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

                                    FORM 10-K

 [X]Annual Report Pursuant to Section 13 or 15(d) of the Securities 
                              Exchange Act of 1934

                      For the year ended September 30, 1997

                         Commission File Number 1-11046

                          TOP SOURCE TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its charter).

          Delaware                                          84-1027821
(State or other jurisdiction of                        (I.R.S. Employer
corporation or organization)                          Identification Number)

        7108 Fairway Drive, Suite 200, Palm Beach Gardens, Florida 33418
               (Address of Principal executive office) (zip code)
 
       Registrant's telephone number, including area code: (561) 775-5756

           Securities registered pursuant to Section 12(b) of the Act:

 
                                                       Name of each exchange
Title of each class                                    on which registered
Common Stock                                           American Stock Exchange
 
          Securities registered pursuant to Section 12(g) of the Act:
                  .001 par value common stock (Title of Class)
                                      None

Indicate  by check  mark  whether  the  Registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the preceding 12 months (or such shorter  period that the Registrant
was  required  to file such  reports);  and (2) has been  subject to such filing
requirements for the past 90 days. Yes X No 

Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
Incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]

As of January 6, 1998, 28,561,477 shares of $.001 par value Common Stock (the
Registrant's only class of voting stock) were outstanding. The aggregate market
value of the common shares of the  Registrant on January 6, 1998 on the closing
sales price) held by  non-affiliates of the Registrant, was approximately 
$36,931,160.

                             Documents Incorporated by Reference

Location in Form 10-K                           Incorporated Document
Part III-Items 10, 11, & 12      Definitive Proxy Statement in connection with
                                 its annual meeting of stockholders to be held
                                 on April 23, 1998


<PAGE>

                                    PART I


ITEM 1.  BUSINESS

A.  General Description of Business

Top  Source  Technologies,  Inc.  (the  "Company")  was  organized  in  1986  to
distribute a patented overhead mounted speaker system ("OHSS") for vehicles.  In
1989, the Company's mission was expanded to include  developing and marketing of
products,   services  and  technologies  for  the   transportation  and  related
industries. The Company has since further expanded its product line. In addition
to the  OHSS,  in  1993  and  1994  the  Company  acquired  three  oil  analysis
laboratories  which were subsequently  sold, (see Item 8 - Financial  Statements
and Supplementary Date, Note 3, Discontinued Operations,  and the heading "Sale
of the United  Testing Group ("UTG")  Discontinued  Operations" in this Business
Section) and has developed a proprietary  oil analysis  instrument,  the On-Site
Oil  Analyzer  ("OSA")  for  use  in  the  automotive,  powertrain  development,
petrochemical  and numerous  other  industries.  The Company  also  licenses one
safety restraint technology,  Acceleration  Restraint Curve Safety Seat ("ARCS")
from the Massachusetts Institute of Technology ("M.I.T.").

As of  January  5,  1998 the  Company  had four  subsidiaries:  Top  Source
Automotive, Inc. ("TSA") located in Troy, Michigan, Top Source Instruments, Inc.
("TSI"),  formerly  named  OSA Inc.,  located  in  Atlanta,  Georgia , and Troy,
Michigan;  ARCS Safety Seat, Inc. ("ARCS, Inc.") located in Troy , Michigan, and
Top Source Oil Analysis  Inc.  ("TSOA")  formerly  named UTG Inc. and  currently
inactive  and a  discontinued  operation.  In fiscal 1997,  the Company  derived
substantially  all of its revenue from sales of its OHSS at TSA. Service revenue
from  UTG for the  fiscal  years  ended  September  30,  1996  and 1995 has been
reclassified  and  is  included  in  the  Company's   financial   statements  as
"discontinued operations."


B.  Financial Information About Industry Segments

     The Company  currently has two industry  segments:  automotive  technology,
TSA, and oil analysis service,  TSI. (For information on industry segments,  see
Item  8. -  Financial  Statements  and  Supplementary  Data,  Note  18,  Segment
Information.)

C.  Narrative Description of Business

General
The Company  markets  one  product,  an OHSS,  and  provides  one  service,  oil
analysis. The Company has three proprietary  technologies:  OHSS which generated
approximately 98% of the Company's revenue, OSA which generated approximately 2%
of the Company's revenues;  and ARCS, which is non-revenue  generating.  Another
technology,  Engine Fuel Economy  Emissions  Control Reduction System ("EFECS"),
was also  licensed  from  M.I.T.  and  subsequently  sold  pursuant to a royalty
agreement in May 1995.  (See Item 8. - Financial  Statements  and  Supplementary
Data,  Note 17 and the heading  "EFECS" in this  Business  Section.) . The EFECS
technology  generated  $50,000 in  royalties  (included  in Other  Income in the
Financial Statements) for the fiscal year ended September 30, 1997.

Products and Technologies

Overhead Speaker System
In 1987, the Company  acquired the exclusive  rights to distribute in the United
States and Canada a patented automotive overhead mounted speaker system from its
Swedish  inventor.  The  Company  holds a number of  patents  for the OHSS which
expire at various times through 2009.  The patents cover the design and mounting
method which permits  speakers,  dome lights and other accessories to be mounted
overhead. The assembly includes enclosed audio speakers pre-wired in an overhead
mounting  system.  The unit,  about six  inches  wide,  mounts  up  against  the
headliner  across  the  width of the sport  utility  vehicle  as a rear  speaker
system.  Overhead mounted speakers  deliver  unobstructed  sound directly to the
listener whereas speakers mounted in the side doors,  tailgate or cargo area can
become  obstructed by passengers or cargo. The OHSS eliminates the need for rear
speakers


<PAGE>



ITEM 1.  BUSINESS (continued)


in  traditional  locations,  reduces  weight in the  liftgate and because of its
fixed overhead mounting,  is not subject to the same risks of damage as speakers
located in door or liftgate  panels.  The OHSS  provides the Original  Equipment
Manufacturers  ("OEMs") with a cost  effective  solution to improved audio sound
without additional expensive tooling and within relatively short lead times, and
the assembly reduces installation time in factory  applications.  This OHSS unit
can be installed in less than 30 minutes and retails for around $300.

In  1991,  a  custom   designed  OHSS  was  approved  by  Chrysler   Corporation
("Chrysler")  for dealer  installation on the Jeep(R)  Wrangler,  and a purchase
order  was  received.  A patent on the  Wrangler  OHSS was  issued  in 1991.  In
February  1992,  the  Company  established  an  engineering  team that worked on
housing designs,  materials,  and other features, as well as audio sound issues.
The team, which included internal engineers and outside consultants,  identified
vehicle  opportunities for the OHSS and built working prototypes.  The Company's
marketing group presented  these units to OEM audio,  trim and product  planning
engineers  for  evaluation.  The second  custom OHSS unit was  designed  for the
Jeep(R)  Cherokee,  a high volume vehicle in production since 1984. The Cherokee
unit was molded from reinforced urethane and housed two 5 1/4 inch speakers. The
unit  mounted  over the rear  cargo  area and  incorporated  the cargo area dome
light.  In May  1992,  Chrysler  approved  this  unit and a  purchase  order was
received for dealer  installation.  The third custom unit which was designed for
the new Jeep(R)  Grand  Cherokee  featured  four  speakers and mounted above the
cargo area in the rear of the  vehicle.  In early  1993,  the  Company  received
approval and a purchase order for the Grand Cherokee unit as a dealer  installed
option.

In  1992,  TSA  focused  its  marketing  effort  on  expanded   production  line
installation  opportunities for both the Wrangler and Cherokee,  and the Company
received  its  first  production  line  orders  for  both the  Wrangler  and the
Cherokee.  That  opportunity  resulted in significant  increases in OHSS volumes
compared to dealer installed application. To support that effort the Company, in
early  1993,  established  its  own  assembly  operation  in a  leased  Michigan
facility. The in-house assembly assured reduced costs and gave TSA total control
of quality and delivery  schedules.  By September 1993, the Company was shipping
significantly increased OHSS units due to the production line purchase orders.

In 1990,  the TSA shipped  approximately  7,480 OHSS units.  During fiscal 1997,
that  number of units  shipped had grown to 196,884  OHSS units,  of which 2,472
units were shipped to Venezuela

In January  1996,  TSA started  shipments of a new Jeep(R)  Wrangler  OHSS model
designed for the completely redesigned Wrangler.  Although no formal commitments
beyond  model  year 1997 have been  received,  the  Company  believes  that this
program is effective at least  through  year 2003.  In August 1997,  the Company
started shipping units for the new Grand Cherokee vehicle, a new production line
contract the Company had been awarded in 1996.  The Grand  Cherokee  contract is
expected to run through the end of fiscal 1998.

During the fourth quarter of fiscal 1997, the Jeep(R) Cherokee  contract,  which
accounted for approximately 44% of TSA's fiscal 1997 revenues expired.  Based on
the anticipated sales of TSA's two remaining production line contracts (Wrangler
and Grand  Cherokee),  TSA  believes it can reduce the impact of the loss of the
Cherokee Program during 1998, excluding any additional after-market revenue that
can be  generated  from new  programs,  to a level where total 1998 TSA revenues
will approximate 70 to 75% of 1997 levels.

The Company  believes it can meet additional  potential demand for its OHSS from
present or new customers due to available capacity at TSA's plant. Components of
the OHSS such as speakers,  grills,  wiring harnesses,  housings and dome lights
are sourced  either by the Company or the OEM customer.  Back-up  supply sources
are available for all components.



<PAGE>



ITEM 1.  BUSINESS (continued)


During  fiscal 1997 the Company  applied  for new patents  covering  several new
potential  vehicle sound  enhancement and modification  devices unrelated to the
OHSS.  The goal of the new designs is to open up a wider target  market range of
vehicles  than the truck,  van and sport  utility  vehicle  market.  The Company
believes  that some of the  concepts  submitted  will  receive  patents and will
eventually lead to the development of one or more commercially  viable products,
however;  there can be no assurances  that any patents will be received,  and if
received,  will result in the  generation of a significant  source of revenue in
the foreseeable future.

In addition to the new product  concepts  described  above,  in 1997 the Company
began seeking  strategic  alliances with several major  automobile  after-market
retailers.  On June 23, 1997 the Company  entered into an agreement with Kenwood
U.S.A.("Kenwood")  to design and build custom  overhead  mounted  enclosures  to
house  Kenwood's  high  quality  speakers.  At that time TSA began  working with
Kenwood on a custom  designed  OHSS for a high volume  pick-up  truck.  In early
January,  1998 this new after-market  product will be displayed at the Consumers
Electronic Show in Las Vegas,  Nevada and will appear in Kenwood's 1998 catalog.
In addition to Kenwood,  the Company is in discussions  with several other major
after-market retailers to produce similar type custom products.

Due to the  receipt by TSA in both 1996 and 1997 of  Chrysler's  Gold  Pentastar
award for  quality,  performance  and  on-time  delivery,  TSA's  unique  patent
position and due to TSA's growing visibility in the overhead speaker market, TSA
anticipates  receiving some new  aftermarket  contracts and developing  products
that will result in significant  revenues during the latter part of 1998 and for
years beyond;  however,  there can be no assurances  that these contracts can be
obtained or that the new products  developed,  if any, will offset or exceed the
loss of the profit on the Cherokee contract.

