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 [a development stage company] as of December
31, 1998, and the related consolidated  statements of operations,  stockholders'
deficit,  and cash flows for each of the years ended December 31, 1998 and 1997.
These consolidated  financial statements are the responsibility of the Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IMSCO  Technologies,  Inc. and Subsidiaries [a development  stage company] as of
December 31, 1998, the results of their operations and their cash flows for each
of the years ended  December 31, 1998 and 1997,  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 discussed in Note
8 to the consolidated  financial statements,  the Company has suffered recurring
losses since its inception primarily resulting from no revenues, has accumulated
deficits at December 31, 1998 of $9,422,387,  has utilized  $768,184 in cash for
operations  for the year ended  December 31, 1998,  and is in default on certain
promissory  notes.  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 8. 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
<PAGE>

April 28, 1999, except as to Note 16D
for which the date is May 25, 1999 and
Note 16E for which the date is May 26, 1999

<PAGE>


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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.


<TABLE>
<CAPTION>

Assets:
Current Assets:
  <S>                                                                            <C>
  Cash                                                                           $     22,992
  Other Current Assets                                                                  1,000
                                                                                        -----

  Total Current Assets                                                                 23,992

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

  Total - At Cost                                                                     128,911
  Less: Accumulated Depreciation and Amortization                                     (98,918)
                                                                                       ------
  Property and Equipment - Net                                                         29,993
                                                                                       ------
Other Assets:

  Deposits                                                                              3,499
  Deferred Financing Costs[15]                                                         82,577

  Total Other Assets                                                                   86,076
                                                                                       ------
  Total Assets                                                                       $140,061
                                                                                     ========
</TABLE>

See Notes to Consolidated Financial Statements.



<PAGE>

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


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998.



<TABLE>
<CAPTION>

Liabilities and Stockholders' [Deficit]:
Current Liabilities:
  <S>                                                                                <C>
  Notes Payable[15][16D]                                                             $390,000
  Accounts Payable                                                                    161,982
  Accrued Salaries                                                                    153,190
  Accrued Expenses                                                                     24,472
  Accrued Payroll Taxes                                                                48,006
  Accrued Marketing Fees                                                               53,000
  Accrued Legal Fees                                                                   50,955
  Due to Stockholders                                                                  29,800
                                                                                       ------

  Total Current Liabilities                                                           911,405
                                                                                      -------
Commitments and Contingencies [7] [12]                                                     --
                                                                                       ------

Stockholders' [Deficit]:
  Series A Preferred Stock - Authorized 1,000,0000 Shares
    at $.0001 Par Value; 45,000 Convertible Shares, Issued and
    Outstanding [5F]                                                                        5

  Common Stock - Authorized 15,000,000 Shares at $.0001 Par Value;
    7,681,278 Shares Issued and Outstanding                                               769

  Additional Paid-in Capital - Series A Convertible Preferred Stock                   224,995

  Additional Paid-in Capital - Common Stock                                         9,803,770

  Less:  Prepaid Advertising Credits                                               (1,378,496)

  Deficit Accumulated During Development Stage                                     (8,801,479)

  Accumulated Deficit - Discontinued Operations                                      (620,908)
                                                                                     --------

  Total Stockholders' [Deficit]                                                      (771,344)
                                                                                      -------
  Total Liabilities and Stockholders' [Deficit]                                  $    140,061
                                                                                 ============
</TABLE>



See Notes to Consolidated Financial Statements.


<PAGE>


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

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                         Cumulative
                                                                                           Amounts
                                                                                            from
                                                                                        July 9, 1992
                                                                                       [Inception of
                                                                                         the Current
                                                                                         Development
                                                                Years ended               Stage] to
                                                               December 31,             December 31,
                                                           1 9 9 8         1 9 9 7         1 9 9 8
                                                           ---------------------------------------

General, Administrative and Development Expense:
  <S>                                                 <C>              <C>             <C>
  Research and Development Expense                    $      29,900    $     66,251    $    293,014
  Salaries and Wages                                        266,511         189,794         702,154
  Officer Salaries                                          661,070         190,714       1,184,853
  Payroll Taxes                                              55,846          29,756         140,872
  Outside Labor                                              36,596          34,190         191,136
  Professional and Consulting Fees                          161,490         276,547         908,020
  Professional and Consulting Fees - Non-Cash [5C][11]    1,126,158         735,249       2,074,969
  Rent                                                       17,804          58,217         156,019
  Rent - Related Party                                        3,750              --           3,750
  Insurance                                                  73,642          34,763         163,243
  Travel and Business Meeting                                59,390          51,997         177,929
  Auto Expense                                               20,230          16,247          60,769
  Telephone and Utilities                                    11,329          16,376          61,402
  Office Expense                                             10,366          80,195         130,843
  Equipment Rental                                            8,474          16,480          33,299
  Corporate Fees                                              9,808          19,568          69,981
  Advertising                                                92,942         223,961         318,703
  Depreciation and Amortization                              10,669          13,258          23,927
  Litigation Settlement                                          --       1,538,392       1,538,392
  Franchise Tax                                                 456             619           1,987
                                                          -----------------------------------------

