SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

For the fiscal year ended December 31, 1997       Commission File Number 0-24520


                            IMSCO TECHNOLOGIES, INC.
           (Name of small business issuer as specified in its charter)


           DELAWARE                                   04-3021770
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)

 40 Bayfield Drive, North Andover, MA                                    01845
(Address of principal executive offices)                              (Zip Code)


Issuer's telephone number, including area code: (978) 689-2080

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

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

                         Common Stock, $.0001 par value

     Check whether the Issuer (1) has filed all reports  required to be filed by
Section 13 or 15(d) of the Exchange  Act 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 ___

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [X].

     State Issuer's revenues for its most recent fiscal year:$0.

     As of December 31, l997: (a) 6,516,536 Common Shares,  $.0001 par value, of
the registrant were outstanding;  (b) approximately 3,135,327 Common Shares were
held by non-affiliates;  and (c) the aggregate market value of the Common Shares
held by  non-affiliates  was $8,230,233 based on the closing bid price of $2.625
per share on December  31, 1997.  Shares of Common  Stock held by each  officer,
director  and  holder of 5% or more of the  outstanding  Common  Stock have been
excluded in that such persons may be deemed  affiliates.  The  determination  of
affiliate  status  is not  necessarily  a  conclusive  determination  for  other
purposes.


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                                     PART I

     This  Annual  Report on Form  10-KSB  contains  forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,  or
Section 21 E of the Securities  Exchange Act of 1934, as amended,  or subsequent
expansions or replacements of such sections,  including information with respect
tothe  Company's  plans and strategy for its  business.  For this  purpose,  any
statements  contained  herein that are not statements of historical  fact may be
deemed to be  forward-looking  statements.  Without limiting the foregoing,  the
words "believes",  "anticipates",  "plans", "estimates",  "feels", "expects" and
similar expressions are intended to identify forward-looking  statements.  There
are a number  of  important  factors  that  could  cause  actual  events  or the
Company's  actual  results to differ  materially  from those  indicated  by such
forward-looking statements. These factors include, without limitation, those set
forth below under the caption "Factors That May Affect Future Results"  included
under  "Management's  Discussion and Analysis of Financial Condition and Results
of Operations" in Part II of this Annual Report on Form 10-KSB.

Item 1. DESCRIPTION OF BUSINESS

General

     IMSCO Technologies, Inc., a Delaware corporation ("IMSCO" or the "Company")
is a  development  stage  company.  The Company  develops and is  attempting  to
commercialize, market and license electrostatic separation products based on its
proprietary  technologies.  Electrostatic  separation  takes  advantage  of  the
fundamental  electrical  properties of  attraction,  wherein  unlike or opposite
charges  attract  each other,  and  repulsion,  wherein like or the same charges
repel each other,  and uses charged  materials  to  selectively  separate  other
substances. In the last four years, the Company has developed several separation
technologies based on electrostatics  combined with mechanical separation.  This
technology was originally  developed by the Company for the specific  purpose of
separating  viruses and viral particles from human plasma.  In 1993, the Company
successfully  designed an electrostatic  separation  technology which removes on
demand caffeine from brewed  liquids,  such as coffee and tea. The Company calls
its decaffeination  technology the "DECAFFOMATIC"  (herein "DECAFFOMATIC" or the
"Decaffeination System"). The Company calls its plasma separation technology the
"PLASMA PURE".

     Having  achieved  separation  of viral DNA and virus from plasma  using the
PLASMA  PURE  in  research   and  testing   performed  by  the  Company  at  the
Massachusetts   General  Hospital  and  the  Mayo  Clinic,   the  Company  began
researching and developing other uses for the technology. Based on the Company's
internal  laboratory  testing  and  research  conducted  by the  Company  at the
University of  Massachusetts  in 1994 and 1995 and at the University of Akron in
1996 and 1997, the Company believes that the DECAFFOMATIC is capable of removing
in excess of 95% of the caffeine from brewed  beverages  such as coffee and tea.
In 1993,  separate patent  applications  were filed by the Company with the U.S.
Office of Patents and Trademarks for the PLASMA PURE and DECAFFOMATIC separation
technologies.  On August 22, l995 the Company was granted a patent by the United
States Patents and Trademarks  Office,  Patent No.  5,443,709 for "Apparatus for
Separating Caffeine From a Liquid Containing the Same".



<PAGE>

     Previously in late 1996 and early 1997,  the Company  anticipated  that the
decaffeinator would be incorporated into a commercial coffee brewer suitable for
the institutional  user marketplace  utilizing the coffee brewer electronics for
power to the decaffeinator.  In late 1997 and early 1998, the Company determined
that it could design the  decaffeination  device to be self contained within the
brew basket,  which is removable from the brewer, with its own independent power
source. It is believed by management that this design is superior to the earlier
version, more universal and interchangeable with different  institutional coffee
brewer models and will be easier for the consumer to use and, hopefully, lead to
increased sales once the product is commercialized.  Consequently,  during 1997,
the Company continued to develop and test a DECAFFOMATIC device contained within
a detachable  coffee brew basket for the institutional  commercial  marketplace.
The Company  believes  that it has  substantially  completed  its  research  and
development  of the  DECAFFOMATIC  technology and is ready to introduce its brew
basket  decaffeination  product to the  commercial  institutional  coffee brewer
market in 1998.

     The  Company's  objective  is to  become a  leader  in the  development  of
electrostatic  separation market by capitalizing on its proprietary  technology.
The Company's  strategy is to initially focus on  commercializing  and launching
the DECAFFOMATIC products. Although due to limited financial and human resources
the Company was unable to conduct any  significant  research and  development on
its PLASMA PURE  technology,  the the Company intends to pursue further research
and the  development  of the  PLASMA  PURE  technologies  when  funding  becomes
available. Although there can be no assurances, the Company intends to implement
its strategy by (i) continuing to establish  manufacturing  contracts with third
party manufactures for its products, (ii) expanding its research and development
activities  for  additional  uses  and  applications  applying  its  proprietary
technologies, and (iii) establishing marketing agreements,  licensing agreements
and  distribution  agreements with  recognized  market leaders for marketing and
distribution of its products once developed.

     In l995, the Company  formally  established a new  subsidiary  called Decaf
Products, Inc. ("DPI"), which was incorporated in the State of Delaware on April
5, l995, that will manufacture and directly market the  DECAFFOMATIC  technology
and  products in North  America.  On  September  20,  1996,  DPI entered  into a
Manufacturing and Distribution Agreement with NEWCO Enterprises, Inc. ("NEWCO"),
of St. Charles, Missouri to manufacture a coffee brew basket,  incorporating the
decaffeination  technology,  for DPI's sales to the  institutional  coffee maker
marketplace in North America (the "NEWCO Agreement"). Under the NEWCO Agreement,
NEWCO was granted the  exclusive  right to market and  distribute  the  products
incorporating the Company's  decaffeination  technology to the so-called "office
coffee supply" market segment in North America for a period of three years. Over
1997,  the  Company  has been  working  with NEWCO to  develop,  design and test
working  models,  and  assist in the design of molds for the  production  of the
decaffeination device.  Although there are no assurance,  it is anticipated that
sales under the NEWCO Agreement will occur in 1998. See "Business -Marketing and
- Manufacturing."

     On July 11, 1997, due to a refocus of the core business of Hughes,  Edwards
& Price,  Inc.  ("Hughes")  the  Company  and  Hughes  mutually  discontinued  a
Marketing   Agreement   wherein   Hughes  had  been   appointed   the  exclusive
representative to market the Company's decaffeination technology and products to
the  institutional  coffee maker  marketplace,  such



<PAGE>

as restaurants and hotels,  excluding the office coffee supply market,  in North
America for a period of three years (the "Hughes Marketing Agreement"). Although
there can be no assurance that it will be  successful,  the Company is currently
negotiating  with new third  parties  to cover the  institutionsl  sales  market
previously assigned to Hughes. Further, although there can be no assurances, the
Company  intends to license the  DECAFFOMATIC  technology  to another  unrelated
company for  manufacture,  marketing and  distribution in the rest of the world.
See "Business -Marketing."

     In December 1995, the Company established  another subsidiary,  BioElectric
Separation  and  Testing,  Inc.  ("BEST"),  a Delaware  corporation,  to further
conduct  research  and  development  on the PLASMA PURE and all related  medical
applications  of the Company's core  electrostatic  separation  technology.  The
Company has only  considered  limited basic  research with respect to the PLASMA
PURE  electrostatic  separation  technology and because of its limited financial
resources it was not able to conduct any significant research and development on
its PLASMA PURE technology in 1997. If adequate  funding were  available,  it is
estimated  that it would take  approximately  18 months in order to conduct  the
necessary clinical trials and research to submit the PLASMA PURE for approval by
the United States Food and Drug Administration  ("FDA"). The PLASMA PURE has not
been submitted to the FDA for approval and, if submitted,  there is no assurance
that it will be approved.  Given the limited funds  available to the Company and
consequent delays in conducting the necessary  research and testing,  the PLASMA
PURE would not  possibly be  submitted  to the FDA, if at all after  considering
further research results, until at least the second half of 1999 if funding were
obtained. See "Business - Research and Development."

     On September 20, 1996, the Company entered into a media purchase  agreement
("Media Purchase Agreement") and agreed to sell an aggregate of 1,136,364 shares
of its common stock, par value $.0001,  to Proxhill  Marketing,  Ltd., a private
media and advertising company based in Colorado ("PML"),  for the sales price of
$1.32 per share and received in consideration  therefor prepaid media credits in
the amount of $1,500,000 to be used at the Company's  direction by PML.  Because
the marketing and advertising  campaign for the Company's commerical brew basket
decaffeinator  has not yet been  implemented,  at December  31, 1997 the Company
possessed $1,300,643 of prepaid media credits in its inventory to use for future
public relations, marketing and advertising.

     The  Company was  originally  formed in 1986 under the laws of the State of
Nevada.  In 1987 the  Company  changed  its  corporate  domicile  from Nevada to
Massachusetts  since the  corporate  operations  were located in  Massachusetts,
which  was  accomplished  through  action by the  shareholders  and the Board of
Directors in 1987. The Company's name at that time was IMSCO, Inc. In July 1996,
the Company was reincorporated in Delaware as IMSCO Technologies,  Inc. In order
to  effectuate  this  change,  the Company  proposed the  implementation  of the
following plan. In May 1996, the Company filed a Certificate of Incorporation in
Delaware incorporating a new wholly-owned subsidiary,  IMSCO Technologies,  Inc.
The Board of  Directors  of the  Company  at a meeting  held in May 1996  voted,
subject to the  adoption  by the  stockholders,  to merge into its  wholly-owned
subsidiary,  IMSCO Technologies,  Inc., a Delaware corporation. On July 9, 1996,
the  stockholders  of IMSCO,  Inc.,  voted to approve  the  change of  corporate
domicile from  Massachusetts  to Delaware.  Therefore,  on July 18, 1996,  there
remained one surviving  corporation  and the name of this surviving  corporation
became IMSCO Technologies,



<PAGE>

     Inc.  As of the  effective  date of the  merger,  each  stockholder  of the
Company held one share of common  stock,  par value  $.0001 per share,  of IMSCO
Technologies,  Inc.  for each one share of  common  stock,  par value  $.001 per
share,  of IMSCO,  Inc.  previously  held by him.  Unless the context  otherwise
requires,  "IMSCO"  and the  "Company"  refer to  IMSCO  Technologies,  Inc.,  a
Delaware corporation.

PRODUCTS AND TECHNOLOGIES

     The Company is in the  development  stage,  and has only recently  begun to
enter  the  early  stage of  product  commercialization  with  its  DECAFFOMATIC
products.  The  development  of any products  will require  significant  further
research,   development,   testing  and  regulatory   approvals  and  additional
investment  prior  to  commercialization.  Substantially  all of  the  Company's
resources  have  been,  and for the  foreseeable  future  will  continue  to be,
dedicated to the discovery,  development and  commercialization of electrostatic
separation  technologies,  most of  which  are  still  in the  early  stages  of
development and testing.  While the Company believes that the development of the
DECAFFOMATIC  technology is substantially  complete, most of 1997 was devoted to
further development,  design and testing of the decaffeination  device as a self
contained device within a detachable  commercial brew basket market.  The detail
engineering  necessary  for the  manufacture  of  production  molds was recently
completed and it is  anticipated  that the Company will be able to introduce the
DECAFFOMATIC  commercial brew basket market in 1998. However, there are a number
of challenges that the Company must successfully  address to complete any of its
development  efforts.  With  respect to PLASMA  PURE,  although  the  results of
initial basic research by the Company and/or its collaborators was positive,  it
may be  inconclusive  and may not be indicative of results that will be obtained
in human clinical trials if conducted by the Company.  If the Company is able to
obtain necessary  funding and conducts clinical trials, as results of particular
preclinical studies and clinical trials are received by the Company, the Company
may abandon projects such as PLASMA PURE, which it might otherwise have believed
to be promising.  The Company presently is pursuing product  opportunities  that
will require extensive  additional capital  investment,  research,  development,
testing, regulatory clearance or approvals prior to commercialization. There can
be no  assurance  that the  Company's  development  programs  will  ever  obtain
necessary  capital  funding,  will be successfully  completed,  or that required
regulatory clearance or approvals will be obtained on a timely basis, if at all.

     In addition,  the product development programs conducted by the Company and
its collaborators are subject to risks of failure inherent in the development of
product   candidates  based  on  new  technologies.   These  risks  include  the
possibility  that  the  technologies  used  by  the  Company  will  prove  to be
ineffective or any or all of the Company's products or technologies  needing FDA
clearance  will  prove  to be  unsafe  or  toxic or  otherwise  fail to  receive
necessary  regulatory  approvals;  that  the  product  candidates,  if safe  and
effective,  will be difficult to manufacture on a large scale or uneconomical to
market;  that the proprietary  rights of third parties will preclude the Company
or  its   collaborators   from  marketing   products   utilizing  the  Company's
technologies; or that third parties will market superior or equivalent products.
Accordingly,



<PAGE>

there can be no assurance that the Company's research and development activities
will result in any commercially  viable products.  See "Management's  Discussion
and  Analysis of Financial  Condition  and Results of  Operations,"  "Business -
"Research and Development" and "- Competition."

DECAFFOMATIC

TECHNOLOGY RESEARCH AND DEVELOPMENT

     In  1993,  using  its  electrostatic  separation  technology,  the  Company
designed,  researched  and  developed a  successfully  working  prototype of the
DECAFFOMATIC  device.  Throughout 1994 and 1995 the Company continued to further
research and develop the DECAFFOMATIC device. To facilitate this development, in
October 1994, the Company  entered into a Memorandum of  Understanding  with the
University of  Massachusetts  whereunder the Company would use the  University's
facilities  and engage  certain of the  University's  professors and students to
perform further research and development on the DECAFFOMATIC  device as directed
by the Company.  Throughout l995, the Company  continued to utilize the services
of the  University  of  Massachusetts  to conduct its research  and  development
activities. In 1996, the Company entered into a collaborative Research Agreement
with the Polymer  Sciences  Division  of the  University  of Akron,  for further
development of the  electrostatic  decaffeination  technology.  The Company paid
$10,000 per month for the use of the  University of Akron's  facilities  and the
dedication of certain  professors to the Company's  project which continued into
1997.  The  specific  focus of the Akron  Research  Agreement  was to select the
polymers to be utilized in the decaffeination  device.  Under the Akron Research
Agreement, the Company believes that it has substantially completed the research
and development of its decaffeination technology.

MARKET

The IMSCO  separation  technology has enabled the Company to build a stand-alone
decaffeinator  which may be used  immediately  after  brewing to  customize  the
product to individual taste and need.  Throughout l995, the Company continued to
further  develop  and  refine the  DECAFFOMATIC  technology  in several  working
prototypes that are used for demonstration  and testing purposes.  Previously in
late  1996  and  early  1997,  the  Company  and  NEWCO   anticipated  that  the
decaffeinator would be incorporated into the coffee brewer, utilizing the coffee
brewer  electronics for power, and had designed the commercial  decaffeinator in
such manner.  In late 1997 and early 1998, the Company  determined that it could
design the  decaffeination  device to be self contained  within the brew basket,
which is removable from the brewer, with its own power source. It is believed by
management that this design is superior to the earlier  version,  more adaptable
and interchangeable  with different  institutional coffee brewer models and will
be easier for the consumer to use and, hopefully, lead to increased sales. Thus,
in late 1997 and early 1998, the Company  continued to develop,  refine and test
its commercial brew basket  decaffeinator.  The detail engineering necessary for
the  manufacture  of  production  molds for the brew  basket  decaffeinator  was
recently completed.  The commercial  customer-user will need to only buy regular
coffee or tea and  decaffeinate the brewed beverage on demand for those who want
the  decaffeinated  product.  The Company  anticipates  that this will result in
considerable  cost saving for the consumer.  Although there can be no assurance,



<PAGE>

in the institutional  marketplace,  the Company believes that such an integrated
decaffeinator  will produce more significant cost savings,  given the difference
in price of decaffeinated  ground coffee beans over regular ground coffee beans.
The Company  believes that this benefit is of primary concern to senior citizens
who are on a fixed income and at the same time, are the largest  growing segment
of the  population.  The  Company  feels that this group is also the one that is
most health  conscious and concerned about chemical  treatment of coffee in most
other decaffeination processes.  There is no chemical treatment in the Company's
process.

     Management  believes  that  removal  of  caffeine  from  coffee  and tea is
recognized  as a  desirable  goal for health and other  reasons.  The  Company's
research has revealed that no technology now exists for removal of caffeine from
hot freshly brewed liquids; rather, the current technology removes caffeine from
the beans prior to brewing.

     The decaffeination process of coffee and tea has been popular since the mid
1930's.  It was initially  started by General Foods and then adapted by Nestle's
and other  multi-national  companies.  The first  decaffeination  process  was a
chemical  method that used  Methylene  Chloride.  This method is still  employed
today, however, not as widely. The Company believes that the chemical extraction
method is not desirable  because of the harsh chemicals and health issues raised
by their use. As consumers became more health  conscious in the 1980's,  the use
of  decaffeinated  products  increased.  A method more  frequently used utilizes
repetitive  washes of the coffee  beans with clean  water.  Although  this water
treatment  process is the method of choice for most coffee roasters  today,  the
Company  believes that it is more costly and ultimately  less convenient for the
consumer.

     The Company is planning to market the DECAFFOMATIC  devices directly in the
United  States  through its DPI  subsidiary.  The Company  intends to have NEWCO
contract  manufacture the DECAFFOMATIC  device on an OEM basis for the Company's
North American sales.

     The Company intends to focus its decaffeination technology marketing on its
internal  decaffeinator  for use with the  automatic  drip coffee maker for both
institutional  and  home  consumer  products.  This  integrated  system  has the
DECAFFOMATIC separation device directly incorporated into the coffee maker, such
that the  decaffeination  occurs as the  consumer  directs on demand as a normal
step in the coffee maker brewing process.

PLASMA PURE

TECHNOLOGY RESEARCH AND DEVELOPMENT

      The Company has designed,  prototyped and done promising basic research on
the PLASMA  PURE  electrostatic/mechanical  separation  device  for the  express
purpose  of  separating  virus and viral  particles  from human  plasma.  Due to
limited  financial  resources,   no  significant  resarch  and  development  was
conducted on the PLASMA PURE technology in 1997. Based on its initial research ,
although there can be no assurance,  the Company  believes that the  PLASMA-PURE
has the capacity to remove a substantial  amount of the viral  population from a
unit of contaminated  plasma without  adversely  affecting the clotting factors.
Because of the high cost of conducting medical research and development  testing
on the PLASMA PURE and the Company's  limited financial



<PAGE>

resources,  the Company was only able to conduct  very  limited  research on the
PLASMA PURE over the past year.  It is  estimated  by the Company  that if it is
able to obtain  adequate  financing to complete its research and  development on
the PLASMA PURE  technology,  of which there can be no assurance,  it would take
approximately  18 months of testing  before  making  application  to the FDA for
approval, which cannot be assured. Although significant amounts of research need
to be conducted,  the Company  believes that PLASMA PURE, with its capability of
removing viruses and viral particles,  if eventually developed and approved, may
significantly  reduce the risk normally associated with transfusion of plasma or
plasma  components.   Although  significant  additional  research  needs  to  be
conducted,  management  believes  that the use of PLASMA  PURE to  filter  fresh
frozen plasma may not significantly  decrease yields of the clotting components.
This is  achieved  because of the unique  electrostatic  internal  matrix  which
enables  the plasma and its  clotting  components  to flow  freely  through  the
device, but still remove significant  amounts of virus and viral particles.  The
methods  currently  used to  inactivate  viruses  in  plasma  such as the use of
detergents or extreme heat all have the possible  adverse effect of limiting the
yield of final desired procoagulant products.

