (91,644)          (2,043,050)        3,065,337
Cash, beginning of period                                       338,669            3,075,921            10,584
                                                           ------------         ------------      ------------
Cash, end of period                                            $247,025           $1,032,871        $3,075,921

Supplemental disclosures of cash flow information:

Cash paid during the period for interest                        $58,302             $143,200

Reduction of long-term notes payable written down against
  Reorganization value in excess of identifiable asset          $13,176
</TABLE>

See accompanying notes.




                                        3
<PAGE>


                        AMERICAN FILM TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 (UNAUDITED)


1.  Reorganization Under Chapter 11

Bankruptcy Proceedings and Basis of Presentation

On October 15, 1993, the Company filed for protection from creditors under
Chapter 11 of the United States Bankruptcy Code. The Chapter 11 filing was the
result of continuing defaults related to the Company's loans, recurring
operating losses and cash flow problems. Under Chapter 11, substantially all
pre-petition liabilities of debtors are subject to settlement under a plan of
reorganization. On October 6, 1995, the Company's Plan of Reorganization (the
"Plan") was approved by the bankruptcy court and became effective October 17,
1995. The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. As
discussed below (see H. J. Meyers Agreement), the Company completed a private
placement for $3,460,200 and management intends to raise additional funds to
finance its future operations. See the Management's Discussion and Analysis of
Financial Condition and Results of Operations section for additional fund
raising activities during and subsequent to the quarter ended December 31, 1996.
While management believes it will be successful in its efforts, there are no
assurances whether sufficient financing or equity will be available to fund the
operations through June 30, 1997. No adjustments have been made to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result if the Company is
unable to continue as a going concern.

Further, the accompanying consolidated financial statements do not reflect any
adjustments relating to settlement of the claims of any class of creditors that
are provided for in the Company's Plan of Reorganization. Any adjustments
relating to such settlements will be recorded at such time as the Bankruptcy
Court enters a final order relating to these settlements. See discussion under
"Fresh Start Reporting" below. The only effect of the bankruptcy proceedings
reflected in the accompanying financial statements is for the period July 1,
1995 to October 16, 1995. "Reorganization items" (including professional fees)
have been specifically identified on the Consolidated Statements of Operations.


Plan of Reorganization

 Under the terms of the Plan, the following is a summary of the treatment of
each of the major classes of creditors and stockholders:



                                       4
<PAGE>

<TABLE>
<CAPTION>

                  Estimated
Class of          Amount of
claims            claim             Distribution under the Plan                    Status
------            -----             ---------------------------                    ------
<S>               <C>               <C>                                             <C>       
Class 1 -         $86,000           Cash payment in full on effective               Unimpaired
Employee                            date.
Priority claim

Class 2 -         $80,000           Cash payment on Distribution Date or, at        Unimpaired
Priority                            the Company's discretion, over six years
Claims                              plus interest

Class 3 -         $623,000          Cash payment on the effective date plus         Unimpaired
Comerica                            interest and reasonable legal fees
Claims

Class 4 -         $500,000          Cash payment plus interest on the effective     Unimpaired
Secured                             date
Claims

Class 5 -         $122,000          $110,000 cash payment plus accrued interest     Impaired
DIP                                 on effective date and remainder in one year
Financing                           note.
Claims

Class 6 -         $  6,000          Cash payment in full on effective date          Unimpaired
Convenience
Claims

Class 7 -         $1,650,000        Unsecured five year notes in full amount of     Impaired
Unsecured                           allowed claim, with interest at 7%.
Claims

Class 8 -             N/A           $10 cash on effective date. Unexercised         Impaired
Preferred                           Series B and the Series C and D voting
Stock                               convertible preferred stock interests will
Interests                           be canceled

Class 9 -             N/A           Retained, subject to dilution                   Impaired
Common
Stock Interests

Class 10 -            N/A           Canceled                                        Impaired
Other Equity
Interests
</TABLE>
                                       5
<PAGE>


                        AMERICAN FILM TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 (UNAUDITED)


The above Class 7 unsecured Claim does not include the Class 7 Claim of Joseph
Taritero which has been compromised pursuant to the provisions of a prior
Stipulation and Order (see Note 4).

A claim becomes impaired when the legal, contractual or equitable right of such
claim is altered, modified or changed by the proposed treatment under the Plan.