  General, Administrative and Development
    Expense                                               2,656,431       3,592,574       8,235,262
                                                          -----------------------------------------

Other Income [Expense]:
  Dividend and Interest Income                                   --           5,541          11,633
  Interest Expense [15]                                    (224,731)             --        (533,778)
  Loss on Sale of Fixed Assets                                   --         (44,072)        (44,072)
                                                              -----          ------          ------

  Other [Expense] - Net                                    (224,731)        (38,531)       (566,217)
                                                           --------         -------        --------

  [Loss] Before Income Taxes                             (2,881,162)     (3,631,105)     (8,801,479)

Provision for Income Tax                                         --              --              --
                                                         ------------------------------------------

  Net [Loss]                                             (2,881,162)   $ (3,631,105)   $ (8,801,479)
                                                         ----------    ============    ============

  [Loss] Per Share                                    $        (.39)   $      (0.57)
                                                      ==============    ===========

  Weighted Average Shares Outstanding                     7,370,026       6,318,281
                                                          =========================
</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>


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


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>

                                                                                   Deficit
                         Series A Convertible                Paid-in             Accumulated  Accumulated                 Total
                         Preferred Stock     Common Stock    Capital               During       Deficit      Prepaid   Stockholders'
                       Number of         Number of          Preferred   Paid-in  Development  Discontinued  Advertising   Equity
                       Shares    Amount   Shares    Amount    Stock     Capital     Stage      Operations      Credit   [Deficit]
                      --------------------------------------------------------------------------------------------------------------
Balance at
<S>                      <C>   <C>      <C>        <C>      <C>       <C>        <C>           <C>          <C>         <C>
December 31, 1995        --    $   --   2,995,425  $   299  $   --    $1,796,700 $(1,226,454)  $ (620,908)   $   --     $(50,363)
Private Placement        --        --      10,000        1      --        19,999          --          --         --       20,000

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

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

Issuance of
Shares for
Consulting
Services                 --        --     284,000       28      --       213,534          --          --         --      213,562

Issuance of
Shares in
Payment of
Loan                     --        --     227,000       23      --       299,977          --          --         --      300,000

Issuance of
Shares for
Advertising
Credits                  --        --   1,136,000      114      --     1,499,886          --          --    (1,500,000)       --

Issuance of
Shares for
Settlement
of Debt                  --        --     775,000       77      --       943,543          --          --         --      943,620

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

Private
Placement                --        --     150,000       15      --       299,985          --          --         --      300,000

Net [Loss]                         --          --       --      --            --          --   (1,062,758)       --           --
                         -------------------------------------------------------------------------------------------------------
(1,062,758)

  Balance at
  December 31, 1996      --        --   6,092,425      609      --     5,083,572   (2,289,212)   (620,908)  (1,500,000)  674,061

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

  Adjusted Balance at
   December 31, 1996 -
   Forward               -- $      --  6,092,425  $   609  $    --   $ 5,191,742 $ (2,289,212) $ (620,908) $(1,608,170    $ 674,061
                         ==========================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>


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


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]
<TABLE>
<CAPTION>

                                                                                   Deficit
                         Series A Convertible                Paid-in             Accumulated  Accumulated                 Total
                         Preferred Stock     Common Stock    Capital               During       Deficit      Prepaid   Stockholders'
                       Number of         Number of          Preferred   Paid-in  Development  Discontinued  Advertising   Equity
                       Shares    Amount   Shares    Amount    Stock     Capital     Stage      Operations      Credit   [Deficit]
                      --------------------------------------------------------------------------------------------------------------

Adjusted Balance at
December 31, 1996 -
<S>                      <C>    <C>     <C>          <C>      <C>     <C>         <C>           <C>          <C>           <C>
Forwarded                --     $  --   6,092,425    $ 609    $ --    $5,191,742  $(2,289,212)  $(620,908)   $(1,608,170)  $674,061

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          --          --     (1,500,000)      --

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

Private
Placement                --        --      62,611        6      --       122,994          --          --         --           --

Advertising
Credits Used             --        --          --       --      --            --          --          --         --           --

Net [Loss]                         --          --       --      --            --   (3,631,105)   (1,062,758)     --           --
                         -------------------------------------------------------------------------------------------------------

  Balance at
  December 31, 1997 -
  Forward                --     $  --   6,516,536      652      --     6,118,198  $(5,920,317)    $(620,908) (1,394,438) (1,816,813)
                         ===========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.



