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, 1996       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
 incorporation or organization)                           Identification Number)


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

Issuer's telephone number, including area code: (508) 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, $.001 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:$3,022.

     As of December 31, l996: (a) 6,092,425  Common Shares,  $.001 par value, of
the registrant were outstanding;  (b) approximately 2,681,116 Common Shares were
held by non-affiliates; an-d (c) the aggregate market value of the Common Shares
held by non-affiliates  was $ 7,708,208 based on the closing bid price of $2.875
per share on December 31, 1996.


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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 three 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 its research
and testing, it is the Company's belief that the PLASMA PURE with further
development will be capable of removing significant amounts of infectious viral
particles from human plasma without significantly affecting the other chemical
properties of the plasma. Additionally, based on the Company's internal
laboratory testing and research conducted by the Company at the University of
Massachusetts

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in 1994  and  1995  and at the  University  of  Akron  in  1996  and  1997,  the
DECAFFOMATIC  demonstrated  that it can remove 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".  On April 2, 1996 the Company was
granted a patent by the United States Patent and Trademarks  office,  Patent No.
5503724 for "Process  for  Decaffeinating  a Caffeine  Containing  Liquid".  The
Company  believes  that  it  has   substantially   completed  its  research  and
development  of the  DECAFFOMATIC  technology  and is  ready  to  introduce  its
decaffeination products to the commercial  institutional coffee brewer market in
1997.

     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. The Company is also pursuing further research and the
development of the PLASMA PURE technologies and related products and other
specific separation technologies that may be used with particular proprietary
and non-proprietary products manufactured by other companies. 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 developed products, (ii) expanding its research and development
activities for additional uses and applications applying its proprietary
technologies, (iii) establishing marketing agreements, licensing agreements and
distribution agreements with recognized market leaders for marketing and
distribution of its products, and (iv) seeking regulatory approval for its
proposed medical products such as PLASMA PURE.

     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
the past five months, the Company has been working with NEWCO to develop, design
and test working models, and assist in the design of moulds for the production
of the decaffeination device. Although there are no assurance, it is anticipated
that sales under the NEWCO Agreement will occur in 1997. See "Business
-Marketing and - Manufacturing."

                                       3

<PAGE>


     On September 20, 1996, the Company entered into a Marketing Agreement with
Hughes, Edwards & Price, Inc. ("Hughes"), of Traverse City, Michigan, wherein
Hughes was appointed the exclusive representative to market the Company's
decaffeination technology and products to the institutional coffee maker
marketplace, such as restaurants and hotels, in North America for a period of
three years (the "Hughes Marketing Agreement"). In exchange, Hughes agreed to
sell or purchase a minimum of $3 million worth of units the first year, $5
million worth of units the second year and $7 million worth of units the third
year from the Company. Although there can be no assurance, sales under the
Hughes Marketing Agreement are anticipated to occur in the last half of 1997.
All of the units to be sold by the Company to Hughes or its customers will be
manufactured by NEWCO. NEWCO has also agreed to purchase a minimum of 25,000
units the first year, 50,000 units the second year and 100,000 units the third
year of the NEWCO Agreement of the DECAFFOMATIC device for sales to the "office
coffee supply" market. 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 formally 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 will need to expand an
estimated $.5 to $1 million over the next 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 will not likely be submitted to the FDA, if at all after considering
further research results, until at least the second half of 1998. See "Business
- Research and Development."

     On September 20, 1996, the Company entered into a stock purchase agreement
("Stock Purchase Agreement") and a separate media purchase agreement ("Media
Purchase Agreement") to sell an aggregate of 2,272,728 shares of its common
stock, par value $.001, to two purchasers. Hampton Tech Partners II, LLC, a
Colorado limited liability company ("HTP-II") which purchased 1,136,364 shares
under the Stock Purchase Agreement, and Proxhill Marketing, Ltd., a private
media and advertising company based in Colorado ("PML"), which received
1,136,364 shares under the Media Purchase Agreement. The closings under the
agreements occurred in November and December 1996, under the Media Purchase
Agreement the sales price was $1.32 per share and gross proceeds and prepaid
media credits received by the Company were $3,000,000. The proceeds were paid
$1,500,000 in cash by HTP-II under the Stock Purchase Agreement and $1,500,000
in media credits to be used at the Company's direction by PML. The Company
intends to use the media credits during the next 18


                                       4
<PAGE>


months to market its DECAFFOMATIC products under the Stock Purchase Agreement.
In both stock sales, the purchasers HTP-II and PML were granted certain
registration rights, and accordingly 2,272,728 of the shares issued to HTP-II
and PML are currently being registered for HTP-II and PML as selling
shareholders under a Registration Statement on Form SB-2 (the "Registration
Statement") filed on January 13, 1997 with the Commission (File No. 333-19707)
which has not yet been declared effective. Also included within the Registration
Statement are 242,272 shares of Common Stock issuable upon exercise of
outstanding Class A Warrants, exercisable at a price of $1.45 per Share for a
period ending July 31, 2001 ("Class A Warrants"), 150,000 shares of common stock
issuable upon exercise of the Class B Warrants, exercisable at a price of $1.50
per Share for a period ending on December 31, 1999 ("Class B Warrants"), 50,000
Shares of Common Stock issuable upon exercise of the Class C Warrants,
exercisable at a price of $2.875 per Share for a period ending on December 31,
1999 ("Class C Warrants") and 127,272 outstanding Class D Warrants, exercisable
at a price of $1.32 of per Share for a period ending July 31, 2001 ("Class D
Warrants"). The Class A, Class B, Class C and Class D Warrants are herein
sometimes collectively called the "Warrants." None of the Warrants were
outstanding on December 31, 1996.

     Hampton, HTP-II and PML, the holders of 2,272,728 of the Shares in the
aggregate being registered under the Registration Statement, have agreed to
contractually have the Shares restricted on sale under a "lock-up" arrangement
contained in the HTP-II Stock Purchase Agreement and the PML Media Purchase
Agreement (the "Lock-Up Agreements"). Under the Lock-Up Agreements, one-third
(1/3) of the Shares will be released at any time after the effective date of the
Registration Statement. After the release of the initial one-third of the
Shares, the remaining two-thirds (2/3) of the Shares shall be locked-up and not
sold until July 15, 1997. During the "lock-up" period, after the Registration
Statement has become effective, HTP-II shall have the right to distribute the
Shares to its respective shareholder-members, provided that each
shareholder-member shall be individually subject to the "lock-up" time periods.
After the respective "lock-up" has expired, each individual holder, including
the various shareholder-members of HTP-II, shall only sell Shares at the same
rate as permitted under Rule 144.

     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


                                       5
<PAGE>


corporation and the name of this 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 $.001 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.


BUSINESS STRATEGY

     The Company's objective is to become the leader in the electrostatic
separation market by capitalizing on its proprietary electrostatic technology.
The Company's strategy is to focus initially on commercializing and launching
the DECAFFOMATIC products based on its decaffeination patented technology.
Initial target markets are the institutional coffee brewer market. The Company
is also pursuing the development and commercialization of decaffeination for
home consumers.

Although there can be no assurance that it will be successful, implementing the
Company's strategy involves the following activities:

Continue and expand research and development.

     The Company intends to increase its research and development staff, expand
its research facilities and acquire additional laboratory and analytical
equipment to conduct further research on the PLASMA PURE. The Company is also
researching other applications of its electrostatic separation technology
including water and air filtration.

Expand manufacturing capacity.

     The Company intends to retain other contract manufacturers for its products
and may expand its manufacturing capacity by adding personnel. In addition, the
Company is researching other processes to improve manufacturing capacity and
efficiency.

Establish marketing partnerships.

     The Company seeks to market and distribute its products through recognized
market leaders to take advantage of their resources and distribution channels.
In addition, in the future, as the Company's other Decaffeination products, such
as for the home consumer, progress toward commercialization, the Company intends
to establish a highly focused sales force to market those products.

Advance Technology.

     The Company believes it has certain core competencies and patent protected


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<PAGE>


core technologies in the field of electrostatic separation that can be
leveraged. Management believes it has significant expertise in engineering and
biochemical research pertaining to its core technologies, including method and
process design, apparatus design and configuration and new application
development. The Company plans to build upon its technical base by conducting
further research and development of existing products for enhancement and
improvement of those products and by researching new products.