Oil Analysis
Oil analysis is a 50-year-old technology initially used by the railroad industry
to monitor the internal condition of their engines.  Over the past 30 years, use
of the  technology  expanded and oil analysis is now widely used for  diagnostic
and  preventative  maintenance  programs for equipment in the aircraft,  marine,
heavy duty vehicle,  industrial machine, defense and automotive industries.  The
technology is also used for process  quality control and pipe line monitoring in
the petrochemical industry as well as many other chemical and mineral production
processes.

It is  estimated  that the size of the oil  analysis  market is in excess of two
billion  dollars.  This  includes oil  analysis  performed  by  independent  and
in-house  laboratories.  The Company  believes that the use of oil analysis will
increase as a  preventative  maintenance  and process  control  technology.  The
Company also  believes  that  advances in oil analysis  technology  owned by the
Company will permit oil analysis utilization in new markets, such as automotive,
and will  increase  oil  analysis  application  by  those  presently  using  the
technology.

Traditionally,  the service requires  extracting a small sample of used oil from
oil  lubricated  equipment  and  sending it to a  laboratory.  Scientific  tests
identify  and quantify  metal  debris that is the result of wear.  The amount of
metal  debris,  correlated  to time or mileage that the oil has been in service,
indicates if wear is normal or abnormal.  Other  laboratory  tests  indicate and
measure  if there is any  coolant or water in the oil,  the  amount of  airborne
dirt, viscosity,  acidity, depletion level of the additive package, flash point,
coloration  and many other  factors.  Oil analysis users select the tests from a
service  menu  based on their  particular  needs.  Once  the  empirical  data is
generated  by  laboratory  tests,  a trained  evaluator  reviews the results and
generates a report, which often contains service recommendations.  The report is
then sent to the end user.

ITEM 1.  BUSINESS (continued)

All major oil companies  provide oil analysis  service for their  industrial and
commercial  lubricant customers to help them monitor the service and maintenance
needs  of  their  equipment.   These  oil  companies  either  contract  with  an
independent  laboratory  for a private  label  package or perform the service in
their own laboratory.

In March of 1992,  the  Company  decided  to pursue  the  concept  of an On-Site
Analyzer using the advanced software technology, automated diagnostic system and
proprietary database developed and used at Spectro/Metrics, Inc. ("SMI"), then a
privately owned oil analysis  laboratory.  The Company entered into an agreement
with SMI to solicit  instrument  manufacturers  with the goal of  designing  and
building a low cost test instrument for use on the shop floor, which was capable
of performing many of the services provided by an oil analysis  laboratory.  The
goal was to provide  almost instant  results by  eliminating  the need to send a
sample  to  a  laboratory.  Initially,  the  Company  intended  to  license  the
proprietary  software and database  from SMI,  purchase  OSAs from an instrument
manufacturer  and either sell the  instrument  or sell the service on a per test
basis.  The Company also conducted  primary  market  research in many markets to
verify the demand, acceptability and requirements of an OSA.

In order to provide  present and  potential  users of OSAs with the oil analysis
data,  the oil  sample  must be  tested  by two  distinctly  different  types of
spectrometers:  an emission spectrometer to identify and quantify metal elements
and an infrared spectrometer to measure the physical-chemical  properties of the
used oil. Other  specifications for the instrument  included parameters such as:
user friendly,  low cost,  minimal  maintenance,  near  laboratory  accuracy and
repeatability, reliability and several minute turn around time, etc. The overall
objective  was to provide  high volume oil analysis  locations  with an OSA that
delivers acceptable data in minutes at about the same price they pay for similar
data by sending samples to a laboratory.

Under their agreement,  the Company and SMI jointly  developed an initial design
that outlined the flow of oil and information in a potential instrument, defined
the  specifications  required  by the  target  market  and  identified  the user
friendly   aspects.   The  instrument   considerations   included  cost  limits,
calibration,   diagnostic   and  service   issues.   The   concept   design  and
specifications  were presented to several  instrument  manufacturers  around the
world.

In January  1993,  the  Company  and SMI  entered  into an  initial  development
agreement  with the Thermo  Jarrell  Ash ("TJA")  Division of Thermo  Instrument
Systems,  Inc.  to  jointly  develop  an OSA with  both  emission  and  infrared
capability.  The  intent of the  agreement  was to  provide  TJA with  exclusive
manufacturing  rights in exchange for their development  expense and the Company
would receive exclusive  distribution  rights to the petrochemical and synthetic
lubricants market while TJA could pursue other markets. Under the agreement, TJA
was responsible for all hardware  included in the instrument as well as software
for each individual spectrometer. The Company was responsible for the analytical
software including  quantification files and database and the overall instrument
operating software.

On March 3, 1995,  the  Company and TJA signed a long-term  OSA  agreement.  The
agreement  provides for  exclusive  manufacturing  rights for TJA and  exclusive
distribution  rights for the Company for  petrochemical  products and synthetics
used as  lubrication.  The Company has received three patents on various aspects
of the instrument and applied for several others.  The Company believes that TJA
has also applied for and received patents on the instrument.  There is presently
no known  technology  competitive to OSA. The  proprietary  nature of the OSA is
also  protected by trade  secrets,  high cost of  development,  requirement of a
large database and a highly complex analytical process. As of January, 1998, the
Company knows of no other  supplier  capable of developing a comparable  unit in
the near term.

In July 1993, the Company acquired SMI and Professional  Services Inc. ("PSI") ,
another oil analysis  laboratory  with a broad customer  base.  This enabled the
Company to gain  control of the  extensive  database,  technology  and  software
necessary  to develop  the OSA.  SMI and PSI were  merged  under the name United
Testing Group,  Inc.  ("UTG").  In January 1994, UTG acquired a small laboratory
located near Reno, Nevada. With this acquisition, UTG now had three laboratories
(Atlanta, Chicago, Reno) and further expanded its database.



<PAGE>



ITEM 1.  BUSINESS (continued)

From July 1993 through September 1996, UTG added a significant amount of new and
diverse oil analysis samples to its database.  This database became essential to
the  development  of the  computer  software  that  operates  and  controls  the
precision  and accuracy of the OSA machines.  In July 1996,  (1) with TSI having
completed the majority of the OSA software development and modification, (2) the
inability of UTG to become profitable at the then current sales levels,  and (3)
the decision by the Company to focus its  resources on the  proprietary  OSA and
OHSS products;  the Company agreed to sell its three oil analysis  laboratories.
(See below.)


Sale of United Testing Group Assets - Discontinued Operations

On  July  31,  1996,  the  Company  entered  into a  non-binding  Memorandum  of
Understanding  to  sell  substantially  all of the  assets  of its  wholly-owned
subsidiary,  UTG,  now  called  TSOA to  Conam  Inspection,  Inc.,  ("Conam")  a
subsidiary of Staveley Industries, plc ("Staveley") from the United Kingdom.

On September 12, 1996,  the Company  agreed to the  financial  terms of the sale
with Conam and adopted a plan to discontinue  UTG  operations  effective for the
Company's fiscal year ended September 30, 1996. On October 30, 1996, pursuant to
an Asset Purchase Agreement (filed by the Company on Form 8-K dated November 12,
1996) ("Agreement") the Company sold substantially all of UTG's assets to Conam.

Under the financial  terms of the Agreement,  Conam  purchased for $3,348,910 in
cash,  after closing  adjustments,  all of UTG's property,  plant and equipment,
deposits,  supplies inventory,  trademarks and patents, and goodwill, and agreed
to assume  substantially  all of UTG's  liability  for  outstanding  prepaid oil
analysis kits, and the liability for various equipment and facility leases. (See
Financial Statements and Supplementary Data, Note 3 - Discontinued  Operations.)
Of this amount $200,000 was placed in an escrow account for a one-year period to
cover  undisclosed  liabilities  not assumed by Conam.  On November 5, 1997, the
escrow  balance of $200,000 and $ 9,620 in accrued  interest was returned to the
Company.

After the  transaction  of October 30, 1996,  UTG retained  ownership of all pre
October  30th net trade  accounts  receivable  balances  amounting to $573,076 .
During  fiscal 1997,  the Company  collected all of the  outstanding  receivable
balance.  Also, as part of the transaction,  the Company maintained ownership of
its proprietary oil analysis database used for creating quantification files for
the  Company's  OSA units.  Conam  agreed to lease this  database for a ten-year
period for a cash prepayment of $100,000. For an additional payment of $100,000,
Conam also agreed to lease two OSA units for a three-year  period with a nominal
buyout at the end of the lease.  During  fiscal  1997,  the  Company  recognized
$43,333 in revenue from the lease of the database and two OSA units.

OSA Development

In July 1993, OSA Inc.  ("OSAI") was formed as a wholly-owned  subsidiary of the
Company to exclusively  develop the OSA program.  On September 12, 1996 pursuant
to the restructuring,  the name of OSAI was changed to TSI. (See  "Restructuring
of TSI" in this Business Section.) The Company, since 1993, has staffed TSI with
spectroscopists,  instrument  specialists,  sales  and  marketing,  systems  and
programmer   personnel   as  well  as   technicians   capable  of  assisting  in
installation, operation and training.

During August 1993, TJA and OSAI produced an Alpha developmental  prototype that
appeared to be able to meet the requirements and specifications  established for
the OSA.  In December  1993,  TSI  introduced  the first OSA Beta  prototype  at
Chevron's national oil distributor  convention in San Diego.  Concurrently,  TSI
placed an order with TJA to manufacture  additional  Beta OSA units.  The intent
was to place OSAs in the field at various  locations  to identify any issues yet
to be resolved before a final design was established for larger distribution.




<PAGE>



ITEM 1.  BUSINESS (continued)

During 1993,  the Company  confirmed  with several oil companies that they had a
strong interest for OSA use in their operations for process  control,  pipe line
monitoring, and maintenance of equipment such as compressors, pumps, engines and
gear cases. The petroleum processing industry,  including refining, blending and
recycling,  is today a large user of oil  analysis.  Presently,  oil  production
facilities  rely on in-house  central  laboratories  for quality control testing
after each  production  process.  It generally  takes more than six hours to get
results  which  determine  if the  product  is  acceptable  to go on to the next
process  or to be  shipped.  OSA has the  potential  to become an at, or on-line
process controller which could provide operators with almost instant information
concerning  the quality of the  product.  This would permit  adjustments  to the
process to keep the product "in spec",  creating  significant  cost  savings and
increases in production speeds.

In December  1993,  the Company  signed a  confidentiality  agreement with Exxon
corporation  ("Exxon")  and  began  evaluating  the  OSA  capability  for use in
monitoring  equipment  for  maintenance,  such  as  compressors,  as well as for
process control in the refining operation. Encouraged by the preliminary results
after  evaluating a variety of petroleum and lube oil products,  the Company and
Exxon  signed a lease in July of 1994 for three OSA units,  Two were  designated
for process  control  (`refinery OSA units") and one for equipment  maintenance.
All  three  were  initially  operated  to  evaluate  durability,   accuracy  and
repeatability,  with  data  compared  to  the  internal  Exxon  quality  control
laboratory.

The equipment  maintenance unit, with enhancements,  has met the requirements to
be used  regularly,  although  revenue to date has been nominal.  The Company is
working on further  hardware and software  enhancements  to improve the economic
viability of the OSA for equipment maintenance by expanding its capability.