<PAGE>


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


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY [DEFICIT]


<TABLE>
<CAPTION>

                                                                                   Deficit
                         Series A Convertible                Paid-in             Accumulated  Accumulated                 Total
                         Preferred Stock     Common Stock    Capital               During       Deficit      Prepaid   Stockholders'
                       Number of         Number of          Preferred   Paid-in  Development  Discontinued  Advertising   Equity
                       Shares    Amount   Shares    Amount    Stock     Capital     Stage      Operations      Credit   [Deficit]
                      --------------------------------------------------------------------------------------------------------------

Balance at
December 31, 1997 -
<S>                      <C>    <C>     <C>          <C>      <C>     <C>         <C>           <C>          <C>           <C>
Forwarded                --     $  --   6,516,536    $ 652    $ --   $6,118,198  $(5,920,317)  $(620,908)  $(1,394,438) $(1,816,813)

Exercise of
Stock Warrants
[5A][11]                 --        --      66,000        7      --       59,393          --          --         --           59,400

Issuance of
Shares in Settlement
of Litigation [5B]       --        --     399,081       39      --    1,538,353          --          --         --        1,538,392

Issuance of
Shares for
Services [5C]            --        --     612,911       62      --      903,838          --          --         --          903,900

Issuance of
Stock Warrants
for 600,000 Shares
of Common Stock
for Consulting
Services [11]            --        --          --       --      --      656,284          --          --         --          656,284

Granting of Stock
Options for 266,750
Shares of Common
Stock to Employees [11]  --        --          --       --      --      133,375          --          --         --          133,375

Private Placement of
Common Stock [5D]        --        --      70,000        7      --       69,993          --          --         --           70,000

Exercise of
Stock Options [5E][11]   --        --      16,750        2      --       24,998          --          --         --           25,000

Issuance of Stock
Warrants for
390,000 Shares of
Common Stock for Notes
Payable [15][11]         --        --          --       --      --      299,085          --          --         --          299,085

Private Placement of
Series A Convertible
Preferred Stock [5F]     --        --          --       --      --           --          --          --         --          225,000

270 Shares Issuable
Pursuant to Financing
Penalty [5F]             --        --          --       --      --          253          --          --         --              253

Advertising Credits
Used                     --        --          --       --      --           --          --          --         --           15,942

Net [Loss]               --        --          --       --      --           --   (2,881,162)        --         --      (2,881,162)
                         ---------------------------------------------------------------------------------------------------------

  Balance at
  December 31, 1997 -
  Forward                --     $   5  $7,681,278     $769  $224,995  $9,803,770  $(8,801,479)   $(620,908) (1,378,496) $(771,344)
                         =========================================================================================================

</TABLE>
See Notes to Consolidated Financial Statements.

<PAGE>





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


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 8         1 9 9 7         1 9 9 8
                                                           ---------------------------------------

Operating Activities:
  <S>                                                 <C>              <C>             <C>
  Net [Loss]                                          $  (2,881,162)   $ (3,631,105)   $ (8,801,479)
                                                      -------------    ------------    ------------
  Adjustments to Reconcile Net [Loss] to Net Cash
    [Used for] Operating Activities:
    Decrease [Increase] in Due from Officers                     --              --            (120)
    Depreciation and Amortization                            10,668          13,258          26,539
    Contract Services Paid with Common Stock [5C]           903,900         729,970       2,070,915
    Interest Paid with Common Stock                             253              --         300,253
    Interest Expense - Deferred Finance Costs [15]          216,508              --         216,508
    Grant of Stock Options and Warrants for
      Past Services [11]                                    789,659              --         789,659
    Amortization of Prepaid Advertising Credits              15,942         213,732         229,674
    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              --
      Other Assets                                               --             100          20,200
      Security Deposits                                          --          18,149           1,176
      Accounts Receivable                                        --              --           2,998

    Increase [Decrease] in:
      Accounts Payable                                       (3,973)        137,078          97,531
      Accrued Expenses                                      (59,748)      1,584,156       1,562,864
      Accrued Salaries                                      104,504          48,686         153,190
      Accrued Payroll Taxes                                  31,310           6,146          48,006
      Accrued Marketing Fees                                 53,000              --          53,000
      Accrued Legal Fees                                     50,955              --          50,955
                                                             --------------------------------------

    Total Adjustments                                     2,112,978       2,994,347       5,666,420
                                                          -----------------------------------------

  Net Cash - Operating Activities - Forward                (768,184)       (636,758)     (3,135,059)
                                                           --------        --------      ----------

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

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


See Notes to Consolidated Financial Statements.