MARKETS

The Company  believes  the PLASMA PURE system and its  electrostatic  technology
offer various growth possibilities for the Company; however, each of these areas
will require significant further research and development, the financing of such
efforts and FDA approval before they can be commercialized. The Company has also
designed and is in the earliest research and development stage for a new product
that is an extension of the PLASMA PURE  separator  appropriately  called PLASMA
PURE PLUS. It would be used only for bulk plasma  fractionation and therefore be
larger than PLASMA PURE and priced  differently.  Another follow-up product that
the  Company  would like to conduct  research  and  development  on if  adequate
financing were  available,  which the Company does not currently  possess,  is a
modified white blood cell filter.  This device would utilize the same technology
as PLASMA-PURE, and therefore management believes its introduction could be more
rapid than it has been for the PLASMA  PURE  device.  Management  feels a second
version of the white blood cell filter could then be marketed to the  diagnostic
reagent market. However, given the numerous uncertainties and risk inherent with
medical  research  in general,  and blood  research  in  particular,  the needed
financing involved to conduct such research which the Company currently does not
possess, there can be no assurance that any of these plasma products and devices
will ever be finally developed,  or if completed that they will receive approval
from the FDA or the comparable regulatory authority of any foreign jurisdiction.
The Company has not prepared or made  application to the FDA or any governmental
authority for approval of its PLASMA PURE device or related products.

     The Company  believes  that the core  electrostatic  separation  technology
lends  itself  to  other  markets  as  well,  particularly  air  filtration  for
hospitals,  convention  centers and  airplanes.  Although  it needs  significant
amounts of  additional  research  and testing  and the  financial  resources  to
conduct such  activities,  which the Company  does not  currently  possess,  the
Company believes that its electrostatic  separation technology can be applied to
extra  corporeally  based  immunotherapies  which involve an improved system for
drug  administration  and improved systems for removal and/or treatment of cells
or other circulating materials (including byproducts of metabolism).



<PAGE>

     Similar to DPI, in 1996, the Company established a new Delaware corporation
subsidiary,  BioElectric  Separating  & Testing,  Inc.  ("BEST")  to conduct the
continued  research  and  development  activities  and  pursue  FDA  application
relating to the PLASMA PURE and related technologies.

MARKETING

     Except for the  marketing  of the  DECAFFOMATIC  products in North  America
through  DPI,  the  Company's  current  strategy is to license its  products and
technologies  to other companies which have  pre-existing  industry  presence in
their respective fields and to enter into  collaborative  arrangements with such
companies  to develop new  applications  for the  technology  with the  contract
partner's own products.  The Company has limited experience in sales,  marketing
and distribution. Therefore, the Company's strategy for commercialization of its
products  includes  entering  into  agreements  with other  companies  to market
current and certain future products  incorporating the Company's technology.  To
date, the Company has one such  agreement with NEWCO.  There can be no assurance
that the Company will be able to enter into additional  marketing  agreements on
terms favorable to the Company,  if at all, or that current or future agreements
will ultimately be beneficial to the Company.

     The large  institutional  marketplace  brew  basket  decaffeinator  will be
manufactured by NEWCO.  Previously in 1996 and early 1997, the Company and NEWCO
anticipated that the decaffeinator would be incorporated into the coffee brewer,
utilizing the coffee brewer  electronics for power. In late 1997 and early 1998,
the Company determined that it could design the decaffeination device to be self
contained within the brew basket,  which is removable from the brewer,  with its
own power  source.  It is  believed  that this design is superior to the earlier
version,  more  interchangeable  with different coffee brewer models and will be
easier for the consumer to use. As of this date, the detail  engineering for the
production  molds  has been  completed  for the  institutional  coffeemaker-brew
basket that will be used for large institutions.  After that model is assembled,
it will be further  tested and  developed to confirm that it has all the desired
specifications,  such as brewing  and  decaffeination  speed,  ease of  customer
removal of the  separation  device and safety  design.  Although there can be no
assurances,  it is anticipated that such final design refinements to the working
model will be completed in 1998 and that sales orders could commence thereafter.

     To create a potential  customer  awareness of the Company's  Decaffeination
System,  the Company  intends to  commence a public  relations  and  advertising
campaign in 1998. The Company will attempt to employ lower cost public relations
at trade shows, in trade  publications and at other  appropriate food or kitchen
appliance shows and events.  Initially,  the advertising employed by the Company
will be print media  consisting of magazines,  newspapers  and point of purchase
signage.  To finance this public relations and advertising,  the Company has the
prepaid Media Credits from PML. At December 31, 1997 the Company had  $1,300,643
of prepaid media credits available for such marketing and advertising.



<PAGE>

Media Purchase Agreement

     Under the Media  Purchase  Agreement with PML, it  contractually  agreed to
finance $1.5 million of media for the Company's public relations and advertising
campaign  through Grow Marketing  Services  ("GROW"),  an independent  marketing
company.  In exchange  for the Company  issuing  1,136,363  shares of its common
stock,  representing a price of $1.32 per share,  the Company  acquired the $1.5
million of prepaid,  dedicated  media credits (the "Media  Credits") and certain
media services.

     The media advertising  services provided by GROW include  conducting market
research  services for the purpose of  formulating  a media plan to optimize the
benefits  of  the  media  advertising  campaign.  Then,  GROW  secures  suitable
advertising time on television, radio, or cable systems, or advertising space in
newspapers, magazines, or other publications of mass appeal.

     At the closing of a media purchase  transaction Proxhill will deliver cash,
media,  media credit  and/or other  media-related  assets to GROW as payment for
media credit  extended to the Company.  Proxhill  then delivers to the Company a
pre-paid purchase order acknowledging the Company's right to purchase media from
GROW under the terms set forth in the Agreement.

     The  Company  intends to use the  remaining  $1,300,643  of  prepaid  Media
Credits  to  finance  the  introduction  and  initial  product  advertising  and
marketing support for the DECAFFOMATIC products in the United States and Canada.

     Given that DPI is newly  formed and has  conducted  no  independent  market
research or consumer focus groups activities, there can be no assurance that DPI
will be successful in introducing  the  DECAFFOMATIC  technology to the consumer
public,  that it will have any  commercial  level of acceptance by the public or
that if there is some level of commercial acceptance, that it will be sufficient
for the  Company of DPI to  continue  supporting  a  marketing  and  advertising
program or that such efforts will ever be profitable.

     The Company  has only  recently  commenced  limited  marketing  activities.
Achieving market acceptance for the Company's products will require  substantial
marketing  efforts and the  expenditure  of significant  funds.  There can be no
assurance  that the Company and its marketing  contractors  and partners will be
able to commercialize successfully or achieve market acceptance of the Company's
products and  technologies.  There is no assurance that the Company will be able
to create a successful  marketing program, or that the Company's products can be
sold  in  a  manner  that  will  permit  the  Company  to  achieve   long  range
profitability. Further, there can be no assurance that the Company's competitors
will not develop  competing  technologies  that are less  expensive or otherwise
superior to the products of the Company.  The failure to market successfully the
Company's products would have a material adverse effect on the Company's results
of operations and financial conditions.


     The Company is dependent for product sales revenues upon the success of its
third party marketing partners in performing their responsibilities.  The amount
and  timing  of



<PAGE>

resources  which  may  be  devoted  to  the  performance  of  their  contractual
responsibilities  by its  marketing  partners  are not within the control of the
Company.  There can be no assurance  that such  marketing  partners will perform
their obligations as expected, pay any additional revenue or license fees beyond
the stated  minimums to the Company or market any products  under the  marketing
agreements,  or that the Company will derive any revenue from such arrangements.
Moreover,  certain of the  agreements  provide  for  termination  under  certain
circumstances.  There can be no assurance that the interests of the Company will
coincide  with those of its marketing  partners or that the  marketing  partners
will not  develop  independently  or with third  parties  products  which  could
compete  with the  Company's  products,  or that  disagreements  over  rights or
technology or other proprietary interests will not occur. To the extent that the
Company  chooses not to or is unable to enter into future  agreements,  it would
experience  increased capital requirements to undertake the marketing or sale of
its current and future products. There can be no assurance that the Company will
be able to market or sell its current or future  products  independently  in the
absence of such agreements.

Research and Development; Collaborative Arrangements

The Company  conducts its research and  development  activities  through its own
staff  and  facilities,  as  well as  through  collaborative  arrangements  with
universities,  and independent consultants.  However, at present the Company has
only  four  full-time  employees,  two of  whom  are  devoted  to  research  and
development,  and,  accordingly  is  dependent  upon  third  parties  to conduct
significant research and development,  laboratory testing, clinical studies, and
the procedures and processes necessary to apply for and, if possible, obtain FDA
and other regulatory approvals and manufacture and market a finished product.

As is the case with the University of Massachusetts and the University of Akron,
it is  believed by the Company  that the use of outside  collaborative  research
agreements  is  the  most  efficient  method  to  have  certain  aspects  of its
technology  further  researched  and  developed  while  minimizing  the  capital
investment such ventures require from the Company.

Although  the Company  had  entered  into an  agreement  with the  Massachusetts
General  Hospital to conduct  collaborative  research on the initial PLASMA PURE
separation  technology,  that agreement  expired in June 1993. To facilitate the
development of its DECAFFOMATIC technology,  in October 1994 the Company entered
into  a  Memorandum  of  Understanding  with  the  University  of  Massachusetts
whereunder the Company would use the University's  facilities and engage certain
of the  University's  professors  and students to perform  further  research and
development on the DECAFFOMATIC  device as directed by the Company.  The Company
conducted various research and development  activities,  primarily pertaining to
the  DECAFFOMATIC  technology,  at the  University of  Massachusetts  facilities
during 1994 and l995.

In 1996, the Company  entered into a collaborative  Research  Agreement with the
University of Akron to further develop and finalize the polymer that the Company
will be using for the  DECAFFOMATIC  separator.  Under the  University  of AKRON
Research  Agreement,



<PAGE>

which was in effect  through the first quarter of 1997, the Company paid $10,000
per month to the University for the services enumerated in the Agreement.

The Company  believes that research  facilities  and  arrangements  necessary to
continue its further  research and development of its  electrostatic  separation
technologies  are readily  available.  From July 1992 to December 31, l997,  the
Company incurred a development stage deficit of $5,920,317.  Provided that it is
able to obtain  financing,  of which  there  can be no  assurance,  the  Company
anticipates incurring  significant research and development  expenditures in the
future as the Company continues its efforts to develop further  applications and
uses for its present separation  technologies and as it begins to research other
technologies.

MANUFACTURING

The  Company  currently  does not own or operate  manufacturing  facilities  for
commercial  production of its  DECAFFOMATIC or any other products.  In addition,
the Company has no  intention  of  acquiring  or  developing  any  manufacturing
facilities.  Instead,  the  Company  intends  to rely on  third  party  contract
manufacturers  to manufacture its products.  There can be no assurance that such
arrangements  will be successful or that the contract  manufacturer will be able
to develop or provide adequate  manufacturing  capabilities for commercial scale
production. Although it has no plans or intentions of doing so, in the event the
Company  decides to establish a commercial  scale  manufacturing  facility,  the
Company will require  substantial  additional  funds and  personnel  and will be
required to comply with extensive regulations applicable to such facility. There
can be no assurance that the Company will be able to develop adequate commercial
manufacturing capabilities either on its own or through third parties.

The NEWCO Manufacturing and Distribution Agreement.

     On September  20, 1996,  the Company  entered into the NEWCO  Agreement for
certain institutional  manufacturing and marketing of the Decaffeination System.
NEWCO is a privately held corporation based in St. Charles, Missouri, and is one
of the larger  manufacturers  and  distributors  of  institutional  coffeemaking
equipment  in North  America.  The  Company  agreed  that  NEWCO  will  have the
exclusive  right to sell the  DECAFFOMATIC  to so-called  "Office Coffee Supply"
("OCS")  subsection  of the  institutional  coffeemaker  market  and will be the
manufacturer  of the  DECAFFOMATIC  for the  institutional  marketplace in North
American for a period of three years.  NEWCO further  agreed to sell or purchase
from the Company for the OCS market a minimum of 25,000 units of the product for
the first year,  50,000  units for the second  year and 100,000  units the third
year. In  consideration  and on account of the exclusive  arrangement  under the
NEWCO  Agreement,  NEWCO has also  agreed to pay the costs and  expenses  of all
materials  and  services  which  NEWCO  shall  incur in the  development  of the
DECAFFOMATIC device for the institutional  coffeemaker  marketplace.  All of the
technology and final commercial model designs of the Decaffeination  System will
be the property of the Company.



<PAGE>

     Under  the  NEWCO   Agreement,   the   Company   will  sell  units  of  the
Decaffeination  System to NEWCO for a net price to the Company.  NEWCO will take
the Decaffeination  System and in turn incorporates it into its coffeemakers and
re-sells it to a variety of end users in the OCS  marketplace.  The terms of the
minimum  purchase by NEWCO are mandatory and are not subject to, or  conditioned
upon,  NEWCO's  ability to sell the units  acquired.  All servicing and customer
calls will be performed by NEWCO.  The Company can terminate the NEWCO Agreement
if NEWCO fails to make the specified  minimum  number of  Decaffeination  System
purchases.

     The Company  believes that its exclusive  agreement with NEWCO in the areas
covered  will allow it to establish a presence in the market more quickly and on
a  more  cost-effective  basis  than  it  could  achieve  by  building  its  own
manufacturing  facility or its own sales,  marketing and service  network in the
relatively fragmented OCS market, that consists primarily of small office users.

     The  Company's  electrostatic  separation  devices  are  manufactured  from
generally available materials,  and the Company is not dependent upon any single
supplier.  The Company  believes  that there are numerous  third party  contract
manufacturers  similar to NEWCO  available  around the world who can manufacture
its  DECAFFOMATIC   products  on  an  OEM  basis.  The  Company   currently  has
insufficient resources to establish and conduct its own commercial manufacturing
activities with respect to its proposed products. If the Company, in the future,
decides to establish its own manufacturing facilities and capabilities, at least
for  certain  products,  it  would  require  substantial  additional  funds  and
personnel.

GOVERNMENT REGULATIONS

The  production and marketing of some of the Company's  products,  including the
PLASMA PURE,  will be subject to regulation  for safety and efficacy by numerous
federal, state and local agencies, and comparable agencies in foreign countries.
The Company's  PLASMA PURE system will be considered a medical device.  As such,
the FDA would  require  the  Company to apply for and obtain  either a premarket
notification  clearance  under  Section  510(k),  or a PMA  prior to  sales  and
marketing of the device in the United States. The 510(k) premarket  notification
may be obtained if the medical device  manufacturer can establish that the newly
developed  product  is  substantially  equivalent  to another  legally  marketed
device.  The FDA may also require  clinical data or other evidence of safety and
effectiveness.  In the  United  States,  the FDA Act,  govern or  influence  the
testing,  manufacture,  safety,  labeling,  storage,  record keeping,  approval,
advertising and promotion of the Company's proposed products and technologies.

     Under the FDA Act, the FDA regulates the preclinical and clinical  testing,
manufacturing labeling,  distribution,  sale and promotion of medical devices in
the United  States.  The FDA prohibits a device,  whether or not cleared under a
510(k)  premarket  notification or approved under a PMA, from being marketed for
unapproved clinical uses.

     Non-compliance  with applicable  requirements can result in fines and other
judicially  imposed  sanctions  including the  initiation  of product  seizures,
injunction  actions,  mandatory  recalls  and  criminal  prosecutions  based  on
products,   promotional



<PAGE>

practices, or manufacturing  practices that violate statutory  requirements.  In
addition,  administrative remedies can involve voluntary recalls or cessation of
sale of products,  administrative detention, public notice, voluntary changes in
labeling, manufacturing or promotional practices. The FDA also has the authority
to withdraw  approval of  instruments  and devices in accordance  with statutory
procedures.

     The  Company  has  not  prepared  or  made  application  to the  FDA or any
governmental  authority  for  approval  of the  PLASMA  PURE  device or  related
products. The FDA approval procedure involves completion of pre-clinical studies
and the  submission of the results of these  studies to the FDA an  application.
Preclinical studies involve laboratory evaluation of product characteristics and
animal studies to assess the efficacy and safety of the product.  Human clinical
trials are typically  conducted in three sequential  phases,  but the phases may
overlap.  Phase I trials  consist of testing  the  product in a small  number of
volunteers  primarily  for  safety.  In Phase II, in  addition  to  safety,  the
efficacy of the product is evaluated in a small  patient  population.  Phase III
trials typically involve additional multi-center testing for safety and clinical
efficacy in an expanded population of patients at geographically  dispersed test
sites.  A clinical  plan,  or  "protocol,"  accompanied  by the  approval of the
institutions  participating in the trials, must be submitted to the FDA prior to
commencement  of each  clinical  trial.  The  FDA may  order  the  temporary  or
permanent  discontinuation  of a clinical  trial at any time if  adverse  safety
effects are observed in volunteers or patients. In addition, the FDA may request
Phase IV trials after approval to resolve any lingering questions.

     The results of the pre-clinical and clinical studies on new medical devices
are  then  submitted  to the FDA for  approval  to  commence  commercial  sales.
Following  extensive  review,  the FDA may  grant  marketing  approval,  require
additional testing or information or deny the application.  Continued compliance
with  all  FDA  requirements  and the  conditions  in an  approved  application,
including   product   specifications,   manufacturing   process,   labeling  and
promotional material and record keeping and reporting requirements, is necessary
for all products.  Failure to comply, or the occurrence of unanticipated adverse
effects  during  commercial  marketing,  could  lead to the  need  for  labeling
changes,  product recall,  seizure,  injunctions  against  distribution or other
FDA-initiated action, which could delay further marketing until the products are
brought into compliance.

     The  preparation  of required  applications  and subsequent FDA and foreign
regulatory  approval  process  is  expensive,  lengthy  and  uncertain.  If  the
manufacturer  cannot  establish  equivalence or if the FDA  determines  that the
device  requires more extensive  review,  the FDA will require the submission of
PMA. The PMA must contain  nonclinical  and clinical  investigation  results,  a
description of the methods, facilities and controls used for manufacturing,  and
the proposed labeling for the device.  The Company must receive FDA approval for
Phase I, II, and III trials to test the PLASMA PURE device.  FDA review of a PMA
would take at least nine months to a year following submission of Phase III test
results, and may take longer. If ever submitted,  no assurance can be given that
approval of the PLASMA PURE PMA would be granted.

     The  packaging  and  labeling  of all the  Company's  proposed  PLASMA PURE
products,  if  developed,  will be  subject  to FDA  regulation.  Because of the
extensive  costs  and time  involved,  the  Company  currently  intends  to rely
primarily on licensees and joint



<PAGE>

venturers to obtain  regulatory  approvals and market its PLASMA PURE  products,
when developed.  No assurance can be given that the Company will reach agreement
with any proposed licensees for such products. Licensees will generally have the
right  to  terminate  funding  a  product  at any time  for any  reason  without
significant  penalty.  The  resources and  attention  devoted by a licensee,  if
obtained by the Company, to a product are not in the Company's control, and this
can result in delays in clinical  testing,  the  preparation  and prosecution of
regulatory  filings  and  commercialization  efforts.  Even  if the  Company  is
successful in finding  licensees for its products,  these delays would cause the
payment of any royalties to be delayed.

     Whether or not FDA  approval  has been  obtained,  approval of a product by
comparable regulatory  authorities must be obtained in any foreign country prior
to the  commencement  of marketing of the product in that country.  The approval
procedure varies from country to country,  can involve additional  testing,  and
the time required may differ from that required for FDA approval.  Although some
procedures for unified filings exist for certain European countries,  in general
each country has its own  procedures  and  requirements,  many of which are time
consuming  and  expensive.   Thus,  substantial  delays  in  obtaining  required
approvals from both the FDA and foreign regulatory  authorities can result after
the relevant applications are filed. After such approvals are obtained,  further
delays may be encountered before the products become commercially available.

     No  assurance  can be given  that any  required  FDA or other  governmental
approval will be granted,  or if granted,  will not be  withdrawn.  Governmental
regulation  may prevent or  substantially  delay the  marketing of the Company's
proposed products,  cause the Company to undertake costly procedures and furnish
a competitive  advantage to the more  substantially  capitalized  companies with
which the  Company  plans to compete.  In  addition,  the extent of  potentially
adverse  government  regulations  which might  arise from future  administrative
action or legislation cannot be predicted.

PATENTS AND LICENSE RIGHTS

     The  Company's  success  depends  in large  part on its  ability  to obtain
patents,  maintain trade secret protection and operate without infringing on the
proprietary  rights of third  parties.  The  Company  applied  for U.S.  patents
covering its DECAFFOMATIC  separation  technology and its PLASMA PURE separation
technology in 1993.  On August 22, l995,  the Company was issued a patent by the
U.S.  Commissioner of Patents and Trademarks,  Patent Number 5,443,709,  for its
"Apparatus  For  Separating  Caffeine  From A Liquid  Containing  the  Same." On
December 11, 1996, the Company  received notice from the U.S. Patent Office that
its core patent  application  for the  electrostatic  separation  technology for
removing substances from a fluid had been allowed.  The granting and issuance of
the patent is expected in the near future.