The process  control unit  project,  which also  started in 1994,  was much more
difficult, in terms of hardware and software development, than anticipated. From
1994 through mid 1997, the Company dedicated significant resources to modify and
enhance the two refinery OSA units in order to meet Exxon's stringent and highly
technical  requirements.  Although  significant  progress was made,  and certain
milestones  were  achieved,  the refinery  OSA units did not receive  production
approval  from  Exxon in 1997.  The  reliability  of the  refinery  OSA unit was
determined to be acceptable,  however,  accuracy had not reached required levels
in all areas. In order to achieve refinery production  acceptance,  all critical
test areas must generate accepted levels of accuracy.

Presently,  the  Company  continues  to  believe  that the OSA unit can  achieve
acceptance  and provide large  economic  benefits to the refinery  industry.  In
order to bolster its efforts in this area,  during the latter part of 1997,  the
Company hired a world recognized  specialist in the hydrocarbon and oil analysis
industry.  Additionally,  in December 1997, the Company  entered into a research
agreement  with the  University of  Tennessee's  Measurement  and Control Center
Engineering Center ("MCEC") which is supported by the petroleum industry.  Under
the terms of the agreement,  the Company agreed to participate in the funding of
a one year  feasibility  study on  spectroscopic  methods  on  petroleum  stream
properties.  The  financial  commitment  by the  Company  for  this  project  is
estimated to be between $75,000 and $100,000.  In addition to financial support,
the Company will,  also, send to the MCEC one of the original two Exxon refinery
OSA units to aid in their  research.  All models and data  derived in this study
will become the exclusive property of the Company.

The Company  believes  that this research  study at the  University of Tennessee
will  ultimately  result in the  development of an OSA unit that will meet Exxon
and other refinery requirements.  However, due to previous delays and the length
of the project, ongoing and changing technical requirements,  and the difficulty
in introducing and receiving customer  acceptance for new technology,  there can
be no assurances  as to the success or timing of future Exxon or other  refinery
OSA purchase orders.

Simultaneously with the work being done on refinery OSA units, in July 1994, the
first 15 Beta equipment  maintenance  OSA (the original basic design) units were
shipped to various  business test sites.  From July 1994 and through  mid-August
1995, the Company and TJA identified and corrected many unexpected  design flaws
and made modifications  necessary for the OSAs to operate reliably. Due to these
engineering changes, the Company was unable to generate any revenue on these OSA
units.



<PAGE>



ITEM 1.  BUSINESS (continued)

By the end of August 1995, the Company had  retrofitted  all existing Beta units
at customer  sites and began  shipping the newly  designed  units to  additional
customers for evaluation  and testing.  In September  1995, the customers  began
re-testing the OSAs in order to ensure the required  reliability and performance
existed.

During 1996 and 1997,  the Company  has  continued  to send OSA units to various
test market locations in diverse  industries and has generated a nominal amount
of revenue  from  leased OSA units.  In 1997,  the Company  completed  the first
outright sales of two OSA units in the OEM powertrain  development industry. One
unit was sold to Chrysler in June 1997 for $ 149,500. The other unit was sold to
Hyundai  Corporation  in  February  1997 for $  145,200  In  October  1997 , TSI
received  an award  from  Chrysler  verifying  that the OSA unit  that  Chrysler
purchased had generated a $2,000,000  cost savings for Chrysler  under the terms
of its Supplier Cost Reduction Program ("SCORE").

Also,  based on market  information  obtained at test  locations the Company has
modified  its pricing  strategy to match the  economics  of various OSA markets.
These  pricing  guidelines  now offer the  customer  five  different  methods of
obtaining the benefits of OSA usage.  These  methods are (1) outright  purchase,
(2) operating leases,  (3) capital leases,  (4) per click usage, and (5) several
other  pricing  structures  whereby TSI  provides for the rental of both the OSA
unit and a trained operator on hourly basis or lease basis.

As of January 9, 1998, the Company is generating  ongoing  nominal monthly lease
revenue from five leased OSA units at (1) a truck stop location,  (2) automobile
dealership, (3) OEM engine development facility, (4) a municipality and (5) at a
refinery. In addition, the Company is recognizing revenue from the two OSA units
leased to Conam in  connection  with sale of the UTG assets (see "Sale of United
Testing Group Assets- Discontinued Operations" in this Business Section), and is
receiving nominal revenue from a Company-owned test mini-lab at its TSA facility
in Troy, Michigan.

Currently,  there are OSA units at 14  different  locations in a wide variety of
industries  in various  stages of  testing.  The Company  anticipates  receiving
purchase  orders to buy or lease one or more OSA units  from some of these  test
locations;  however,  there can be no assurances as to the quantity of units and
the timing of these purchase orders.

Each OSA currently has the capacity to effectively  analyze  approximately eight
samples per hour. Software  enhancements  currently in process will increase the
samples  per hour to 12. The  Company  believes  that the OSA units are now user
friendly,  self-calibrating,  self-diagnostic,  and capable of being operated by
non-technical personnel in a non-laboratory environment.

Although  the  commercialization  by the  Company of OSA units has  occurred  at
slower than anticipated pace, the Company believes it has gained valuable market
information  from OSAs at test locations that has enabled it to identify primary
and secondary  markets and to devise a strategy to help  accelerate  OSA revenue
growth.  The  Company  currently  believes  that  its  primary  markets  are  in
powertrain  development  locations,  franchising  mini-laboratories  which would
encompass   new  and   used  car   dealers   and  car   "superstores",   fleets,
municipalities,  quick  lubes,  auto and truck  service  centers,  truck  stops,
industrial and marine locations, and the refinery and petrochemical industry.

To  date,  the  Company  has  used  its  existing  cash  resources  to fund  the
development of OSA units and the  operations of TSI.  Future units will continue
to be paid for with  available  cash  and  credit  lines,  if  necessary. (See
Financial  Statements and Supplementary Data, Note 10 and Debt and Liquidity and
Capital Resources in Item 7 - Management's  Discussion and Analysis of Financial
Condition and Results of Operations.)

TSI Marketing and Franchise Agreements
During 1997, the Company and Conam, the acquirer of the UTG assets, entered into
two non-exclusive  marketing  agreements to help market and commercialize OSA in
the area of  franchising,  and in the refinery  industry.  Throughout  1997, the
companies worked together with the goal of entering into an exclusive  long-term
arrangement to distribute and market OSA on an exclusive basis in North America.
On December 31, 1997,  both  agreements  expired,  however,  Conam  continues to
operate one pilot OSA franchise  location and  discussions  are  continuing on a
limited basis.


<PAGE>



ITEM 1.  BUSINESS (continued)

Currently,  the Company  continues  to seek  strategic  business  partners  both
domestically  and   internationally   in  synergistic   industries  who  possess
established  infrastructure  and  resources to help improve and  accelerate  OSA
commercialization.

Restructuring of TSI Operations
As a result of the sale of UTG and favorable  initial interest in OSA by several
Detroit  OEMs in fiscal  1996 the  Company  incurred  a  $725,000  restructuring
charge,  relocated  TSIs office and certain  personnel  from Atlanta to Troy and
made several management  changes.  In 1997, the intended impact of these changes
which  was to  increase  OSA  revenues  thus  helping  to  improve  consolidated
operating results,  did not materialize.  Consequently,  during fiscal 1997, the
Company initiated another Company-wide restructuring.

In a series of moves,  the Company hired a new Chief Executive  Officer ("CEO"),
closed its New York City investor relations office,  consolidated its Farmington
Hills,  Michigan TSI operations into its Troy, Michigan TSA facility and reduced
overall Company-wide  personnel by approximately  one-third.  This restructuring
resulted in a one-time charge to 1997 earnings of  approximately  $416,000;  and
reduced Company expenses on an annualized basis by approximately $2,000,000.

ARCS (Acceleration Restraint Curve Safety Seat)
Over the past seven  years the Company has  developed a  proprietary  technology
involving  controlled  seat motion that occurs at the instant of a frontal crash
to help  restrain  vehicle  occupants and assist  automakers in meeting  Federal
passive  restraint laws. The Company  labeled the technology ARCS  (Acceleration
Restraint  Curve Safety Seat).  The primary  objective of this  technology is to
provide supplemental lower torso restraint to alleviate abdominal,  hip, leg and
ankle  injuries  caused by unwanted  lower torso motion often  experienced  in a
severe  frontal  crash.  The secondary  objective of the technology is to better
position the upper torso in a frontal crash and alleviate  injuries to the head,
neck  and  chest.  In a  severe  frontal  crash,  occupants  restrained  by  any
combination of air bags and seat belts may  experience  upper and/or lower torso
injuries caused by "submarining" under the lap belt, shoulder harness and/or air
bag.  The ARCS  technology  is designed to reduce or  alleviate  those  injuries
caused by  submarining.  The ARCS  technology  is intended to become part of the
overall  restraint  system along with air bags and seat belts,  eliminating  the
need and expense of knee  bolsters,  allowing more passenger leg room and giving
instrument panel designers more latitude.

A prototype seat was built in October 1990. The Company selected the Wayne State
University Biomechanics Department, based in Detroit, to conduct the sled tests.
The sled test  results  proved  ARCS'  ability  to  provide  significant  injury
reduction  potential for vehicle  occupants  during a frontal crash.  Sled tests
were conducted with the occupant  restrained by a shoulder  harness only without
the use of an air bag or lapbelt,  and the instrument  panel and steering column
were removed.  During the third and fourth quarters of fiscal year 1994, a major
Detroit  automaker  sled-tested  the ARCS  technology in a second  vehicle.  The
results were within Federal Safety Standards with the occupant  restrained using
the ARCS seat motion for the lower torso and an air bag for the upper body.  The
Company  is  unaware  of  any  other  moving  seat   technology  that  has  been
successfully  tested by a major automobile  manufacturer.  In December 1996, the
U.S. Patent Office granted patent protection for ARCS technology.

The Company believes  research and development costs to the Company for the ARCS
is complete and all future development and application  engineering will be paid
for by the vehicle and/or seat  manufacturers.  Due to the requirement to design
and build actual  pre-production  hardware for automaker testing, the Company is
attempting  to  establish  a  strategic   partner   relationship   with  a  seat
manufacturer.  The Company hopes to sell the technology and maintain a long-term
opportunity  for future  royalty  income.  Based on lead times in the automobile
industry,  royalties  would not be generated for a minimum of four years after a
contract is signed;  however,  due to the increasing  regulation and scrutiny on
air  bag  technology,  the  time  period  for  implementation  of  an  alternate
technology could be shortened.