<PAGE>


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


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 8         1 9 9 7         1 9 9 8
                                                           ---------------------------------------

  <S>                                                 <C>              <C>             <C>
  Net Cash - Operating Activities - Forwarded         $    (768,184)   $   (636,758)   $ (3,135,059)
                                                      -------------    ------------    ------------

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

Financing Activities:
  Cash Overdraft                                            (18,804)         18,804              --
  Proceeds from Notes Payable                               390,000              --         775,000
  Proceeds from Issuance of Common Stock
    [5A][5D][5E]                                            154,400         196,528       2,247,304
  Proceeds from Preferred Stock Subscriptions [5F]          225,000              --         225,000
  Loans from Stockholders                                    38,300           3,000          41,300
  Payment on Loans from Stockholders                        (11,500)             --         (11,500)
                                                            -------              ------------------

  Net Cash - Financing Activities                           777,396         218,332       3,277,104
                                                            ---------------------------------------

  Net Increase [Decrease] in Cash                             9,212        (437,100)         37,099
Cash - Beginning of Periods                                  13,780         450,880            (327)
                                                             --------------------------------------
  Cash - End of Periods                               $      22,992    $     13,780    $     36,772
                                                      =============================================

Supplemental Disclosures of Cash Flow Information:
  Cash paid during the periods for:
    Interest                                          $          --    $         --    $      9,047
    Income Taxes                                      $          --    $         --    $         --

Supplemental Schedule of Non-Cash Investing and Financing Activities:
  During 1998, the Company  entered into a financing  transaction by settling an
accrued  expense of  $1,538,392  with the  issuance of 399,081  shares of common
stock [See Note 5B].

  During 1998, the Company entered into financing transactions by granting stock
warrants in connection with total  financing costs of $299,085.  The unamortized
balance of deferred  financing  costs at December  31, 1998  amounted to $82,577
[See Note 15].

</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>





IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
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, 1998, 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"] and
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 expensed as incurred.  Depreciation is provided
on the  straight-line  method  over the  estimated  useful  lives of the  assets
ranging from three to five 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, 1998, 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.


<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2



[1] Summary of Significant Accounting Policies [Continued]

EARNINGS [LOSS] PER SHARE - 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.

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 earnings 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.

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

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. 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.

RECLASSIFICATIONS  - Certain  amounts in the prior year  consolidated  financial
statements have been reclassified to conform to the current year's presentation.




<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3



[2] Income Taxes

Income  taxes have been  recorded  under SFAS No.  109,  "Accounting  for Income
Taxes."  Deferred income taxes reflect the net tax effects of (i) operating loss
carryforwards,  and (ii) temporary  differences  between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income  tax  purposes.  The tax  effects of  significant  items  comprising  the
Company's net deferred tax asset as of December 31, 1998 is as follows:

Deferred Tax Asset:
  Net Operating Loss Carryforward                              $   3,768,000
  Valuation Allowance for Deferred Tax Asset                       3,768,000
                                                                   ---------

  Net Deferred Tax Asset                                       $          --
  -------------------------------------------------------------=============

The  valuation  allowance of  $3,768,000  at December 31,  1998,  represents  an
increase of $1,152,000 over the preceding year.

The Company has approximately  $9,421,000 of net operating losses as of December
31, 1998 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
2013. 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 net operating loss  carryforwards  of  approximately  $9,421,000
which expire as follows:

            Years ended
           December 31,                       Amount

               2001                        $        4,000
               2002                               181,000
               2003                               233,000
               2004                                88,000
               2005                                71,000
               2009                               863,000
               2010                               406,000
               2011                             1,063,000
               2012                             3,631,000
               2013                             2,881,000
                                                ---------

               Total                       $    9,421,000
               -----                       ==============

A  reconciliation  of the  federal  statutory  income tax rate to the  Company's
effective  income  tax rate  for the  years  ended  December  31,  1998 and 1997
follows:

                                                     1 9 9 8          1 9 9 7
                                                     ------------------------

Federal Statutory Income Tax Rate                        (34)%           (34)%
Change in Valuation Allowance                             34              34
                                                          ------------------

  Effective Income Tax Rate                               --              --
  -------------------------                               ==================


<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4



[3] 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 former  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
13]. 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.