Broaden Applications.

     To date, the Company has focused on the two primary applications the
electrostatic technologies : the DECAFFOMATIC device and the PLASMA PURE
technology. The Company believes there are significant other opportunities to
increase the number of applications for the core electrostatic technology, such
as water filtration, air filtration, other types of blood filtration, and
biological testing of the presence of viral and bacteriologic presence in fluid
samples.

Utilize Multiple Distribution Channels.

     Depending upon the product and specific application, the Company will
determine whether to market through its direct sales force, to focus on sales to
several major national accounts, or to market the product or technology by a
licensing arrangement through a licensee-distributor already in the field of the
particular application.

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 and plans are being made to
introduce the DECAFFOMATIC product to the market in 1997, 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. 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,
some of which may be described in this Prospectus. The Company presently is
pursuing product opportunities that will require extensive additional capital


                                       7
<PAGE>


investment, research, development, testing, regulatory clearance or approvals
prior to commercialization. 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
"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 pays
$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. 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.  Based on research  conducted at the  University  of
Akron, the DECAFFOMATIC  demonstrated that it can remove in excess of 95% of the
caffeine from a brewed beverage such as coffee.


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<PAGE>


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. Additionally,
in 1996, the Company designed and built a decaffeinator that is incorporated
into the coffee maker brew basket as an integral part of the coffee brewing
process. The 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, 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. 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.


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     The Company intends to focus its decaffeination technology marketing on its
recently developed 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. The Company
believes that such a separation device could be extremely important in the
battle against AIDS, Hepatitis and other plasma borne viral infections. 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
resources, the Company was only able to conduct very limited research on the
PLASMA PURE over the past year. However, assuming that the Company is able to
obtain adequate financing to complete its research and development on the PLASMA
PURE technology, of which there can be no assurance, plans are being made to
approach the FDA in 1998 to begin testing for the FDA approval process. 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 additional
research needs to be conducted, management believes that the use of PLASMA PURE
to filter fresh frozen plasma will 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 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
intends to conduct research and development on is a modified white blood cell
filter. This device would utilize 


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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 currentl 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, 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). The Company is presently seeking an involvement with
a major pharmaceutical company to initiate such a working partnership, although
there can be no assurance that it will be able to consummate any such
agreements.

     Similar to DPI, the Company recently 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 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.

     However, the first phase of its marketing of the DECAFFOMATIC is the
institutional brewer


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<PAGE>


market, the Company has entered into two separate marketing agreements with
Hughes and NEWCO.

The Hughes Marketing Agreement.

     On September 20, 1996, the Company entered into the Hughes Marketing
Agreement for certain large institutional marketing of the Decaffeination
System. Hughes is a privately held corporation, based in Traverse City,
Michigan, and is one of the larger marketers of institutional coffee making
equipment and supplies in North America. The Company agreed that Hughes will
have the exclusive right to sell the DECAFFOMATIC to so-called "large
institution" coffeemaker market in North American for a period of three years.
The "large institutional" marketplace is dominated by major hotel chains and
major restaurant and fast-food chains. In exchange for these exclusive rights,
Hughes agreed to sell or purchase from the Company a minimum of $3 million worth
of units for the first year, $5 million worth of units for the second year and
$7 million worth of units the third year.

     Under the Hughes Agreement, if Hughes fails to sell the minimum amount it
must purchase the difference for its own account to maintain the Agreement in
force. All servicing and customer calls will be performed by Hughes. The Company
can terminate the Hughes Agreement if Hughes fails to make the specified minimum
amount of Decaffeination System purchases.

     The Company believes that its exclusive agreement with Hughes 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 sales,
marketing and service network in the competitive large institution market.
Hughes sales and purchase obligations to the Company commence once the Company
has a commercial ready institutional coffee brewer unit ready to model for
demonstration and sales. The large institutional marketplace brewer will be
manufactured by NEWCO. As of this date, NEWCO is working on a pre-final working
model of the institutional coffeemaker-brewer 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 the middle of
1997 and that sales orders could commence thereafter. Once the final working
model has been designed, NEWCO will create the necessary moulds for parts and
assembly line manufacture.

     To create a potential customer awareness of the Company's Decaffeination
System, the Company intends to commence a public relations and advertising
campaign in the second quarter of 1997. 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


                                       12
<PAGE>


has the prepaid Media Credits from PML.

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.

     In the Media Purchase Agreement, PML provides the Company with an agreed
amount in media financing as part of the Company's overall media plan, on a
basis of one-third cash and two-thirds media credit. At the closing of the
transaction Proxhill delivers 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 will use the $1,500,000 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. The Company is currently
interviewing advertising agencies and public relation firms who will assist the
Company in the design and implementation of an marketing campaign to introduce
DECAFFOMATIC to the public.

     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


                                       13
<PAGE>


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 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 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.


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, three 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.


                                       14
<PAGE>


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, which is currently in effect the Company pays $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, l996, the
Company incurred a development stage deficit of $1,989,212. 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


                                       15
<PAGE>


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.

     Under the NEWCO Agreement, the Company sells units of the Decaffeination
System to NEWCO for a net price to the Company. The Company anticipates that the
price to be paid by NEWCO, which is still being finalized until the final
working and commercial ready components are established, will be in the range of
approximately $20 per unit for small OCS type users, ranging to $200 for large,
high volume institutional coffee brewers. NEWCO takes 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.
As of the date of this Prospectus, NEWCO has make several working models and has
recently completed one pre-final working model of the institutional
coffeemaker-brewer that is being 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 refinements to the
final institutional working model will be completed in the first half of 1997
and that sales orders could commence thereafter.

     The Company also utilized the facilities at the University of Massachusetts
and University of Akron to conduct development design of the DECAFFOMATIC system
relating to the characteristics of the brewed coffee, including pH, color,
flavor and aroma of the coffee, after it has passed through the DECAFFOMATIC
device. This on-going development of the optimum product that removes caffeine
most efficiently with the minimal impact on color, taste and aroma


                                       16
<PAGE>


of the brewed coffee is being conducted by the Company at the University of
Akron. The Company intends to continue working at the University of Akron to
further refine and develop new decaffeination products in the future.

     The Company has manufactured and supplied the PLASMA PURE separation
device, on a limited basis, for test purposes only, to research institutions and
to prospective financing partners and others. The Company has made five
prototype PLASMA PURE devices to date which were tested by the Company from
August 1992 through April 1993. The Company believes that its early basic test
results demonstrated that the PLASMA PURE separation technology is capable of
removing significant amounts of infectious viral particles from plasma. However,
the PLASMA PURE requires significant further research and development before it
can be submitted to the FDA if at all after the further results of research and
clinical trials are obtained.

     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.


                                       17
<PAGE>


     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. 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



                                       18

<PAGE>

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. 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 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 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 


                                       19

<PAGE>

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 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

                                       20

<PAGE>


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 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 five full time employees, one in
management, three 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.



                                       21

<PAGE>


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 pays an annual rent of $14,450.00. 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 lease contains standard
pass-throughs by the unaffiliated landlord of increases in real estate taxes and
operating expenses after the first year of occupancy. The 950 Third Avenue lease
expires on January 31, 2002. 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 and is negotiating to sub-lease or assign the lease
at 950 Third Avenue to an unrelated party.

     Upon the end of these current leases, the Company expects to be able to
either negotiate new leases 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

     The Company is not aware of any other material pending or threatened legal
proceedings against the Company or its officers and directors.


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


There were no matters submitted to a vote of the security holders in the fourth
quarter of 1996.

                                    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.

                                       22
<PAGE>


     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
1996. 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, 1996 - March 31, 1996            $2.50          1.25
April 1, 1996 - June 30, 1996                3.25          1.25
July 1, 1996 - September 30, 1996            3.87          2.25
October 1, 1996 - December 31, 1996          3.25          2.50


     (b)  Holders of Common Stock

     Title of Class                      Approximate Number of Record Holders
                                              (as of December 31, l996)

     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,

                                       23

<PAGE>


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 $1,989,212 at December 31, 1996 and has a total
accumulated deficit of $2,610,120.

     The Company had no revenues from continuing operations in years ending
December 31, 1993, December 31, 1994, December 31, l995 or December 31, 1996.
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 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 1997, 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


                                       24

<PAGE>


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.