H. J. Meyers Agreement

On May 3, 1995, the Company executed an agreement with H. J. Meyers and Co.,
Inc. ("Meyers") pursuant to which Meyers purchased an exclusive 90 day option,
as of May 30, 1995, to purchase common stock from the Company for $3,000,000
which would provide Meyers up to 51% of the outstanding shares. Upon approval of
the agreement by the Bankruptcy Court, on May 30, 1995, Meyers paid the Company
a non-refundable fee of $150,000 for the option. The agreement required Meyers
to pay $3,000,000 to the Company upon the effective date of the Company's Plan.
Through a subsequent amendment to that agreement, Meyers agreed to use its best
efforts to increase the proceeds of the offering to $4,000,000 which would
result in net proceeds of $3,480,000 to the Company. In exchange for this
possible increase, the Company agreed to issue an additional 3,800,000 shares to
Meyers and its assignees. Meyers raised the money through a private placement of
the Company's common stock to "accredited investors", as that term is defined by
the Securities Act of 1933. The proceeds to the Company totaled $3,460,200,
including the conversion of a $300,000 bridge loan discussed below.

The Company agreed to grant a one-time demand and piggy back registration right.
For a period of two years from the effective date, (upon demand by at least 25%
of the new stockholders) the new stockholders can demand the Company file a
registration statement with the SEC covering the reoffer and resale of its
shares (up to 38,982,508). Notwithstanding the foregoing, if at any time prior
to exercise of the demand registration right the Company receives a Letter of
Intent from an underwriter for a public equity offering of at least $5,000,000
of the Company's securities, then the demand registration right shall terminate.
On March 28, 1996, the Company entered into a letter of intent with H. J. Meyers
(the "Meyers Letter of Intent") under which Meyers confirmed its interest in
underwriting on a firm commitment basis a public offering of shares of the
Company's common stock. The Meyers Letter of Intent contemplates the negotiation
and execution of formal agreements relating to the proposed offering and
provides, among other things, that the Company will apply for listing on the
NASDAQ Small Cap Market and use its best reasonable efforts to maintain such
listing for not less than five years; that the Company, if requested, obtain
"key man" life insurance on the lives of designated officers of the Company and
that the Company shall have entered into a joint venture, business alliance or
business combination with an owner of content on terms acceptable to Meyers.

                                       6
<PAGE>


                        AMERICAN FILM TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 (UNAUDITED)


The new stockholders also have a right to register their shares in any offering
of the Company stock (a "piggy-back" right). The amount of stock the new
shareholders may register and sell is subject to pro-rata reduction or
elimination at the sole discretion of the underwriter. The existence of these
rights could adversely impact the future price of the common stock or the
ability of the Company to raise additional equity capital.

To enable the Company to fund certain obligations prior to the effective date of
the Plan, on July 28, 1995 Meyers arranged a $500,000 bridge loan to the Company
with interest at 8% plus common stock at the rate of one half share for every
dollar of bridge loan. The loans were convertible into common stock at the same
rate as the private placement to the accredited investors. On the effective
date, $300,000 of the bridge loan was converted into the Company's common stock
and the remaining $200,000 was repaid. The $500,000 bridge loan is included in
Class 4 - Secured Claims mentioned above.

Fresh Start Reporting

Under the provision of Statement of Position (SOP) 90-7, "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code," issued in November 1990
by the American Institute of Certified Public Accountants, the Company has
prepared the following balance sheet as of the effective date, October 17, 1995
on the basis of "fresh start" reporting since the reorganization value, as
defined, was less than the total of all post-petition liabilities and
prepetition claims, and holders of voting shares immediately before confirmation
of the Plan received less than fifty percent of the voting shares of the
emerging entity. Under this concept, all assets and liabilities are restated to
reflect the reorganization value of the reorganized entity, which approximates
its fair value at the date of reorganization. In addition, the accumulated
deficit of the Company was eliminated and its capital structure was recast in
conformity with the Plan. As such, the following consolidated balance sheet as
of October 17, 1995 represents that of a successor company which, in effect, is
a new entity with assets, liabilities and a capital structure having carrying
values not comparable with prior periods and with no beginning retained earnings
or deficit.