In 1996, Mr. Sol L. Berg, a former Director and former 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
former  Director and former  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,  then a member of Epstein,  Becker & Green,  P.C., which was 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 former  director  of the
Company,  is President and a 50% shareholder,  received cash compensation in the
amount  of  $31,500  for  services  rendered  to  the  Company,   including  the
recruitment of the services of Mr. Abramson for the Company.




<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5


[3] Related Party Transactions [Continued]

The balance of $29,800 Due to  Stockholders  relates to short-term  loans to the
Company in 1998.  The loans are  non-interesting  bearing and are due on demand.
During 1998, the Company  received  $38,300 in loans from the  stockholders  and
repaid $11,500 of loans.

During 1998,  the Company  commenced  leasing  office space on a  month-to-month
basis  from one of the  stockholders  of the  Company.  During  the  year  ended
December 31, 1998, the Company incurred $3,750 of rent expense under this lease.

[4] Research and Development Costs

During the years ended December 31, 1998 and 1997, the Company  charged  $29,900
and $66,251, respectively to research and development expense.

[5] Equity Transactions

Equity transactions during the year ended December 31, 1998 are as follows:

[A] Common  stock  issued  pursuant  to the  exercise of stock  warrants  was as
follows:


   Date            Number of Shares     Par Value     Paid-in Capital    Total

January 8                66,000        $       7        $   59,393    $   59,400
                         =======================================================

[B] Common stock issued in settlement of litigation was as follows:

   Date            Number of Shares     Par Value     Paid-in Capital    Total

January 13              150,000        $      15        $  591,674    $  591,689
March 30                249,081               24           946,679       946,703
                       ---------------------------------------------------------

  Totals                399,081        $      39        $1,538,353   $ 1,538,392
  ------               =========================================================


The  Company  will issue  another  39,239  shares of common  stock to one of the
plaintiffs in this settlement  upon  resolution of plaintiff's  tax lien.  There
will be no effect on total equity upon  resolution of this matter.  In addition,
the  settlement  also called for the issuance of warrants for 400,000  shares of
the Company's common stock [See Note 12].

[C] Common stock issued for services was as follows:


   Date        Number of Shares     Par Value     Paid-in Capital    Total

February 25            125,000        $      13        $  203,111   $   203,124
March 31                48,727                5            66,995        67,000
May 7                  339,184               34           508,742       508,776
August 6               100,000               10           124,990       125,000
                       --------------------------------------------------------

  Totals               612,911        $      62        $  903,838   $   903,900
  ------               ========================================================


[D] Common stock issued in private placement was as follows:

   Date        Number of Shares     Par Value     Paid-in Capital    Total

May 26              70,000        $       7        $   69,993    $   70,000
                    =======================================================


<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6



[5] Equity Transactions [Continued]

[E] Common stock issued pursuant to the exercise of stock options as follows:

   Date        Number of Shares      Par Value     Paid-in Capital    Total

May 28               16,750        $       2        $   24,998    $   25,000
                     =======================================================

[F] Series A convertible preferred stock issued in private placement as follows:

   Date        Number of Shares      Par Value     Paid-in Capital    Total

August 25            45,000        $       5        $  224,995    $  225,000
                     =======================================================

The Series A convertible  preferred  stock is  convertible  at the option of the
holder  into one share of the  Company's  common  stock for every five shares of
convertible preferred stock commencing three months after the date subscribed. A
registration  statement  was to be filed and declared  effective by November 30,
1998, registering the common shares available for conversion, or incur a penalty
at the rate of 3% per month for the common shares to be registered.  At December
31, 1998,  the  registration  statement was not declared  effective.  Therefore,
paid-in  capital  includes  $253 for the  obligation  to issue 270 shares of the
Company's common stock as of December 31, 1998. The  registration  statement has
not become effective as of April 28, 1999 [See Note 16E].

[6] Fair Value of Financial Instruments

In  assessing  the fair value of financial  instruments,  the Company has used a
variety of methods  and  assumptions,  which were based on  estimates  of market
conditions  and risks  existing  at that time.  For all  financial  instruments,
including  cash, due to  stockholders  and debt maturing within one year, it was
estimated that the carrying amount  approximated  fair value for these financial
instruments because of their short maturities.

[7] Commitments

Leases - The Company leases office space under an operating  lease which expires
in March of 2000. In addition to the minimum rentals,  the Company is liable for
contingent rentals based on its proportionate  share of operating  expenses,  as
defined.

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 New York lease was $24,367
for the year ended December 31, 1997.




<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7




[7] Commitments [Continued]

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

Year ending
December 31,
    1999                                $    15,890
    2000                                      3,973
                                              -----

    Total                               $    19,863
    -----                               ===========

Total  rental  expense was $17,804 and $40,257 for the years ended  December 31,
1998 and 1997, respectively.