<PAGE>


ITEM 1.  BUSINESS (continued)

EFECS
In early 1990, the technology  licensing office at M.I.T.  offered the Company a
new  technology  that  promised to improve the fuel  economy and reduce  exhaust
emissions of a spark-ignited  engine,  without decreasing power or driveability.
The technology,  named EFECS,  Engine Fuel Economy  Emissions  Control Reduction
System,  was developed by an engineer who is also a member of the M.I.T.  racing
team. EFECS is based on a patented computer-controlled engine operation strategy
and employs its own  patented  high  powered  variable  output  ignition  system
coupled to a unique spark plug design. The system is intended to help automakers
meet  future  stringent  exhaust  emission   standards,   including  cold  start
emissions,  as well as improve fuel economy.  The EFECS technology may solve the
major problems  experienced with lean burn engine operation in the past and also
provide a cost and weight  effective  solution  to cold start  emissions.  These
problems  include  (i)  control of the  transient  fuel air  charge to  maintain
driveability,  (ii) control of a variable air fuel ratio,  (iii) maintaining low
NOX in a lean burn  environment,  (iv)  ignitability  of a lean  mixture and (v)
misfire control.  EFECS' self-tuning  capability  eliminates the need to tune-up
the engine and keeps it running efficiently for the life of the vehicle. It also
provides diagnostics and trouble-shooting  information. In May 1995, the Company
sold the EFECS  technology to Adrenaline  Inc., the original  inventor of EFECS,
pursuant to a future royalty  arrangement to accelerate  royalty payments to the
Company and to place a ceiling on the amount of total  royalties  payable to the
Company.  This  agreement was  subsequently  amended on February 22, 1996.  (See
Financial  Statements  and  Supplementary  Data,  Note  17 - Sale  of  EFECS  to
Adrenaline,  Inc.) . During  Fiscal  1997,  the Company had  received a total of
$50,000 in royalty payments.

Significant Customer Information
During 1997,  approximately  97% of the Company's  revenue was derived from OHSS
sales to Chrysler Corporation. Revenue from the UTG operations has been excluded
from total revenue.  (See Item 8 - Financial  Statements and Supplementary Data,
Note 3 Discontinued  Operations.) For significant  customer information see Item
8. - Financial  Statements and  Supplementary  Data, Note 16 - Concentration  of
Credit Risk.

Government Regulation
The  Company  is subject  to  government  regulations  generally  affecting  all
businesses.  UTG, while it was in operation,  routinely  disposed of used oil in
the ordinary  course of its  business and as such was subject to federal,  state
and  local  regulations.  To handle  this oil  disposal,  UTG hired a  licensed,
insured third party. The Company believes that UTG and its predecessors  were in
material  compliance  with all rules and  regulations of the federal,  state and
local agencies and agreed to indemnify  Conam, the purchaser of UTG, against any
compliance penalties, if any should arise .

Seasonal Information
The Company's management believes that their business is not seasonal,  however,
its OHSS product sold by TSA is subject to normal periods of OEM production line
shutdown for vehicle  model year  changeovers.  This  shutdown  period  normally
occurs for  periods of time  ranging  from two to six weeks and not  necessarily
occurring during the same quarter or quarters during each fiscal year.

Offices and Employees
The Company maintains its principal administrative and investor relations office
in Palm Beach Gardens,  Florida. The Company's automotive  subsidiary,  TSA, and
TSI, the OSA subsidiary,  share a 45,000 square foot facility in Troy, Michigan,
which includes administrative, engineering and assembly operations. TSI also has
a facility in Atlanta,  Georgia. The Company employs  approximately 60 full-time
and two part-time people.




<PAGE>



ITEM 2. DESCRIPTION OF PROPERTY

The following table sets forth the location and use of the Company's facilities.
All of the facilities are leased.

             USE          LOCATION                        EXPIRATION
Corporate Headquarters    Palm Beach Gardens, Florida     January 1999
TSA and TSI               Troy, Michigan                  June 2000
TSI                       Atlanta, Georgia                September 2001

All  facilities  have excess  capacity  and the  capability  to  accommodate
significant future growth.  Each of these facilities is in good condition.

ITEM 3. LEGAL PROCEEDINGS

NONE


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER'S

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the fiscal year ended September 30, 1997.


ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information For Common Stock
The following table sets forth for the periods  indicated the range of quarterly
high and low  representative  market prices for the Company's  common stock. The
Company's  common stock trades on the American  Stock  Exchange under the symbol
"TPS".

<TABLE>

<S>                                     <C>                <C> 
                                         Fiscal 1997         Fiscal 1996
                                         -----------         ------------
                                          High    Low       High      Low
First Quarter  (December 31)            5-5/16   2-3/16    8-7/8     6-3/8
Second Quarter (March 31)               3-5/16   1-3/4     7-3/8     5
Third Quarter  (June 30)                2-7/8    1-3/16    8-3/16    5-5/16
Fourth Quarter (September 30)           2-1/4    1-1/8     7-1/16    3-3/8

</TABLE>

Holders
As of January 6, 1998, there were  approximately  1,263 holders of record of the
Company's common stock.

Dividend Policy
The  Company  has never  paid cash  dividends  on its common  stock.  Payment of
dividends is within the discretion of the Company's  Board of Directors and will
depend upon the  earnings,  capital  requirements  and  operating  and financial
condition of the Company,  and any  restrictions in loan agreements  among other
factors.  Currently,  the Company intends to follow a policy of retaining future
earnings in order to finance the growth and development of its businesses.

Share Repurchase Program
On November  12,  1996,  the Company  announced  that it put into effect a stock
repurchase  plan to  repurchase up to 400,000  shares of its common stock.  From
November 12, 1996 through April 22, 1997,  the Company had  repurchased  378,700
shares at an average  purchase  price of $3.21 per  share.  All shares of common
stock  purchased  through the period  ended  September  30, 1997 are included in
treasury stock in the  accompanying  balance sheet.  The Company  anticipates no
further stock repurchases for the immediate future.


ITEM 6.  SELECTED FINANCIAL DATA

The following table summarizes  certain selected financial data of the Company's
financial  condition  and  results of  operations  as of and for the years ended
September 30, 1997,  1996,  1995,  1994 and 1993.  The selected  financial  data
should  be  read  in  conjunction   with  Item  8.   Financial   Statements  and
Supplementary Data and Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<PAGE>

<TABLE>

AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, 1995, 1994  AND 1993
----------------------------------------------------------------------------
<S>                                           <C>                 <C>            <C>


Balance Sheet Data                                1997             1996              1995             1994             1993

Total Assets                                    $ 11,355,030      $ 16,012,716     $ 19,109,250     $ 17,855,313     $ 10,632,917
Long-term Debt                                     3,020,000         3,020,000        2,060,000       ---                 458,368
Total Liabilities                                  6,870,577         7,095,991        4,704,152        2,351,143        2,784,104
Stockholders' Equity                               4,484,453         8,916,725       14,405,098       15,504,170        7,848,813

Statement of Operations Data

Net Sales                                        $16,984,123       $16,146,524     $ 13,907,354    $   9,259,581    $   2,536,340
Income (Loss) from Continuing
     Operations                                  (3,304,057)       (4,831,786)      (2,820,492)        1,840,366      (3,671,212)
Net Income (Loss)                                (3,235,316)       (6,698,787)      (3,399,796)        2,014,577      (3,610,226)
Income (loss) per Common Share
     from Continuing Operations                       (0.12)            (0.17)           (0.10)             0.06           (0.18)
Net Income ( Loss) per Weighted
     Average Common Share                             (0.12)            (0.24)           (0.12)             0.07           (0.18)

</TABLE>


See Notes to Consolidated  Financial  Statements for information on transactions
and  accounting  classifications  which have affected the  comparability  of the
periods  presented  above.  The Company has not declared  cash  dividends on its
common stock for any of the periods presented above.


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

Results of Operations
On October 30, 1996, the Company sold certain assets and liabilities of the
Company's oil analysis  subsidiary,  UTG. (See Item 8. Financial  Statements and
Supplementary Data, Note 3. Discontinued  Operations.  Therefore, the operations
of UTG for 1996 and 1995 are excluded from the analysis below.


1997 Compared to 1996

Total revenue for the year ended September 30, 1997 was $16,984,123  compared to
$16,146,524  for the year ended  September 30, 1996,  an increase of 5.2%.  This
nominal  increase  is  attributable  to  an  increase  in  revenues  at  TSA  to
$16,580,270  in fiscal  1997  compared to  $16,102,523  in fiscal  1996;  and an
increase in  revenues at TSI to $403,853 in fiscal 1997  compared to $44,001 for
fiscal  1996.  The  increase  in revenue  at TSA is  attributable  to  increased
production  line  sales of OHSS.  The  increase  in  service  revenue  at TSI is
attributable  to the outright sale of two OSA units for $294,700;  and due to an
increase in operating lease revenue from the lease of OSA units.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)


The gross  profit  margin of 33.4% for the year  ended  September  30,  1997 was
comparable  to a gross profit  margin of 33.3% for the year ended  September 30,
1996. This slight increase is attributable to a decrease in product sale margins
of OHSS at TSA from 33.2% in 1996 compared to 32.4% in 1997, partially offset by
service  revenue  margins of 73.5% on revenues  of $403,853 in 1997  compared to
nominal sales in 1996.

General  and  administrative  expenses  decreased  $447,770  for the year  ended
September 30, 1997 compared to the year ended  September 30, 1996. This decrease
is attributable to personnel  reductions at the Corporate office during the year
and due to the  Company-wide  restructuring  which  occurred  during  the fourth
quarter of fiscal 1997.

Selling and  marketing  increased  40.1% for the year ended  September  30, 1997
compared to the year ended  September  30,  1996.  The  increase  was  primarily
attributable to the continued marketing and promotional activities in support of
the OSA.

Depreciation and  amortization  increased 19.3% for the year ended September 30,
1997 compared to the year ended  September  30, 1996.  The increase is primarily
attributable  to  purchases of  $1,442,265  in capital  assets  which  primarily
related to  $1,055,572 in capital  expenditures  for the OSA.  Depreciation  and
amortization  of $319,324 was allocated to cost of sales as it directly  related
to the  products  and  services  sold during the year ended  September  30, 1997
compared to $307,373 for the year ended September 30, 1996.

The restructuring expense of $415,830 for the period ended September 30, 1997 is
related to the Company-wide  restructuring which took place in the forth quarter
of fiscal 1997. (See Item 8 - Financial  Statements and Supplementary Data, Note
20.Restructuring)

Interest  expense  increased  26.7% to $350,281 for the year ended September 30,
1997 compared to $276,566 for the year ended  September 30, 1996.  This increase
is  attributable to new borrowings in the fourth quarter under the Company's new
credit lines (See Item 8 - Financial  Statements and Supplementary Data Note 10.
Debt, and "Liquidity and Capital  Resources").  The increase in interest expense
was  partially  offset by an increase of  interest  income in the fourth  fiscal
quarter of 1997 compared to previous  quarters in 1997, due to required  minimum
borrowing under the terms of the Company's new credit lines.

Other income for the year ended  September 30, 1997 was $7,345 compared to other
expense of $68,099  for the year ended  September  30,  1996.  The  increase  is
primarily  attributable  to the  inclusion  in 1997 of one  full  year of  EFECS
royalty income compared to a partial year of EFECS income in the prior year.

The pre-tax loss from  operations for the period ended September 30, 1997 before
the restructuring charge was $2,182,630 compared to a pre-tax loss of $2,331,219
before the restructuring  charge and loss from  discontinued  operations for the
period  ended  September  30,  1996.  The losses in both  periods are  primarily
attributable  to losses at the TSI  subsidiary  to develop  the OSA  product and
corporate expenses offset by profits generated by TSA.



<PAGE>




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS  (continued)

1996 Compared to 1995

Total revenue for the year ended September 30, 1996 was $16,146,524  compared to
$13,907,354  for the year ended  September 30, 1995,  an increase of 16.1%.  TSA
generated  total revenue for the year ended  September  30, 1996 of  $16,102,523
compared to $13,893,459  for the year ended September 30, 1995. This increase of
15.9% is due to increased  sales of the OHSS.  TSI's revenue for fiscal 1996 and
1995 was nominal.