The Company estimated the fair value of the reorganized entity based on the
proceeds received from the private placement of 56% of its common stock which
was completed on the effective date. While the estimated reorganization value of
the Company has been primarily allocated to specific asset categories pursuant
to Fresh Start Reporting, the effects of such are subject to further refinement
or adjustment. Current assets have been recorded at their book value, which the
Company believes approximates fair value. Equipment, software and film library
have been recorded at their approximate fair value. Long-term debt consists of
pre-petition liabilities and will be paid out subject to the terms of the Plan.


                                       7
<PAGE>

                        AMERICAN FILM TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 (UNAUDITED)

         The effect of the Plan on the Company's audited consolidated balance
sheet at October 17, 1995 (the Effective Date) was as follows:
<TABLE>
<CAPTION>

                                                                      (1)              (2)
                                                                    H.J Meyers             Fresh      Reorganized
                                                     Prior to          Private             Start          Balance
Assets                                         Reorganization        Placement       Adjustments            Sheet
                                               --------------   --------------    --------------   --------------
<S>                                              <C>               <C>                <C>              <C>
Current Assets:
  Cash                                               $115,721       $2,960,200                $0       $3,075,921
  Restricted cash                                   2,960,200       (2,960,200)                                 0
  Accounts receivables                                      0                                                   0
  Other current assets                                 36,493                                              36,493
                                               --------------   --------------    --------------   --------------
Total current assets                                3,112,414                0                 0        3,112,414

Equipment and software, at cost, net                  755,253                           (305,253)         450,000
Leasehold improvement, net                             64,740                                              64,740
Film library, net                                      55,380                            394,620          450,000
                                               --------------   --------------    --------------   --------------
Property and equipment, net                           875,373                0            89,367          964,740

Reorganization value in excess of
   identifiable assets                                      0                          6,237,264        6,237,264
                                               --------------   --------------    --------------   --------------
Total assets                                       $3,987,787               $0        $6,326,631      $10,314,418
                                               ==============   ==============    ==============   ==============

Liabilities and stockholders' equity/(deficit) Current Liabilities:
  Notes payable:
     Bank Loans - in default                         $348,385                                            $348,385
     Other loans                                      622,300         (300,000)                           322,300
  Accounts payable and accrued expenses             1,470,705                                350        1,471,055
  Accrued compensation                                729,376                                             729,376
                                               --------------   --------------    --------------   --------------
Total current liabilities                           3,170,766         (300,000)              350        2,871,116

Notes payable                                               0                          1,642,234        1,642,234
Liabilities subject to compromise                   1,642,211                         (1,642,211)               0

Stockholders'equity/(deficit):
Preferred stock                                           695                               (695)               0
Common stock                                           60,821           78,294                            139,115
Capital in excess of par value                     13,526,768        3,181,906       (11,046,721)       5,661,953
Accumulated deficit                               (17,373,674)                        17,373,674                0
Subscription payable                                2,960,200       (2,960,200)                                 0
                                               --------------   --------------    --------------   --------------
Total liabilities and stockholders' equity/(de     $3,987,787               $0        $6,326,631      $10,314,418
                                               ==============   ==============    ==============   ==============
</TABLE>

(1) To record the effects of the H. J. Meyers Private Placement Plan. Subsequent
    to October 17, 1995, the Company received an additional $200,000 from
    subscriptions related to the Private Placement.
(2) To record assets, liabilities and capital at their fair value pursuant to
    Fresh Start Reporting and eliminate any retained deficit.

                                       8
<PAGE>

                        AMERICAN FILM TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 (UNAUDITED)



2. Summary of Significant Accounting Policies

The Company's principal business is the production of color versions of motion
pictures and television programs originally produced in black-and-white. The
Company has produced colorized films for its own library and owns the copyrights
on eleven such films. These films are available for sale and or distribution.

Consolidation

The consolidated financial statements include the accounts of Midtech de Mexico,
S.A. de C.V., the Company's wholly-owned Mexican subsidiary. All intercompany
transactions have been eliminated in consolidation.

Depreciation and Amortization

Depreciation and amortization are provided over the estimated useful lives of
the underlying assets using primarily the straight line method over a five-year
period. Leasehold improvements are amortized over the life of the lease or the
estimated useful life of the assets. Reorganization value in excess of
identifiable assets is being amortized over twenty years.