PREPAID  ADVERTISING  CREDITS - 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.

SALES  AGREEMENT - 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
DECAFFOMATIC 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.

EMPLOYMENT  AGREEMENTS - 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  in 1998
provides  for the  granting  of 250,000  warrants  as amended  to  purchase  the
Company's stock at $1.50 per share from $2.00 per share. Compensation expense of
$125,000 was recorded for this amendment to the warrants. The options expire May
30, 2003.

[8] 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.




<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8


[8] Going Concern [Continued]

As shown in the accompanying  financial  statements,  the Company incurred a net
loss of $2,881,162 primarily resulting from no revenues and utilized $768,184 in
cash for operations  during the year ended  December 31, 1998.  The  significant
operating  losses  as well as the  uncertain  sources  of  financing,  create an
uncertainty about the Company's  ability to continue as a going concern.  During
1999,  the Company has reduced their  monthly  expenditures  from  approximately
$65,000 to  approximately  $22,000.  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  debt and  equity  financing  [See Note 16B].
Additionally, the Company is negotiating to sell the prepaid advertising credits
on an as  needed  basis  at a  discount  of  approximately  50%.  The  financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.

The continuation of the Company as a going concern is dependent upon the success
of these plans.

There can be no assurances 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.

[9] Development Stage Enterprise

On July 7, 1992, the Company discontinued  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. The Company is considered 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 $8,801,226 for the period July 7, 1992
through December 31, 1998.

[10] Advertising

The Company expenses advertising costs as incurred. For the years ended December
31, 1998 and 1997, advertising expense was $92,942 and $223,961, respectively.

[11] 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.  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 option 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.


<PAGE>
IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9


[11] Stock Based Compensation [Continued]

The following table summarizes the activity in common shares subject to options.

<TABLE>
<CAPTION>
                                                        1 9 9 8               1 9 9 7
                                                        -----------------------------
                                                             Weighted               Weighted
                                                              Average                Average
                                                             Exercise               Exercise
                                                  Shares       Price     Shares       Price

<S>                                               <C>       <C>     <C>           <C>         <C>
Outstanding - Beginning of Years                  110,000   $       1.45          110,000 $   1.45
Granted or Sold During the Years                  266,750   $       1.50          --      $   --
Canceled During the Years                              --   $      --          -- $      --
Expired During the Years                               --   $      --          -- $      --
Exercised During the Years                        (16,750)  $       1.50          --      $   --
                                                  -------                         --------

  Outstanding - End of Years                      360,000   $       1.48          110,000 $   1.45
                                                  ==========                      ========

  Exercisable - End of Years                      360,000   $       1.48          110,000 $   1.45
                                                  ==========                      ========

</TABLE>

The following  table  summarizes  stock options  information  as of December 31,
1998:

                                               Options Outstanding
                                                   Weighted-
                                                    Average    Weighted-
                                                   Remaining    Average
                                        Number    Contractual  Exercise
Exercise Price                        Outstanding    Life        Price

$.90                                     10,000           1.0 $        .90
$1.50                                   350,000           5.3 $       1.50
                                        ----------------------------------

  Totals                                360,000           5.2 $       1.48
  ------                                ==================================

The exercise  prices of the options  outstanding  at December  31,  1998,  range
between $.90 and $1.50 with a weighted average contractual life of 5.2 years.

The  following  table  summarizes  the  activity  in common  shares  subject  to
warrants:

<TABLE>
<CAPTION>
                                                        1 9 9 8               1 9 9 7
                                                        -----------------------------
                                                             Weighted               Weighted
                                                              Average                Average
                                                             Exercise               Exercise
                                                  Shares       Price     Shares       Price

<S>                                               <C>       <C>               <C>     <C>
Outstanding - Beginning of Years                  785,645   $   1.59          485,534 $   1.28
Granted or Sold During the Years                  990,000   $   1.30          300,111 $   2.08
Canceled During the Years                        (250,000)  $   2.00          --      $   --
Expired During the Years                               --   $  --             --      $   --
Exercised During the Years                        (66,000)  $    .90          --      $   --
                                                  -------                     --------

  Outstanding - End of Years                    1,459,645   $   1.35          785,645 $   1.59
                                                ============                  ========

  Exercisable - End of Years                    1,459,645   $   1.35          785,645 $   1.59
                                                ============                  ========
</TABLE>
<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10



[11] Stock Based Compensation [Continued]

The following  table  summarizes  stock warrants  information as of December 31,
1998:

                                                   Weighted-
                                                    Average    Weighted-
                                                   Remaining    Average
                                        Number    Contractual  Exercise
Exercise Prices                       Outstanding    Life        Price

$.90 - $1.00                            440,000           3.8 $        .99
$1.32 to $1.50                          969,534           3.7 $       1.46
$2.50                                    50,111           4.0 $       2.50
                                      ------------------------------------

  Totals                              1,459,645           3.7 $       1.35
  ------                              ====================================

The Company applies  Accounting  Principles Board Opinion No. 25 ["APB No. 25"],
Accounting for Stock Issued to Employees, and related interpretations, for stock
options issued to employees in accounting  for its stock options plans.  For the
year ended December 31, 1998, stock  compensation of $133,375 was recognized for
stock-based employee amounts.