Year Ended December 31, l995 Compared to the Year Ended December 31, 1994

     The Company had a net loss of $406,086 for the year ended December 31, l995
in comparison to a net loss of $514,147 for the year ended December 31, 1994.
The Company had no revenues or operating income for the years ended December 31,
l995 and December 31, 1994 from continuing operations. Total general,
administrative and development expenses were $408,100 for l995 in comparison to
$514,147 for 1994. The decrease in these costs from 1994 to l995 was primarily
due to less research and development being performed in l995, as less capital
was available to the Company. All research and development costs were expensed
currently in the year incurred, rather than capitalized.

     At December 31, 1995, the Company had total assets of $12,980, total
liabilities of $63,343 and total stockholders' deficit of $50,363. At December
31, 1994, the Company had total assets of $167,878, total liabilities of $81,168
and total stockholders' equity of $86,710. The decline in assets during fiscal
l995 resulted from available current assets being expended for research and
development and other general and administrative expenses without any operating
income.For year ended December 31, l994, the reduction in total assets by
$99,284 and total stockholders' equity by $121,505 from the amounts earlier
reported for that period resulted from the receivable shown due 

                                       25
<PAGE>


at December 31, l994 under the Regulation S subscription agreements outstanding
from various foreign purchasers, which amount was reported to be subject to
offset by legal expenses incurred in Germany, offering costs and expenses and
interim loans payable, being reclassified as a reduction of paid in capital.

     No provision for income taxes has been recorded due to net operating loss
carry forwards.


                         LIQUIDITY AND CAPITAL RESOURCES


     The Company had positive working capital as of December 31, l996, of
$935,497 in comparison to a negative working capital position as of December 31,
l995 of $(54,709). The Company had an accumulated deficit of $2,610,120 at the
period ended December 31, l996, in comparison to an accumulated deficit of
$1,847,362 at the period ended December 31, l995. The increase in the
accumulated deficit is primarily related to continuing operating costs during
the development phase without any operating income.

     The Company has financed operations from entering the development phase in
July 1992 (through December 31, 1996) primarily through the private placement of
its stock and, to a lesser extent, through borrowings from notes payable. For
the year ended December 31, l996, the Company's cash requirements were satisfied
primarily from the cash reserves in its operating accounts, a private placement
consisting of a promissory note in the amount of $300,000 and 150,000 shares of
the Company's Common Stock for par value of $.001 per share, made to the company
by a private lender, Hampton Tech Partners, LLC ("Hampton"), on August 19, 1996.
The promissory note bore interest at the rate of 7% per annum and was due in
full on the earlier of (a) February 19, 1997, or (b) from the proceeds of an
equity or debt placement by the Company prior to that date. Additionally, on
September 20, 1996, the Company entered into the Stock Purchase Agreement and
the separate Media Purchase Agreement to sell an aggregate of 2,272,728 shares
of its common stock, par value $.001, to two purchasers, Hampton Tech Partners
II, LLC, a Colorado limited liability company ("HTP-II"), which purchased
1,136,364 shares, and Proxhill Marketing, Ltd., a private company based in
Colorado ("PML"), which received 1,136,364 shares. The closing under the
agreements occurred in November and December 1996 and the sales price was $1.32
per share and gross proceeds and credits received by the Company were
$3,000,000. The proceeds were paid $1,500,000 in cash by HTP-II under the Stock
Purchase Agreement and $1,500,000 in prepaid media credits ("Media Credits") to
be used at the Company's direction under the Stock Purchase Agreement. The
Company intends to use the Media Credits during the next 18 months to market its
DECAFFOMATIC products. In both stock sales, the purchasers represented that they
were "Accredited Investors" as that term is defined under Regulation D
promulgated by the Commission pursuant to the Securities Act. Of the Shares
being registered under this Prospectus, 150,000 were sold to Hampton, 1,136,364
were sold to HTP-II and 1,136,363 were issued to PML. Upon the closing of the
HTP-II Stock Purchase Agreement in November 1996 the Company repaid 

                                       26

<PAGE>

the $300,000 promissory note to Hampton in full.

     The Company does not currently possess a bank source of financing. Although
the Company believes that the above financing will be adequate to cover its
liquidity requirements over the next 8 months, it cannot be certain that these
sources of 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. Any such reductions of expenditures
might materially adversely affect the ability of the Company to produce
competitive products and services and to market these effectively.

     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 1997.
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 (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 five months, the Company has
been working with NEWCO to develop, design and test working models, and assist
in the design of moulds for the production of the decaffeination device.
Although there are no assurance, it is anticipated that sales under the NEWCO
Agreement will occur in the second half of 1997.

     On September 20, 1996, the Company entered into a Marketing Agreement with
Hughes, Edwards & Price, Inc., of Traverse City, Michigan, wherein Hughes was
appointed the exclusive representative to market the Company's decaffeination
technology and products to the institutional coffee

                                       27

<PAGE>



maker marketplace, such asrestaurants and hotels, in North America for a period
of three years (the "Hughes Marketing Agreement"). In exchange, Hughes agreed to
sell or purchase a minimum of $3 million worth of units the first year, $5
million worth of units the second year and $7 million worth of units the third
year from the Company. Although there can be no assurance, sales under the
Hughes Marketing Agreement are anticipated to occur in 1997. All of the units to
be sold by the Company to Hughes or its customers will be manufactured by NEWCO.
NEWCO has also agreed to purchase a minimum of 25,000 units the first year,
50,000 units the second year and 100,000 units the third year of the NEWCO
Agreement of the DECAFFOMATIC device for sales to the "office coffee supply"
market. 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.

      The Company believes that its existing cash and cash equivalents, the $1.5
million of prepaid Media Credits, together with anticipated cash flow from
operations in the latter part of 1997 will be sufficient to meet its operating
expenses and capital expenditures requirements for at least the next 8 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:


                                       28

<PAGE>


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 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 capital requirements
for at least the next 8 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.


                                       29

<PAGE>


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
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 1997, 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. 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,
some of which may be described in this Prospectus. 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 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

                                       30

<PAGE>


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 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

                                       31

<PAGE>


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.

     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

                                       32

<PAGE>


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 is 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 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

                                       33

<PAGE>


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 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. 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 

                                       34

<PAGE>


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, Mr. Crose and Dr. Waldman to be key
executives. The loss of the services of Mr. Berg, Mr. Crose or Dr. Waldman, 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, Mr. Crose or Dr. Waldman
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
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

                                       35

<PAGE>



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
noassurance 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 in the United States at any time in the
future. At December 31, 1996 the Company had approximately 6,092,424 shares
outstanding. Of these shares, approximately 4,987,442 outstanding shares,
including the 2,860,228 outstanding shares being registered in the Registration
Statement, will be freely tradable without restriction. 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 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 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

                                       36

<PAGE>


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. 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. The Company's emergence from the development
phase may 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, $.001 par value, and 1,000,000 shares of preferred
stock, $.001 par value per share (the "Preferred Stock"). There are currently
approximately 6,092,425 shares of Common Stock outstanding, and stock options
and warrants outstanding to acquire an additional 1,055,773 shares of Common
Stock.

     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


                                       37

<PAGE>


powers and the 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 may be adversely affected. Upon the
consummation of this offering based on the shares outstanding on December 31,
1996, the Company will have 6,092,424 shares of Common Stock outstanding. Of
these shares, approximately 4,987,422 shares, including the 2,280,228
outstanding shares being registered in this Prospectus, will be freely tradable
without restriction or further registration 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 and the approximately 1,513,636 shares which are subject
to the Lock-Up Agreement until July 15, 1997. All of the remaining 1,105,002
shares are deemed to be "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act, as such shares were issued in
private transactions not involving a public offering. Approximately 790,000 such
shares are currently eligible for sale under 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,

                                       38

<PAGE>


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 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, 1996, the Company is excluded from the definition of
a "penny stock" based on its net tangible assets being over $2 million at that
date. If the Common Stock becomes 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,
1996, and 1995 are included herein and consist of:

     Consolidated Balance Sheet (1996 and 1995)                    FS-2
     Consolidated Statement of Operations and Deficit              FS-3
     Consolidated Statement of Cash Flows                          FS-4
     Consolidated Statement of Stockholders' Equity (Deficit)      FS-5
     Notes to Consolidated Financial Statements                    FS-6

                                       39

<PAGE>


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

     There have been no changes in or reported disagreements with the
accountants on any matter of accounting principles, practices or financial
statement disclosure.