The gross profit margin for the year ended September 30, 1996 was 33.3% compared
to 37.2% for the year ended  September  30, 1995.  The decrease in margins below
comparable  levels is primarily  attributable  to  increased  labor and overhead
costs relating to product sales at TSA.

General and administrative  expenses decreased 4.6% for the year ended September
30, 1996 compared to the year ended  September 30, 1995.  The decrease is due to
personnel  reductions and improved  efficiency at the Company's corporate office
which were offset by increased  expenses at the Company's  subsidiaries  TSA and
TSI.

Selling and marketing  expense  increased 50.6% for the year ended September 30,
1996 compared to the year ended  September 30, 1995.  This increase is primarily
due to increased salary and commission expense at TSA and TSI.

Depreciation  and  amortization  expense  increased  20.9%  for the  year  ended
September 30, 1996 compared to the year ended  September 30, 1995.  The increase
is  primarily  due to  increased  depreciation  at TSI which is  related  to the
purchase of  additional  OSA units  during the year ended  September  30,  1996.
Additional  depreciation and amortization of $307,373 has been allocated to cost
of sales as it directly  relates to the products and services sold during fiscal
1996.

Interest income increased $49,553 or 78.8% for the year ended September 30, 1996
compared to the year ended September 30, 1995,  which was due to interest earned
on increased funds that were invested during the current fiscal year.

Interest expense  increased  $216,266 during the fiscal year ended September 30,
1996 as compared to the year ended  September  30, 1995.  The increase is due to
the  interest  expense on the  Company's  $3,020,000  nine  percent  (9%) Senior
Subordinated  Convertible  Notes  which were issued in June and October of 1995.

Other  income  decreased  $221,589  for the year  ended  September  30,  1996 as
compared  to the same  period  in 1995.  This  decrease  is due to  proceeds  of
$229,500 from Professional Services Industries,  Inc.("PSI") received in June of
1995. 

Income tax expense  increased  $933,300 for the year ended September 30, 1996 as
compared to the year ended September 30, 1995. The increased tax expense was due
to a reversal of $1,365,000 of the Company's previously established tax asset as
a result of the Company not meeting  expected  taxable income in fiscal 1996. In
addition, TSA had increased state tax expense of $117,500 during fiscal 1996.

The increase of $3,298,991 in the net loss for the year ended September 30, 1996
as compared to the same period in 1995 is  primarily  related to the  $1,804,791
loss from the disposal of UTG as well as a restructuring reserve of $725,000 set
up for TSI. In  addition,  tax expense  increased  $933,300  primarily  due to a
reversal of the Company's tax asset.


<PAGE>



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS  (continued)


The pre-tax loss from  operations for the period ended September 30, 1996 before
restructuring  charge was $2,331,219 compared to a pre-tax loss of $2,366,527 in
1995. The losses in both periods are primarily  attributable  to expenses at TSI
to develop the OSA product,  and corporate  expenses offset by  profitability at
TSA.


Liquidity and Capital Resources

Net cash flows  used in  operations  during  the  current  fiscal  year  totaled
($1,794,090).  The usage of cash is primarily  attributable  to a net  operating
loss excluding  depreciation  and  amortization,  of  $1,804,521,  a decrease in
accounts payable and accrued  liabilities of $1,855,125,  offset by a decease in
accounts receivable of $1,845,369.

Net cash provided by investing  activities was  $2,445,255.  This source of cash
was attributable to the sale of net assets of TSOA,  formerly UTG, of $3,540,579
and $361,056 related to the  reimbursement of tooling costs offset by $1,442,265
expended for capital assets and $14,115 for patent costs.

Net cash  provided by  financing  activities  was  $799,385  which  included the
exercise of stock  options and  warrants  (exercise  prices  ranged from $.5625-
$1.786) that generated approximately $20,613 in net proceeds.  Also, the Company
borrowed  $1,966,341 from its new Credit Facility with NationsCredit  Commercial
Corporation.  (See Note 10. Debt) which was offset by the  repurchase of 378,700
shares of the Company's  common stock at an average price of $3.21 per share for
a total of $1,217,569.

On July 1, 1997, the Company  entered into a three-year  $5,000,000  asset-based
financing   agreement   ("Credit   Facility")  with   NationsCredit   Commercial
Corporation  ("Nations").  This Credit  Facility  replaced the Company's  former
$3,750,000 facility. The new Credit Facility,  which is secured by substantially
all of the assets of the Company  enables the Company to borrow up to $5,000,000
based upon certain  percentages of accounts  receivable and inventory  balances.
The Credit Facility allows for borrowing of up to 85% of accounts receivable and
50% of  inventory  for both TSA and TSI.  The  overall  sub-limit  of  borrowing
against  inventory is $1,500,000.  The interest rate on this Credit  Facility is
1-1/2%  over the prime  rate and is  payable  monthly  with a  required  minimum
borrowing  level of $2,500,000 for the fee calculation  purposes.  The Company's
effective  interest rate at September 30, 1997 factoring the interest  earned on
used drawn funds was 5.44%.  As of September 30, 1997 and December 18, 1997, the
entire available borrowings on this Credit Facility of $1,996,341 and $1,911,771
were outstanding, respectively.

The Credit  Facility  calls for certain  financial  covenants  that, if not met,
would cause a default  under the  Agreement and increase the interest rate by 2%
over current  levels.  As of  September  30, 1997,  the covenant  requiring  the
Company's fiscal year pre-tax  operating loss, not to exceed certain levels,  as
defined in the Agreement has not been met by the Company.  Nations has agreed to
waive this  covenant  which is  measured  on an annual  basis.  As a result,  in
January  1998 the Company  paid a one-time fee to Nations of $25,000 to maintain
the current rate of prime plus 1-1/2% and avoid the 2% interest rate increase.

On June 9, 1995, the Company entered into an agreement with advisory  clients of
Ganz Capital Management,  Inc., now Mellon Private Asset Management  (Mellon),
whereby the holders would purchase $3,020,000 in Senior Subordinated convertible
notes from the Company.  In June 1995,  the Company  issued  $2,060,000  of nine
percent (9%) convertible  notes (The Notes)  maturing in June 2000. After June
9, 1996,  the Notes can be prepaid by the  Company  without  penalty  and can be
converted by the holders into fully  registered  shares of the Companys  common
stock at a conversion  price of $10 per share.  The Company issued the remaining
$960,000 in notes and  received the related  proceeds on October 12,  1995.  The
Notes are subject to an  Indebtedness  to Equity ratio that cannot exceed 1.5 to
1.0. As of September  30, 1997,  the Company was in  compliance  with the ratio.
However,  due to the Companys historic losses and due to the uncertainty on the
timing of OSA revenues, there is a possibility that the Company will exceed this
ratio during  fiscal 1998.  In the event the ratio is not met and the Company is
unable to receive a waiver from Mellon, a Board member of the Company has agreed
to guarantee sufficient capital infusion into the Company to maintain compliance
of this ratio through October 1, 1998 or refinance the notes to the satisfaction
of Mellon.  In  consideration  for this  guarantee,  the Company  issued  50,000
warrants at a strike price of $2.00 per share to this Board member.

As of January 1, 1998, the Company had approximately $1,750,000 of cash on hand.
Based on this cash  balance,  the Credit line and its ability to further  reduce
expenses,  if required,  the Company  believes it has  sufficient  cash flow and
liquidity  to  fund  its  current  operations  and  anticipated  increasing  OSA
commercialization.

The Company has  recently  completed  the  restructuring  of top  management  of
corporate  and  the  oil  analysis  service  segment.  (See  Item 8 -  Financial
Statements and Supplementary  Data, Note 20.  Restructuring.) New management has
devised a strategy to concentrate  marketing activities to sell or lease OSAs to
seven  specific  markets.  Additionally,  the  Company  has  continued  to  have
discussions  with potential  strategic  partners who are interested in licensing
the OSA technology for specific  industry  applications  both  domestically  and
internationally.

The Company believes that their marketing  efforts will be successful.  However,
if the  Company is unable to meet goals or to have the  necessary  resources  to
sustain their  marketing  activities it could have a material  adverse effect on
the  financial  condition of the Company.  The Company will continue to evaluate
the success of the new marketing efforts.
<PAGE>



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

Forward-Looking Statements
The statements discussed above under the Business Section, Liquidity and Capital
Resources  relating  to the  Company's  expectations  that  it  anticipates  (1)
generating  OSA  revenue  from OSA units at  current  test  sites and from other
sources, (2) entering into strategic  relationships,  (3) obtaining  significant
dealer installed and aftermarket OHSS programs,  (4) future  production line TSA
orders, (5) development of a production line ready OSA unit at Exxon or at other
refineries,  (6) receipt of patent protection by TSA on new concepts  submitted,
(7) the  development  by TSA of new  sound  and  OHSS  compatible  with a larger
population of vehicles than  currently  being  produced for, (8) the increase in
the usage of oil  analysis as a  preventative  maintenance  and process  control
technology,  and (9) entering  into an agreement to license the ARCS  technology
are  forward-looking  statements  within  the  meaning  of  Section  27A  of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Important  factors that could cause actual results to differ materially from the
forward-looking  statements  include the following:  (1) a decline in production
levels at Chrysler for vehicles  installing OHSS, (2) the continued  reliability
of the OSA technology over an extended period of time, (3) the Company's ability
to market OSAs, (4) the acceptance of the OSA technology by the marketplace, (5)
the  general  tendency  of  large  corporations  to  slowly  change  from  known
technology to emerging new  technology,  (6) the  Company's  reliance on a third
party to  manufacture  OSAs,  and (7) potential  future  competition  from third
parties that may develop  proprietary  technology  which either does not violate
the  Company's  proprietary  rights or is claimed not to violate  the  Company's
proprietary rights.

Inflation
The impact of inflation has become less significant with dormant inflation rates
in recent years. The Company believes inflation has not had a material effect on
the Company's operations.

New Accounting Standards
In February 1997, the Financial  Accounting  Standards  Board  ("FASB")"  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share".  SFAS No. 128 supersedes the previous  standard  (Accounting  Principles
Board Opinion No. 15),  modifies the methodology  for  calculating  earnings per
share,  and is  effective  for periods  ending after  December  15, 1997;  early
adoption  is not  permitted.  Upon  adoption,  the  Company  will be required to
restate  previously  reported per share data to conform with the requirements of
SFAS No.  128.  Had the  provisions  of SFAS  No.  128  been  applicable  to the
accompanying  condensed  consolidated  financial  statements,  basic and diluted
earnings per share,  as calculated in accordance with the provisions of SFAS No.
128, would not have been different  from the per share amounts  reported  herein
for all periods presented.