The  exercise  prices of the  warrants  outstanding  at December  31, 1998 range
between $.90 and $2.50 with a weighted average contractual life of 3.7 years.

Had  compensation  cost been  determined on the basis of fair value  pursuant to
FASB  Statement No. 123, net loss and loss per share would have been recorded as
follows:

                                                       December 31,
                                                   1 9 9 8       1 9 9 7

Net Loss as Reported                           $  (2,881,162)  $(3,631,105)
                                               =============   ===========

Pro Forma Net Loss                             $  (2,881,162)  $(3,916,105)
                                               =============   ===========

Net Loss Per Share as Reported                 $       (0.39)   $    (0.57)
                                               =============   ===========

Pro Forma Net Loss Per Share                   $       (0.39)   $    (0.62)
                                               =============   ============

The weighted  average  grant date fair value of options and warrants  granted in
1998 and 1997 was $1.34 and $1.14, respectively.

The fair value of each option and warrant granted is estimated on the grant date
using an option  pricing model which takes into  account,  as of the grant date,
the exercise  price and the expected life of the option or warrant,  the current
price of the underlying stock and its expected volatility, expected dividends on
the stock and the risk-free interest rate for the expected term of the option or
warrant. The following is the average of the data used for the following items:

                                                       1 9 9 8         1 9 9 7
                                                       -----------------------

Expected Life [Years]                                      5              5
Risk-Free Interest Rate                                    5  %           6  %
Expected Dividends                                        --             --
Expected Volatility                                       76  %          74  %


<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11



[12] 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 438,320 shares of common stock and 400,000
warrants to purchase common stock at $1.32 and $2.00. $1,538,392 was included in
accrued expenses at December 31, 1997 [See Note 5B].

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 the  Enterprise  75,000  shares of the  Company's
common  stock and 75,000  warrants to purchase  the  Company's  common stock for
recruitment  services  that were  performed  for the Company  during  1996.  The
Company's counsel cannot predict the outcome of this matter although it believes
it has meritorious defenses and will vigorously defend the action. Therefore, no
accrual  has been made at December  31,  1998.  However,  if such  defenses  are
unsuccessful, it may have a material adverse impact on the results of operations
and financial  condition of the Company.  The chairman of the Company,  is a 50%
shareholder of the Plaintiff [See Note 3].

On December 24, 1998, a second action was commenced  against the Company and the
Chairman and Chief  Executive  Officer of the Company by BPV  Enterprises,  Inc.
doing business as Universal  Sales, and Victor Bauer in the Supreme Court of the
State of New York,  County of Suffolk.  The plaintiff alleges breach of contract
under a sales and service  administration  agreement claiming a commission equal
to 2.5% of the Company's  sales in excess of $5,000,000 per year, and a standard
sales  commission  equal to 2.5% per year of  revenues  derived  from  customers
obtained by the  plaintiff.  The plaintiff  also alleges the amount of potential
lost  commissions to be $25,000,000.  Additional  causes of action,  against the
Chairman  and Chief  Executive  Officer of the Company  include  breaches of his
roles and duties for the plaintiff and unjust enrichment.  The Company's counsel
cannot  predict  the  outcome  of  this  matter  although  it  believes  it  has
meritorious  defenses  and will  vigorously  defend the  action.  Therefore,  no
accrual  has been made at December  31,  1998.  However,  if such  defenses  are
unsuccessful, it may have a material adverse impact on the results of operations
and financial condition of the Company.

[13] 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 3]. 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  prepaid  advertising  credits and  additional
paid-in capital. Such restatement had no affect on the statement of operations.




<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12



[14]  New Authoritative Accounting Pronouncements

The  Financial  Accounting  Standard  Board  ["FASB"]  has issued  Statement  of
Financial  Accounting  Standards  ["SFAS"] No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities."  SFAS No. 133  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value.  The  accounting  for  changes in the fair value of a  derivative
depends on the intended use of the  derivative  and how it its  designated,  for
example, gain or losses related to changes in the fair value of a derivative not
designated  as a hedging  instrument  is recognized in earnings in the period of
the  change,  while  certain  types of hedges  may be  initially  reported  as a
component  of  other   comprehensive   income   [outside   earnings]  until  the
consummation of the underlying transaction.