                                    PART III


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


Sol L. Berg                62         1986           President and Director

Dr. Alan Waldman           51         1992           Vice President and Director

Mr. James Yurak            61         1995           Director

Mr. Victor Bauer           52         1996           Director

Mr. Scott Robinson         35         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:


                                       40

<PAGE>



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


Sol L. Berg                62       1986            President and Director

Dr. Alan Waldman           51       1992            Vice President and Director

Gloria Berg                58       1986            Secretary-Treasurer


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

(c) The following person is considered a significant employee of the Company:


     James R. Crose, age 62, has been Director of Engineering for the Company
since 1992 and Vice President-Engineering since 1996. Mr. Crose earned a B.S. 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.

(d)  Family Relationships

     Sol L. Berg, the President and a Director, and Gloria Berg, the
Secretary-Treasurer, are husband and wife.

(e)  Business Experience

     Sol L. Berg (age 62)

     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.


     Alan Waldman (age 51)

     Dr. Alan A. Waldman, Ph.D. joined IMSCO as Executive Vice President and a
Director in 1992. Since 1988, Dr. Waldman has served as President of Waldman
Biomedical Consultancy,  an

                                       41

<PAGE>


international advisory group. From 1981 to 1988, Dr. Waldman was the Technical
Director for the New York Blood Center, which is the largest blood bank in the
world having annual sales in excess of $400 million. Dr. Waldman is a recognized
leader in planning, development and automation of serologic and diagnostic
testing related to immunologic and viral markers. He is the author of over 60
reports and publications. Dr. Waldman is contractually obligated to devote at
least 20% of his time to the Company. Dr. Waldman also became Chief Executive
Officer of the Company's BioElectric Separation & Testing, Inc. subsidiary in
January 1996.

     James G. Yurak  (age 61)

     Mr. Yurak was elected to the Board in l995 and serves as President and
Chief Executive Officer of its DPI subsidiary. He brings 20 years of direct
experience in the marketing and sales of coffee makers and coffee products to
the Company and DPI. He joined Mr. Coffee, Inc. in 1976 as a Vice President and
from 1986 to 1994 served as its Executive Vice President, where he helped direct
the growth of Mr. Coffee from a concept to a company with sales of approximately
$200 million per year. Mr. Yurak is a graduate of Colgate University.

     Gloria Berg (age 58)

     Gloria Berg has served as Secretary-Treasurer 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.

     Victor Bauer (age 52)

     Mr. Bauer became a Director in 1996. Mr. Bauer has over 25 years experience
in establishing product sales, marketing and distribution organizations. He is
also the President and Chief Executive Officer of Universal Sales, Inc., which
is a sales and marketing firm based in New York. Since l994, he has been
President and chief Executive Officer of BIJ Enterprises, Ltd., St. James, New
York, which entity serves as an Agent/Broker for Stone Container Corporation and
Formosa Plastics. From 1991 to 1994, he was President and Chief Executive
Officer of Royal Beverages of New York, Ltd., which was the exclusive franchised
bottler and distributor of Royal Crown Cola Company for the New York and Long
Island metropolitan area, excluding Manhattan. At Royal Beverages, Mr Bauer
recruited and supervised management teams consisting of sales manager, directors
of chain sales, controller and operations specialists, warehouse managers plus
in excess of 100 additional employees. From 1971 to 1991, Mr. Bauer was the
President of wholesale beverage distribution companies. He received a Bachelor
of Science in Business Administration from New York University in l964 and a
Masters Degree in Education from Brooklyn College in 1967.

     Scott Robinson (age 35)

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<PAGE>





     Mr. Robinson became a Director in 1997. Mr. Robinson currently co-owns and
operates one of the largest retail liquor operations in Colorado. Since
returning to Denver, Colorado in 1988, he has doubled the size of this family
owned business. Prior to that time, Mr. Robinson spent several years in the
mortgage banking and real estate brokerage business in Dallas, Texas.

     A graduate of the University of Colorado, he also earned an MBA from
Southern Methodist University in 1985.

Directors do not receive any compensation for services as directors. During
fiscal year 1996, 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, 1994, 1995 and 1996, whose total annual
salary and bonus exceeded $100,000 in any of those fiscal years.



                           SUMMARY COMPENSATION TABLE


Name of Individual   Capacity in which    Year      Salary        Additional
                          served                                 Compensation
------------------------------------------------------------------------------
                                                 
                     Executive Officer     1996     $100,000

Sol. L. Berg         President and Chief   1995     $ 75,300
                     Executive Officer     1994     $ 51,944

James G. Yurak       Director and          1996           --       $100,000(2)
                     President of
                     DPI Subsidiary        1995           --



                                       43

<PAGE>




                        Executive Officer       1994      --

Dr. Alan D. Waldman     Director,               1996      --      132,000(3)
                        Vice President
                        and President           1995      --
                        of BEST Subsidiary      1994      --


(1)  Consists 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.

(2)  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. Using the same $1.32 price per share the shares were
     sold to HTP-II and PML, the shares granted to Mr. Yurak would have a value
     of $100,000.

(3)  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 1997. Using the same $1.32 price per share that
     shares were sold to HIP-II and PML, the shares issued to Dr. Waldman would
     have a value of $132,000.

     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 September 1, 1996, 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

                                       44

<PAGE>

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 one year's 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.

     Effective 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. Additionally, for sales
orders generated by Mr. Yurak within North America, excluding Hughes, Edwards &
Price, Inc., he will be paid commission of 3% of the first $5 million in sales,
2% of the next sales between $5 million and $15 million and 1% of all sales in
excess of $15 million. the commissions shall be paid when received by the
Company. From February 23, 1996 through February 26, 1997 Mr. Yurak served as
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 September 1, 1996, 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 $75,000 per year. Mr. Crose shall also be entitled to medical
insurance, vacation and other benefits provided to the Company's employees
generally.

     On August 13, 1996, the Company entered into a Business Consulting
Agreement with Mr. Edmund Abramson for a period of three years at an annual cash
compensation of $200,000, excluding benefits. The services to be rendered by
Abramson under his Consulting Agreement consist of advice and opinions to the
Company concerning business and financial problems in connection with the
operation and management of the Company, capital structuring and private and
public equity and debt financing, shareholder relations (including assistance in
the preparation of the Company's Annual Report), acquisitions, mergers, and
other similar business combinations. Abramson is obligated to render such
services as are reasonably necessary to pursue the transactions contemplated
therein, provided, however, that Consultant shall have sole discretion as to the
form, manner and place in which said advice shall be given under this Agreement.
At no time is 
                                       45

<PAGE>


Abramson under any obligation whatsoever to render written opinions or reports
in connection with any advice he may give to the Company. Abramson is obligated
to devote to the Company only such time as he may deem necessary, and when
reasonably requested by the Company, and shall not be prevented or barred from
rendering services of any nature whatsoever for or on behalf of persons, firms
or corporations other than the Company, provided however that Consultant agrees
not to such a third party engagement during the term of the agreement with any
company or entity that competes in the same line or lines of business as the
Company or its subsidiaries. Consequently, Consultant shall not be an employee
of the Company but shall be an independent contractor to the extent permitted by
applicable law. Edmund Abramson was Chairman of the Board and a director of
Ferrara Food Company, Inc., from May, 1992, until March 1996. From April 1990 to
September 1992, Mr. Abramson was President of Adelaide Holdings, Inc., a public
company. From August 1990 to December 1992, Mr. Abramson was Chairman of the
Board of Restaurant Enterprises, Inc., a company that owns and operates
restaurants in South Florida. From 1984 to 1990, Mr. Abramson was on the Board
of Directors of International Recovery which is now trading on the New York
Stock Exchange. The agreement also provides that Mr. Abramson shall be provided
with a car by the Company and be reimbursed for automobile insurance. Mr.
Abramson shall also be entitled to medical insurance. In the event that Mr.
Abramson's agreement with the Company is terminated by the Company, Mr. Abramson
shall receive two year's base cash compensation. Mr. Abramson was also granted
100,000 shares of the Company's Common Stock and an option to purchase 100,000
shares of Common Stock at $1.50 per share. See "Stock Option Plan". For fiscal
year ended December 31, 1996, Mr. Abramson received total consulting fees having
a value of $291,666 from the Company, which consisted of the described 100,000
shares of common stock and cash of $91,666.