<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX                                                                    Page
Report of Independent Certified Public Accountants........................18
Consolidated Balance Sheets as of September 30, 1997 and 1996.............19
Consolidated  Statements of Operations  for the Years Ended
  September 30, 1997, 1996 and 1995.......................................20
Consolidated Statements of Stockholders' Equity for the Years Ended 
  September 30, 1997, 1996 and 1995.......................................21
Consolidated Statements of Cash Flows for the Years Ended September
  30, 1997, 1996 and 1995.................................................22
Notes to Consolidated Financial Statements............................... 23

<PAGE>



                              REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of Top Source Technologies, Inc.:

We have  audited  the  accompanying  consolidated  balance  sheets of Top Source
Technologies,  Inc., (a Delaware  corporation)  and subsidiaries as of September
30,  1997 and 1996,  and the  related  consolidated  statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended September 30, 1997. These financial  statements and the schedule  referred
to below are the responsibility of the Company's management.  Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial  statements  referred to above present fairly, in
all material respects,  the financial position of Top Source Technologies,  Inc.
and  subsidiaries  as of  September  30,  1997 and 1996 and the results of their
operations  and their cash flows for each of the three years in the period ended
September 30, 1997 in conformity with generally accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the basic  financial
statements taken as a whole.  Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein in relation to the basic  financial  statements  taken as a
whole.



ARTHUR ANDERSEN LLP



West Palm Beach, Florida,
January  9 , 1998


<PAGE>





<TABLE>

                                                TOP SOURCE TECHNOLOGIES, INC.
                                                  ANNUAL REPORT ON FORM 10-K

                                                 CONSOLIDATED BALANCE SHEETS
                                               AS OF SEPTEMBER 30, 1997 and 1996
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                             <C>


ASSETS                                                                          1997                                1996
                                                                          ------------------                  -----------------
Current Assets:
  Cash and cash equivalents                                                     $ 2,103,679                          $ 653,129
  Accounts receivable trade (net of allowance of $83,650
      in 1996)                                                                    2,255,303                          4,100,672
  Inventories                                                                       881,023                            511,958
  Advances to officers                                                               57,919                                  -
  Prepaid expenses                                                                  219,446                            325,946
  Other                                                                             155,448                            111,685
                                                                          ------------------                  -----------------
Total current assets                                                              5,672,818                          5,703,390
Property and equipment, net                                                       2,147,403                          2,503,033
Manufacturing and distribution rights and patents, net                              284,562                            333,762
Capitalized database, net                                                         2,284,027                          2,494,860
Deferred income tax assets, net                                                           -                            355,000
Note receivable from officer                                                         76,002                                  -
Other assets, net                                                                   890,218                            784,203
Net assets from discontinued operations                                                   -                          3,838,468
                                                                          ==================                  =================
TOTAL ASSETS                                                                   $ 11,355,030                       $ 16,012,716
                                                                          ==================                  =================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Line of credit                                                                $ 1,996,341                                $ -
  Accounts payable                                                                  672,836                          1,836,395
  Accrued salaries                                                                    7,494                            229,939
  Accrued liabilities                                                             1,050,978                          1,520,099
  Net liabilities from discontinued operations                                      122,928                            489,558
                                                                          ------------------                  -----------------
Total current liabilities                                                         3,850,577                          4,075,991
  Senior subordinated convertible notes                                           3,020,000                          3,020,000
                                                                          ------------------                  -----------------
Total liabilities                                                                 6,870,577                          7,095,991

Commitments and contingencies (Note 11)

Stockholders' equity:
  Preferred stock - $.10 par value, 5,000,000 shares
   authorized; none outstanding                                                           -                                  -
  Common stock-$.001 par value, 50,000,000 shares
   authorized; 28,461,477 and 28,446,477 shares issued and
   outstanding in 1997 and 1996, respectively                                        28,461                             28,446
  Additional paid-in capital                                                     28,744,451                         28,723,853
  Accumulated deficit                                                           (22,939,105)                       (19,703,789)
  Treasury stock-at cost; 466,234 and  87,534 shares in 1997
    and 1996, respectively                                                       (1,349,354)                          (131,785)
                                                                          ------------------                  -----------------
Total stockholders' equity                                                        4,484,453                          8,916,725
                                                                          ------------------                  -----------------
                                                                          ==================                  =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                     $ 11,355,030                       $ 16,012,716
                                                                          ==================                  =================

  The accompanying  notes to consolidated  financial  statements are an integral
part of these balance sheets.

                                                                        19



</TABLE>
<PAGE>
<TABLE>
                                                TOP SOURCE TECHNOLOGIES, INC.
                                                  ANNUAL REPORT ON FORM 10-K

                                            CONSOLIDATED STATEMENTS OF OPERATIONS
                                    FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995

<S>                                                                          <C>                <C>                 <C>

                                                                                1997              1996              1995
-------------------------------------------------------------------------------------------------------------------------------

Product sales                                                                   $16,580,270       $16,102,523      $13,893,459
Service revenue                                                                     403,853            44,001           13,895
                                                                          -----------------------------------------------------
  Net sales                                                                      16,984,123        16,146,524       13,907,354
                                                                          -----------------------------------------------------

Cost of product sales                                                            11,197,664        10,749,431        8,739,691
Cost of services                                                                    107,044            26,772                  -
                                                                          -----------------------------------------------------
  Cost of sales                                                                  11,304,708        10,776,203        8,739,691
                                                                          -----------------------------------------------------
Gross profit                                                                      5,679,415         5,370,321        5,167,663
                                                                          -----------------------------------------------------
Expenses:
  General and administrative                                                      5,303,963         5,751,733        6,030,533
  Selling and marketing                                                           1,385,891           989,450          657,220
  Depreciation and amortization                                                   1,111,471           931,563          770,286
  Restructuring expense                                                             415,830           725,000                  -
  Research and development                                                           60,720            28,794           76,151
                                                                          -----------------------------------------------------
Total expenses                                                                    8,277,875         8,426,540        7,534,190
                                                                          -----------------------------------------------------
Loss from operations                                                             (2,598,460)       (3,056,219)      (2,366,527)
Other income (expense):
  Interest income                                                                   119,339           112,398           62,845
  Interest expense                                                                 (350,281)         (276,566)         (60,300)
  Other income (expense), net                                                         7,345           (68,099)         153,490
                                                                          -----------------------------------------------------
Net other income (expense)                                                         (223,597)         (232,267)         156,035
                                                                          -----------------------------------------------------
Loss before income taxes                                                         (2,822,057)       (3,288,486)      (2,210,492)
Income tax expense                                                                 (482,000)       (1,543,300)        (610,000)
                                                                          -----------------------------------------------------
Loss from continuing operations                                                  (3,304,057)       (4,831,786)      (2,820,492)
                                                                          -----------------------------------------------------
Discontinued operations:
   Income (loss) from discontinued operations                                        68,741           (62,210)        (579,304)
   Loss on disposal of discontinued operations                                            -        (1,804,791)               -
                                                                          -----------------------------------------------------
Net loss                                                                    ($3,235,316)      ($6,698,787)         ($3,399,796)
                                                                          -----------------------------------------------------
Loss per weighted average common share
   outstanding:
   Continuing operations                                                                 (0.12)            (0.17)           (0.10)
   Discontinued operations:
     Loss from operations                                                               -                  -                (0.02)
     Loss on disposal                                                                     -                (0.07)            -
                                                                          =====================================================
     Total                                                                               (0.12)            (0.24)           (0.12)
                                                                          =====================================================
Weighted average common shares outstanding                                       28,065,563        28,027,959       27,249,541
                                                                          =====================================================







The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.

                                                                            20


</TABLE>

<PAGE>

<TABLE>
    
                                                  TOP SOURCE TECHNOLOGIES, INC.
                                                   ANNUAL REPORT ON FORM 10-K
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                       FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<S>                                               <C>         <C>        <C>            <C>            <C>         <C>

                                                                          ADDITIONAL                                   TOTAL
                                                                           PAID-IN      ACCUMULATED    TREASURY    STOCKHOLDERS'
                                                    SHARES      AMOUNT     CAPITAL        DEFICIT        STOCK        EQUITY
                                                  --------------------------------------------------------------------------------
                                                                                                                  ----------------
BALANCE, SEPTEMBER 30, 1994                        26,716,395   $ 26,716 $ 25,214,445    $ (9,605,206) $   (131,785) $ 15,504,170

Exercise of stock options ($.28 to
   $6.50 per share)                                 1,015,082      1,015    2,299,709               -           -       2,300,724
Net loss                                                    -                -             (3,399,796)          -      (3,399,796)
                                                  --------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995                        27,731,477     27,731   27,514,154     (13,005,002)     (131,785)   14,405,098

Exercise of stock options ($.53 to
   $6.50 per share)                                   675,000        675    1,169,739               -           -       1,170,414
Exercise of warrants ($1.00 per share)                 40,000         40       39,960               -           -          40,000
Net loss                                                          -          -             (6,698,787)          -      (6,698,787)
                                                  --------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996                        28,446,477     28,446   28,723,853     (19,703,789)     (131,785)    8,916,725

Exercise of stock options ($.5625 to
   $1.78 per share)                                    15,000         15       20,598               -           -          20,613
Treasury stock purchases                                    -          -            -               -    (1,217,569)   (1,217,569)
Net loss                                                    -          -            -      (3,235,316)          -      (3,235,316)
                                                  ================================================================================
BALANCE, SEPTEMBER 30, 1997                        28,461,477   $ 28,461 $ 28,744,451   $ (22,939,105) $(22,939,105)  $ 4,484,453
                                                  ================================================================================


       The accompanying notes to consolidated financial statements are an integral part of these consolidated statements.

                                                                      21 



                                      
</TABLE>


<PAGE>
<TABLE>
                                                TOP SOURCE TECHNOLOGIES, INC.
                                                  ANNUAL REPORT ON FORM 10-K

                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                     <C>               <C>


                                                                                  1997              1996              1995
                                                                          -----------------------------------------------------
OPERATING ACTIVITIES:
    Net loss                                                                   $ (3,235,316)     $ (6,698,787)    $ (3,399,796)
    Adjustments to reconcile net loss to
       net cash used in operating activities:
    Loss (income) from discontinued operations                                      (68,741)        1,867,001          579,304
    Depreciation                                                                  1,152,627           963,302          631,578
    Amortization                                                                    278,168           275,634          268,946
    Disposal of equipment                                                           284,212           151,411           64,735
    Deferred income taxes                                                                    -       (970,000)         (75,000)
    Decrease in deferred income tax assets, net                                     355,000         2,335,000          625,000
    Provision for doubtful accounts                                                          -               -          (4,297)
    Advances/notes to officers                                                     (133,921)                 -         (45,000)
    Repayment from officer                                                                   -               -          85,000
    Decrease (increase) in accounts receivable, net                               1,845,369          (610,881)        (121,934)
    Increase in inventories                                                        (369,065)          (43,789)        (111,671)
    Decrease (increase) in prepaid expenses                                         106,500           (25,397)           7,056
    Decrease (increase) in other assets                                            (153,798)           (8,561)         100,422
    Increase (decrease) in accounts payable                                      (1,163,559)          556,634         (325,561)
    Increase (decrease) in accrued salaries                                        (222,445)          (88,682)         199,138
    Increase (decrease) in accrued liabilities                                     (469,121)          838,138          143,665
                                                                          -----------------------------------------------------
Net cash used in operating activities                                            (1,794,090)       (1,458,977)      (1,378,415)
                                                                          -----------------------------------------------------