     The Company believes that patent protection of its technologies,  processes
and  products is very  important  to its future  operations.  The success of the
Company's proposed products may significantly  depend upon the Company's ability
to obtain patent protection.  No assurance can be given that any patents will be
issued or if issued that they will have  commercial  value to the Company.  If a
patent  is  granted,  the cost of



<PAGE>

enforcing  the  Company's  patent  rights  in  lawsuits,  if  necessary,  may be
significant and could interfere with the Company's operations.

     Although the Company  intends to file  additional  patent  applications  as
management   believes   appropriate   with   respect  to  any  new  products  or
technological  developments,  no  assurance  can be given  that  any  additional
patents will be issued, or if issued, that they will be of commercial benefit to
the Company. In addition, to anticipate the breadth or degree of protection that
any such patents may afford is impossible. To the extent that the Company relies
on unpatented proprietary technology, no assurance can be given that others will
not  independently  develop  or  obtain  substantially  equivalent  or  superior
technology or otherwise  gain access to the Company's  trade  secrets,  that any
obligation of  confidentiality  will be honored or that the Company will be able
to  effectively  protect  its  rights to  proprietary  technology.  Further,  no
assurance  can be given that any  products  developed  by the  Company  will not
infringe patents held by third parties or that, in such case, licenses form such
third parties would be available on commercially acceptable terms, if at all.

COMPETITION

     The  Company  competes  with  numerous  firms,  many of  which  are  large,
multi-national  organizations  with  worldwide  distribution.  These  firms have
substantially greater capital resources,  research and development and technical
staffs,  facilities and experience in obtaining regulatory approvals, as well as
in the manufacturing,  marketing and distribution of products, than the Company.
Academic  institutions,  hospitals,  governmental  agencies and other public and
private research  organizations are also conducting  research and seeking patent
protection and may develop  competing  products or  technologies on their own or
through joint ventures or other  arrangements.  In addition,  recently developed
technologies or technologies that may be developed in the future are or could be
the basis for competitive products. No assurance can be given that the Company's
competitors  will not succeed in developing  technologies  and products that are
more effective or less costly than any that are being developed by the Company.

     The  Company  expects  products  approved  for  sale,  if any,  to  compete
primarily on the basis of product  uniqueness,  efficacy,  safety,  reliability,
price and patent position.  The Company's  competitive position will also depend
on its ability to attract and retain  qualified  scientific and other personnel,
develop  effective  proprietary  products,  implement  production  and marketing
plans, obtain patent protection and secure adequate capital resources.

PRODUCT LIABILITY

     The development,  manufacture and sale of the Company's products involve an
inherent risk of product liability claims and associated adverse publicity.  The
Company currently does not maintain liability  insurance and may need to acquire
such  insurance  coverage prior to the  commercial  introduction  of some of its
products.  No  assurance  can be given that the  Company  will be able to obtain
product  liability  insurance or, if obtainable,  that it will be on financially
reasonable  terms. It is anticipated that the liability



<PAGE>

insurance for the types of products to be marketed by the Company, if available,
will be very  expensive.  If such  insurance is not obtained and  maintained  at
sufficient  levels,  or if any product  liability claim were brought against the
Company and were  sustained  for a sufficient  amount,  it could have a material
adverse affect on the business or financial condition of the Company.

EMPLOYEES

     As of the date  hereof,  the Company has four full time  employees,  one in
management,  two in research and development and one in administration.  None of
the Company's  employees is represented by a labor union. The Company  considers
its relations with its employees to be satisfactory. See "Management".

ENVIRONMENTAL QUALITY

     The Company  believes that it is now in compliance with all Federal,  State
and local laws relating to the protection of the  environment.  The Company does
not  generate,  store,  transport or dispose of any  hazardous  waste,  and that
management  believes  that  none of the  Company's  products  is  regarded  as a
hazardous  material by the  applicable  regulations  for the  protection  of the
environment.  The Company does not anticipate making any capital expenditures in
the  current  or  succeeding  fiscal  year  for  environmental  control  efforts
regarding its products.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company's principal offices are currently located at 40 Bayfield Drive,
North Andover,  Massachusetts  and consists of approximately  1,276 square feet.
The Company had an initial  three year lease which  commenced on August 12, 1993
and ended on August 11, 1996. The Company extended this lease for one additional
year. The Company entered into a new three year lease effective April 1, 1997 at
the annual  rate of  $15,890.  The  Company's  headquarters,  and  research  and
development facilities are located therein.

In October 1996,  the Company  established  an office at 950 Third  Avenue,  New
York, New York, consisting of approximately 2,500 square feet of space, with the
intention of conducting its sales, marketing and finance related activities. The
lease at 950 Third Avenue, New York, New York, is for a term of five years at an
annual base rental of $32 per square foot. The Company  determined in the Spring
of  1997  that  it is  more  efficient  and  cost  effective  to run  all of its
activities  from the North Andover office for the near future and on May 1, 1997
terminated and surrendered  the lease at 950 Third Avenue.  The landlord found a
replacement tenant for the 950 Third Avenue space and the Company has no further
liability on the 950 Third Avenue lease.

     Upon the end of the  current  lease in North  Andover,  Massachusetts,  the
Company  expects to be able to either  negotiate  a new lease  with the  current
landlord or locate suitable  premises  elsewhere for comparable fair market rent
to that now being paid. The Company believes that its property and equipment are
in good  operating  condition  and are adequate  for  existing  and  immediately
foreseeable needs.

ITEM 3. LEGAL PROCEEDINGS



<PAGE>

     The Company  received a Summons and Complaint from BPV  Enterprises,  Inc.,
d/b/a  Universal  Sales  ("Universal  Sales") on April 12,  1998  brought in the
Supreme  Court of the  state of New York,  Suffolk  County,  alleging  breach of
contract and seeking damages under a Placement Agreement dated September 1, 1996
entered into between  Universal Sales and the Company wherein Universal Sales is
seeking  damages of $334,000.  In April 1997, the Company  terminated all of its
relationships with Universal Sales for cause. The Company has not yet engaged in
substantive  discovery  and the  ultimate  outcome of this matter  cannot yet be
determined.  The Company plans to vigorously  defend this lawsuit.  No provision
for any  liability  that may result from the action has been  recognized  in the
consolidated financial statements.  In the opinion of management,  resolution of
this  litigation  is not  expected  to have a  material  adverse  effect  on the
financial position of the Company. However,  depending on the amount and timing,
an unfavorable  resolution of this matter could materially  affect the Company's
future results or expense in a particular period. The Company has not formulated
a response or answered the lawsuit filed by Universal  Sales.  Mr.  Alexander T.
Hoffman,  the Chairman  and Chief  executive  Officer of the Company,  is also a
Director and a 50% shareholder of Universal Sales.

     In June 1997, Edmund Abramson  ("Abramson")  brought a civil action against
the  Company in the  Circuit  Court of the  Eleventh  Judicial  District in Dade
County,  Florida,  alleging  breach of contract under his  Consulting  Agreement
entered into with the Company in August 1996. The Company answered the Complaint
and brought a  counter-claim  against  Abramson  alleging breach by Abramson and
seeking recission of the Consulting Agreement.  The Company and Abramson entered
into a Settlement  Agreement and Mutual Release on January 16, 1998, whereby the
action brought by Abramson and the counter-claims brought by the Company against
Abramson were  withdrawn  and the  litigation  terminated,  with  prejudice.  In
consideration  of the termination of the Abramson  Consulting  Agreement and the
execution  of the  Settlement  Agreement  by  Abramson  and the mutual  releases
contained  herein,  the  Company  withdrew  its  counter-claim  and  action  for
recission of the unexecuted stock options issued to Abramson in September, 1996.

     In June 1997, WRA Consulting,  Inc.  ("WRA") brought a civil action against
the  Company in the  Circuit  Court of the  Eleventh  Judicial  District in Dade
County,  Florida,  alleging  breach of contract  under its Financial  Consulting
Agreement entered into with the Company in August 1996. The Company answered the
Complaint  and brought a  counter-claim  against WRA alleging  breach by WRA and
seeking recission of the WRA Consulting  Agreement.  The Company and WRA entered
into a Settlement  Agreement and Mutual Release on January 16, 1998, whereby the
action  brought  by WRA and  the  counter-claims  brought  by the  Company  were
withdrawn and the litigation terminated, with prejudice. In consideration of the
consulting  services  performed by WRA in 1996  assisting in the arranging of $3
million private placement by the Company,  the termination of the WRA Consulting
Agreement and the execution of a Settlement Agreement and Mutual Release by WRA,
the  Company  agreed  to issue to WRA and  aggregate  of (a)  150,000  shares of
IMSCO's  unregistered  common  stock,  $.0001 par value per share,  (b)  200,000
options to purchase  IMSCO's common stock over a period ending December 31, 2000
for the exercise price of $1.32 per share,  and (c) 100,000  options to purchase
common stock over a period  ending  December 31, 2000 for the exercise  price of
$2.00 per share.

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

By an action taken by a majority of the  shareholders by written consent in lieu
of a shareholders'  meeting,  Gary Graham,  Frank Lubrano and Alexander Hoffmann
were elected Directors for the Company on October 1, 1997 as permitted under the
Company's By-laws and the Delaware General  Corporation Law. There were no other
matters  submitted  to a vote of the security  holders in the fourth  quarter of
1997.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a)  Market Information

     There is currently a limited public trading market for the Company's Common
Stock.  There are currently five  market-makers  for the Company's Common Stock.
The Common Stock has traded on a limited  basis on the OTC Bulletin  Board under
the symbol  "IMSO" since  November 15, 1994.  The stock  registrar  and transfer
agent for the Company is Progressive Transfer Company, Salt Lake City, Utah.

     The following table sets forth the high and low closing  quotations for the
Common  Stock,  as reported by NASDAQ for each fiscal  quarterly  period  during
1997. The quotations as reported reflect inter-dealer  quotations without retail
markup,   markdown  or  commission  and  do  not  necessarily  represent  actual
transactions.

                                                    High        Low
                                                    ----        ---
January 1, 1997 - March 31, 1997                    $3.00       $1.81
April 1, 1997 - June 30, 1997                       $2.69        1.81
July 1, 1997 - September 30, 1997                    2.44        1.50
October 1, 1997 - December 31, 1997                  3.06        1.81



<PAGE>

     (b)  Holders of Common Stock

                                          Approximate Number of Record Holders
      Title of Class                           (as of December 31, l997)
      --------------                           -------------------------

     Common Stock, $.001 par value                          258

A number of shares are held of record by brokerage and other institutional firms
for their customers.

     (c)  Dividends

     The Company has never declared or paid a cash dividend on its common stock,
and it is anticipated  that the Company will continue to retain its earnings for
use in its  business  and not pay cash  dividends.  Declaration  and  payment of
dividends are within the discretion of the Company's  Board of Directors,  which
will review such dividend policy from time to time.

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

General

     The Company is in the  development  stage and its operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing  a new  product/service  and  in  establishing  a  name  and  business
reputation. The likelihood of the success of the Company must also be considered
in  connection  with the rapidly and  continually  changing  technology  and the
competitive  environment  in which the  Company  will  operate.  There can be no
assurance that the Company's operations will result in its becoming or remaining
economically  viable.  Potential  investors  should  be aware  of the  problems,
delays, expenses and difficulties  encountered by any company in a developmental
stage, many of which may be beyond the Company's control. These include, but are
not limited to,  unanticipated  regulatory  compliance,  marketing  problems and
intense  competition that may exceed current  estimates.  The Company has had no
revenues from operations to date and,  because it is just beginning to enter the
commercial  stage, it will likely sustain  operating losses for an indeterminate
time period. Since entering the development phase in July, 1992, the Company has
devoted  substantially  all of its resources to the research and  development of
its products  and  technology  and general and  administrative  expenses.  Since
entering  the  development  stage in July,  1992,  the Company has  generated an
accumulated  deficit  of  $5,920,317  at  December  31,  1997  and  has a  total
accumulated deficit of $6,541,225.

     The Company had no revenues  from  continuing  operations  in years  ending
December 31, 1995,  December  31,  1996,  or December 31, 1997.  The Company has
incurred net losses in each year since its inception in 1986.  Given the dormant
level of business  activity from 1988 through 1991, the Company realized that it
could not continue with its luminator technology



<PAGE>

product,  discontinue  operations  and was  reactivated  and entered  into a new
development stage in July 1992.

     The Company's  losses  incurred since  inception have resulted  principally
from expenditures under its research and development  programs,  and the Company
expects to incur significant  operating costs and possible losses therefrom over
the next  several  years due  primarily  to expanded  research  and  development
efforts in the PLASMA PURE area and related  medical  products,  preclinical and
clinical   testing  of  its   product   candidates   and  the   performance   of
commercialization  activities. There can be no assurance of when and whether the
Company will generate  significant  revenues or become profitable on a sustained
basis, if at all. Although the Company believes it has  substantially  completed
the  research  and   development  of  its   decaffeination   technology  and  is
anticipating  sales  thereof  to  commence  in 1998,  the  Company's  results of
operations  may vary  significantly  from  quarter to  quarter  due to timing of
payments and other factors.  The timing of the Company's  revenues may not match
the timing of associated  product  development of other expenses.  The amount of
revenues in any given period is not necessarily  indicative of expected revenues
for future periods.

     The  Company's  ability to achieve sales and increase its levels of revenue
will  depend  upon  its  ability  to  secure  additional  financing  and  future
licensees,  if any,  and  successfully  develop,  test and  sell  the  Company's
products.  The  Company's  ability to  generate  significant  revenue and become
profitable is dependent in large part on its  commercializing the Company's lead
product,  the  DECAFFOMATIC,  expanding its  manufacturing  contracts with third
party  manufacturers,  entering into  additional  marketing  agreements  and the
ability of its marketing  contractors  to  commercialize  successfully  products
incorporating  the Company's  technologies.  There can be no assurance  that the
operations  of the Company  will  generate  significant  revenue or will ever be
profitable.  The following discussion and analysis should be read in conjunction
with the  Financial  Statements  and notes thereto  appearing  elsewhere in this
report.

RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996

     Net losses  increased to  $3,631,105  for the year ended  December 31, 1997
from  $1,062,758  for the year ending  December 31, 1996, a 242%  increase.  The
Company had no revenues or  operating  income for years ended  December 31, 1996
and December 31, 1997 from  continuing  operations.  For the year ended December
31,  1997,  the  Company  earned  $5,541 in  interest  on its  interest  bearing
investment  account.  $3,022 in interest was earned for the comparable period in
1996.

     Total operating expenses were $3,592,574 for 1997 in comparison to $758,280
for 1996,  an increase of 85%. The increase in these costs from 1996 to 1997 was
primarily  due  to  increased  outside   consultants'  and  professional   fees,
litigation settlement costs, higher costs under research agreements with outside
institutions,  and more  staffing  and  wages  and  salaries  for  research  and
development  being  performed in 1997 than those incurred in 1996 as the Company
continues   further  product   research,   development  and  refinement  on  its
Decaffomatic  and other  separation  technologies.  All research and development
costs were expensed currently in the year



<PAGE>

incurred,  rather than capitalized.  This resulted in a loss per share of $(.33)
for the year ended  December  31,  1996,  in  comparison  to a loss per share of
$(.57) for the year ended December 31, 1997.

     At  December  31,  l997,  the Company  had total  assets of $58,940.  Total
liabilities of $1,875,753 and total  stockholders'  equity of  $(1,816,813). 

Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995

     Net losses  increased from $406,086 for the year ended December 31, 1995 to
$762,758 for the year ending December 31, 1996, a 149% increase. The Company had
no revenues or operating  income for years ended  December 31, 1995 and December
31, 1996 from continuing  operations.  For the year ended December 31, 1995, the
Company earned $3,070 in interest on its interest  bearing  investment  account.
$3,022 in interest was earned for the comparable period in 1996.

     Total  operating  expenses were $408,700 for 1995 in comparison to $757,824
for 1996,  an increase of 85%. The increase in these costs from 1995 to 1996 was
primarily  due to  increased  outside  consultants'  fees,  higher  costs  under
research agreements with outside  institutions,  and more staffing and wages and
salaries  for  research  and  development  being  performed  in 1996 than  those
incurred in 1995 as the Company continues further product research,  development
and  refinement  on its  Decaffomatic  and other  separation  technologies.  All
research and  development  costs were expensed  currently in the year  incurred,
rather  than  capitalized.  This  resulted in a loss per share of $(.23) for the
year ended  December 31, 1996,  in  comparison to a loss per share of $(.14) for
the comparable year in 1995.

     At  December  31,  l995,  the Company  had total  assets of $12,980.  Total
liabilities of $63,343 and total stockholders' equity of $(50,363).  At December
31, l996, the Company had total assets of $2,251,944,  an increase of $2,238,964
from the comparable  period in l995, total liabilities of $77,883 an increase of
$14,540 from l995, and a total stockholders' equity of $2,174,061, in comparison
to a stockholders' deficit of $(50,363) in the prior year.

                         LIQUIDITY AND CAPITAL RESOURCES

     The Company  had  negative  working  capital as of December  31,  l997,  of
$1,860,973 in comparison to a positive  working capital  position as of December
31, l996 of $572,997.  The Company had an  accumulated  deficit of $2,610,120 at
the period ended December 31, l996, in comparison to an  accumulated  deficit of
$6,541,225  at  the  period  ended  December  31,  l997.  The  increase  in  the
accumulated  deficit is primarily  related to continuing  operating costs during
the development phase without any operating income.



<PAGE>

     The Company has financed  operations from entering the development phase in
July 1992 (through December 31, 1997) primarily through the private placement of
its stock and, to a lesser extent,  through  borrowings from notes payable.  For
the year ended December 31, l997, the Company's cash requirements were satisfied
primarily from the cash reserves in its operating accounts,  a private placement
consisting of shares of the Company's  Common Stock.  Additionally,  the Company
had $1,300,643 of remaining prepaid media credits available for execution of its
public  relations,  advertising  and marketing  campaign for its  decaffeination
technology.  The Prepaid Media Credits were obtained by the Company on September
20,  1996,  when it entered  into the Media  Purchase  Agreement  with  Proxhill
Marketing,  Ltd., a private  company based in Colorado  ("PML"),  which received
1,136,364  shares in  consideration  for  $1,500,000  in prepaid  media  credits
("Media Credits") to be used at the Company's direction . The Company intends to
use the Media  Credits  during  the next 12 months  to market  its  DECAFFOMATIC
products.   In  the  Media  Purchase  Agreement  the  purchaser  of  the  shares
represented that it was an "Accredited  Investors" as that term is defined under
Regulation D promulgated by the Commission pursuant to the Securities Act.

     The Company does not currently possess a bank source of financing. Although
the  Company  has the  $1,300,643  of Prepaid  Media  Credits  which  management
believes  will be adequate  to  introduce  its  decaffeination  technology,  the
Company's  negative  working  capital  at  December  31,  1997  was  $1,860,973.
Management  believes  that the above  financing  will be  adequate  to cover its
liquidity  requirements  over the next 3 months  and  thereafter  it  cannot  be
certain  that  its  capital  will be  adequate.  Should  insufficient  funds  be
available  from the foregoing  sources,  reducing the Company's  present rate of
expenditures which might materially  adversely affect the ability of the Company
to produce competitive products and services and to market them effectively.

     The Company's  ability to continue in business as a going  concern  depends
upon  its  ability  to  generate  revenues  and  royalties  from the sale of its
technology and products,  to conserve  liquidity by setting  marketing and other
priorities  and reducing  expenditures,  to obtain bank  financing and to obtain
additional  funds  through the  placement  of its common  stock.  The  Company's
ability to obtain bank financing will require  significantly  improved operating
results over the Company's results for its past twelve months, the likelihood of
which the Company presently cannot assure.

     The Company's long term capital  expenditure  requirements will depend upon
numerous  factors,   including  the  progress  of  the  Company's  research  and
development programs,  the resources that the Company devotes to the development
of  self-funded  products,   proprietary   manufacturing  methods  and  advanced
technologies,  the ability of the Company to obtain licensing arrangements,  and
the demand for its products if and when approved.

     The  Company   believes   that  its   research  and   development   of  its
decaffeination technology is substantially complete and it is ready to introduce
its decaffeination products to the commercial institutional user market in 1998.
On September  20,  1996,  DPI entered into the  Manufacturing  and  Distribution
Agreement with NEWCO Enterprises,  Inc., of St. Charles, Missouri to manufacture
a coffee brew basket,  incorporating the  decaffeination  technology,  for DPI's
sales to the institutional coffee maker marketplace in North America



<PAGE>

(the  "NEWCO  Agreement").  Under the NEWCO  Agreement,  NEWCO was  granted  the
exclusive  right  to  market  and  distribute  the  products  incorporating  the
Company's  decaffeination  technology to the so-called  "office  coffee  supply"
market  segment  in North  America  for a period of three  years.  Over the past
seventeen months, the Company has been working with NEWCO to develop, design and
test working models, and assist in the design of molds for the production of the
decaffeination device. Although there are no assurance, based on the progress in
completing  detail drawings for  manufacture of production  molds is anticipated
that sales under the NEWCO Agreement should occur in the second half of 1998.