     On August 13, 1996, the Company entered into a three year Consulting
Agreement with WRA Consulting, Inc. a corporation having Willa Rose Abramson,
wife of Edmund Abramson ("WRA") as its sole director and shareholder. Under the
agreement, if WRA finds $1 million in capital financing for the Company, the
Company shall grant WRA 150,000 shares of Common Stock and warrants or options
to acquire an additional 150,000 shares of Common Stock at $1.50 per share. If
WRA arranges a transaction with a third party introduced by WRA which has a
consideration or value to the Company of $5 million or greater, whether through
a merger, acquisition, business combination or security placement for the
benefit of the Company, it shall receive an additional 250,000 shares of the
Company's Common Stock and 250,000 warrants to purchase Common Stock,
exercisable at $1.50 per share for a period ending December 31,1999. If the
transaction is assisting in arranging capital for the Company, it shall also
receive an investment banking fee equal to five percent of amounts in excess of
$5 million. WRA introduced HTP, HTP-II an PML to the Company and assisted in the
Company's sale of the $3 million of common stock to such parties in November and
December 1996. The agreement also grants WRA a bonus equal to 5% of the "Net
Earnings" in excess of $3 million per year from the Company if WRA is successful
in arranging an equity or debt placement for the Company, or a transaction which
has a consideration or value to the Company of $5 million or greater. The term

                                       46

<PAGE>


"Net Earnings" shall mean the earnings of the Company 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 Securities and Exchange Commission; or, if the
Company shall not be subject to the reporting requirements of Sections 13 or 15
of the Exchange Act, 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. In
consideration of its arranging the $3 million sale and exchange of Common Stock
to HTP, HTP-II and PML in November and December 1996, the Board of Directors has
determined that WRA is entitled to receive 150,000 shares of Common Stock and
150,000 Class B Warrants entitling it to acquire Common Stock for $1.50 per
Share for a period ending December 31, 1999.

     Effective as of September 1, 1996, Universal Sales, Inc., also 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. Victor Bauer, a Director 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 also received $31,500 and 75,000 Shares of
Common Stock as compensation for services rendered to the Company in 1996.

     Except as described above, there are presently no pension or other plans or
arrangements pursuant to which renumeration 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. 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.

                                       47

<PAGE>

     (a) As of the December 31, l996, 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, 1996, 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:


Name and Address of                   Amount and Nature of
Beneficial Owner                      Beneficial Ownership      Percent of Class
----------------                      --------------------      ----------------

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

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

Vic Bauer (4)(7)                               85,000(4)             1.4%
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845

James Yurak (4)(8)
c/o IMSCO
40 Bayfield Drive
North Andover, MA 01845                        75,000               1.2%

Vernon Oberholtzer (9)
c/o IMSCO
40 Bayfield Drive

                                       48

<PAGE>


North Andover, MA 01845                             0                  *

All Officers and Directors                    880,250              14.5%
as a group (6 persons)

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

(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)  Includes 75,000 Shares beneficially owned by Mr. Bauer through Universal
     Sales, Inc., and 10,000 Shares that are directly owned by Mr. Bauer's sons,
     Ian and Jason Bauer. Does not include the Class C Warrants which entitle
     Mr. Bauer to acquire 50,000 Shares at an exercise price of $2.875 per
     Share, exercisable over a period of three years ending December 31, 1999.

(8)  Does not include the 75,000 shares of Common Stock granted to Mr. Yurak one
     year after his employment agreement in February 1997.

(9)  A former director who resigned in February 1997, represents options
     received to purchase 10,000 shares at a price of $1.50 per share.

*    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.

                                       49

<PAGE>



ITEM 12.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTION


     (a) Except as described below, since January 1, l996, 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. In
August 1996, Hampton Tech Partners, LLC ("HTP") acquired $300,000 in promissory
notes from the Company and 150,000 shares of Common Stock for the total
consideration of $300,000. The notes were repaid in full on October 22, 1996. On
September 20, 1996, the Company entered into a Purchase Agreement with HTP-II
wherein HTP-II acquired 1,136,363 shares of Common Stock for $1,500,000 in cash
or $1.32 per share. The proceeds of the $1.5 million sale of stock to HTP-II
were used to repay the $300,000 note to HTP. Mr. Scott Robinson, a recently
elected director of the Company, is a member of HTP and HTP-II. Mr. Robinson's
brother, Mr. Jeffrey Robinson is the sole shareholder of Hampton Partners
Investments, Inc., the Managing Member of HTP and HTP-II.

     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.

     In 1996, Mr. Sol L. Berg, a Director and President of the Company, received
150,000 shares of Common Stock as compensation for services rendered. In 1996,
Mr. James G. Yurak, a Director and President of the DPI subsidiary, received
75,000 shares of Common Stock for services rendered. 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 l996,
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 for various
legal services rendered to the Company over the prior two years, which shares
will be deemed earned and 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 

                                       50

<PAGE>

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.

     (b) Except as above described, there have been no business relationships
with directors or nominees for director of the Company since January 1, l996.

     (c) At December 31, l996, no officers or directors were indebted to the
Company.

     (d) See 7(b) above.


ITEM 8. 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.)


                                       51

<PAGE>


      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.)

      (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).

      (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)

                                       52

<PAGE>


      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).

      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)

(b)      Reports on Form 8-K.

     The Company filed two reports on Form 8-K for the year ending December 31,
l996.

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.


                                       53

<PAGE>



GORDON, HARRINGTON & OSBORN, P.C. 
Certified Public Accountants

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Imsco Technologies,
Inc. (a development  stage  enterprise) and subsidiaries as of December 31, 1996
and 1995 and the results of their consolidated operations and their consolidated
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 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 financial  statements,
the Company  incurred a net loss of $762,758  during the year ended December 31,
1996.  As  discussed  in Notes 1, 8 and 9, the Company has  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.

                             /S/ GORDON, HARRINGTON & OSBORN, P.C.
North Andover, MA
April 2, 1997
                                       54

<PAGE>


30 Massachusetts  Avenue, North Andover,  Massachusetts  01845-3413 . Tel. (508)
689-0601


                                       55
<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES

                        (A Development Stage Enterprise)
                           CONSOLIDATED BALANCE SHEET
                        As of December 31, 1996 and 1995
<TABLE>
<CAPTION>

                                                                               1996           1995
                                                                           -----------    -----------
<S>                                                                        <C>            <C>        
Current assets:
  Cash and cash equivalents                                                $   450,880    $     8,634
  Prepaid advertising                                                        1,500,000
  Miscellaneous receivable                                                     200,000
                                                                           -----------    -----------
       Total current assets                                                  2,150,880          8,634
                                                                           -----------    -----------
Property and equipment:
  Equipment & furniture                                                        151,717         76,672
  Leasehold improvements                                                         5,845          4,900
  Less accumulated depreciation                                                (78,246)       (78,246)
                                                                           -----------    -----------
      Net property & equipment                                                  79,316          3,326
                                                                           -----------    -----------
Other assets:
  Organization costs, net of amortization of $28,060                               100            100
  Deposits                                                                      21,648            390
  Due from officer                                                                 530
                                                                           -----------    -----------
     Total other assets                                                         21,748          1,020
                                                                           -----------    -----------
      Total assets                                                         $ 2,251,944    $    12,980
                                                                           ===========    ===========
                    LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable                                                         $    28,877    $    52,927
  Accrued payroll taxes                                                         10,550          2,044
  Accrued expenses                                                              38,456          8,372
                                                                           -----------    -----------
       Total current liabilities                                                77,883         63,343
                                                                           -----------    -----------
Minority interest                                                                  -0-            -0-

Stockholders' equity (deficit):
  Common stock, par value $.001 per share, 15,000,000 shares authorized;
   6,092,425 issued and outstanding and 3,000,000 shares
   authorized; 2,994,839 issued and outstanding,  respectively                   6,092          2,995

   Preferred stock, par value $.001 per share, 1,000,000
     shares authorized, -0- shares issued and outstanding                            0              0

  Additional paid-in capital                                                 4,778,089      1,794,004

  Accumulated deficit:
   Development stage                                                        (1,989,212)    (1,226,454)
   Discontinued operations                                                    (620,908)      (620,908)
                                                                           -----------    -----------
     Total accumulated deficit                                              (2,610,120)    (1,847,362)
                                                                           -----------    -----------
     Total stockholders' equity (deficit)                                    2,174,061        (50,363)
                                                                           -----------    -----------
     Total liabilities and stockholders equity (deficit)                   $ 2,251,944    $    12,980
                                                                           ===========    ===========


</TABLE>


          See accompanying notes to consolidated financial statements.