INVESTING ACTIVITIES:
    Purchases of property and equipment, net                                     (1,442,265)       (1,857,004)      (1,682,018)
    Reimbursement of tooling costs                                                  361,056           465,222                  -
    Increase in other assets                                                                 -               -        (650,000)
    Additions to patent costs, net                                                  (14,115)          (42,510)         (77,650)
    Discontinued operations - change in net assets                                3,540,579           221,847         (759,824)
                                                                          -----------------------------------------------------
Net cash provided by (used in) investing activities                               2,445,255        (1,212,445)      (3,169,492)
                                                                          -----------------------------------------------------

FINANCING ACTIVITIES:
    Proceeds from sale of common stock, net                                          20,613         1,210,414        2,300,724
    Repurchases of treasury stock                                                (1,217,569)                 -                 -
    Proceeds from borrowings                                                      1,996,341           960,000        4,460,000
    Repayments of borrowings                                                                 -               -      (2,488,042)
                                                                          -----------------------------------------------------
Net cash provided by financing activities                                           799,385         2,170,414        4,272,682
                                                                          -----------------------------------------------------
Net increase (decrease) in cash and cash equivalents                              1,450,550          (501,008)        (275,225)
Cash and cash equivalents at beginning of period                                    653,129         1,154,137        1,429,362
                                                                          =====================================================
Cash and cash equivalents at end of period                                       $2,103,679          $653,129       $1,154,137
                                                                          =====================================================


                                                                 

The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
                                                                      22
</TABLE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business - Top Source  Technologies,  Inc.  (the  "Company")  is focused on
developing  and  commercializing  state-of-the-art  technologies  for use in the
transportation, industrial and petrochemical marketplaces. The Company has three
wholly-owned  subsidiaries:  Top Source  Automotive,  Inc.  ("TSA"),  Top Source
Instruments,  Inc. ("TSI"),  and ARCS Safety Seat, Inc. ("ARCS,  Inc.").  United
Testing Group, Inc., ("UTG") was discontinued  effective  September 30, 1996 and
is currently inactive.

The Company concentrates on two industry segments: automotive technology and oil
analysis service.  Within these two segments,  the Company has three proprietary
technologies:  an Overhead Speaker System ("OHSS");  safety restraint technology
("ARCS");  and the On-Site Analyzer ("OSA")  (developed  jointly with the Thermo
Jarrell Ash ("TJA") Division of Thermo  Instrument  Systems,  Inc.),  which is a
proprietary oil analysis  instrument that combines two spectrometers in order to
analyze both new or used oil in eight minutes at the end-user's site.

Revenue  is  currently  derived  primarily  from  sales  of the  OHSS  for  both
production line and dealership  installed units and from TSI sales and leases of
the OSA.

Basis of Presentation - Certain 1996 and 1995 amounts have been  reclassified to
conform to the current year presentation.

Cash Equivalents - The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.

Principles of Consolidation - The consolidated  financial statements include the
accounts of the  Company  and its  subsidiaries.  All  significant  intercompany
accounts and transactions have been eliminated.

Revenue  Recognition - The Company recognizes revenue from sales of its products
(Automotive  Technology segment) and sales of OSA units at the time the products
are shipped. Revenue from leased OSA units are recognized ratably over the lease
term. The Company  recognized  revenue from the  performance of its oil analysis
services (oil analysis service segment) at the time the service is rendered.

Inventories  -  Inventories  are  stated at the lower of cost or market  and are
valued by the first-in, first-out (FIFO) method.

Fair  value of  Financial  Instruments  - The  carrying  amount of cash and cash
equivalents,  accounts receivable,  accounts payable, accrued liability and debt
approximates fair value.

Property and Equipment - Property and equipment are stated at cost.  Repairs and
maintenance  costs  are  charged  to  expense  as  incurred.   Depreciation  and
amortization  are computed  using the  straight-line  method over the  estimated
useful  lives  of the  assets,  or the  lease  term if  shorter  in the  case of
leasehold  improvements,  ranging  from two to twelve  years.  When  property or
equipment is retired or otherwise disposed of, the cost less related accumulated
depreciation  is removed from the accounts and the resulting gains or losses are
included in other expense in the accompanying statements of operations.

Manufacturing  and Distribution  Rights and Patents - These assets are valued at
the lower of cost or net  realizable  value and are  being  amortized  using the
straight-line  method over the terms of the  agreements  or life of the patents,
ranging from ten to thirteen years.

Intangible  Assets  -  Intangible  assets  primarily  consisted  of the  cost of
acquired businesses in excess of the fair value of net tangible and identifiable
intangible  assets  acquired  . The  cost in  excess  of the  fair  value of net
tangible  and   identifiable   intangible   assets  was  being  amortized  on  a
straight-line basis over 40 years. All costs in excess of fair value relating to
the acquisition of UTG were sold during the year.  Accordingly,  costs in excess
of fair value (goodwill) in the Company's consolidated financial statements have
been included in net assets from discontinued  operations at September 30, 1996.
The   capitalized   database  is  being   amortized  over  15  years  using  the
straight-line method (see Note 8.). Subsequent to its acquisitions, the

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (continued)

Company continually  evaluates factors,  events and circumstances which include,
but are not limited to, the  historical and projected  operating  performance of
acquired businesses, specific industry trends and general economic conditions to
assess  whether the remaining  estimated  useful life of  intangible  assets may
warrant revision or that the remaining  balance of intangible  assets may not be
recoverable. When such factors, events or circumstances indicate that intangible
assets should be evaluated for possible impairment, the Company uses an estimate
of undiscounted  cash flow over the remaining lives of the intangible  assets in
measuring their recoverability.

Research and Development - The costs associated with research and development of
products and technologies are expensed as incurred.

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

New Accounting Standards
In February 1997, the Financial  Accounting  Standards  Board  ("FASB")"  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per
Share".  SFAS No. 128 supersedes the previous  standard  (Accounting  Principles
Board Opinion No. 15),  modifies the methodology  for  calculating  earnings per
share,  and is  effective  for periods  ending after  December  15, 1997;  early
adoption  is not  permitted.  Upon  adoption,  the  Company  will be required to
restate  previously  reported per share data to conform with the requirements of
SFAS No.  128.  Had the  provisions  of SFAS  No.  128  been  applicable  to the
accompanying  condensed  consolidated  financial  statements,  basic and diluted
earnings per share,  as calculated in accordance with the provisions of SFAS No.
128, would not have been different  from the per share amounts  reported  herein
for all periods presented.

Quarterly  Information - The Company recorded an additional  valuation allowance
to reduce the  deferred tax assets in the amounts of  $355,000,  $1,365,000  and
$550,000  during the fourth  quarters of the fiscal  years ended  September  30,
1997, 1996 and 1995, respectively. (See Note 13.)

Stock-Based  Compensation - Statement of Financial Accounting Standards No. 123,
"Accounting  for  Stock-Based  Compensation,"  encourages,  but does not require
companies  to record  compensation  plans using a fair value based  method.  The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value based method  prescribed in Accounting  Principles Board Opinion
No. 25,  "Accounting for Stock Issued to Employees."  Accordingly,  compensation
cost for stock  options is measured as the excess,  if any, of the quoted market
price of the  corporation's  stock at the date of the grant  over the  amount an
employee must pay to acquire the stock.

2.    OIL ANALYSIS SERVICE SEGMENT

During 1997,  revenues of the oil analysis  service  segment were  approximately
$400,000. As of September 30, 1997, identifiable assets relating to this segment
are approximately as follows:

                   Capitalized database, net             $2,284,000
                   Property and equipment, net            1,584,000
                   Long-term deposit                        650,000
                   Inventories                              116,000
                   Other assets                             149,000
                                                            -------
                                                         $4,783,000


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

2.  OIL ANALYSIS SERVICE SEGMENT, (continued)

The Company has  recently  completed  the  restructuring  of top  management  of
corporate and the oil analysis  service  segment.  (See Note 20.) New management
has devised a strategy to concentrate marketing activities to sell or lease OSAs
to seven  specific  markets.  Additionally,  the Company has  continued  to have
discussions  with potential  strategic  partners who are interested in licensing
the OSA technology for specific  industry  applications  both  domestically  and
internationally.

The Company believes that their marketing  efforts will be successful.  However,
if the  Company is unable to meet goals or to have the  necessary  resources  to
sustain their  marketing  activities it could have a material  adverse effect on
the Company's  business,  the carrying value of the above listed assets, as well
as the financial condition of the Company. The Company will continue to evaluate
the success of the new  marketing  efforts as well as the carrying  value of the
related assets.

3. DISCONTINUED OPERATIONS

On September 12, 1996, the Company's Board of Directors  approved a plan to sell
certain assets and  liabilities of the Company's oil analysis  subsidiary,  UTG.
The sale was  consummated  on October 30, 1996.  The  provision  for loss on the
disposal  of UTG  of  $1,804,791  reflected  in the  consolidated  statement  of
operations  includes  a write  down  of the  net  assets  of  $1,565,621  and an
additional $239,170 for estimated costs to dispose of these operations.

The net  losses  of UTG for the  years  ended  September  30,  1996 and 1995 are
included  in  the  consolidated  statement  of  operations  under  "discontinued
operations."  Revenues from such  operations  for the years ended  September 30,
1996  and  1995  were  $4,549,944  and  $5,061,452,  respectively,  and were not
included  in service  revenue in the  accompanying  consolidated  statements  of
operations.

Assets and liabilities sold consisted of the following:
<TABLE>

<S>                                                                <C> 
                                                                   1996

            Supplies inventory                                 $      91,422
            Property, plant and equipment, net                       812,197
            Deposits                                                  27,639
            Trademarks and patents                                     5,692
            Intangibles                                            4,642,604
                                                                   ---------
                  Total assets                                     5,579,554

            Deferred service revenue                                 608,619
            Long-term capital lease                                   56,404
                  Total liabilities                                  665,023
              Net assets disposed of                               4,914,531
            Less allowance for discontinued
              operations                                          (1,565,621)
               Net assets from discontinued
              operations
                                                                 $ 3,348,910

</TABLE>


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
4. STATEMENTS OF CASH FLOWS

There were no  significant  non-cash  investing or financing  activities for the
years ended September 30, 1997, 1996 and 1995.


5. INVENTORIES

Inventories consisted of the following at September 30, 1997 and 1996:

                           1997                            1996
                           -----                           ----

Raw materials                        $820,821              $398,248
Finished goods                        60,202                113,710
                                     -------               --------
                                     $881,023              $511,958
                                      =======              ========


6.  PROPERTY AND EQUIPMENT

Property  and  equipment  consisted of the  following at September  30, 1997 and
1996:
<TABLE>
<S>                                         <C>                              <C>                    <C>  

                                            Useful                                1997               1996
                                                                                  ----               ----
                                            Life (Years)
Equipment                                        2-12                        $   296,028        $   287,074
Computer equipment                               3-4                           1,141,000          1,021,937
On-Site Analyzers                                4-5                           2,184,464          1,613,014
Tooling                                          2                               305,273            891,540
Furniture and fixtures                           3-5                             309,694            296,271
Vehicles and delivery equipment                  3                               131,124            119,103
Leasehold improvements                           2-5                             155,924            134,049
                                                                               ---------         ----------
                                                                               4,523,507          4,362,988
Less:  accumulated depreciation                                               (2,376,104)        (1,859,955)
                                                                               ---------         ----------
                                                                              $2,147,403         $2,503,033
                                                                               =========         ==========

</TABLE>

Depreciation of tooling and production  equipment incurred in manufacturing OHSS
in the amount of $319,324 and $307,373  for the years ended  September  30, 1997
and  1996,  respectively,  has been  allocated  to cost of sales as it  directly
relates  to the  products  sold.  Amounts  relating  to UTG for 1996  have  been
excluded  from the total above and are included in net assets from  discontinued
operations (see Note 3.)