     The Company believes that its existing cash and cash equivalents,  the $1.3
million of Prepaid  Media  Credits,  together  with  anticipated  cash flow from
operations  in the latter part of 1998 will be  sufficient to meet its operating
expenses  and  capital  expenditures  requirements  for the next 3  months.  The
Company's future capital requirements, however, will depend on numerous factors,
including  (i) the progress of its research  and product  development  programs,
including clinical studies, (ii) the effectiveness of product  commercialization
activities and marketing  agreements,  including the development and progress of
sales and marketing efforts and manufacturing  operations,  (iii) the ability of
the Company to maintain existing marketing agreements and establish and maintain
new  marketing  agreements,  (iv)  the  costs  involved  in  preparing,  filing,
prosecuting,  defending and enforcing intellectual property rights and complying
with regulatory requirements,  and (v) the effect of competing technological and
market developments.  However, if operating expenses are higher than expected or
if cash  flow  from  operations  is  lower  than  anticipated,  there  can be no
assurance that the Company will have sufficient  capital resources to be able to
continue as a going concern.

Factors That May Affect Future Results

Statements  included in this "Management's  Discussion and Analysis of Financial
Condition and Results of Operations"  Section,  in other sections of this Annual
Report  on  Form  10-KSB  including,  without  limitation  the  "Description  of
Business" Section in Part I, and in prior and future filings by the Company with
the Securities and Exchange  Commission,  in the Company's press releases and in
oral statements made with the approval of an authorized  executive which are not
historical or current facts are  "forward-looking  statements"  made pursuant to
the safe harbor  provisions of the Private  Securities  Litigation Reform Act of
1995 and are subject to certain risks and uncertainties  that could cause actual
results to differ materially from those presently anticipated or projected.  The
Company  wishes to  caution  readers  not to place  undue  reliance  on any such
forward-looking statements,  which speak only as of the date made. The following
important  factors,  among others, in some cases have affected and in the future
could affect the Company's  actual results and could cause the Company's  actual
financial and operating  performance to differ materially from that expressed in
any expressed in any forward-looking statement:

Development Stage Company - History of Operating Losses and Accumulated Deficit.

     The Company is in the  development  stage and its operations are subject to
all the problems, expenses, delays and other risks inherent in the establishment
of a new business enterprise, as well as the problems inherent in developing and
marketing  a new



<PAGE>

product/service  and  in  establishing  a  name  and  business  reputation.  The
likelihood  of the success of the Company must also be  considered in connection
with  the  rapidly  and  continually  changing  technology  and the  competitive
environment  in which the Company will operate.  There can be no assurance  that
the Company's  operations will result in its becoming or remaining  economically
viable.  Potential investors should be aware of the problems,  delays,  expenses
and difficulties  encountered by any company in a developmental  stage,  many of
which may be beyond the Company's  control.  These include,  but are not limited
to,  unanticipated   regulatory  compliance,   marketing  problems  and  intense
competition that may exceed current  estimates.  The Company has had no revenues
from  operations  to  date  and,  because  it is just  beginning  to  enter  the
commercial  stage, it will likely sustain  operating losses for an indeterminate
time period.  The Company has incurred net losses in each year since  inception.
These losses have resulted primarily from expenses associated with the Company's
research and development  activities and general  administrative  expenses.  The
Company anticipates that its expenses will increase in the future. The amount of
future expenses, corresponding further potential net losses and time required by
the  Company to reach  profitability,  if ever,  are  uncertain.  The  Company's
ability to generate  significant  revenue and become  profitable is dependent in
large part on its commercializing the Company's lead product,  the DECAFFOMATIC,
expanding its manufacturing  contracts with third party manufacturers,  entering
into  additional   marketing   agreements  and  the  ability  of  its  marketing
contractors to commercialize  successfully products  incorporating the Company's
technologies.  There can be no assurance that the operations of the Company will
generate significant revenue or will ever be profitable.

Future Capital Requirements; Uncertainty of Future Funding.

     IMSCO'S  operations to date have consumed  substantial  amounts of cash. As
the  Company  continues  its  research  and  development  of  its  electrostatic
technologies  in various  areas,  it expects to  continue  spending  substantial
amounts over the foreseeable  future. The Company  anticipates that its existing
capital  resources  will be  adequate to satisfy  its  current  working  capital
requirements for the next 3 months.  Thereafter,  the Company will need to raise
substantial  additional  funds  through  equity or debt  financings,  or sale or
licensing of its  technology  and products.  There can be no assurance  that any
such  additional  funding  will be  available to the Company or that the Company
will have  sales of its  products.  In the event the  Company  has  insufficient
working capital, and is unable to locate additional capital on acceptable terms,
the Company may be required to curtail its operations  substantially,  including
its research and development activities.

Early Stage of Product Commercialization; Technological Uncertainties.

     The Company is in the  development  stage,  and has only recently  begun to
enter  the  early  stage of  product  commercialization  with  its  DECAFFOMATIC
products.  The  development  of any products  will require  significant  further
research,   development,   testing  and  regulatory   approvals  and  additional
investment  prior  to  commercialization.  Substantially  all of  the  Company's
resources  have  been,  and for the  foreseeable  future  will  continue  to be,
dedicated to the discovery,  development and  commercialization of electrostatic
separation  technologies,  most of  which  are  still  in the  early  stages  of



<PAGE>

development and testing.  While the Company believes that the development of the
DECAFFOMATIC  technology is  substantially  complete and plans are being made to
introduce the DECAFFOMATIC  product to the market in 1998, there are a number of
challenges  that the Company  must  successfully  address to complete any of its
development efforts and meet this anticipated product introduction. With respect
to PLASMA PURE,  although the results of initial  basic  research by the Company
and/or its  collaborators  was positive,  it may be inconclusive  and may not be
indicative of results that will be obtained in human clinical trials. As results
of  particular  preclinical  studies  and  clinical  trials are  received by the
Company,  the Company may abandon  projects such as PLASMA PURE,  which it might
otherwise  have  believed to be  promising.  The Company  presently  is pursuing
product opportunities that will require extensive additional capital investment,
research,  development,  testing,  regulatory  clearance or  approvals  prior to
commercialization. Based on the Company's currently limited financial resources,
there can be no assurance  that the  Company's  development  programs  will have
necessary  capital  funding,  will be successfully  completed,  or that required
regulatory clearance or approvals will be obtained on a timely basis, if at all.

     In addition,  the product development programs conducted by the Company and
its collaborators are subject to risks of failure inherent in the development of
product   candidates  based  on  new  technologies.   These  risks  include  the
possibility  that  the  technologies  used  by  the  Company  will  prove  to be
ineffective or any or all of the Company's products or technologies  needing FDA
clearance  will  prove  to be  unsafe  or  toxic or  otherwise  fail to  receive
necessary  regulatory  approvals;  that  the  product  candidates,  if safe  and
effective,  will be difficult to manufacture on a large scale or uneconomical to
market;  that the proprietary  rights of third parties will preclude the Company
or  its   collaborators   from  marketing   products   utilizing  the  Company's
technologies; or that third parties will market superior or equivalent products.
There can be no  assurance  that any medical  products  being  developed  by the
Company or others  will be  successfully  developed  or  commercially  accepted.
Accordingly,  there  can  be  no  assurance  that  the  Company's  research  and
development  activities will result in any  commercially  viable  products.  See
"Business - "Research and Development" and "- Competition."

Government Regulations.

     The production and marketing of some of the Company's  products,  including
the PLASMA PURE,  are subject to regulation  for safety and efficacy by numerous
federal, state and local agencies, and comparable agencies in foreign countries.
In the United States, the Federal Food, Drug and Cosmetic Act, the Public Health
Service  Act,  the  Controlled  Substances  Act and other  federal  statutes and
regulations  govern or influence the testing,  manufacture,  safety,  labelling,
storage,  recordkeeping,  approval,  advertising  and promotion of the Company's
proposed products and technologies.  Non-compliance with applicable requirements
can  result  in fines and  other  judicially  imposed  sanctions  including  the
initiation  of product  seizures,  injunction  actions,  mandatory  recalls  and
criminal prosecutions based on products, promotional practices, or manufacturing
practices  that violate  statutory  requirements.  In  addition,  administrative
remedies  can  involve  voluntary  recalls  or  cessation  of sale of  products,
administrative   detention,   public  notice,  voluntary  changes  in  labeling,
manufacturing or promotional practices, as well as the refusal of the government
to  enter  into  supply  contracts  or to  approve



<PAGE>

NDAs.  The FDA also has the authority to withdraw  approval of  instruments  and
devices in accordance with statutory procedures.

     The Company's  PLASMA PURE system will be considered a medical  device.  As
such,   the  FDA  would  require  the  Company  to  obtain  either  a  premarket
notification  clearance  under Section  510(k) of the Federal,  Food,  Drug, and
Cosmetic Act ("510(k)"),  or an approved premarket  application ("PMA") prior to
sales and  marketing of the device in the United  States.  The 510(k)  premarket
notification  may be obtained if the medical device  manufacturer  can establish
that the newly developed product is substantially  equivalent to another legally
marketed  device.  The FDA may also require  clinical data or other  evidence of
safety and effectiveness.

     If the manufacturer  cannot establish  equivalence or if the FDA determines
that the  device  requires  more  extensive  review,  the FDA will  require  the
submission of PMA. The PMA must contain  nonclinical and clinical  investigation
results,  a  description  of the  methods,  facilities  and  controls  used  for
manufacturing,  and the  proposed  labeling  for the device.  The  Company  must
receive FDA approval for trials to test the PLASMA PURE device.  FDA review of a
PMA  would  take at least  six  months  following  submission  of Phase III test
results,  and may take longer.  (See  "Business --  Government  Regulation"  for
details on the various  phases) It is  currently  estimated  by the Company that
with  adequate  funding,  it would take  approximately  two years to receive FDA
clearance.  No assurance can be given that approval of the PLASMA PURE PMA would
be granted.

     Whether or not FDA  approval  has been  obtained,  approval of a product by
comparable regulatory  authorities must be obtained in any foreign country prior
to the  commencement  of marketing of the product in that country.  The approval
procedure varies from country to country,  can involve additional  testing,  and
the time required may differ from that required for FDA approval.  Although some
procedures for unified filings exist for certain European countries,  in general
each country has its own  procedures  and  requirements,  many of which are time
consuming  and  expensive.   Thus,  substantial  delays  in  obtaining  required
approvals from both the FDA and foreign regulatory  authorities can result after
the relevant applications are filed. After such approvals are obtained,  further
delays may be encountered before the products become commercially available.

     The Company has not prepared or filed any applications  with the FDA or any
governmental  authority  for  approval  of the PLASMA PURE device or any related
product.  No assurance can be given that any required FDA or other  governmental
approval will be granted,  or if granted,  will not be  withdrawn.  Governmental
regulation  may prevent or  substantially  delay the  marketing of the Company's
proposed products,  cause the Company to undertake costly procedures and furnish
a competitive  advantage to the more  substantially  capitalized  companies with
which the  Company  plans to compete.  In  addition,  the extent of  potentially
adverse  government  regulations  which might  arise from future  administrative
action or legislation cannot be predicted.

Competition.



<PAGE>

     The  Company  competes  with  numerous  firms,  many of  which  are  large,
multi-national  organizations  with  worldwide  distribution.  These  firms have
substantially greater capital resources,  research and development and technical
staffs,  facilities and experience in obtaining regulatory approvals, as well as
in the manufacturing,  marketing and distribution of products, than the Company.
Academic  institutions,  hospitals,  governmental  agencies and other public and
private research  organizations are also conducting  research and seeking patent
protection and may develop  competing  products or  technologies on their own or
through joint ventures or other  arrangements.  In addition,  recently developed
technologies or technologies that may be developed in the future are or could be
the basis for competitive products. No assurance can be given that the Company's
competitors  will not succeed in developing  technologies  and products that are
more effective or less costly than any that are being developed by the Company.

     The  Company  expects  products  approved  for  sale,  if any,  to  compete
primarily on the basis of product  uniqueness,  efficacy,  safety,  reliability,
price and patent position.  The Company's  competitive position will also depend
on its ability to attract and retain  qualified  scientific and other personnel,
develop  effective  proprietary  products,  implement  production  and marketing
plans,  obtain patent  protection and secure  adequate  capital  resources.  See
"Business - Competition."

Uncertainty of Market Acceptance.

     The Company  has only  recently  commenced  limited  marketing  activities.
Achieving market acceptance for the Company's products will require  substantial
marketing  efforts and the  expenditure  of significant  funds.  There can be no
assurance  that the Company and its marketing  contractors  and partners will be
able to commercialize successfully or achieve market acceptance of the Company's
products and  technologies.  There is no assurance that the Company will be able
to create a successful  marketing program, or that the Company's products can be
sold  in  a  manner  that  will  permit  the  Company  to  achieve   long  range
profitability. Further, there can be no assurance that the Company's competitors
will not develop  competing  technologies  that are less  expensive or otherwise
superior to the products of the Company.  The failure to market successfully the
Company's products would have a material adverse effect on the Company's results
of operations and financial conditions.

Dependence on Marketing Partners.

     The Company has limited  experience in sales,  marketing and  distribution.
Therefore, the Company's strategy for commercialization of its products includes
entering  into  agreements  with other  companies to market  current and certain
future products incorporating the Company's technology. To date, the Company has
entered  into two  such  agreements  with  Hughes  and  NEWCO.  There  can be no
assurance  that the  Company  will be able to enter  into  additional  marketing
agreements  on terms  favorable  to the  Company,  if at all, or that current or
future agreements will ultimately be beneficial to the Company.

     The Company will be dependent for product  sales  revenues upon the success
of such third party marketing partners in performing their responsibilities. The
amount and timing of resources  which may be devoted to the performance of their
contractual  responsibilities  by its  marketing  partners  are not  within  the
control of the Company.  There can be no



<PAGE>

assurance  that such  marketing  partners  will  perform  their  obligations  as
expected,  pay any additional revenue or license fees beyond the stated minimums
to the Company or market any products  under the marketing  agreements,  or that
the Company will derive any revenue from such arrangements. Moreover, certain of
the agreements provide for termination under certain circumstances. There can be
no assurance  that the  interests of the Company will  continue to coincide with
those of its marketing  partners or that the marketing partners will not develop
independently  or with third  parties  products  which  could  compete  with the
Company's  products,  or that  disagreements  over rights or technology or other
proprietary interests will not occur. To the extent that the Company chooses not
to or is unable to enter into future agreements,  it would experience  increased
capital  requirements  to  undertake  the  marketing  or sale of its current and
future  products.  There can be no  assurance  that the Company  will be able to
market or sell its current or future  products  independently  in the absence of
such agreements. See "Business - Marketing."

Lack of Manufacturing and Sales and Marketing Experience.

     The Company has no  experience  in, and  currently  lacks the resources and
capability to,  manufacture any of its proposed  products on a commercial basis.
Initially,  the Company  anticipates  that it will be dependent to a significant
extent on third party  contract  manufacturers  or other entities for commercial
scale  manufacturing of its products.  Although it has no plans or intentions of
doing so, in the event the  Company  decides to  establish  a  commercial  scale
manufacturing  facility,  the Company will require substantial  additional funds
and  personnel  and  will be  required  to  comply  with  extensive  regulations
applicable to such facility.  There can be no assurance that the Company will be
able to develop adequate commercial manufacturing capabilities either on its own
or  through  third  parties.  In  addition,  the  Company  does  not  anticipate
establishing its own sales and marketing capabilities in the foreseeable future.
There can be no  assurance  that the  Company  will be able to develop  adequate
marketing capabilities either on its own or through third parties. See "Business
- Manufacturing; - Marketing."

Possible Product Obsolescence.

     The Company expects technological  developments to continue at a rapid pace
in the electrostatic  separation industries,  and there can be no assurance that
technological  developments  will  not  cause  the  Company's  technology  to be
rendered obsolete.  The Company's future success, if any, will be dependent upon
its  ability to remain  competitive  with others  involved  in the  development,
manufacture  and  marketing  of similar  products and  technologies  through its
continued  capability  to design high quality  products in a cost  efficient and
timely manner, of which there can be no assurance.

No Assurance as to Protection of Intellectual Property; Dependence on
Intellectual Property.

     The  Company's  success  depends  in large  part on  whether  it can obtain
patents,  maintain trade secret protection and operate without infringing on the
proprietary rights of third parties.

     Patents  have been granted to the Company for both method and devise in the
technology  for the  separation  of caffeine  from a brewed  beverage.  No other
patents



<PAGE>

have, as yet,  been issued but it is expected  that patents will be issued.  The
Company  believes  that patent  protection  of its  technologies,  processes and
products  is  very  important  to its  future  operations.  The  success  of the
Company's proposed products may significantly  depend upon the Company's ability
to obtain  patent  protection.  No  assurance  can be given that any  additional
patents will be issued or if issued that they will have commercial  value to the
Company.  When a patent is granted,  the cost of enforcing the Company's  patent
rights in lawsuits,  if necessary,  may be significant  and could interfere with
the Company's operations.

     Although the Company  intends to file  additional  patent  applications  as
management   believes   appropriate   with   respect  to  any  new  products  or
technological  developments,  no  assurance  can be given  that  any  additional
patents will be issued, or if issued, that they will be of commercial benefit to
the Company.  Further,  the  Company's  ability to file such  additional  patent
applications may be reduced by the Company's  limited  financial  resources.  In
addition,  to  anticipate  the  breadth  or degree of  protection  that any such
patents  may afford is  impossible.  To the extent  that the  Company  relies on
unpatented  proprietary  technology,  no assurance can be given that others will
not  independently  develop  or  obtain  substantially  equivalent  or  superior
technology or otherwise  gain access to the Company's  trade  secrets,  that any
obligation of  confidentiality  will be honored or that the Company will be able
to  effectively  protect  its  rights to  proprietary  technology.  Further,  no
assurance  can be given that any  products  developed  by the  Company  will not
infringe patents held by third parties or that, in such case, licenses from such
third parties would be available on  commercially  acceptable  terms, if at all.
The Company's  ability to compete  effectively with other companies will depend,
in part, on its ability to maintain the proprietary  nature of its technologies.
The Company intends to market its products internationally, and the laws of some
foreign countries may not protect the Company's  proprietary  rights to as great
an extent as do the laws of the United  States.  There can be no assurance  that
the Company's  competitors will not independently develop comparable or superior
technologies. See "Business - Patents and License Rights."

Dependence Upon Key Management Personnel.

     The  success  of the  Company  is  substantially  dependent  upon  existing
management.  The Company  considers Mr. Berg and Mr. Crose to be key executives.
The  loss of the  services  of Mr.  Berg or Mr.  Crose,  as  well as  other  key
personnel, or any inability to attract and retain qualified personnel to replace
them in the event of their  leaving the Company  for any reason,  may  adversely
affect the  Company's  business.  The  Company  has not applied for key man life
insurance on the lives of Mr. Berg or Mr. Crose and does not intend to.  Because
of the nature of its business, the Company will be dependent upon its ability to
attract and retain technological qualified personnel, including competition from
companies with  substantially  greater  resources than the Company.  There is no
assurance that the Company will successfully  recruit or retain personnel of the
requisite  expertise or in adequate numbers to enable it to conduct its business
as proposed.

Rapid Technological Change.

     The market  for  biotechnology  products  has been  characterized  by rapid
technological  change,  frequent  product  introductions  and evolving  industry



<PAGE>

requirements.  The Company  believes  that these trends will  continue  into the
foreseeable future. The Company's success will depend, among other matters, upon
its ability to enhance its  existing  products and to  successfully  develop new
products that meet increasing customer  requirements and gain market acceptance.
Achieving  these goals will  require  continued  substantial  investment  by the
Company in product development and marketing. There can be no assurance that the
Company  will have  sufficient  resources  to make these  investments,  that the
Company will be successful in developing product enhancements or new products on
a timely  basis,  if at all,  or that the Company  will be able to  successfully
market these enhancements and new products once developed. Further, there can be
no assurance  that the Company's  products will not be rendered  obsolete by new
industry standards or changing technology.

Products Liability and Other Claims.