                                        2

<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                    CONSOLIDATED STATEMENT OF OPERATIONS AND
             DEFICIT For the Years Ended December 31, 1996 and 1995
                                 and Cumulative
     Amounts from July 9, 1992 (inception of the current development stage)

<TABLE>
<CAPTION>

                                                                                                        Cumulative Amounts
                                                                                                           from current
                                                                                                           development
                                                              1996                    1995                    stage
                                                           -----------             -----------             -----------
<S>                                                        <C>                     <C>                     <C>        
Operating expenses:
  Development expense                                      $    53,838             $    30,759             $   196,863
  Salaries and wages                                            42,087                  82,645                 245,849
  Officers' salaries                                            61,375                 110,458                 333,069
  Payroll taxes                                                 10,006                  20,407                  55,270
  Outside labor                                                                                                120,350
  Professional services                                        458,483                 116,434                 683,545
  Public relations                                               1,800                                           1,800
  Rent                                                          22,470                  15,088                  79,998
  Insurance                                                     22,344                  12,553                  54,838
  Travel & business meetings                                    35,222                   8,754                  66,542
  Auto expense                                                   3,716                   2,580                  24,292
  Telephone & utilities                                          9,199                   4,226                  33,697
  Office expense                                                25,905                   3,468                  40,247
  Equipment rental                                               4,883                                           8,345
  Contributions                                                                                                     35
  Corporate fees                                                 6,496                   1,328                  40,605
                                                           -----------             -----------             -----------
      Total operating expenses                                 757,824                 408,700               1,985,345

Other income (expense):
  Interest & dividend income                                     3,022                   3,070                   6,092
  Interest expense                                              (7,500)                      0                  (9,047)
                                                           -----------             -----------             -----------

Loss before provision  for income taxes                       (762,302)               (405,630)             (1,988,300)

Provision for income taxes                                        (456)                   (456)                   (912)
                                                           -----------             -----------             -----------
Net loss from development                                     (762,758)               (406,086)             (1,989,212)
                                                                                                           ===========
Accumulated deficit-development
 stage at beginning of year                                 (1,226,454)               (820,368)
                                                           -----------             -----------
Accumulated deficit-development
 stage at end of year                                       (1,989,212)             (1,226,454)
                                                           -----------             -----------
Accumulated deficit-discontinued
 operations                                                   (620,908)               (620,908)
                                                           -----------             -----------
     Total accumulated deficit                             $(2,610,120)            $(1,847,362)
                                                           ===========             ===========

Net loss per common share                                  $      (.23)            $      (.14)
                                                           ===========             ===========

Weighted average number of
 shares outstanding                                          3,274,954               2,899,790
                                                           ===========             ===========
</TABLE>

          See accompanying notes to consolidated financial statements.



                                        3

<PAGE>

                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                      CONSOLIDATED STATEMENT OF CASH FLOWS
               For the Years Ended December 31, 1996 and 1995 and
             Cumulative Amounts from July 9, 1992 (inception of the
                           current development stage)

<TABLE>
<CAPTION>
                                                                                                              Cumulative Amounts
                                                                                                                from current
                                                                                                                 development
                                                                                 1996             1995              stage
                                                                             -----------       -----------       -----------
<S>                                                                          <C>               <C>               <C>        
Cash flows for operating activities:
  Cash received from dividends and interest                                  $     3,022       $     3,070       $     6,092
  Cash received from customers                                                                                        57,004
  Cash received from research and testing                                                                              8,187
  Cash received from unemployment taxes                                                                                  170
  Cash received from travel reimbursements
   and other rebates                                                                                   408               938
  Cash  paid to suppliers and employees                                         (758,406)         (320,126)       (1,802,508)
                                                                             -----------       -----------       -----------
     Net cash used by operating activities                                      (755,384)         (316,648)       (1,730,117)
                                                                             -----------       -----------       -----------

Cash flows form investing activities:
  Prepaid Research Testing                                                                                            (7,734)
  Purchase of Fixed Assets                                                       (75,990)                            (78,538)
                                                                             -----------       -----------       -----------

     Net cash provided (used) by investing activities                            (75,990)                            (86,272)
                                                                             -----------       -----------       -----------

Cash flows from financing activities:
  Interim Loan financing                                                         300,000                             385,000
  Proceeds from issuance of common stock                                         973,620           162,000         1,896,376
                                                                             -----------       -----------       -----------
     Net cash provided by financing activities                                 1,273,620           162,000         2,281,376
                                                                             -----------       -----------       -----------

Net increase (decrease) in cash and  cash equivalents                            442,246          (154,648)          464,987
Cash and cash equivalents at beginning of year                                     8,634           163,282           (14,107)
                                                                             -----------       -----------       -----------
Cash and cash equivalents at end of year                                     $   450,880       $     8,634       $   450,880
                                                                             ===========       ===========       ===========

                         RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Net loss                                                                     $  (762,758)      $  (406,086)      $(1,989,212)
                                                                             -----------       -----------       -----------
Increase in prepaid advertising                                               (1,500,000)                         (1,500,000)
Increase in miscellaneous receivable                                            (200,000)                           (200,000)
Decrease in Due from Officers                                                        530                                (120)
Depreciation and amortization                                                      2,613
Contract Services paid with common stock                                         213,562           107,013           437,045
Prepaid advertising paid with common stock                                     1,500,000                           1,500,000
Increase (decrease) in accounts payable                                          (24,050)          (14,798)          (35,574)
Increase (decrease) in accrued payroll taxes                                       8,506           (11,399)           10,550
Increase in accrued expenses                                                      30,084             8,372            38,456
Decrease (increase) in deposits                                                  (21,258)              150           (16,973)
Decrease in accounts receivable                                                                                        2,998
Decrease in inventory and assets                                                                       100            20,100
                                                                             -----------       -----------       -----------
    Total adjustments                                                              7,374            89,438           259,095
                                                                             -----------       -----------       -----------

Net cash used by operating activities                                        $  (755,384)      $  (316,648)      $(1,730,117)
                                                                             ===========       ===========       ===========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        4

<PAGE>

                            IMSCO TECHNOLOGIES, INC.
                        (A Development Stage Enterprise)

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                 FOR THE YEARS ENDED DECEMBER 31, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                          Total
                                                          Additional                  Stockholders'
                                             Common        Paid-in       Accumulated     Equity
                                             Stock         Capital         Deficit      (Deficit)
                                          -----------    -----------    -----------    -----------
<S>                                       <C>            <C>            <C>            <C>     
Balance at December  31, 1994             $     2,751    $ 1,525,235    $(1,441,276)   $    86,710

Issuance of shares of $.001 par
 value for $1.25 per share                         97        120,403                       120,500

Issuance of shares  of $.001 par
 value for contract  services performed           119        106,894                       107,013

Issuance of shares  of $.001 par
 value for 1.55 per  share                         11         16,989                        17,000

Issuance of shares  of $.001 par
 value for $1.50 per  share                        17         24,483                        24,500

Loss from development for the year
 ended December  31, 1995                                                  (406,086)      (406,086)
                                          -----------    -----------    -----------    -----------
Balance at December  31, 1995                   2,995      1,794,004     (1,847,362)       (50,363)

Issuance of subsidiary stock                                  10,000                        10,000

Issuance of shares of $.001 par value
  for $2.00 per share                              10         19,990                        20,000

Issuance of shares of $.001 par value             197           (197)

Issuance of shares of $.001 par value
  for contract services                           284        213,278                       213,562

Issuance of shares of $.001 par value
  in payment of loan                              227        299,773                       300,000

Issuance of shares of $.001 par value
  for prepaid advertising                       1,136      1,498,864                     1,500,000

Issuance of shares of $.001 par value
  at $1.32 per share                              775        942,845                       943,620

Issuance of shares of .001 par value
  for subsidiary stock                            468           (468)

Loss from development for the year
  ended December 31, 1996                                                  (762,758)      (762,758)
                                          -----------    -----------    -----------    -----------
Balance at December 31, 1996              $     6,092    $ 4,778,089    $(2,610,120)   $ 2,174,061
                                          ===========    ===========    ===========    ===========

</TABLE>
              The accompanying notes are an integral part of these statements.