Film Library

Costs incurred in creating the Film Library include direct salaries and related
benefits of production personnel charged to specific coloring projects, an
allocation of overhead and costs of materials used in the coloring process.
Costs are charged to Film Library using the same system the Company maintains
for calculating cost of coloring films for customers. The Film Library is being
amortized using the straight line method over a three year period.

Loss per Share

Loss per share has been calculated by dividing the net loss applicable to common
stock by the weighted average number of common stock outstanding for the periods
indicated. For the quarter ended December 31, 1996 and the period October 17,
1995 to December 31, 1995, no exercise of stock options was assumed because the
exercise of such equivalents would be anti-dilutive.

Stock Options

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options.

                                       9
<PAGE>

                        AMERICAN FILM TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          DECEMBER 31, 1996 (UNAUDITED)

3. Reorganization value in excess of identifiable assets

In accordance with Statement of Position (SOP) 90-7, upon the effective date,
$6,237,264 of the reorganization value of the Company was not attributable to
specific tangible or identified intangible assets and has been classified as an
intangible asset. While the estimated reorganization value of the Company has
been preliminarily allocated to specific asset categories pursuant to Fresh
Start Reporting, the effects of such are subject to further refinement, which
will cause this "reorganization value" account to be adjusted accordingly.
Furthermore, any adjustment relating to the settlement of a disputed prepetition
claim by the Bankruptcy Court will also cause this "reorganization value"
account to be adjusted accordingly. Reorganization value in excess of
identifiable assets is as follows:


                                                              December 31, 1996
                                                              -----------------
Reorganization value in excess of identifiable assets                $6,214,676
less accumulated amortization                                           367,641
                                                                     ----------
                                                                     $5,847,035
                                                                     ==========

The related amortization for the quarter ended and six month period ended
December 31, 1996 was $78,780 and $157,560, respectively.

4.  Lawsuit Settlement

In January 1993, a suit was instituted against the Company by Joseph M. Taritero
in the Superior Court of the State of California for the County of Los Angeles
alleging breach of contract and fraud and seeking damages of $892,000. The
Company has settled with Mr. Taritero for an amount totaling $275,000. In
accordance with the terms of the Plan, $125,000 was paid on the effective date,
$75,000 was paid in April 1996 and the remaining $75,000 was paid in October
1996.

                                       10
<PAGE>



Item 2.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations
         ----------------------------------------------------------------

         This discussion should be read in conjunction with the consolidated
financial statements, related notes and management's discussion and analysis of
financial conditions and results of operations included in the Company's annual
report on Form 10-K for the year ended June 30, 1996.

Overview and Reorganization.

         On October 15, 1993, the Company filed for protection under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court for the District of Delaware. On
October 6, 1995, the Company's Plan of Reorganization (the "Plan") was approved
by the Bankruptcy Court and became effective October 17, 1995 (the "Effective
Date"). In connection with the Plan, the Company raised $3.46 million in new
capital in exchange for the issuance of common stock representing approximately
56% if its total outstanding common stock. The Company emerged from bankruptcy
under Fresh Start Reporting as promulgated by Statement of Position No. 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code. For
a detailed discussion of the bankruptcy proceedings, see Note 1 in the Notes To
Condensed Consolidated Financial Statements.

         Success of the Company will, among other things, depend upon the
resumption of production in Mexico. That will require reemployment of selected
former Mexican employees. Since the Mexican operation was suspended in October
1993, the Company believes most of the former employees have found other jobs.
If Midtech is unable to rehire certain former employees, it will have to recruit
and train a new work force. That would delay the resumption of production and
increase the cost of production. As such, it could have a materially adverse
effect on the Company. Although the Company expects to benefit from the
devaluation of the peso, there is no assurance of how long those expected
benefits will last.

         Since emerging from bankruptcy, the Company has actively pursued new
product development and opportunities, as well as strategic alliances, partners
and other sources of financing. Related to those efforts, during the quarter
ended September 30, 1996 the Company issued 1,333,334 shares of its Common Stock
for an aggregate cash purchase price of $200,000. During the quarter ended
December 31, 1996, the Company issued 2,500,000 shares of its Common Stock for
an aggregate cash purchase price of $375,000.

         The Company is in discussions with other potential investors regarding
the purchase of equity securities or other investments in the Company, however,
there can be no assurance that any transaction can be negotiated or, if
negotiated, that such a transaction can be consummated.