     The  Company  may be subject to  substantial  products  liability  costs if
claims arise out of problems  associated  with the products by the Company.  The
Company currently has no product liability insurance; however, it is anticipated
that such insurance  will be very  expensive to maintain,  if obtainable at all.
The Company will seek to maintain products liability coverage for the benefit of
the Company to protect the Company against such liabilities, but there can be no
assurance that such  arrangements  can be made, or if made, will be effective to
insulate the assets of the Company from such claims. The Company will attempt to
maintain  insurance  against  such  contingencies,  in scope and amount which it
believes to be adequate.  However,  there can be no assurance  that such product
liability insurance will be available, or if available,  that it will adequately
insure  against such claim.  If such insurance is not obtained and maintained at
sufficient  levels,  or if any product  liability claim were brought against the
Company and were  sustained  for a sufficient  amount,  it could have a material
adverse affect on the business or financial condition of the Company.

Limited Prior Market for the Common Stock.

     There has only been a limited  public  market for the shares of the Company
on the OTC Bulletin  Board.  There is no assurance  that an active public market
for the Common  Stock will  develop or continue  at any time in the  future.  At
December 31, 1997 the Company had approximately 6,516,536 shares outstanding. Of
these shares, approximately 4,987,442 outstanding shares will be freely tradable
without  restriction or are eligible for resale under Rule 144. As long as there
is a limited public market for the Company's Common Stock, the sale or placement
by a shareholder of a significant number of shares for sale in the market at any
one time could be difficult to achieve at then current market prices,  and could
cause a material decline in the market price of the Common Stock.

Volatility of Stock Price.

     The  market  price of the shares of Common  Stock,  like that of the common
stock of many other  technology  companies,  has been and is likely to be highly
volatile.  Factors such as the results of clinical  trials by the Company or its
competitors,  other  evidence  of the safety or  efficacy  of the  Company's  or
competitors  products,   announcements  of  technological   innovations  or  new
commercial  products by the Company or its



<PAGE>

competitors,  government regulation, developments in patent or other proprietary
rights  of  the  Company  or its  competitors,  fluctuations  in  the  Company's
operating results, sales of large amounts of stock by shareholders, and limited,
undercapitalized  and less experienced  market makers are among the many reasons
which could have a  significant  effect on the market price of the Common Stock.
In  addition,  the stock market has  experienced  and  continues  to  experience
extreme  price and volume  fluctuations  which have affected the market price of
many technology and biotechnology companies.

Management of Changing Business.

     The Company is a development  stage company which has primarily devoted its
activities to research and development. As the Company begins to emerge from the
development phase to a commercial operations place, given the level of technical
and marketing  expertise  necessary to support its  anticipated new products and
customers, the Company must attract and retain highly qualified and well-trained
personnel  in those  areas.  There are a  limited  number  of  persons  with the
requisite  skills to serve in these  positions,  and it may become  increasingly
difficult  for the  Company to hire such  personnel.  Moreover,  the Company has
limited  capital  resources  to attract and  compensate  such  individuals.  The
Company's  emergence from the development phase will also  significantly  strain
the Company's  management,  financial and other resources.  The Company believes
that  improvements  in  management  and  operational  controls  and  operations,
financial  and  management  information  systems will be needed to manage future
emergence from the development and commercial  operating phase, should it occur.
The failure to implement such changes could have a material  adverse effect upon
the Company.

Products Reliability.

     Most applications  incorporating the Company's technologies are being still
developed or have only begun to be introduced to the market.  As a result of the
limited  period  of use and the  controlled  environment  in  which  most of the
Company's  technologies  have  been  tested  and used to date,  there  can be no
assurance  that  they  will  meet  their  performance  specifications  under all
conditions or for all applications. If any of the Company's technologies fail to
meet such  expectations,  the Company may be required to enhance or improve that
technology,  and there can be no assurance  that the Company would be able to do
so on a timely basis, if at all. Any significant reliability problems could have
a material adverse effect on the Company's business and prospects.

Potential Issuance of Additional Shares.

     The Company is currently  authorized  to issue up to a total of  15,000,000
shares of Common  Stock,  $.0001 par value,  and  1,000,000  shares of preferred
stock,$.0001 par value per share (the "Preferred  Stock"). At December 31, 1997,
there were 6,516,536 shares of Common Stock outstanding.

     The  Company's  Board  of  Directors  is  authorized,  without  stockholder
approval,  to issue  Preferred Stock in one or more series and to fix the voting
powers and the



<PAGE>

designations,  preferences and relative, participating, optional or other rights
and restrictions thereof. Accordingly, the Company may further issue a series of
Preferred  Stock in the future that will have  preference  over the Common Stock
with  respect to the  payment  of  dividends  and  proceeds  from the  Company's
liquidation, dissolution or winding up or have voting or conversion rights which
could adversely affect the voting power and percentage  ownership of the holders
of  the  Common  Stock.  The  Company  currently  has  no  plans,   commitments,
arrangements or understandings to issue any Preferred Stock.

Shares Eligible for Future Sale;  Potential  Adverse Impact on Market Price From
Sales of Shares.

     Sales of  substantial  amounts  of  Common  Stock in the  public  market by
shareholders  could  adversely  affect the market  price of the Common Stock and
adversely  affect the Company's  ability to raise capital at a time and on terms
favorable  to  the  Company.   Although  the  Company  has  approximately   five
broker-dealers  that  are  making a market  in its  common  stock as of the date
hereof,  the Company shares are thinly traded on a limited basis.  Consequently,
if  substantial  amounts  of Common  Stock are sold  into the  public  market by
shareholders,  the prevailing market price will likely be adversely affected. As
of  December  31,  1997,  the  Company  had  6,516,536  shares of  Common  Stock
outstanding.  Of  these  shares,  approximately  4,987,422  shares,  are  freely
tradable without restriction or are eligible for resale under Rule 144 under the
Securities  Act, except for any shares held by an "affiliate" of the Company (as
defined in the Securities Act and the rules and  regulations  thereunder)  which
will be subject to the limitations of Rule 144.

     In  general,  under  Rule  144  as  currently  in  effect,  subject  to the
satisfaction of certain other conditions,  a person (or persons whose shares are
aggregated under the terms of Rule 144),  including an affiliate of the Company,
who has owned  restricted  shares of Common Stock  beneficially for at least one
year, is entitled to sell,  within any  three-month  period,  a number of shares
that does not exceed the greater of 1% of the total number of outstanding shares
of the same class,  or the average  weekly  trading  volume of the Common  Stock
during the four calendar  weeks  preceding the sale, as reported by all national
securities  exchanges on which the Common Stock is traded  and/or the  automated
quotation  system  of  a  registered  securities  association,  or  an  approved
consolidated  transaction  reporting  system.  A  person  who  has  not  been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has  beneficially  owned  shares of Common Stock for at least three
years is  entitled  to sell such  shares  under Rule 144  without  regard to the
volume limitations  described above. No prediction can be made as to the effect,
if any, that sales of shares of Common Stock or the  availability  of shares for
sale will have on the market prices prevailing from time to time.

Risks of Low Priced Securities.

     If the price per share of the Company's  common stock is below $5.00,  then
unless the Company satisfied  certain net asset tests, the Company's  securities
would  become  subject  to  certain  "penny  stock"  rules  promulgated  by  the
Commission.  The  penny  stock  rules  require  a  broker-dealer,   prior  to  a
transaction in a penny stock not otherwise  exempt from the rules,  to deliver a
standardized  risk disclosure  document prepared by the Commission that



<PAGE>

provides information about penny stocks and the nature and level of risks in the
penny stock  market.  The  broker-dealer  also must  provide the  customer  with
current bid and offer  quotations for the penny stock,  the  compensation of the
broker-dealer  and  its  salesperson  in the  transaction  and  monthly  account
statements  showing the market value of each penny stock held in the  customer's
account. In addition,  the penny stock rules require that prior to a transaction
in a penny stock not otherwise  exempt from such rules, the  broker-dealer  must
make a  special  written  determination  that  the  penny  stock  is a  suitable
investment for the purchaser and receive the  purchaser's  written  agreement to
the transaction.  These disclosure  requirements may have the effect of reducing
the level of trading  activity in the secondary  market for a stock that becomes
subject to the penny stock rules.  Based on the Company's most recent  financial
statement for the year ended  December 31, 1997, the Company is a "penny stock".
Consequently,  because  it is subject to the penny  stock  rules,  owners of the
Company's common stock may find it more difficult to sell their shares.

Absence of Dividends.

     The Company has never  declared or paid cash  dividends on its Common Stock
and does not anticipate  paying cash dividends in the  foreseeable  future.  The
Company  currently  intends  to  retain  future  earnings,  if any,  to fund the
development and growth of its business.

ITEM 7. FINANCIAL STATEMENTS

     The Company's financial statements for the fiscal years ending December 31,
1997, and 1996 are included herein and consist of:

     Consolidated Balance Sheet (1997 and 1996)                      F-2
     Consolidated Statement of Operations                            F-3
     Consolidated Statement of Stockholders' Equity (Deficit)        F-4
     Consolidated Statement of Cash Flows                            F-5
     Notes to Consolidated Financial Statements                      F-6

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

     The Company  changed  accountants in 1997 from Gordon  Harrington & Osborn,
P.C.  to  Moore  Stevens,  P.C.  There  have  been  no  disagreements  with  the
accountants  on any matter of  accounting  principles,  practices  or  financial
statement disclosure.

                                    PART III



<PAGE>

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
        COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

     The  following  table  sets  forth  information  concerning  the  executive
officers, directors and key employees of the Company:

(a)  The current directors of the Company are set forth in the following table:

                             YEAR FIRST
                             ELECTED AS       OFFICE WITH
NAME                  AGE    DIRECTOR         COMPANY
--------------------------------------------------------------------------------

Alexander Hoffmann     56    1997             Chairman & Chief Executive Officer

Gary A. Graham         49    1997             Director

Frank Lubrano                1997             Director

     Each  Director  is elected for a period of one year and  thereafter  serves
until his successor is duly elected by the stockholders.

     The  Directors of the Company are not currently  compensated  as Directors,
but the Board of Directors may in the future  determine to pay  directors'  fees
and reimburse directors for expenses related to their activities.

(b)  The  current  executive  officers  of the  Company  are  set  forth  in the
     following table:

                                 YEAR
                                 FIRST ELECTED   OFFICE
NAME                    AGE      INTO OFFICE     WITH COMPANY
--------------------------------------------------------------------------------

Alexander T. Hoffmann     56     1997            Chief Executive Officer

Sol L. Berg               63     1986            President and Director

James R. Crose            63     1992            Vice President

Gloria Berg               59     1986            Secretary

Scott Singer              44     1997            Assistant Secretary & Treasurer

Except for its agreements  with Mr. Sol Berg,  Mr.  Hoffmann and Mr. Crose there
are no other employment contracts with the executive officers. Officers serve at
the will of the Board of Directors.



<PAGE>

(c)  There are no other significant employees of the Company:

(d)  Family Relationships

      Sol L. Berg,  the President,  and Gloria Berg, the Secretary,  are husband
and wife.

(e)  Business Experience

     Alexander T. Hoffmann (age 56)

     Mr. Hoffmann was elected a Director and became Chairman and Chief executive
Officer  of the  Company  in  October  1997.  From 1963 to 1975 he served in the
United States Army and the U.S. Army Reserves and retired with the rank of Major
in the Infantry.  From 1970 to 1976 he was the Vice President -Marketing & sales
of Lepel high frequency  Laboratories,  where he was  instrumental in developing
and  marketing  "Under  the Cap  seals"  with 3M  Corporation  and worked on new
methods of producing  semi-conductors.  From 1976 to 1986 he owned an operated a
beverage  manufacturers  representative  company  based in New York.  In 1981 he
organized and served as director and  president of a company which  acquired the
Yoo Hoo  Chocolate  Beverage  Company  from  Iroquois  Brands,  Inc. In 1984 Mr.
Hoffman  sold his interest in Yoo Hoo  Chocolate  Beverage  Company.  In 1986 he
started the Spritzer  Wine Company  which  developed  wine coolers and converted
soft drink bottling  plants to produce wine coolers for Seagrams,  Inc. In April
1996 he filed an uncontested  petition for bankrupty in the Eastern  District of
New York. From 1985 to the present he has served as a consultant to the beverage
industry. Mr. Hoffman attended Long Island University.

     Gary A. Graham (age 49)

Mr. Graham became a Director of the Company in October 1997. He is the president
of First Capital financial services Corporation,  which is an investment advisor
to the Company, Proxhill Marketing, Ltd., and First Capital Investments, Inc., a
registered  broker dealer and member of the National  Association  of Securities
Dealers,  Inc. In 1996, First Capital  Investments,  Inc., served as a placement
agent for the Company in connection  with its private  placement of $1.5 million
of common stock and its purchase of $1.5 million of Prepaid  Media  Credits from
Proxhill  Marketing,  Ltd.  Mr.  Graham  also serves as a member of the Board of
Directors  of  Proxhill  Marketing,   Ltd.,  First  Capital  Financial  Services
Corporation  and First  Capital  Investments,  Inc.  He  received a Bachelor  of
Science in Business administration from Dyke College.

     Frank Lubrano (age __)

Mr. Lubrano,  a certified public  accountant,  has been involved in several high
tech,  start-up  ventures  which  developed  into  leading  companies  in  their
particular  industry  segment.  He has over  twenty-five  years of operating and
financial management experience in both service and manufacturing industries.

     Sol L. Berg (age 62)


<PAGE>

     Since the latter part of 1984,  Mr. Berg has devoted his full-time  efforts
to the  business  of the  Company.  From 1982 to 1984,  Mr. Berg was the Project
Director  and  Product  Manager  for United  Technologies  Packard  in  Chicago,
Illinois. This Company is a manufacturer of precision instrumentation. From 1980
to 1982, Mr. Berg was Product Manager for the Hamilton Company in Reno,  Nevada.
Hamilton Company is a manufacturer of precision scientific equipment.  From 1974
to 1980, Mr. Berg, was the National Accounts Manager for Bio-Rad Laboratories in
Richmond,   California.  This  Company  manufactures  diagnostic  materials  and
equipment. Sol L. Berg is the husband of Gloria Berg.

     James R. Crose ( age 63)

     Mr. Crose has been Director of  Engineering  for the Company since 1992 and
Vice  President-Engineering  since 1996.  Mr. Crose earned a Bachelor of Science
degree in Mechanical  Engineering  from  Northeastern  University.  His areas of
expertise  include:   Fluidics,   Vacuum  Process  Control,   Heat  Transfer  in
Electronics and AutoCad 1-4. He has 3 patents assigned to him with several other
pending. He has held key engineering  positions with Raytheon,  Martin Marietta,
Corning Glass, Sanders Assoc. and Sweetheart Cup Corp.

     Gloria Berg (age 59)

     Gloria Berg has served as Secretary for the Company  since late 1984.  From
1982 to 1984,  she was a  bookkeeper  and  accountant  for Hidden  Lake  Village
Condominiums,  Illinois.  From 1975 to 1982, she was a department  manager for 4
departments for Famous Barr department stores. Gloria Berg is the wife of Sol L.
Berg.

     Scott Singer (age 44)

Mr.  Singer  is a  Certified  Public  Accountant  and  serves as and has been in
private  accounting  practice  for over ten  years in the New York  Metropolitan
area. He received a bachelor of Business Administration from Adelphi University.

Directors  do not receive any  compensation  for services as  directors.  During
fiscal year 1997, the Company's Board of Directors  performed the functions of a
compensation  committee  of the  Board in  reviewing  the  compensation  paid to
employees,  and  of  an  audit  committee  in  reviewing  financial  statements,
management  and internal  audits.  IMSCO does not have a separate  Nominating or
Compensation Committee.

ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets for the annual and long-term  compensation of the chief
executive  officer and other  executive  officers for services in all capacities
for the fiscal years ended December 31, 1995, 1996 and 1997,  whose total annual
salary and bonus exceeded $100,000 in any of those fiscal years.



<PAGE>

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
Name of Individual       Capacity                   Year      Salary      Additional
                                                                          Compensation

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

<S>                  <C>                            <C>       <C>         <C>
Alexander Hoffmann   Executive Officer              1997      $25,962     $105,600(1)

Sol. L. Berg         President                      1997      $115,625
                                                    1996                  $100,000(2)
                                                    1995      $75,300

James A. Yurak       Former Director                1997                  $100,000(3)
                                                    1996                  $100,000
                                                    1995

Alan D. Waldman      Former Director                1997
                                                    1996                  $132,000(4)
                                                    1995
</TABLE>

(1)  In connection with the signing of his employment agreement in October 1997,
     Mr. Hoffmann was granted 80,000 shares of unregistered  common stock of the
     Company.  He also The value of shares  shown use the same  $1.32  price per
     share that shares  were sold to Hampton  Tech  Partners  II, LLC in October
     1996. He is also entitled to an annual salary of $150,000.

(2)  Consist of 150,000  shares of the Company  received by Mr. Berg pursuant to
     the general exchange of the Company's shares for shares of DPI conducted in
     May 1996. In November of 1995, Mr. Berg had received  250,000 shares of DPI
     for assigning  his patent to the  decaffeination  technology  and for other
     services  rendered.  When all of the shares of DPI not owned by the Company
     were exchanged by the respective DPI  shareholders  in May 1996 for Company
     shares on a 0.6 Company  shares to DPI share  basis,  Mr.Berg  received the
     150,000 shares of the Company. 

(3)  In  connection  with the signing of his  amended  employment  agreement  in
     September 1996, Mr. Yurak was granted 75,000 shares of unregistered  common
     stock of the Company. He also received 75,000 shares of unregistered common
     stock of the Company in March 1997.  The value of shares shown use the same
     $1.32 price per share that shares were sold to Hampton  Tech  Partners  II,
     LLC in October 1996.

(4)  For his services the Company agreed to issue Dr. Waldman  100,000 shares of
     common  stock  in  October  1996  which  shares  did not  vest and were not
     delivered  until January



<PAGE>

     1997.  The value of shares  shown use the same  $1.32  price per share that
     shares were sold to Hampton Tech Partners II, LLC in October 1996.

     There are no  arrangements  known to the Company  which may at a subsequent
date result in a change in control of the Company.

     The Company currently provides medical insurance to all its employees.

Employment Arrangements

     Effective as of October 1, 1997,  the Company  entered  into an  employment
agreement with Alexander T. Hoffmann providing for Mr. Hoffmann's  employment as
the Company's  Chief  executive  Officer and Chairman for a three year term. Mr.
Hoffmann's  salary under this agreement is $150,000 per year. The agreement also
provides  that Mr.  Hoffmann  shall be provided with a car by the Company and be
reimbursed  for  automobile  insurance.  Mr.  Hoffmann shall also be entitled to
medical  insurance,  vacation  and  other  benefits  provided  to the  Company's
employees  generally.  In the  event  that Mr.  Hoffmann's  employment  with the
Company is terminated by the Company other than for cause,  Mr.  Hoffmann  shall
receive one year's base salary

     Effective as of October 1, 1997,  the Company  entered  into an  employment
agreement with Sol L. Berg providing for Mr. Berg's  employment as the Company's
President  for a three year term.  Mr.  Berg's  salary  under this  agreement is
$125,000 per year. Mr. Berg is also eligible to receive an annual bonus equal to
3.5% of the "Net  Earnings" in excess of $1 million per year from the  Company's
"Heal & Seal"  Division.  The term "Net Earnings" shall mean the earnings of the
Company's  "Heal & Seal"  Division  before  taxes for each given fiscal year and
shall be conclusively  determined to be those shown on the income  statement for
such  fiscal  year by the  Company in its Annual  Report on Form 10-KSB as filed
with the  Commission;  or, if the Company  shall not be subject to the reporting
requirements  of Sections 13 or 15 of the  Securities  Exchange Act of l934,  as
shown on the Company's income statement  audited and certified by an independent
certified public accountant. The annual bonus shall be paid within 90 days after
the end of the Company's fiscal year end. For purposes of calculating the bonus,
the  Company  shall be  charged in the  aggregate  no more than 10% of its gross
revenues by Company for  royalties on licenses  from Company to the Division and
for  administration  and  management  fees. The agreement also provides that Mr.
Berg  shall  be  provided  with a car  by the  Company  and  be  reimbursed  for
automobile  insurance.  Mr. Berg shall also be  entitled  to medical  insurance,
vacation and other benefits provided to the Company's  employees  generally.  In
the event that Mr.  Berg's  employment  with the  Company is  terminated  by the
Company other than for cause, Mr. Berg shall receive six months' base salary. In
connection  with the exchange of his DPI stock for the  Company's  Common Stock,
Mr. Berg received 150,000 shares of the Company's Common Stock.

     As of February 26, 1997,  DPI entered into a consulting  agreement with Mr.
James G. Yurak to provide marketing and sales consulting  services and advice to
DPI through  December 31, 1999. Under Mr. Yurak's  agreement,  he is paid a base
retainer  of  $12,000  per year and will be paid a per diem fee of  $1,000  when
specific services are expressly requested by DPI. From February 23, 1996 through
February  26,  1997 Mr.  Yurak  served



<PAGE>

as a Director of the Company and was  President and Chief  Executive  Officer of
DPI. As total  compensation  for such services Mr. Yurak was also granted 75,000
shares of the Company's  Common Stock upon signing his employment  agreement and
75,000 shares after one full year of employment.