                                        5

<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


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 $.001 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  microbiogical  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.

     There  are  15,000,000  shares  of common  stock  and  1,000,000  shares of
     preferred stock  authorized,  of which 6,092,425 and -0-,  respectively are
     issued and outstanding at December 31, 1996.

     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  technology  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,
     1996 and December 31, 1995 the subsidiaries had minimal  activity,  did not
     own any assets and are not liable for any liabilities.



                                        6

<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


1.   Summary of Significant Accounting Policies: (Cont.)

     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  intercompany  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. No depreciation  expense was charged to development
     stage operations for the years ended December 31, 1996 and 1995.

     Cash Equivalents:

     The  Company  considers  all highly  liquid  investments  with an  original
     maturity of less than three months to be cash equivalents.

     Loss per Common Share:

     Loss per common  share is based on the  weighted  average  number of common
     shares  and  common  equivalent  shares  outstanding  during the year ended
     December 31, 1996 and 1995.

     Estimates:

     Management uses estimates and assumptions in preparing financial statements
     in  accordance  with  generally  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.


                                        7

<PAGE>

                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995

2.   Leases:

     In 1993, the Company entered into an operating lease for office space which
     expired in August, 1996. The Company is currently leasing the premises as a
     tenant-at-will.  Rental  expense  for the  operating  lease was $14,050 and
     $15,088 for the years ended December 31, 1996 and 1995, respectively. Under
     the terms of the lease the  Company  is  responsible  for 15% of  operating
     expense and maintenance costs of the leased property,  including 15% of any
     increase  in  real  estate  taxes.  The  Company  is  responsible  for  all
     utilities.

     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 and is  negotiating to sub-lease or assign the lease at 950
     Third  Avenue to an unrelated  party.  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  lease  contains  standard   pass-throughs  by  the
     unaffiliated  landlord  of  increase  in real  estate  taxes and  operating
     expenses  after the first year of  occupancy.  The 950 Third  Avenue  lease
     expires on January 31, 2002.  Rental expense for the above lease was $8,020
     for the year ended December 31, 1996.

     Minimum future lease payments under  noncancelable  operating  leases as of
     December 31, 1996 are as follows:

     Year ending December 31:

                           1997                      $78,575
                           1998                       78,575
                           1999                       78,575
                           2000                       78,575
                           2001                       78,575
                           2002                        6,548

     The Company  entered into  various  leases for  equipment  during thte year
     ended  December  31,  1996.  Minimum  future  lease  payments  under  these
     noncancelable operating leases as of December 31, 1996 are as follows:

                            1997                     $14,676
                            1998                      14,676
                            1999                      11,045

         Rental expense for the above leases was $4,883 for the year ended
December 31, 1996.

                                        8
<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995

3.   Federal and State Income Taxes:

     As of December 31, 1996, the Company had net operating  loss  carryforwards
for federal income tax
purposes which expire as follows:

                 2000                         $    4,180
                 2001                            181,180
                 2002                            233,280
                 2003                             88,125
                 2004                             70,850
                 Thereafter                    2,032,140
                                               ---------
                                              $2,609,755
                                              ==========

     The  deferred  tax asset from the  benefit of the  losses is  $391,460  and
     $277,050  for the years  ending  December  31, 1996 and 1995,  respectively
     which is offset by an equivalent reserve account each year.

     As of December 31, 1996, the Company had net operating  loss  carryforwards
for state income tax purposes which expire as follows:

                  1997                         $  259,185
                  1998                             40,825
                  1999                            513,690
                  2000                            405,630
                  2001                            762,300
                                               ----------
                                               $1,981,630
                                               ==========

     The deferred tax asset from the benefit of the losses is $188,250 and
$115,800 for the years ending December 31, 1996 and 1995, respectively which is
offset by an equivalent reserve account each year.

         State excise tax expense amounted to $456 for the years ended December
31, 1996 and 1995.

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 Tech 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.


                                       9
<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


4.   Related Party Transactions: (Continued)

     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. 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 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.
     shares for 1.00 Decaf Products,  Inc.  shares.  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 Decaf  Products,  Inc.  shares,  which  shares will vest on
     January 1, 997. 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
     or the Company.


                                       10

<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


4.   Related Party Transactions: (Continued)

     During the year ended  December 31, 1995, a director of the Company,  David
     E. Fleming,  Esquire was also a partner with Campbell and Fleming,  P.C., a
     law firm which provides  certain  services for the Company.  As of July 31,
     1995, David E. Fleming had resigned as a director of the Company.

     In April 1994, the Company entered into a "best efforts"  placement  letter
     agreement with D.H. Vermogensverwaltungs-und  Beteiligungsgesellschaft mbH,
     a German investment company ("DH"), for 500,000 shares of common stock at a
     minimum of $.90 per share.  This placement  letter agreement was amended on
     August 29, 1994. DH also arranged the placement of another 80,000 shares of
     Common Stock as a supplement to the Regulation S placement. Mr. Dirk Hagee,
     a director of IMSCO is the managing  director and majority  shareholder  of
     DH.

     Upon closing of the  offering,  the Company paid DH a commission of $52,200
     which is at the rate of ten  percent  (10%) of all  monies  raised  in that
     offering and also granted to DH warrants to 116,000  shares of common stock
     of the Company.  These warrants are  exercisable for up to five years after
     issuance  at  the  same  price  paid  by  purchasers   of  the   placement.
     Additionally,  the placement agreement provides that upon completion of the
     placement,  DH shall have the right to  designate  two  directors of a five
     member board of  directors of the Company for a period of three years.  See
     Note 5 for agreements.


5.   Agreements:

     Effective as of September 1, 1996,  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.  In the event that Mr. Berg's  employment with the Company is
     terminated by the Company other than for cause,  Mr. Berg shall receive one
     year's 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.

                                       11

<PAGE>

                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995



5.   Agreements: (Continued)

     Effective  February 23, 1996, as amended effective as of September 1, 1996,
     the  Company  entered  into an  employment  agreement  with  James G. Yurak
     providing  for Mr.  Yurak's  employment  as the DPI's  President  and Chief
     Executive  Officer for a three year term.  Mr.  Yurak's  salary  under this
     agreement  is $75,000 for the first year,  $125,000 for the second year and
     $150,000  for the third  year.  Mr.  Yurak is also  eligible  to receive an
     annual  bonus.  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 September 1, 1996, 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 $75,000 per year.

     On  August  13,  1996,  the  Company  entered  into a  Business  Consulting
     Agreement with Mr. Edmund Abramson for a period of three years at an annual
     cash  compensation  of  $200,000,  excluding  benefits.  The services to be
     rendered by Abramson under his Consulting  Agreement  consist of advice and
     opinions to the  Company  concerning  business  and  financial  problems in
     connection  with the  operation  and  management  of the  Company,  capital
     structuring and private and public equity and debt  financing,  shareholder
     relations (including  assistance in the preparation of the Company's Annual
     Report), acquisitions, mergers, and other similar business combinations. In
     the event that Mr.  Abramson's  agreement with the Company is terminated by
     the Company,  Mr. Abramson shall receive two year's base cash compensation.
     Mr. Abramson was also granted 100,000 shares of the Company's  Common Stock
     and an  option to  purchase  100,000  shares  of Common  Stock at $1.50 per
     share. For fiscal year ended December 31, 1996, Mr. Abramson received total
     consulting  fees of $291,666 from the Company,  which consisted of $150,000
     in common stock and $141,666 in cash and accrued payments.