                                       11
<PAGE>


         On March 28, 1996, the Company entered into a letter of intent with
Meyers (the "Meyers Letter of Intent") under which Meyers confirmed its interest
in underwriting on a firm commitment basis a public offering of shares of the
Company's common stock. The Meyers Letter of Intent contemplates the negotiation
and execution of formal agreements relating to the proposed offering and
provides, among other things, that the Company will apply for listing on the
NASDAQ Small Cap Market and use its best reasonable efforts to maintain such
listing for not less than five years; that the Company, if requested, obtain
"key man" life insurance on the lives of designated executive officers of the
Company; and that the Company shall have entered into a joint venture, business
alliance or business combination with an owner of content on terms acceptable to
Meyers.

Results of Operations.

         The operations of the Company for the period ended December 31, 1996
(Successor Company), for the period October 17, 1995 to December 31, 1995
(Successor Company) and for the period July 1, 1995 to October 16, 1995
(Predecessor Company) were significantly affected by the cessation of production
operations of the Company. As a result, the financial results of the Company for
each of the periods addressed by this report do not reflect the earnings
capacity of the Company. The financial data for the period ended December 31,
1996 and for the period October 17, 1995 to December 31, 1995 reflects the
adoption of Fresh Start Accounting. As such, the financial data is considered
that of a Successor Company and is not comparable to prior periods.

         Since the filing under Chapter 11 in October, 1993, the Company has not
generated any income from film colorization, animation or fee for service
orders. For the quarter ended December 31, 1996 the Company recorded net
interest expense of approximately $31,000 as compared to $14,000 for the period
October 17, 1995 to December 31, 1995. Interest income for the quarter ended
December 31, 1996 was $3,000 as compared to $23,000 for the period October 17,
1995 to December 31, 1995. For the six month period ended December 31, 1996, the
Company recorded net interest expense of $62,000, including $5,000 of interest
income.

         For the quarter ended December 31, 1996, the Company recorded
compensation and benefits for its administration and officers of approximately
$101,000 as compared to $37,000 for the period October 17, 1995 to December 31,
1995. The increase over the period October 17, 1995 to October 31, 1995 is due
to $60,000 of amortization expense related to the deferred compensation under
Gerald Wetzler's compensation agreement. For the six month period ended December
31, 1996, compensation and benefits for its administration and officers totaled
approximately $200,000, including $120,000 of amortization expense related to
the deferred compensation under Gerald Wetzler's compensation agreement.

                                       12
<PAGE>


         For the quarter ended December 31, 1996, the Company recorded selling,
general and administrative expenses of approximately $219,000 as compared to
$253,000 for the period October 17, 1995 to December 31, 1995. For the six month
period ended December 31, 1996, selling, general and administrative expenses
totaled approximately $436,000.

         For the quarter ended December 31, 1996, the Company recorded
depreciation and amortization expense of approximately $140,000 as compared to
$113,000 for the period October 17, 1995 to December 31, 1995. For the six month
period ended December 31, 1996, depreciation and amortization expense totaled
approximately $279,000. Depreciation and amortization expense for these periods
is based on Fresh Start Accounting, which among other things, includes a
restatement of all assets and liabilities to approximate their fair value as of
the date of reorganization.

         For the quarter ended December 31, 1996 the Company had a net loss of
approximately $490,000, or $0.01 per share, as compared to a net loss of
$418,000. or $0.01 per share for the period October 17, 1995 to December 31,
1995. For the six month period ended December 31, 1996, the Company had a net
loss of approximately $977,000, or $0.01 per share.

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

          In connection with the Plan, the Company completed a private placement
of $3.46 million. During the fiscal year ended June 30, 1996, the Company
entered into a stock option agreement with Gerald Wetzler, its Chairman and CEO,
whereby Mr. Wetzler purchased for a fee of $200,000 (which was deemed fair
value) an option to acquire the Company's common stock, or in the alternative,
preferred stock convertible into common stock. Subsequent to the quarter ended
December 31, 1996, the Company entered into an additional stock option agreement
with Mr. Wetzler, whereby Mr. Wetzler purchased for a fee of $200,000 (which was
deemed fair value) an option to acquire up to 10 million shares of the Company's
common stock. This option would be exercisable upon shareholder approval for the
increase in the number of authorized shares and the filing of an amendment to
the Company's certificate of incorporation reflecting the foregoing.