     Effective as of October 1, 1997,  the Company  entered  into an  employment
agreement with James Crose providing for Mr.Crose's  employment as the Company's
Vice President of Engineering for a two year term. Mr. Crose's salary under this
agreement  is $85,000  per year.  Mr.  Crose  shall also be  entitled to medical
insurance,  vacation  and other  benefits  provided to the  Company's  employees
generally.

     Effective as of September 1, 1996, BVP  Enterprises,  Inc. D/b/a "Universal
Sales" entered into a Sales  Administration and Servicing Agreement  ("Universal
Agreement")  with the Company for a seven year term,  providing a broad scope of
sales  administration  and  services to the  Company.  As  compensation  for its
services, Universal shall receive an amount equal to 2.5% of the Company's gross
revenues  from  operations in excess of $5 million per annum.  Mr.  Alexander T.
Hoffmann,  the Chairman and Chief Executive Officer of the Company,  is also the
President and a 50%  shareholder  of Universal  Sales.  Additionally,  under the
Universal Agreement,  Universal shall be entitled to a sales commission equal to
2.5% of the gross  revenues  resulting  from all  sales  generated  through  the
efforts of Universal.  Universal  received $31,500 for services  rendered to the
Company in 1996. The Company  terminated the Universal Sales Agreement for cause
in April 1997.  Universal  Sales filed a Complaint  against the Company on April
12, 1998 alleging  breach of contract and seeking  75,000 shares of common stock
as damages. The Company is reviewing its position and has not filed an answer to
the Universal Sales lawsuit. See "Legal Proceedings".

     Except as described above, there are presently no pension or other plans or
arrangements pursuant to which remuneration is proposed to be paid in the future
to any of the  officers  or  directors  of the  Company  other than as set forth
above.  At the present time,  the directors do not receive  compensation  of any
form. Non-Cash  Compensation for all of the executive officers of the Company as
a group (3 persons)  did not exceed the lesser of  $25,000.00  per person or Ten
(10%) Percent of such person's cash  compensation.  The Company does not provide
life,  health  or  medical  plans  to  officers  that are not  available  to all
employees.  Except  as  provided  above,  the  Company  has no other  employment
contracts with any executive officers or other employees.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table  identifies each person known to the Company to be the
beneficial owner of more than five percent of the Company's  Common Stock,  each
director  of the  Company  and all  directors  and  officers of the Company as a
group,  and sets  forth  the  number of shares  of the  Company's  Common  Stock
beneficially  owned by each such person and such group and the percentage of the
shares of the Company's  outstanding  Common Stock owned by each such person and
such group.  In all cases,  the named person  individually  or together with his
spouse has sole voting power and sole investment power over the securities.



<PAGE>

     (a) As of the December 31, l997, five persons owned of record or were known
by the Company to own  beneficially  more than five  percent  (5%) of the Common
Stock outstanding.

     (b) The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership  (determined  in accordance  with  Securities and Exchange
Commission  Rule 13d-3  Securities  Exchange Act of 1934) of common stock of the
Company as of December 31, 1997, by: (i) each person who is known by the Company
to own beneficially more than 5% of the outstanding shares of common stock; (ii)
each of the  Company's  directors;  and (iii) all officers and  directors of the
Company's as a group:

<TABLE>
<CAPTION>
Name and Address of                  Amount and Nature of
Beneficial Owner                     Beneficial Ownership                Percent of Class
----------------                     --------------------                ----------------

<S>                                       <C>                                 <C>  
Hampton Tech Partners II, LLC
8400 East Prentice Avenue
Englewood, CO 80111 (1)                   1,117,424                           18.3%

Hampton Tech Partners, LLC
8400 East Prentice Avenue
Englewood, CO 80111 (2)                     150,000                            2.5%

Proxhill Marketing, Inc.(3)               1,263,635                           20.7%
9250 E. Costilla Avenue
Englewood, CO 80112

Gary A. Graham (4)                        1,263,635                           20.7%
9250 E. Costilla Avenue
Englewood, CO 80112

Sol L. Berg (4)                             385,000(5)                         6.3%
11 Royal Crest Drive
North Andover, MA  01845

Gloria Berg                                 165,250(6)                         2.7%
11 Royal Crest Drive
North Andover, MA 01845

Dr. Alan Waldman (4)                        170,000                            2.8%
184 Seiffert Court
Oceanside, NY  11572

Mrs. Alexander T. Hoffman                   369,900                            6.0%
1660 Old Country Road
Plainview, NY  11803

Alexander T. Hoffmann (4)(7)                 80,000                            1.22%
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845

James Yurak (4)(8)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845                     150,000                            2.4%
</TABLE>



<PAGE>

<TABLE>
<S>                                       <C>                                 <C>  
Dr. Alan D. Waldman (4)(8)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845                     180,000                            2.8%

Frank Lubrano (9)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845                           0                            0

All Officers and Directors                1,893,885                           29.1%
as a group (5 persons)
</TABLE>

---------------
(1)  The  members  of  Hampton  Tech  Partners  II,  LLC  who   indirectly   and
     beneficially own these shares of the Company are:

     Steven Demby, Equitrust Mortgage Corporation, David McCall, Scott Robinson,
     Kent Lovelace, Bennett Aisenberg, Gerald Gray, Tyler Runnels, Andrew
     Telsey, Bravely Morton, Grant Street Joint Venture, Andrew Telsey, SEP/IRA,
     David Sprang, James Curtis, Mark Rosenberg, Charles McKenney, Michael
     Geller, Hampton Partners Investments, LLC, 181 Realty, Inc., Capital Market
     Solutions, Inc. Clifford Greenbaum, Jolie Robinson, Henrik Oerbekker,
     Russell Scott, Joseph Scott, Suzanne Robinson, Doug Hickok, Bob Sanderman,
     Mark Bradford, Stanley Cohen, and Mark Lampirski.

(2)  The natural persons who are the Hampton Tech Partners, LLC are:

     Hampton  Partners  Investments,  Inc., Kent Lovelace,  David McCall,  Scott
     Robinson,  Jack Robinson,  Wexler & Burkhart, Del Morton, David Strang, and
     Henrik Oerbekker.

(3)  Does not include 127,272 Shares issuable to Proxhill Marketing,  Ltd., upon
     exercise of the Class D Warrants for the exercise price of $1.32 per Share.

(4)  Denotes a director of the Company.

(5)  The shares shown as owned by Sol L. Berg do not include  either (i) 165,250
     shares  owned by his  wife,  Gloria  Berg,  or (ii)  150,000  shares  owned
     directly  by Sol L.  Berg's  three  adult  children,  since  Mr.  Berg  has
     disclaimed  any interest and may not be deemed to have voting or investment
     power over these shares.

(6)  The shares shown as owned by Gloria Berg do not include  either (i) 235,000
     shares owned by her  husband,  Sol L. Berg,  or (ii)  150,000  shares owned
     directly by Sol L. Berg's three adult children,  since Mrs. Berg may not be
     deemed to have shares voting or investment power over these shares.

(7)  The shares shown as owned by  Alexander  T. Hoffman do not include  369,900
     owned by his wife Rosemary Hoffmann,  since Mr. Hoffmann has disclaimed any
     interest  and may not be deemed to have  voting or  investment  power  over
     these shares.

(8)  Was a director of the Company until October 1997.

*    Less than 1%

     There are no  arrangements  known to the Company which may, at a subsequent
date, result in a further change in control of the Company.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION



<PAGE>

     (a) Except as described  below,  since January 1, l997,  there have been no
transactions   with  any  officer,   director  or  five  percent  (5%)  or  more
shareholders of the Company in which the amount involved exceeded $60,000.

     On  September  20,  1996,  the  Company  entered  into the  Media  Purchase
Agreement  with PML,  wherein PML agreed to sell  $1,500,000 of media credits to
the Company in consideration  for the Company issuing 1,136,363 shares of Common
Stock,  representing a price of $1.32 per share.  In connection with the private
placement of the Shares to HTP, HTP-II and PML, First Capital Investments, Inc.,
a  broker-dealer  which is a member of the National  Association  of  Securities
Dealers,  Inc.  ("NASD"),  received the 242,273 Class A Warrants entitling it to
acquire Common Stock for the price of $1.45 per Share  exercisable over a period
ending July 31, 2001. First Capital Investments, Inc., also received a placement
fee  equal  to 10%  of the  $1.5  million  received  under  the  Stock  Purchase
Agreement, a non-accountable  expense allowance equal to 3% of the amount raised
under the  Stock  Purchase  Agreement.  As Media  Credits  are used by the Media
Purchase  Agreement,  First  Capital  Investments,  Inc.,  shall also  receive a
placement  fee of 10% of the amount of Media Credit used.  For  advertising  and
marketing  services  rendered to the Company in 1996 and 1997, PML also received
the 127,272 Class D Warrants, entitling it to acquire Common Stock for the price
of $1.32 per Share for a period ending July 31, 2001. Mr. Gary A. Graham who was
elected a Director of the Company in October  1997 is also the  President  and a
Director of PML and First Capital Investments , Inc.

     In 1997, Mr. Alexander T. Hoffmann,  a Director and Chief Executive Officer
of the  Company,  received  80,000  shares of Common Stock as  compensation  for
services rendered under his Employment Agreement. In 1997, Mr. James G. Yurak, a
Director of the Company  until  October 1997 and  formerly  President of the DPI
subsidiary, received 75,000 shares of Common Stock for services rendered in 1996
and 75,000  shares of Common  Stock for  services  rendered in 1997.  In January
1997,  Dr. Alan Waldman  received  100,000  shares of Common Stock  representing
payment for services due him under his consulting agreement through December 31,
1996,  with the shares  vesting  and being  issued on January 1, 1997.  David E.
Fleming,  a member of Epstein,  Becker & Green,  P.C.,  corporate counsel to the
Company,  was granted  90,000 shares of the  Company's  Common Stock for various
legal services rendered to the Company over the prior two years, with the shares
vesting and deemed earned on January 1, 1997. In 1996, Mr. Vernon Oberholtzer, a
former  Director of the Company who resigned in February  1997,  received  stock
options to acquire 10,000 Shares for a price of $1.32, exercisable over a period
ending December 31, 1999. In 1996, Universal Sales, Inc. ("Universal"),  a sales
and marketing  company of which Mr.  Alexander T.  Hoffmann,  a Director and the
Chief  Executive  Officer of the  Company,  is Director  and a 50%  shareholder,
received cash compensation in the amount of $31,500 for services rendered to the
Company. See "Legal Proceedings."

     (b) Except as above  described,  there have been no business  relationships
with directors or nominees for director of the Company since January 1, l997.

     (c) At December 31, l997,  no officers or  directors  were  indebted to the
Company.



<PAGE>

     (d) See 7(b) above.

ITEM 8. EXHIBITS AND REPORTS ON FORM 8-K

(a)  List of Exhibits.

     The  Exhibits  listed  below are either  filed or are deemed to be filed as
part of this Report.

     2.0  --   Agreement and Plan of Reorganization dated August 11, 1986 (filed
               as  Exhibit  C-1  to  Form  8-K,   File  Number   2-98084-D   and
               incorporated herein by reference).

     3.0  --   Articles of Incorporation  and By-Laws (filed as Exhibits 4 and 5
               to the Company's Registration Statement on Form S-18, File Number
               2- 98084-D and incorporated herein by reference).

     3.1  --   Amended  and  Restated  Certificate  of  Incorporation  (filed as
               Exhibit 3.1 to the Company's Registration Statement on Form SB-2,
               File Number 333-19707 and incorporated herein by reference.)

     3.2  --   Bylaws of the  Company  (filed as  Exhibit  3.2 to the  Company's
               Registration  Statement on Form SB-2,  File Number  333-19707 and
               incorporated herein by reference.)

     4.1  --   Form of Common  Stock  Certificate  (filed as Exhibit  4.1 to the
               Company's  Registration  Statement  on  Form  SB-2,  File  Number
               333-19707 and incorporated herein by reference.)

     4.2  --   Form of Class A Common Stock  Purchase  Warrant (filed as Exhibit
               4.2 to the Company's  Registration  Statement on Form SB-2,  File
               Number 333-19707 and incorporated herein by reference.)

     4.3  --   Form of Class B Common Stock  Purchase  Warrant (filed as Exhibit
               4.3 to the Company's  Registration  Statement on Form SB-2,  File
               Number 333-19707 and incorporated herein by reference.)

     4.4  --   Form of Class C Common Stock  Purchase  Warrant (filed as Exhibit
               4.4 to the Company's  Registration  Statement on Form SB-2,  File
               Number 333-19707 and incorporated herein by reference.)

     4.5  --   Form of Class D Common Stock  Purchase  Warrant (filed as Exhibit
               4.51 to the Company's  Registration  Statement on Form SB-2, File
               Number 333-19707 and incorporated herein by reference.)



<PAGE>

   (6)(A) --   Note and Security Agreement dated October 3, 1986 between Company
               and Naper Bank,  N.A. (filed as Exhibit 10(A) to Annual Report on
               Form 10-K,  File  Number  2-98084-D  and  incorporated  herein by
               reference).



<PAGE>


   (6)(B) --   Agreement   dated  October  22,  1986  between  Company  and  LKB
               Diagnostics,  Inc.  regarding  exclusive  right and  authority to
               market,  sell and  distribute  certain  LKB  products  (filed  as
               Exhibit  10(B)  to  Annual  Report  on  Form  10-K,  File  Number
               2-98084-D and incorporated herein by reference).

   (6)(C) --   Outside Director's Stock Option Plan dated May 21, 1987 (filed as
               Exhibit  (10) (c) to Annual  Report  on Form  10-K,  File  Number
               2-98084-D and incorporated herein by reference).

   (6)(D) --   Placement    Letter   dated   April   11,   1994   between   D.H.
               Vermogensverwaltungs-und  Beteiligungsgesellschaft  mbH  and  the
               Company.(1)

   (6)(E) --   Promissory  Note dated  April 12, 1994 made by the Company to the
               order  of  D.H.Vermogensverwaltungs-und  Beteiligungsgesellschaft
               mbH.(1)

   (6)(F) --   Common Stock Purchase  Warrant dated April 12, 1994 issued by the
               Company to D.H. Vermogensverwaltungs-und Beteiligungsgesellschaft
               mbH.(1)

   (6)(G) --   Amendment  Dated August 29, 1994 to Placement  Letter dated April
               11,    1994     between    D.H.     Vermogensverwaltungs-     und
               Beteiligungsgesellschaft mbH. and the Company.(1)

   (6)(H) --   Consulting  Agreement dated July 1, 1992 between IMSCO,  Inc. and
               Waldman  Biomedical,  Inc.,  and Addendum  thereto  Dated July 1,
               1994.(1)

   (6)(I) --   Escrowed  Common Stock  Agreement  made as of September  30, l995
               between Decaf Products, Inc. and James G. Yurak.(2)

   (6)(J) --   Employment  Agreement  effective  as of January  1, 1996  between
               Decaf Products, Inc. and James G. Yurak.(2)

   (6)(K) --   License Agreement dated February 23, 1996 between IMSCO, Inc. and
               Decaf Products.(2)

     10.1.--   Stock  Purchase  Agreement  between the Company and Hampton  Tech
               Partners  II, LLC dated  September  20,  1996  (Filed on Form 8-K
               dated October 1, 1996 -- Commission No. 0-24520).

     10.2.--   Media  Purchase   Agreement  between  the  Company  and  Proxhill
               Marketing,  Ltd.,  dated  September  20,  1996 (Filed on Form 8-K
               dated October 1, 1996 -- Commission No. 0- 24520).



<PAGE>

     10.3.--   Manufacturing and Distribution  Agreement between the Company and
               NEWCO Enterprises,  Inc., dated September 20, 1996 (Filed on Form
               8-K dated October 1, 1996 -- Commission No. 0-24520).

     10.4.--   Marketing  Agreement  between  the  Company  and Huhes  Edwards &
               Price,  Inc.,  dated  September 20, 1996 (Filed on Form 8-K dated
               October 1, 1996 -- Commission No. 0- 24520).

     10.5.--   Consulting  Agreement  between the  Company  and Edmund  Abramson
               dated August 13, 1996.(3)

     10.6.--   Consulting  Agreement  between the  Company  and WRA  Consulting,
               Inc., dated August 13, 1996.(3)

     10.7 --   Agreement  between the Company  and  Universal  Sales dated as of
               September 1, 1996.(3)

     10.8 --   Employment   Agreement  dated  as  of  October  1,  1997  between
               Alexander T. Hoffmann and the Company.

(b)  Reports on Form 8-K.

     The Company filed two reports on Form 8-K for the year ending  December 31,
l997.

Footnotes

(1) Filed as Exhibits to the  Company's  Form 10-SB  dated July 14,  1994,  File
Number 0-24520, and incorporated herein by reference.

(2) Filed as Exhibits to the Company's  Form 10-KSB for the year ended  December
31, 1995, File Number 0-24520, and incorporated by reference herein.

(3) Filed as Exhibits to the Company's  Form 10-KSB for the year ended  December
31, 1996, File Number 0-24520, and incorporated by reference herein.


<PAGE>

                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders of
   IMSCO Technologies, Inc.


We  have  audited  the   accompanying   consolidated   balance  sheet  of  IMSCO
Technologies,  Inc. ( a development  stage  enterprise)  and  subsidiaries as of
December  31,  1996  and  1995,  and  the  related  consolidated  statements  of
operations  and deficit and cash flows for the years ended December 31, 1996 and
1995 and the  cumulative  amounts  from July 9, 1992  (inception  of the current
development stage) to December 31, 1996. These consolidated financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an  opinion  on these  consolidated  financial  statements  based on our
audit.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Imsco Technologies,
Inc. (a development  stage  enterprise) and subsidiaries as of December 31, 1996
and 1995 and the cumulative  amounts from July 2, 1992 (inception of the current
development  stage) to  December  1996 in  conformity  with  generally  accepted
accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern. As shown in the consolidated financial
statements the Company  incurred a net loss of $1,062,758  during the year ended
December  31,  1996.  As discussed in Notes 1, 8 and 9, the Company had suffered
continuing losses from now discontinued losses and development stage operations.
The continuing  losses raise  substantial  doubt about the Company's  ability to
continue  as a going  concern.  The  financial  statements  do not  include  any
adjustments that might result from the outcome of this uncertainty.

As described in Note 14 to the  financial  statements,  the Company has restated
its financial  statements to reflect the  additional  costs of media credits for
the year ended December 31, 1996.



GORDON, HARRINGTON & OSBORN, P.C.



North Andover, MA
April 2, 1997
Except as to Note 14 which is as of April 3, 1998


                                       F-1
<PAGE>



                       CONSENT OF INDEPENDENT ACCOUNTANTS



We conssent to the  incorporation by reference of our report dated April 2, 1997
which  includes an  explanatory  paragraph  regarding the  Company's  ability to
continue  as a  going  concern,  on our  audits  of the  consolidated  finanical
statements  of Imsco  Technologies,  Inc. as of December 31, 1996 and 1995 which
report is included in this Annual Report on Form 10-KSB.



GORDON, HARRINGTON & OSBORN, P.C. 


North Andover, MA
April 2, 1997


                                       F-1
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Stockholders of
   IMSCO Technologies, Inc.
   North Andover, Massachusetts



     We have  audited  the  accompanying  consolidated  balance  sheet  of IMSCO
Technologies,  Inc. and  Subsidiaries  as of December 31, 1997,  and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
IMSCO  Technologies,  Inc. and  Subsidiaries  as of December  31, 1997,  and the
results  of their  operations  and  their  cash  flows for each of the year then
ended, in conformity with generally accepted accounting principles.

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming  that the Company  will  continue as a going  concern.  As shown in the
consolidated financial statements and as discussed in Note 9 to the consolidated
financial  statements,  the  Company has  suffered  recurring  losses  since its
inception  and has an  accumulated  deficit at December 31, 1997 of  $6,541,225.
These conditions raise substantial doubt about the Company's ability to continue
as a going  concern.  Management's  plans in  regard to these  matters  are also
described in Note 9. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.




                                                MOORE STEPHENS, P.C.
                                                Certified Public Accountants.