                                       12

<PAGE>

                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


5.   Agreements: (Continued)

     On August 13,  1996,  the  Company  entered  into a three  year  Consulting
     Agreement  with WRA  Consulting,  Inc.  a  corporation  having  Willa  Rose
     Abramson,  wife  of  Edmund  Abramson  ("WRA")  as its  sole  director  and
     shareholder.  Under the  agreement,  if WRA  finds $1  million  in  capital
     financing for the Company,  the Company  shall grant WRA 150,000  shares of
     Common  Stock and  warrants  or options to  acquire an  additional  150,000
     shares of Common Stock at $1.50 per share.  If WRA  arranges a  transaction
     with a third party  introduced by WRA which has a consideration or value to
     the  Company  of  $5  million  or  greater,   whether   through  a  merger,
     acquisition,  business combination or security placement for the benefit of
     the Company, it shall receive an additional 250,000 shares of the Company's
     Common Stock and 250,000 warrants to purchase Common Stock,  exercisable at
     $1.50 per share for a period ending December 31,1999. If the transaction is
     assisting  in arranging  capital for the Company,  it shall also receive an
     investment  banking  fee equal to five  percent  of amounts in excess of $5
     million.  WRA  assisted in the  Company's  sale of the $3 million of common
     stock to Hampton  Tech  Partners,  Hampton  Tech  Partners II and  Proxhill
     Marketing Ltd. in November and December 1996. The agreement also grants WRA
     a bonus equal to 5 % of the "Net Earnings" in excess of $3 million per year
     from the  Company  if WRA is  successful  in  arranging  an  equity or debt
     placement for the Company,  or a transaction  which has a consideration  or
     value to the  Company of $5 million or  greater.  In  consideration  of its
     arranging  the $3 million sale and exchange of Common Stock to Hampton Tech
     Partners,  Hampton Tech Partners II and Proxhill  Marketing Ltd., the Board
     of Directors  determined  that WRA is entitled to receive  150,000  Class B
     Warrants  entitling  it to acquire  Common  Stock for $1.50 per Share for a
     period ending December 31, 1999. As of December 31, 1996, the  registration
     statement  for the  Class B  Warrant  Common  Stock  had not been  declared
     effective.

     Effective as of September 1, 1996, Universal Sales, Inc., also 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.
     Victor  Bauer,  a Director 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 also received $31,500 and 75,000 Shares of
     Common Stock as compensation for services rendered to the Company in 1996.

                                       13

<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995



6.   Research and Development Costs:

     During the year ended  December  31,  1996 and 1995,  the  Company  charged
     $53,838 and $30,759, respectively to research and development expense.


7.   Nonmonetary Transactions:

     During the years  ended  December  31, 1996 and 1995,  the  Company  issued
     common  stock for  services  rendered  based upon the fair market  value of
     services  received.  The following  summarizes  the capital stock issued in
     lieu of cash for services received: 


<TABLE>
<CAPTION>

                                                                                                 Charged to  
         Description of              Shares       Common          Paid in       Charged          Assets/Liabilities/
         Service                     Issued       Stock           Capital       to Expense       Expense
         -------                     ------       -----           -------       ----------       -------
         1996
         ----
<S>                                <C>            <C>            <C>                            <C>      
         Prepaid adv.              1,136,364      1,136          1,498,864                      1,500,000
         Loan repayment              227,273        227            299,773                        300,000
         Finance consultants         140,000        140            202,660        202,800
         Private placement fees      129,151        129               (129)
         Legal fees                   15,000         15             10,747          5,138           5,624


</TABLE>


<TABLE>
<CAPTION>


         Description of            Shares                 Common              Paid in               Charged
         Service                   Issued                 Stock               Capital              to Expense
         -------                   ------                 -----               -------              ----------
         1995
         ----
<S>                                <C>                     <C>                <C>                   <C>    
         Research                  22,000                  $22                 $21,978               $22,000
         Accounting &
           auditing                74,790                  $75                 $60,971               $61,046
         Other 
           professional             9,510                  $10                 $11,004               $11,014
</TABLE>

     In  addition,  the  Company  issued  12,923  shares in  payment  of a prior
     obligation valued at $12,953.

8.   Commitments:

     The Company  entered an agreement with the University of  Massachusetts  to
     provide certain  services in connection with the testing and development of
     materials for use in a decaffeinator device for the period November 1, 1994
     through  December 31, 1994.  During the year ended  December 31, 1995,  the
     University of Massachusetts  continued to provide research  services to the
     Company for which it received 10,000 shares of common stock.

                                       14

<PAGE>

                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


8.   Commitments: (Continued)

     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
     pays $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.

     On  September  20,  1996,  the Company  entered  into the Hughes  Marketing
     Agreement for certain large  institutional  marketing of the Decaffeination
     System.  Hughes is a privately  held  corporation,  based in Traverse City,
     Michigan, and is one of the larger marketers of institutional coffee making
     equipment  and supplies in North  America.  The Company  agreed that Hughes
     will have the exclusive right to sell the  DECAFFOMATIC to so-called "large
     institution"  coffeemaker  market in North  American  for a period of three
     years.  The "large  institutional"  marketplace is dominated by major hotel
     chains and major  restaurant  and fast-food  chains.  In exchange for these
     exclusive  rights,  Hughes  agreed to sell or  purchase  from the Company a
     minimum of $3 million  worth of units for the first year,  $5 million worth
     of units for the second year and $7 million worth of units the third year.

     Under the Hughes Agreement,  the Company sells units of the  Decaffeination
     System to  Hughes'  customers  for a stated  price of $199 per unit for the
     institutional  coffeemakers.  If Hughes fails to sell the minimum amount it
     must purchase the  difference for its own account to maintain the Agreement
     in force. All servicing and customer calls will be performed by Hughes.  In
     addition to other legal  remedies,  the  parties can  terminate  the Hughes
     Agreement  if  Hughes  fails  to  make  the  specified  minimum  amount  of
     Decaffeination System purchases.

     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 Grown 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.

                                       15

<PAGE>


                    IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


8.   Commitments: (Continued)

     On September 20, 1996, the Company entered into an agreement with NEWCO 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
     DEFAFFOMATIC  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. 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  coffeemaker
     marketplace.  All of the technology and final  commercial  model designs of
     the Decaffeination System will be the property of the Company.

     Under the NEWCO  Agreement,  the Company sells units of the  Decaffeination
     System to NEWCO for a net price to the  Company.  The  Company  anticipates
     that the price to be paid by NEWCO,  which is still being  finalized  until
     the final working and commercial ready components are established,  will be
     in the  range  of  approximately  $20 per unit for  small  OCS type  users,
     ranging to $200 for large, high volume institutional coffee brewers.  NEWCO
     takes  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.  In
     addition to other legal  remedies,  the  parties  can  terminate  the NEWCO
     Agreement  if  NEWCO  fails  to  make  the  specified   minimum  number  of
     Decaffeination System purchases.

9.   Going Concern:

     As shown in the accompanying  financial statements,  the Company incurred a
     net  loss of  $762,758  during  the  year  ended  December  31,  1996 . The
     significant  operating  loss as well as the uncertain  conditions  that the
     Company faces regarding  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  to  its
     subsidiaries.  The plan calls for the  subsidiaries  to seek  partners  for
     manufacturing  and  marketing.  The  subsidiaries  will also seek financing
     through a public  offering.  The  ability of the  Company to  continue as a
     going concern is dependent on the plan's success.  The financial statements
     do not  include  any  adjustments  that might be  necessary  if the Company
     isunable to continue as a going concern.


                                       16
<PAGE>


                   IMSCO TECHNOLOGIES, INC. and SUBSIDIARIES
                        (A Development Stage Enterprise)


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1996 and 1995


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  $1,989,212  for the  period  July 7,  1992  through
     December 31, 1996.

11.  Advertising

     The costs of advertising are expensed the first time the advertising  takes
     place.  There was no  advertising  expense for the years ended December 31,
     1996 and 1995, respectively.  At December 31, 1996 and 1995, $1,500,000 and
     $ -0-, respectively, of advertising was reported as a prepaid asset.

12.  Employee Incentive Stock Options

     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 $.001),  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 exercisable 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.  As of
     December 31, 1996, an option to purchase  100,000 shares of common stock at
     $1.50 per share was issued and outstanding.


                                       17

<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/ Sol L. Berg
                                         -------------------------
                                         Sol L. Berg, President

                                    Date: April 14, 1997

     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.


/s/ Sol L. Berg
---------------------------------------
Sol L. Berg, President and Director

Date: April 14, 1997


/s/ Alan Waldman
---------------------------------------
Dr. Alan Waldman, Vice President
and Director

Date: April 14, 1997


/s/ Gloria Berg
---------------------------------------
Gloria Berg, Secretary-Treasury

Date: April 14, 1997



---------------------------------------
James G. Yurak, Director

Date:  


---------------------------------------
Victor Bauer, Director

Date:  


/s/ Scott Robinson
---------------------------------------
Scott Robinson, Director

Date: April 14, 1997



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