         During the quarter ended September 30, 1996, the Company issued
1,333,334 shares of its Common Stock for an aggregate cash purchase price of
$200,000. During the quarter ended December 31, 1996, the Company issued
2,500,000 shares of its Common Stock for an aggregate cash purchase price of
$375,000.

         The Company believes the funds received during the quarter ended
December 31, 1996 from the stock issuance and the funds received from the
$200,000 stock option fee subsequent to the quarter ended December 31, 1996 will
be sufficient to last through May 1997.

                                       13
<PAGE>


         The funds raised in the private placements, as well as the additional
funds raised are essential for the Company to continue operations. As noted
above, the Company has entered into a Letter of Intent with H. J. Meyers & Co.,
Inc. for the purpose of raising additional capital through a public offering.
The Company will be required to raise additional financing to fund operations
past May 1997 and no assurances can be made that such additional financing will
occur.


                           PART II : OTHER INFORMATION
                           ---------------------------

Item 1. Legal Proceedings
-------------------------

         None.

Item 2.  Changes In Securities
-------  ---------------------

         Sale of Unregistered Securities - In September 1996, the Company issued
1,333,334 shares of its Common Stock (the "Shares") in a private placement to
two investors for an aggregate purchase price of $200,000. The Shares were
issued without the benefit of an effective registration statement under the
Securities Act of 1933, as amended (the "Act") in reliance upon the private
placement exemptions under Section 4(2) of the Act. During the quarter ended
December 31, 1996, the Company issued in a private placement an additional
2,500,000 shares of Common Stock to two investors for an aggregate purchase
price of $375,000. These sales were also consummated without the benefit of an
effective registration statement under the Act based upon the private placement
exemptions issued under Section 4(2) of the Act.

Item 3.  Defaults Upon Senior Securities
-------  -------------------------------

         None.

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

         None.

Item 5.  Other Information
-------  -----------------

         As a result of the Plan, as of the Effective Date of the Plan, the
Company adopted "fresh start" accounting, which reflects the payment or
discharge of certain debts in accordance with the Plan. "Fresh start accounting"
allows a reorganized entity to reflect its reorganization value, which
approximates its fair value at the date of reorganization. In addition, the
accumulated deficit of the Company is eliminated and its capital structure is
recast in conformity with the Plan.

                                       14
<PAGE>


Item 6.  Exhibits and Reports on Form 8-K
-------  --------------------------------

         10.21 Stock purchase agreement dated October 21, 1996 between the
Company and Porter Bibb.

         10.22 Registration undertaking agreement dated October 21, 1996 between
the Company and Porter Bibb.

         10.23 Stock purchase agreement dated October 28, 1996 between the
Company and AFT Investments, a California general partnership.

         10.24 Registration undertaking agreement dated October 28, 1996 between
the Company and AFT Investments, a California general partnership.

         10.25 Five year stock option agreement dated October 17, 1996 between
the Company and Ed Payne.

         10.26 Five year stock option agreement dated October 17, 1996 between
the Company and Steven Lefkowitz.

         10.27 Five year stock option agreement dated October 17, 1996 between
the Company and Porter Bibb.

         10.28 Five year stock option agreement dated October 15, 1996 between
the Company and Milton Rich.

         10.29 Five year stock option agreement dated October 15, 1996 between
the Company and Sheldon Jacobs.

         10.30 Stock option agreement dated January 3, 1997 between the Company
and Gerald Wetzler.

         10.31 Five year stock option agreement dated November 20, 1996 between
the Company and Porter Bibb.

         10.32 Five year stock option agreement dated November 20, 1996 between
the Company and Harvey Finkel.



                                       15
<PAGE>




                                   Signatures

In accordance with the requirements 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.

AMERICAN FILM TECHNOLOGIES, INC.



Date:  February 4, 1997              By:  /s/ Gerald M. Wetzler //
       -------------------                -------------------------
                                              Gerald M. Wetzler,
                                              Chairman, Chief Executive Officer



 Date:  February 4, 1997              By:  /s/ John J. Karl //
        -----------------                  --------------------
                                               John J. Karl,
                                               Principal Accounting Officer

                                     16