Cranford, New Jersey
April 3, 1998



                                      F-1
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997.
--------------------------------------------------------------------------------

<TABLE>
<S>                                                                      <C>        
Assets:
Current Assets:
   Cash                                                                  $    13,780
   Other Current Assets                                                        1,000
                                                                         -----------

   Total Current Assets                                                       14,780
                                                                         -----------

Property and Equipment:
   Property and Equipment                                                    123,066
   Leasehold Improvements                                                      5,845
                                                                         -----------

   Total - At Cost                                                           128,911
   Less: Accumulated Depreciation and Amortization                           (88,250)
                                                                         -----------

   Property and Equipment - Net                                               40,661
                                                                         -----------

Other Assets:
   Deposits                                                                    3,499
                                                                         -----------

   Total Assets                                                          $    58,940
                                                                         ===========

Liabilities and Stockholders' [Deficit]:
Current Liabilities:
   Cash Overdraft                                                        $    18,804
   Accounts Payable                                                          165,955
   Due to Officer                                                              3,000
   Accrued Salaries                                                           48,686
   Accrued Expenses                                                        1,622,612
   Accrued Payroll Taxes                                                      16,696
                                                                         -----------

   Total Current Liabilities                                               1,875,753
                                                                         -----------

Commitments and Contingencies [8] [13]                                          --
                                                                         -----------

Stockholders' [Deficit]:
   Preferred Stock - Authorized 1,000,0000 Shares at $.0001 Par Value;
      0 and 0 Shares, Issued and Outstanding                                    --

   Common Stock - Authorized 15,000,000 Shares at $.0001 Par Value;
      6,516,536 Shares Issued and Outstanding                                    652

   Additional Paid-in Capital                                              6,118,198

   Less:  Prepaid Advertising Credits Receivable                          (1,394,438)

   Deficit Accumulated:
      Developments Stage                                                  (5,920,317)
      Discontinued Operations                                               (620,908)
                                                                         -----------

   Total Stockholders' [Deficit]                                          (1,816,813)
                                                                         -----------

   Total Liabilities and Stockholders' [Deficit]                         $    58,940
                                                                         ===========
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                      F-2
<PAGE>

 IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                                        Cumulative
                                                                                                                          Amounts
                                                                                                                           from
                                                                                                                       July 9, 1992
                                                                                                                       [Inception of
                                                                                                                        the Current
                                                                                                                        Development
                                                                                             Years ended                 Stage] to
                                                                                            December 31,                December 31,
                                                                                1 9 9 7              1 9 9 6              1 9 9 7
                                                                                -------              -------              -------

<S>                                                                           <C>                  <C>                  <C>        
General, Administrative and Development Expense:
   Research and Development Expense                                           $    66,251          $    53,838          $   263,114
   Salaries and Wages                                                             189,794               42,087              435,643
   Officer Salaries                                                               190,714               61,375              523,783
   Payroll Taxes                                                                   29,756               10,006               85,026
   Outside Labor                                                                   34,190                 --                154,540
   Professional Services and Consulting Fees                                    1,011,796              458,483            1,695,341
   Rent and Fees                                                                   85,421               22,470              165,419
   Insurance                                                                       34,763               22,344               89,601
   Travel and Business Meeting                                                     51,997               35,222              118,539
   Auto Expense                                                                    16,247                3,716               40,539
   Telephone and Utilities                                                         16,376                9,199               50,073
   Office Expense                                                                  52,991               25,905               93,273
   Equipment Rental                                                                16,480                4,883               24,825
   Corporate Fees                                                                  19,568                6,496               60,173
   Advertising                                                                    223,961                1,800              225,761
   Depreciation and Amortization                                                   13,258                 --                 13,258
   Consulting Fees and Litigation Settlement                                    1,538,392                 --              1,538,392
   Franchise Tax                                                                      619                  456                1,531
                                                                              -----------          -----------          -----------

   General, Administrative and Development Expense                              3,592,574              758,280            5,578,831
                                                                              -----------          -----------          -----------

Other Income [Expense]:
   Dividend and Interest Income                                                     5,541                3,022               11,633
   Interest Expense                                                                  --               (307,500)            (309,047)
   Loss on Sale of Fixed Assets                                                   (44,072)                --                (44,072)
                                                                              -----------          -----------          -----------

   Other Income [Expense] - Net                                                   (38,531)            (304,478)            (341,486)
                                                                              -----------          -----------          -----------

   [Loss] Before Income Taxes                                                  (3,631,105)          (1,062,758)          (5,920,317)
Provision for Income Tax                                                             --                   --                   --
                                                                              -----------          -----------          -----------
   Net [Loss]                                                                 $(3,631,105          $(1,062,758)         $(5,920,317)
                                                                              ===========          ===========          ===========
   [Loss] Per Share                                                           $     (0.57)         $     (0.33)
                                                                              ===========          ===========

   Weighted Average Shares Outstanding                                          6,318,281            3,274,954
                                                                              ===========          ===========
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                      F-3
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                          
                                                                      Common Stock                                        '
                                                                  Number of                   Paid-in       Accumulated   
                                                                   Shares       Amount        Capital         Deficit     

<S>                                                             <C>           <C>           <C>            <C>            
   Balance at December 31, 1995                                 $ 2,995,425   $       299   $ 1,796,700    $(1,847,362)   

Private Placement                                                    10,000             1        19,999           --      

Issuance of Subsidiary Stock                                           --            --          10,000           --      

Issuance of Shares                                                   47,000             5            (5)          --      

Issuance of Shares for Consulting Services                          284,000            28       213,534           --      

Issuance of Shares in Payment of Loan                               227,000            23       299,977           --      

Issuance of Shares for Advertising Credits                        1,136,000           114     1,499,886           --      

Issuance of Shares for Settlement of Debt                           775,000            77       943,543           --      

Issuance of Shares for Subsidiary Stock                             468,000            47           (47)          --      

Private Placement                                                   150,000            15       299,985           --      

Net [Loss] for the year ended December 31, 1996                        --            --            --       (1,062,758)   
                                                                -----------   -----------   -----------    -----------    

   Balance at December 31, 1996                                   6,092,425           609     5,083,572     (2,910,120)   

Warrants Issued for Cost of Advertising Credits - Restatement          --            --         108,170           --      
                                                                -----------   -----------   -----------    -----------    

   Adjusted Balance at December 31, 1996                          6,092,425           609     5,191,742     (2,910,120)   

Issuance of Shares for Consulting Services                          100,000            10       274,990           --      

Issuance of Shares on Consulting Services                            75,000             8       196,867           --      

Private Placement                                                    23,000             2        34,498           --      

Issuance of Shares for Professional Services                         18,500             2        27,747           --      

Private Placement                                                    15,000             2        33,748           --      

Issuance of Shares for Consulting Services                          130,000            13       235,612           --      

Private Placement                                                    62,611             6       122,994           --      

Advertising Credits Used                                               --            --            --             --      

Net [Loss] for the year ended December 31, 1997                        --            --            --       (3,631,105)   
                                                                -----------   -----------   -----------    -----------    

   Balance at December 31, 1997                                   6,516,536   $       652   $ 6,118,198    $(6,541,225)   
                                                                ===========   ===========   ===========    ===========    
</TABLE>

<TABLE>
<CAPTION>
                                                                     Prepaid          Total
                                                                   Advertising    Stockholders'
                                                                     Credits         Equity
                                                                    Receivable      [Deficit]

<S>                                                                <C>            <C>         
   Balance at December 31, 1995                                    $      --      $   (50,363)

Private Placement                                                         --           20,000

Issuance of Subsidiary Stock                                              --           10,000

Issuance of Shares                                                        --             --

Issuance of Shares for Consulting Services                                --          213,562

Issuance of Shares in Payment of Loan                                     --          300,000

Issuance of Shares for Advertising Credits                          (1,500,000)          --

Issuance of Shares for Settlement of Debt                                 --          943,620

Issuance of Shares for Subsidiary Stock                                   --             --

Private Placement                                                         --          300,000

Net [Loss] for the year ended December 31, 1996                           --       (1,062,758)
                                                                   -----------    -----------

   Balance at December 31, 1996                                     (1,500,000)       674,061

Warrants Issued for Cost of Advertising Credits - Restatement         (108,170)          --
                                                                   -----------    -----------

   Adjusted Balance at December 31, 1996                            (1,608,170)       674,061

Issuance of Shares for Consulting Services                                --          275,000

Issuance of Shares on Consulting Services                                 --          196,875

Private Placement                                                         --           34,500

Issuance of Shares for Professional Services                              --           27,749

Private Placement                                                         --           33,750

Issuance of Shares for Consulting Services                                --          235,625

Private Placement                                                         --          123,000

Advertising Credits Used                                               213,732        213,732

Net [Loss] for the year ended December 31, 1997                           --       (3,631,105)
                                                                   -----------    -----------

   Balance at December 31, 1997                                    $(1,394,438)   $(1,816,813)
                                                                   ===========    ===========
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                      F-4
<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                         Cumulative
                                                                                                                           Amounts
                                                                                                                            from
                                                                                                                        July 9, 1992
                                                                                                                       [Inception of
                                                                                                                        the Current
                                                                                                                        Development
                                                                                         Years ended                     Stage] to
                                                                                         December 31,                   December 31,
                                                                                1 9 9 7              1 9 9 6              1 9 9 7
                                                                                -------              -------              -------
<S>                                                                           <C>                  <C>                  <C>         
Operating Activities:
   Net [Loss]                                                                 $(3,631,105)         $(1,062,758)         $(5,920,317)
                                                                              -----------          -----------          -----------
   Adjustments to Reconcile Net [Loss] to Net Cash
      [Used for] Operating Activities:
      Decrease [Increase] in Due from Officers                                       --                    530                 (120)
      Depreciation and Amortization                                                13,258                 --                 15,871
      Contract Services Paid with Common Stock                                    729,970              213,562            1,167,015
      Interest Paid with Common Stock                                                --                300,000              300,000
      Amortization of Advertising Credits                                         213,732                 --                213,732
      Loss on Disposal of Property and Equipment                                   44,072                 --                 44,072

   Changes in Assets and Liabilities:
      [Increase] Decrease in:
        Other Current Assets                                                       (1,000)                --                 (1,000)
        Miscellaneous Receivables                                                 200,000             (200,000)                --
        Other Assets                                                                  100                 --                 20,200
        Security Deposits                                                          18,149              (21,258)               1,176
        Accounts Receivable                                                          --                   --                  2,998

      Increase [Decrease] in:
        Accounts Payable                                                          137,078              (24,050)             101,504
        Accrued Expenses                                                        1,584,156               30,084            1,622,612
        Accrued Salaries                                                           48,686                 --                 48,686
        Accrued Payroll Taxes                                                       6,146                8,506               16,696
        Cash Overdraft                                                             18,804                 --                 18,804
        Due to Officer                                                              3,000                 --                  3,000
                                                                              -----------          -----------          -----------

      Total Adjustments                                                         3,016,151              307,374            3,575,246
                                                                              -----------          -----------          -----------

   Net Cash - Operating Activities - Forward                                     (614,954)            (755,384)          (2,345,071)
                                                                              -----------          -----------          -----------

Investing Activities:
   Purchase of Fixed Assets                                                       (39,674)             (75,990)            (118,212)
   Prepaid Research Testing                                                          --                   --                 (7,734)
   Proceeds from Sale of Fixed Assets                                              21,000                 --                 21,000
                                                                              -----------          -----------          -----------

   Net Cash - Investing Activities - Forward                                  $   (18,674)         $   (75,990)         $  (104,946)
</TABLE>

The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                      F-5
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE ENTERPRISE]
--------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                                                         Cumulative
                                                                                                                           Amounts
                                                                                                                            from
                                                                                                                        July 9, 1992
                                                                                                                       [Inception of
                                                                                                                        the Current
                                                                                                                        Development
                                                                                        Years ended                      Stage] to
                                                                                        December 31,                    December 31,
                                                                                1 9 9 7              1 9 9 6              1 9 9 7
                                                                                -------              -------              -------
<S>                                                                           <C>                  <C>                  <C>         
   Net Cash - Operating Activities - Forwarded                                $  (614,954)         $  (755,384)         $(2,345,071)
                                                                              -----------          -----------          -----------

   Net Cash - Investing Activities - Forwarded                                    (18,674)             (75,990)            (104,946)
                                                                              -----------          -----------          -----------

Financing Activities:
   Interim Loan Financing                                                            --                300,000              385,000
   Proceeds from Issuance of Common Stock                                         196,528              973,620            2,092,904
                                                                              -----------          -----------          -----------
   Net Cash - Financing Activities                                                196,528            1,273,620            2,477,904
                                                                              -----------          -----------          -----------

   Net [Decrease] Increase in Cash and Cash
      Equivalents                                                                (437,100)             442,246               27,887
Cash and Cash Equivalents - Beginning of Periods                                  450,880                8,634              (14,107)
                                                                              -----------          -----------          -----------
   Cash and Cash Equivalents - End of Periods                                 $    13,780          $   450,880          $    13,780
                                                                              ===========          ===========          ===========

Supplemental Disclosures of Cash Flow Information:
   Cash paid during the periods for:
      Interest                                                                $      --            $     7,500          $     9,047
      Income Taxes                                                            $      --            $      --            $      --
</TABLE>


The  Accompanying  Notes are an Integral  Part of These  Consolidated  Financial
Statements.


                                      F-6
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

[1] Summary of Significant Accounting Policies

Organization - In July 1996, IMSCO, Inc. was reincorporated in Delaware as IMSCO
Technologies,  Inc. The Company filed a Certificate of Incorporation in Delaware
incorporating a new wholly-owned subsidiary, IMSCO Technologies,  Inc. The Board
of Directors of the Company at a meeting held in May 1996 voted,  subject to the
adoption by the stockholders,  to merge into its wholly-owned subsidiary,  IMSCO
Technologies, Inc., a Delaware corporation. On July 9, 1996, the stockholders of
IMSCO,   Inc.,   voted  to  approve  the  change  of  corporate   domicile  from
Massachusetts  to  Delaware.  Therefore,  on July 18, 1996,  there  remained one
surviving   corporation  and  the  name  surviving   corporation   became  IMSCO
Technologies,  Inc. As of the effective date of the merger,  each stockholder of
the Company held one share of common stock, par value $.0001 per share, of IMSCO
Technologies,  Inc.  for each one share of  common  stock,  par value  $.001 per
share, of IMSCO, Inc. previously held by him.

Imsco  Technologies,  Inc., a Delaware  corporation,  is currently a development
stage enterprise  which has developed a core technology that achieves  molecular
separation with innovative  applications of electrostatics.  Until July 7, 1992,
the  Company  was  engaged  in  the  sale  of an  automated  luminometer  and an
accompanying  reagent  system that  measures raw  material  for  microbiological
contamination.  The Company discontinued operations and liquidated the remaining
inventory  of  reagents  on April  16,  1993.  Due to a lack of  demand  for the
technology  developed,  the  Company  changed its focus and began  applying  its
engineering and medical talents to the  development of a separation  system.  No
revenue  has  been  received  from  current  products  to date.  The  technology
developed has two prototypes.  Tests of the Company's decaffeination  technology
have successfully removed caffeine from coffee. In addition, The Plasma Pure has
been tested and can remove viruses from plasma.

The  Company's  subsidiaries,  Decaf  Products,  Inc.  ["DPI"]  and  BioElectric
Separation and Testing,  Inc. ["BEST"] [the  subsidiaries]  were formed in 1995.
DPI was  formed  to market a unique  proprietary  technologies  to  decaffeinate
coffee.  BEST was  founded  to create  systems  to  improve  human  therapy,  by
developing new diagnostics and improved methods for production and use of drugs,
biologics, and extracorporeal devices. As of December 31, 1997, the subsidiaries
had  minimal  activity,  did not  own any  assets  and  are not  liable  for any
liabilities.

Principles of Consolidation - The consolidated  financial statements include the
accounts of the Company and its  subsidiaries  Decaf Products,  Inc.  ["DPI"] an
BioElectric Separation and Testing, Inc. ["BEST"]. All significant inter-company
accounts and transactions have been eliminated in consolidation.

Property and Equipment - Property and equipment are stated at cost.  Significant
additions  or  improvements  extending  asset  lives  are  capitalized;   normal
maintenance and repair costs are expended as incurred.  Depreciation is provided
on the  straight-line  method  over the  estimated  useful  lives of the  assets
ranging from five to ten years.

Cash Equivalents - The Company  considers all highly liquid  investments with an
original maturity of less than three months to be cash equivalents.  At December
31, 1997, the Company had no cash equivalents.

Income  Taxes - The  Company  accounts  for  income  taxes  under  Statement  of
Financial  Accounting Standards ["SFAS"] No. 109, "Accounting for Income Taxes."
Under SFAS No. 109, the asset and liability method is used to determine deferred
tax assets and liabilities based on differences  between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.




                                      F-7
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
--------------------------------------------------------------------------------

[1] Summary of Significant Accounting Policies [Continued]

Earnings  [Loss] Per Share - Earnings  per share of common  stock  reflects  the
weighted  average number of shares  outstanding  for each period.  The Financial
Accounting   Standards  Board  ["FASB"],   has  issued  Statement  of  Financial
Accounting  Standards ["SFAS"] No. 128, "earning per share",  which is effective
for  financial  statements  issued for periods  ending after  December 15, 1997.
Accordingly,  earnings per share data in the financial  statements  for the year
ended December 31, 1997,  have been  calculated in accordance with SFAS No. 128.
Prior  period  earnings  per share data have been  recalculated  as necessary to
conform prior years data to SFAS No. 128.

SFAS No. 128 supercedes Accounting Principles Board Opinion No. 15, "earning per
share," and replaces its primary earnings per share with a new basic earning per
share representing the amount of earnings for the period available to each share
of common  stock  outstanding  during the  reporting  period.  SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share on the face
of  the  statement  of  operations  for  all  companies  with  complex   capital
structures.  Diluted  earnings per share  reflects the amount of earning for the
period available to each share of common stock outstanding  during the reporting
period,  while giving effect to all dilutive  potential  common shares that were
outstanding during the period,  such as common shares that could result from the
potential exercise or conversion of securities into common stock.

The  computation  of diluted  earnings  per share  does not  assume  conversion,
exercise or contingent  issuance of securities  that would have an  antidulutive
effect on earnings  per share [i.e.,  increasing  earnings per share or reducing
loss per share].  The dilutive  effect of  outstanding  options and warrants and
their   equivalents  are  reflected  in  dilutive  earnings  per  share  by  the
application  of the treasury  stock method which  recognizes the use of proceeds
that could be obtained  upon the  exercise of options and  warrants in computing
diluted  earnings  per share.  It  assumes  that any  proceeds  would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive  effect only when the average  market price of the
common  stock  during the period  exceeds the  exercise  price of the options or
warrants.

Estimates - Management  uses estimates and  assumptions  in preparing  financial
statements in accordance  with general  accepted  accounting  principles.  Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent  assets and liabilities,  and the reported revenues
and expenses.  Actual results could vary from the estimates that were assumed in
preparing the financial statements.

Stock Options and Similar  Equity  Instruments - On January 1, 1996, the Company
adopted  the  disclosure  requirements  of  Statement  of  Financial  Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," for stock
options  and  similar  equity  instruments  [collectively  "Options"]  issued to
employees  and  directors,  however,  the  Company  will  continue  to apply the
intrinsic  value based  method of  accounting  for options  issued to  employees
prescribed by Accounting  Principles  Board ["APB"] Opinion No. 25,  "Accounting
for Stock  Issued to  Employees"  rather  than the fair  value  based  method of
accounting  prescribed by SFAS No. 123 also applies to  transactions in which an
entity  issues  its  equity  instruments  to  acquire  goods and  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.

[2] Leases

In 1997,  the Company  entered  into an  operating  lease for office space which
expires in March 2000.  Rental  expense for the operating  lease was $15,890 and
$22,470 for the year ended December 31, 1997 and 1996,  respectively.  Under the
terms of the lease the Company is responsible for all utilities.




                                      F-8
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
--------------------------------------------------------------------------------

[2] Leases [Continued]

In September  1996, the Company  established an office at 950 Third Avenue,  New
York, New York, consisting of approximately 2,500 square feet of space, with the
intention of conducting its sales, marketing and finance related activities. The
Company has decided that it will be more efficient and cost effective to run all
of its activities  from the North Andover office for the near future.  The lease
at 950 Third  Avenue,  New York,  was for a term of five years at an annual base
rental of $32 per square foot. The 950 Third Avenue lease was terminated on July
10, 1997. The Company  forfeited its security deposit and paid other fees due to
the termination of the lease. Rental expense for the above lease was $24,367 for
the year ended December 31.

The Company  entered into  various  leases for  equipment  during the year ended
December 31, 1996.

Minimum annual rentals under non-cancelable operating leases having term of more
than one year are as follows:

   Year ending
   December 31,

      1998                           $ 30,566
      1999                           $ 26,935
      2000                           $  3,973

Rental  expense for the above leases was $16,706 for the year ended December 31,
1997.

[3] Income Taxes

Due to loses  incurred  for the years  ended  December  31,  1997 and 1996,  the
Company recorded no tax provisions. The Company provided $619 and $456 for state
and local  franchise and capital taxes for the year ended  December 31, 1997 and
1996. These expenses have been included in selling,  general and  administrative
expenses for each of the years presented.