SFAS No. 133 is  effective  for all fiscal  quarters of fiscal  years  beginning
after June 15,  1999.  Initial  application  of SFAS No. 133 should be as of the
beginning  of a fiscal  quarter;  on that date,  hedging  relationships  must be
designated  anew and  documented  pursuant  to the  provisions  of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged,  but
it is permitted only as of the beginning of any fiscal quarter.  SFAS No. 133 is
not to be applied  retroactively to financial  statements of prior periods.  The
Company does not currently have any derivative  instruments and is not currently
engaged in any hedging activities.

[15] Notes Payable

Notes payable at December 31, 1998 consisted of the following:

Senior secured promissory notes payable,
  due January 31, 1999, including interest
  at 10%, collateralized by all of the assets
  of the Company.                                            $   100,000

Senior secured convertible promissory notes
  payable due January 31, 1999 including
  interest at 10%, collateralized by all of the
  asset of the Company.                                          290,000

  Total                                                      $   390,000
                                                             ===========

The holders of the senior secured  promissory notes payable of $100,000 received
warrants to purchase  100,000 shares of the Company's  common stock at $1.00 per
share.  The Company  recorded  paid-in  capital and  deferred  finance  costs of
$80,505 to be  amortized  over four months.  During the year ended  December 31,
1998,  $60,379  was  amortized  as  interest  expense.  The  warrants  expire in
September 2003. The notes were paid in 1999.

The  senior  secured  convertible  promissory  notes  payable  of  $290,000  are
convertible  into shares of the Company's  common stock at any time prior to the
due date of the notes.  The notes may be converted  into shares of the Company's
common  stock at the rate  equal to the  lessor of (a) $1.00 per share of common
stock, or (b) eighty percent at the average closing "bid" price of the Company's
publicly traded common stock for the five trading days immediately preceding the
conversion. Additionally, the notes included warrants to purchase 290,000 shares
of the Company's  common stock at $1.00 per share.  The Company recorded paid-in
capital and deferred  finance costs of $218,580 to be amortized over three and a
half months.  During the year ended December 31, 1998, $156,129 was amortized as
interest expense. The warrants expire in October 2003 [See Note 16D].





<PAGE>


IMSCO TECHNOLOGIES, INC. AND SUBSIDIARIES
[A DEVELOPMENT STAGE COMPANY]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13



[16] Subsequent Event

[A] Issuance of Common  Stock - On January 15,  1999,  the Board of Directors of
the Company  authorized  the issuance of 80,000 shares of the  Company's  common
stock to satisfy  accrued  expenses  at  December  31,  1998 of $63,000  and for
services to be performed January through April 1999 in the amount of $12,000.

[B] Financing - On February 9, 1999, the Company completed a private offering of
$600,000 of 8% convertible  debentures due January 31, 2002 and 120,000 warrants
to purchase  the  Company's  common  stock at $1.50 per share until  January 31,
2002. Interest is payable quarterly in cash or common stock at the option of the
Company.  The debentures are convertible in $5,000  multiples into shares of the
Company's  common  stock at a  conversion  price for each share of common  stock
equal to 75% of the market price at the conversion  date, but no more than $1.00
per share.  The 25% fair  market  value  adjustment  at date of issue will be an
additional cost to the Company in the year exercised.

[C]  Termination  of Officer - On March 22,  1999,  the Company  terminated  the
employment  contract of the president of the Company,  for cause, as he violated
the terms of his employment agreement which was to expire in October 1999.

[D]  Defaults  on  Convertible  Promissory  Notes  - Two of the  senior  secured
convertible  promissory  notes payable due January 31, 1999 were extended  until
May 25, 1999 and in  consideration  of the extension  the exercise  price of the
warrants was decreased to $.40 per share.  This will result in a financing  cost
in 1999 of $21,000.  The Company  did not pay these notes on May 25,  1999.  The
Company has not received any notices of default, however, all five of the senior
secured  convertible  promissory  notes are deemed to be in default in the total
amount of $118,355 plus interest because of failure to receive  extension or pay
timely.

[E] Waiver of Penalty - On May 26, 1999,  the holder of the Series A Convertible
Preferred  Stock  agreed that the penalty  for the related  registration  rights
shall  apply and accrue up and until April 30,  1999,  however,  thereafter  the
penalty for failure to achieve the required registration shall cease.