A reconciliation  of the federal  statutory rate to the Company's  effective tax
rate is as follows:

Federal Statutory rate                    (34)%       (34)%
Increase in Valuation Allowance            34          34
                                      -------     -------
   Effective Tax Rate                      --          --
                                      =======     =======

The Company has approximately  $6,540,000 of net operating losses as of December
31, 1997 which may reduce taxable  income and income taxes in future years.  The
utilization  of these  losses to  reduce  future  income  taxes  will  depend on
generating  sufficient taxable income prior to their expiration through the year
2012. In addition,  the Internal Revenue Code of 1986 includes  provisions which
may limit the net operating loss  carryforwards  available for uses in any given
year if certain events occur including significant changes in stock ownership.

The Company has recorded a deferred  tax asset of  approximately  $2,616,000  at
December 31, 1997,  principally related to its net operating loss carryforwards.
Such deferred tax asset has been completely  offset by a valuation  allowance in
the  same  amount  due  to the  uncertainty  of its  ultimate  realization.  The
valuation allowance increased by federal $1,452,000 in 1997.




                                      F-9
<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
--------------------------------------------------------------------------------

[3] Federal and State Income Taxes [Continued]

The following summarizes the operating loss carryforwards by year of expiration:

      Expiration Date                             Amount
      ---------------                             ------

December 31, 2001                           $     4,000
December 31, 2002                           $   181,000
December 31, 2003                           $   233,000
December 31, 2004                           $    88,000
December 31, 2005                           $    71,000
December 31, 2009                           $   863,000
December 31, 2010                           $   406,000
December 31, 2011                           $ 1,063,000
December 31, 2012                           $ 3,631,000

[4] Related Party Transactions

In August 1996, Hampton Tech Partners, LLC acquired $300,000 in promissory notes
from the Company and 150,000 shares of Common Stock for the total  consideration
of  $300,000.  On  September  20,  1996,  the  Company  entered  into a Purchase
Agreement  with Hampton Tech Partners II, LLC wherein  Hampton Tech Partners II,
LLC acquired  761,000 shares of Common Stock for $1,004,520 in cash or $1.32 per
share.   Private  placement  expenses  of  $77,400  were  incurred  during  this
transaction,  reducing  net cash  proceeds  to  $927,120.  Hampton  Partners  II
received  227,273  shares in  repayment of the  $300,000  promissory  notes with
Hampton Tech Partners,  LLC and 129, 151 shares in payment of private  placement
fees.  Mr. Scott  Robinson,  a recently  elected  director of the Company,  is a
member of  Hampton  Tech  Partners  and  Hampton  Tech  Partners  II,  LLC.  Mr.
Robinson's  brother,  Mr.  Jeffrey  Robinson is the sole  shareholder of Hampton
Partners  Investments,  Inc.,  the Managing  Member of Hampton Tech Partners and
Hampton Tech Partners II, LLC.

On September 20, 1996,  the Company  entered into the Media  Purchase  Agreement
with Proxhill  Marketing Ltd.,  wherein  Proxhill  Marketing Ltd. agreed to sell
$1,500,000  of media  credits to the  Company in  consideration  for the Company
issuing  1,136,364  shares of Common  Stock,  representing  a price of $1.32 per
share. The total cost of such transaction was $1,608,170  including the value of
the 127,262  warrants issued by the Company to Proxhill  Marketing Ltd [See Note
14]. In  connection  with the private  placement  of the Shares of Hampton  Tech
Partners II, LLC,  Hampton Tech  Partners and  Proxhill  Marketing  Ltd.,  First
Capital  Investments,  Inc. a  broker-dealer  which is a member of the  National
Association  of Securities  Dealers,  Inc.  ["NASD"],  received  242,272 Class A
Warrants  entitling it to acquire  Common Stock for the price of $1.45 per share
exercisable  over a period ending July 31, 2001. For  advertising  and marketing
services rendered to the Company in 1996 and 1997,  Proxhill marketing Ltd. Also
received 127,262 Class D Warrants,  entitling it to acquire Common Stock for the
price of $1.32 per share for a period  ending July 31, 2001.  As of December 31,
1996, the registration  statement for the Class A Warrant Common Stock and Class
D Warrant Common Stock had not been declared effective.





                                      F-10
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
--------------------------------------------------------------------------------

[4] Related Party Transactions [Continued]

In 1996,  Mr. Sol L. Berg,  a Director and  President  of the Company,  received
150,000  shares of Common  Stock in exchange for shares of common stock in Decaf
Products,  Inc.  ["DPI"] based on a conversion of .60 IMSCO  Technologies,  Inc.
shares for 1.00 Decaf  products,  Inc.  shares.  In 1996,  Mr. James G. Yurak, a
Director and President of the DPI  subsidiary,  received 75,000 shares of Common
Stock in exchange for shares of common  stock in Decaf  Products,  Inc.  ["DPI"]
based on a  conversion  of .60 IMSCO  Technologies,  Inc.  share for 1.00  Decaf
Products,  Inc. share.  Mr. Yurak received another 75,000 shares of Common Stock
in February 1997 upon the one year Anniversary of his employment  agreement with
DPI. In 1996,  Dr. Alan  Waldman  entered  into an  understanding  that he shall
receive 100,000 shares of Common Stock representing payment for services due him
under his consulting agreement through December 31,1996, with the shares vesting
and being  issued on January 1, 1997.  In 1996,  David E.  Fleming,  a member of
Epstein, Becker & Green, P.C., counsel to the Company, was granted 90,000 shares
of the  Company's  Common  Stock in exchange for shares of Common Stock in Decaf
Products,  Inc.  ["DPI"] based on a conversion of .60 IMSCO  Technologies,  Inc.
shares for 1.00 DecafProducts, Inc. shares, which shares will vest on January 1,
1997. In 1996,  Mr.  Vernon  Oberholtzer,  a former  Director of the Company who
resigned in February 1997, received stock options to acquire 10,000 shares for a
price of $1.32,  exercisable  over a period  ending  December 31, 1999. In 1996,
Universal Sales, Inc. ["Universal"],  a sales and marketing company of which Mr.
Victor Bauer,  a director of the Company,  is President  and a 50%  shareholder,
received cash  compensation in the amount of $31,500 and 75,000 shares of Common
Stock for services  rendered to the Company,  including the  recruitment  of the
services of Mr. Abramson for the Company.

The balance of $3,000 Due to Officer relates to a short-term loan to the Company
in 1997 which was paid in January 1998.

[5] Research and Development Costs

During the year ended  December 31, 1997 and 1996, the Company  charged  $66,251
and $53,838, respectively to research and development expense.

[6] Stockholders' Equity

For the year ended December 31,1997 and 1996,  respectively,  323,500 shares and
284,000  shares  were  issued by the Company  for  consulting  and  professional
services  rendered to the  Company.  Such  services  were valued at common stock
price on the date such shares issued. The following expenses were charged to the
value of such services rendered:

                                            Years ended
                                            December 31,
                                    -------------------------
                                     1 9 9 7         1 9 9 6
                                     -------         -------

Consulting                          $ 305,000       $ 284,000
Professional Services                  18,500              --
                                    ---------       ---------

   Totals                           $ 323,500       $ 284,000
                                    =========       =========

[7] Fair Value of Financial Instruments

Effective  December  31,  1995,  the  Company  adopted  Statement  of  Financial
Accounting  Standards ["SFAS"] No. 107, which requires  disclosing fair value to
the  extent  practicable  for  financial  instruments  which are  recognized  or
unrecognized in the balance sheet.  The fair value of the financial  instruments
disclosed therein is not necessarily  representative of the amount that could be
realized  or  settled,   nor  does  the  fair  value  amount  consider  the  tax
consequences  or  realization  or  settlement.  For  cash,  trade  payables  and
short-term  debt, the carrying amount  approximated  fair value because the near
term maturities of items.




                                      F-11
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
--------------------------------------------------------------------------------

[8] Commitments

Under a media Purchase  Agreement with Proxhill Marketing Ltd., it contractually
agreed to finance $1.5 million of media for the Company's  public  relations and
advertising  campaign through Grow Marketing Services  ["GROW"],  an independent
marketing  company.  In exchange for the Company issuing 1,136,363 shares of its
common stock,  representing a price of $1.32 per share, the Company acquired the
$1.5  million of prepaid,  dedicated  media  credits [the "Media  Credits"]  and
certain media services. The media Purchase Agreement expires at the end of sixty
[60] months or upon the depletion of the prepaid media credits.

On September  20,  1996,  the Company  entered  into an  agreement  with NEWCO a
privately  held  corporation   based  in  St.  Charles,   Missouri  for  certain
institutional  manufacturing  and marketing of the  Decaffeination  System.  The
Company agreed that NEWCO will have the exclusive right to sell the DECAFFOMATIC
to so-called  "Office Coffee  Supply"  ["OCS"]  subsection of the  institutional
coffee-maker  market and will be the  manufacturer of the  DEFAFFOMATIC  for the
institutional  marketplace in North American for a period of three years.  Under
the  NEWCO  Agreement,  NEWCO has also  agreed to pay the costs of making  final
working  models,  and the cost of  creating  moulds  and  related  parts for the
DECAFFOMATIC device for the institutional  coffee-maker marketplace.  All of the
technology and final commercial model designs of the Decaffeination  System will
be the property of the Company.

In October  1997,  the company  entered  into  employment  agreement  with three
officers of the Company.  Such agreements provide for total annual  compensation
of $385,000. Two of the agreements expire in 1999, the third expires in the year
2000. The agreement with one of the officers provide for the granting of 250,000
warrant to purchase the Company's stock at $2.00 per share, for a period of five
year from the date  that  they  vest.  Such  options  vest at the rate of 20,833
warrants quarterly over a three year period.

[9] Going Concern

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles, which contemplates continuation of the
Company  as a  going  concern  and  realization  of  assets  and  settlement  of
liabilities and commitments in the normal course of business.

As shown in the accompanying  financial  statements,  the Company incurred a net
Loss of  $3,631,105  during the year ended  December 31, 1997.  The  significant
operating  loss  as  well as the  uncertain  sources  of  financing,  create  an
uncertainty  about  the  Company's  ability  to  continue  as a  going  concern.
Management  of the Company has  developed a business plan to finance the Company
through  licensing of its technology  and individual  patent rights and sell its
products to manufacturers. The Company will also seek financing through a public
offering.  The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.

There can be no assurance that management's plans to reduce operating losses and
obtain additional financing to fund operations will be successful. The financial
statements do not include any  adjustments  relating to the  recoverability  and
classification  of  recorded  assets,  or  the  amounts  and  classification  of
liabilities  that might be necessary in the event the Company cannot continue in
existence.






                                      F-12
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
--------------------------------------------------------------------------------

[10] Development Stage Enterprise

On July 7, 1992, the Company  discontinued  regular  operations  relating to the
sale of an automated luminometer.  On July 22, 1992, the company and The General
Hospital Corporation,  doing business as Massachusetts General Hospital, entered
a research  agreement for $45,100,  to perform the research and evaluation using
the Company's  electro-static  filter.  As defined by the  Financial  Accounting
Standards  board  Statement  No.  7,  the  Company  is now a  development  stage
enterprise  and it has  been  devoting  substantially  all  of  its  efforts  to
developing,  engineering and obtaining patents for new technologies  relating to
separation  technologies  for the  medical and  consumer  product  sectors.  The
Company applied for United States Patents covering its decaffeination and Plasma
Pure  separation  technologies  in 1993.  With a  prototype,  marketing  of this
product began in December,  1993. Although no income has been received,  letters
of interest  and royalty  agreement  negotiations  have  begun.  The  cumulative
deficit during the  development  stage is $5,920,317 for the period July 7, 1992
through December 31, 1997.

[11] Advertising

The costs of  advertising  are  expensed  the first time the  advertising  takes
place.  For the year ended December 31, 1997 and 1996, the  advertising  expense
was $223,961 and $1,800, respectively.

[12] Stock Based Compensation

On May 21, 1996,  the Board of Directors  adopted the Employee  Incentive  Stock
Option Program [the "Option Program"],  which provides for the issuance of up to
the lesser of 24% of the issued and outstanding Common Stock or 1,500,000 shares
of Common Stock through the grant of incentive and non-qualified  stock options.
Stock  options  will be  issued  by  action  of the  Board of  Directors  or its
Compensation  Committee [the "Administrator"] to key employees of the Company as
a long-term incentive.  Key employees will be designated by the Administrator in
its sole  discretion;  there are currently three employees so designated.  Stock
Options  under the Option  Program will provide for an exercise  price per share
determined  by the  Administrator  [but not less than the par value of  $.0001],
subject to tax  requirements  in connection  with incentive  stock  options.  No
payment will be required  from  participants  in  connection  with  grants.  The
options will be  execisable  as specified  by the  Administrator  at the time of
grant, although the tax benefits of incentive stock options described below will
be  unavailable  if the  options is  exercised  less than one year after  grant.
Options will be exercisable for a period determined by the Administrator but not
in excess of 10 years after grant.

A summary of the activity under the Company's stock option plan is as follows:

                                                1 9 9 7            1 9 9 6
                                           ----------------   ----------------
                                                   Weighted           Weighted
                                                    Average            Average
                                                   Exercise           Exercise
                                           Shares    Price    Shares    Price
                                           -------    ----    -------    ----
Outstanding - Beginning of Years           110,000    1.45     10,000     .90
Granted or Sold During the Years              --      --      100,000    1.50
Canceled During the Years                     --      --         --      --
Expired During the Years                      --      --         --      --
Exercised During the Years                    --      --         --      --
                                           -------    ----    -------    ----

   Outstanding - End of Years              110,000    1.45    110,000    1.45
                                           =======    ====    =======    ====

   Exercisable - End of Years              110,000    1.45    100,000    1.45
                                           =======    ====    =======    ====



                                      F-13
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
--------------------------------------------------------------------------------

[12] Stock Based Compensation [Continued]

The following  table  summarizes  stock options  information  as of December 31,
1997:

                                             Weighted
                                              Average        Weighted
                                             Remaining       Average
                                            Contractual      Exercise
Stock Price                     Shares          Life          Price
                               ---------     ----------     ---------

$.90                              10,000            2.0           .90
$1.50                            100,000            8.7          1.50
                               ---------     ----------     ---------

   Totals                        110,000            8.1          1.45
   ------                      =========     ==========     =========

During  1996,  the Company  issued  warrants to First  Capital  Investments  and
Proxhill Marketing Ltd. [See Note 8]. In 1997, the Company issued 50,111 Class B
Warrants to purchase the Company's common shares at $2.50 per share in a private
placement transaction.

A summary of warrant activity is as follows:

                                               1 9 9 7              1 9 9 6
                                         ------------------   -----------------
                                                   Weighted            Weighted
                                                    Average             Average
                                                   Exercise            Exercise
                                          Shares     Price     Shares    Price
                                         --------    -----    --------   -----

Outstanding - Beginning of Years          485,534     1.28     116,000     .90
Granted or Sold During the Years          300,111     2.08     369,534    1.40
Canceled During the Years                    --       --          --      --
Expired During the Years                     --       --          --      --
Exercised During the Years                (66,000)     .90        --      --
                                         --------     ----    --------    ----

   Outstanding - End of Years             719,645     1.65     485,534    1.28
                                         ========     ====    ========    ====

   Exercisable - End of Years             719,645     1.65     485,534    1.28
                                         ========     ====    ========    ====

The following  table  summarizes  stock options  information  as of December 31,
1997:

                                                     Weighted         Weighted
                                                      Average          Average
                                                     Remaining        Exercise
Range of Exercise Prices             Shares             Life           Price
                                     ------             ----           -----

$ .90                                 50,000            1.70             .90
$1.32 to $1.40                       369,534            3.70            1.40
$2.00                                250,000            5.00            2.00
$2.50                                 50,111            5.00            2.50
                                     -------            ----            ----

Totals                               719,645            4.10            1.65
                                     =======            ====            ====

The Company applies  accounting  principles Board Options No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock options plans.

                                      F-14

<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
--------------------------------------------------------------------------------

[12] Stock Based Compensation [Continued]

If the Company had  accounted  for the issuance of all options and  compensation
based  warrants  pursuant  to the fair value based  method of SFAS No. 123,  the
Company would have recorded additional  compensation  expenses totaling $285,000
and $123,000 for the years ended December 31, 1997 and 1996,  respectively,  and
the Company's net loss and net loss per share would have been as follows:

                                                   December 31,
                                           1 9 9 7              1 9 9 6
                                        -------------       -------------

Net Loss as Reported                    $  (3,631,105)      $  (1,062,758)
                                        =============       =============

Pro Forma Net Loss                      $  (3,916,105)      $  (1,185,758)
                                        =============       =============

Net Loss Per Share as Reported          $       (0.57)      $        (.32)
                                        =============       =============

Pro Forma Net Loss Per Share            $       (0.62)      $        (.35)
                                        =============       =============

The fair value of options and warrants at date of grant was estimated  using the
Black-Scholes  fair value  based  method  with the  following  weighted  average
assumptions for the years ended December 31,1997 and 1996:

                                           1 9 9 7                1 9 9 6
                                           -------                -------

Expected Life [Years]                           5                    10
Interest Rate                                   6%                    6%
Annual Rate of Dividends                       --                    --
Volatility                                     74%                   74%

The weighted average fair value of options at date of grant using the fair value
based method during 1996 was $1.14 and $1.23, respectively.

No stock compensation cost was recognized for stock-based employee amounts.

[13] Litigation

In June 1997, an action was commenced against the Company by Edmund Abramson and
by WRA  Consulting,  Inc.  in the  Eleventh  Judicial  Circuit  of Dade  County,
Florida. Abramson alleged breach of contract, claims damages of $1,400,000, plus
attorneys fee. WRA alleged breach of contract, failure of the Company to deliver
150,000  registered  shares of common  stock and  150,000  warrants  to purchase
common  stock to WRA  Consulting,  Inc.  and  claims  damages  in the  amount of
$800,000,  plus  attorneys  fees. In January 1998, the action was settled by the
Company  agreeing to issue a total of 438,410 shares of common stock and 400,000
warrants to  purchase  common  stock at $1.32 and $2.00.  Included in the amount
shown were warrants valued at approximately  $650,000 pursuant to the fair value
based method of SFAS #123.

On  March  5,  1998,  an  action  was  commenced  against  the  Company  by  BPV
Enterprises,  Inc. doing business as Universal sales in the Supreme Court of the
State of New York, County of Suffolk.  The plaintiff alleges breach of contract,
claiming damages of $337,000 plus attorney's  fees. In addition,  plaintiff also
claims  that the  Company  owes it  75,000  shares of  common  stock and  75,000
warrants to purchase common stock for recruitment services that it performed for
the Company  during 1996.  The Company cannot predict the outcome of this matter
although it believes it has meritorious  defenses and will vigorously defend the
action. However, if such actions is unsuccessful, it may have a material adverse
impact on the results of  operations  and  financial  condition  of the Company.
Alexander T.  Hoffman,  chairman of the  Company,  is a 50%  shareholder  of BPV
Enterprises.




                                      F-15
<PAGE>

IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
--------------------------------------------------------------------------------


[14] Restatement

The Company's statement of stockholders' deficit has been restated to record the
effect of the additional cost of media credits obtained from Proxhill Marketing,
Ltd. in 1996 [See Note 4]. Such amount was $108,170,  and represents the cost of
warrants issued to Proxhill Marketing Ltd. The effect of such restatement of the
1996 financials was to increase  deferred  compensation  and additional  paid-in
capital. Such restatement had no affect on the statement of operations.

[15]  New Authoritative Accounting Pronouncements

The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is  effective  for fiscal years  beginning  after  December  15,  1997.  Earlier
application is permitted.  Reclassification of financial  statements for earlier
periods  provided  for  comparative  purposes is  required.  SFAS No. 130 is not
expected to have a material impact on the Company.

The FASB has issued SFAS No. 131,  "Disclosures  About Segments of an Enterprise
and  Related  Information."  SFAS No. 131  changes how  operating  segments  are
reported in annual  financial  statements and requires the reporting of selected
information  about  operating  segments in interim  financial  reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December 15,
1997, and comparative  information for earlier years is to be restated. SFAS No.
131 need not be applied to interim  financial  statements in the initial year of
its  application.  SFAS No. 131 is not expected to have a material impact on the
Company.




                          . . . . . . . . . . . . . . .






                                      F-16
<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.

                                          IMSCO TECHNOLOGIES, INC.

                                          By: /s/ ALEXANDER T. HOFFMANN
                                              -----------------------------
                                              Alexander T. Hoffmann,
                                              Chief Executive Officer

                                          Date: April 15, 1998

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


By: /s/ ALEXANDER T. HOFFMANN
-------------------------------
Alexander T. Hoffmann, Chairman
and Chief Executive Officer

Date: April 15, 1998


/s/ SCOTT SINGER
-------------------------------
Scott Singer, Treasurer and Assistant Secretary
(Chief Financial and Accounting Officer)

Date: April 15, 1998


/s/ GARY A. GRAHAM
-------------------------------
Gary A. Graham, Director

Date: April 15, 1998


-------------------------------
Frank Lubrano, Director

Date: _________, 1998