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
MANUFACTURING AND DISTRIBUTION RIGHTS AND PATENTS

Manufacturing and distribution  rights and patents consisted of the following at
September 30, 1997 and 1996:
<TABLE>
<S>                                <C>                  <C>           <C>            
                                 Useful
                                 Life (Years)          1997          1996
                                 ------------          ----          ----

Manufacturing rights                13           $   58,438       $58,438
Distribution rights                 13              437,501       437,501
Patents                             10              258,209       244,094
                                                     -------       -------
                                                    754,148       740,033
Less: accumulated amortization                     (469,586)     (406,271)
                                                    --------     --------
                                                    $284,562     $ 333,762
                                                     =======      =========

</TABLE>

OHSS  (Overhead Speaker System)
The Company has the exclusive  right to produce and sell Pelo Sound  products in
North,  Central and South America and a non-exclusive  right to produce and sell
the  products in all other areas of the world,  excluding  Europe.  The value of
these rights is being  amortized over thirteen  years,  and have a remaining net
book value of $17,707 at September 30, 1997.

The Company has  distribution  rights acquired from B&R  International  Imports,
Corp.  related  to its  Overhead  Speaker  System.  The net book  value of these
rights,  which are being  amortized over thirteen years, is $85,518 at September
30, 1997. The Company also has patents on the OHSS relating to improvements  and
perfections on the Overhead Speaker System.  The value of these patents is being
amortized  over ten years and have a  remaining  net book  value of  $53,789  at
September 30, 1997.

OSA  (On-Site Analyzer)
TSI has been granted two patents on unique technology critical to the operations
of its On-Site Analyzer.  The value of these patents is being amortized over ten
years and have a remaining net book value of $57,698 at September 30, 1997.

ARCS (Acceleration Restraint Curve Safety Seat)
In September  1990, the Company  entered into an exclusive  licensing  agreement
with M.I.T. for certain technologies associated with the ARCS Seat Safety Motion
whereby M.I.T. would share in any revenue produced from the technologies. M.I.T.
shall receive 5% of any sublicense  revenue and one-half of one percent (.5%) of
Net Sales of Licensed Products or Licensed Processes, as defined. These licensed
technologies  have  contributed to the research,  development and design efforts
for the Company's ARCS project.  No revenues and minimal  expenses were incurred
in fiscal years 1997, 1996 and 1995.

The  value of the  patents  related  to the ARCS  Seat  Safety  Device  is being
amortized over ten years and have a remaining net book value of $69,850.


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

8.  CAPITALIZED DATABASE

Capitalized database onsisted of the following at September 30, 1997 and 1996:
                                      Useful
                                      Life 
                                     (Years)           1997           1996
                                     ---------         ----           ----
Capitalized database                   15           $3,162,500    $3,162,500
Less:  accumulated amortization                       (878,473)     (667,640)
                                                      --------      ---------
                                                    $2,284,027    $2,494,860

The capitalized  database contains an active library of engine and machine tests
that  have a  diagnosed  history.  The  value of the  capitalized  database  was
determined  based on an  assessment  of the  number of samples  included  in the
database and a per unit cost to develop/buy  the data. The 15-year  amortization
period is supported by an independent  study of the expected life in use of each
engine type in the database. The database will remain for use by TSI and will be
an integral part of TSI by developing  specialized  markets. As of September 30,
1997, TSI has generated  $403,853 in revenue.  


9. OTHER ASSETS

Included in other  assets at  September  30, 1997 and 1996 is a $650,000 
deposit  which was made to the  manufacturer  of the OSA units.



10.  DEBT

Notes payable at September 30, 1997 and 1996
 are as follows:

Senior Subordinated convertible notes,
  due June 2000, bearinginterest at 9%        1997                 1996
                                              -----                ----
                                            $3,020,000          $3,020,000
                                             =========          ==========


On June 9, 1995, the Company entered into an agreement with advisory  clients of
Ganz Capital Management,  Inc., now Mellon Private Asset Management  (Mellon),
whereby the holders would purchase $3,020,000 in Senior Subordinated convertible
notes from the Company.  In June 1995,  the Company  issued  $2,060,000  of nine
percent (9%) convertible  notes (The Notes)  maturing in June 2000. After June
9, 1996,  the Notes can be prepaid by the  Company  without  penalty  and can be
converted by the holders into fully  registered  shares of the Companys  common
stock at a conversion  price of $10 per share.  The Company issued the remaining
$960,000 in notes and  received the related  proceeds on October 12,  1995.  The
Notes are subject to an  Indebtedness  to Equity ratio that cannot exceed 1.5 to
1.0. As of September  30, 1997,  the Company was in  compliance  with the ratio.
However,  due to the Companys historic losses and due to the uncertainty on the
timing of OSA revenues, there is a possibility that the Company will exceed this
ratio during  fiscal 1998.  In the event the ratio is not met and the Company is
unable to receive a waiver from Mellon, a Board member of the Company has agreed
to guarantee sufficient capital infusion into the Company to maintain compliance
of this ratio through October 1, 1998 or refinance the notes to the satisfaction
of Mellon.  In  consideration  for this  guarantee,  the Company  issued  50,000
warrants at a strike price of $2.00 per share to this Board member.


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

10.  DEBT (continued)

Prior to July 1, 1997, the Company had a $3,750,000  credit  facility with First
Union Bank of Florida,  ("First  Union"),  no amounts were  outstanding  on this
facility.  On July 1, 1997,  the Company  entered into a  three-year  $5,000,000
asset-based   financing   agreement   ("Credit   Facility")  with  NationsCredit
Commercial Corporation  ("Nations").  This Credit Facility replaced the facility
with First  Union which was  canceled  by the Company as a condition  of the new
Credit Facility.  The Credit Facility,  which is secured by substantially all of
the  assets of the  Company  enables  it to borrow up to  $5,000,000  based upon
certain percentages of accounts  receivable and inventory  balances.  The Credit
Facility  allows for  borrowing of up to 85% of accounts  receivable  and 50% of
inventory  for both TSA and TSI.  The  overall  sublimit  of  borrowing  against
inventory is  $1,500,000.  The interest  rate on this Credit  Facility is 1-1/2%
over the prime rate and is payable  monthly  with a required  minimum  borrowing
level of  $2,500,000  for fee  calculation  purposes.  The  Company's  effective
interest  rate at September  30, 1997  factoring  the interest  earned on unused
drawn funds was 5.44%. The initial maturity date is June 2000, but this date may
be  automatically  extended for successive  additional terms of three years each
unless either party chooses to terminate.  As of September 30, 1997,  the entire
available borrowings of $1,996,341 was outstanding on this Credit Facility.

As part of the credit facility,  Nations was granted outside of the stock option
plans options to purchase 25,000 shares of the Company's common stock at a price
of $1.50 equal to 105% of the fair market value of the Company's common stock at
the date of the closing of the Credit Facility. The options vest 100% after year
three and may  convert to stock  appreciation  rights  after year three upon the
occurrence of an adverse event as defined in the Agreement.  (See Note 15. Stock
and Stock Option  Plans.) The expense  associated  with the fair market value of
the issuance of these options is not material.


The credit facility calls for certain financial  covenants that if not met would
cause a default  under the Agreement and increase the interest rate by 2%. As of
September 30, 1997,  the Company  failed to meet the annual  financial  covenant
relating  to the  amount of pre-tax  operating  loss for  fiscal  1997,  and has
received a waiver from Nations for fiscal 1997.  The Company paid a one-time fee
to Nations of $25,000 to  maintain  the  current  rate of prime plus  1-1/2% and
avoid the 2% increase.

Cash paid for interest on all debt for the years ended  September  30,  1997,
1996 and 1995 was  $350,281,  $276,566 and $60,300, respectively.


11. COMMITMENTS AND CONTINGENCIES

The Company leases office space under  noncancelable  operating  leases.  Future
minimum rental commitments under these leases are as follows:

         Fiscal Year Ending September 30:

         1998               $386,322
         1999                283,075
         2000                192,702
         2001                 37,771
         2002                  -
         Thereafter            -

Total rental  expense for  continuing  operations  amounted to $492,011,
$479,135 and $321,293 for the years ended  September 30, 1997, 1996, and 1995,
respectively.


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

11. COMMITMENTS AND CONTINGENCIES (continued)

The Company has commitments  under certain  employment  agreements  entered into
with  individuals in management  positions.  The base salary  payments due under
these  agreements  aggregate  $800,000 and are payable  during fiscal 1998.  One
executive  is eligible to receive an  incentive  payment of one-half of his base
salary  if the  Company's  net  operating  income as a  percentage  of net sales
exceeds eight percent. This incentive payment could be as high as twice the base
salary if this  percentage is 20 percent or greater.  (See Note 14 for incentive
compensation based on revenue.)

The Company  enacted a  Retirement  Salary  Savings Plan  (401(k))  (the "Plan")
effective  October 1, 1993.  All employees that were employed on October 1, 1993
were eligible to join the Plan. Otherwise,  they will be eligible to participate
in the Plan if they have completed three months of service and have attained the
age of 21. The enrollment  dates are the first day of each quarter.  The Company
will match 25% of each  dollar  contributed  by an  employee  to the Plan on the
first 6% of the salary  deferral,  not to exceed 1 1/2% of the employee's  total
salary  eligible  under the Plan.  The cost the Company  incurred  for  matching
employee  contributions  and  administrative  costs during fiscal 1997, 1996 and
1995 was $41,637, $55,521 and $57,384, respectively.

In  September,  1997,  the  Company  entered  into a  commitment  under  a sales
representative  agreement  with a company  to act as a  non-exclusive  sales and
marketing  representative  for the OSA. For its  services to be performed  under
this agreement, TSI shall pay a commission of 6% of net sales from all OSA sales
and leases  derived by this company.  Also, the Company  granted  outside of the
stock option plan,  options to purchase  200,000 shares of the Company's  common
stock.  This  Agreement  expired  on  December  23,  1997 and was not  extended;
accordingly,  these options  granted were  canceled  subsequent to September 30,
1997.

Subsequent to September 30, 1997, the Company entered into a sales and marketing
agreement with a company in which this company would act as the exclusive  sales
and marketing  representative  for the OSA in Asia and the Pacific Rim. TSI will
pay this company a sales  commission  of 10% of net sales from all OSA sales and
leases derived from OSAs used within Asia and the Pacific Rim. In addition,  the
Company  has  granted  outside of the stock  option  plan,  options to  purchase
150,000 of the Company's common stock. The vesting of these options is dependent
upon future OSA sales.

The Company has from time to time incurred  expenses  associated with litigation
defense  and  payment  of  settlements  or  judgments  in  connection  with  its
businesses.  The Company  believes that such  litigation and other legal matters
should not have a significant adverse effect on the Company's financial position
or results of operations.

12.  NET INCOME (LOSS) PER SHARE

The Company  utilizes the treasury  stock method for computing net income (loss)
per  share.  Net loss per  share is  computed  by  dividing  the net loss by the
weighted  average  number of  common  shares  outstanding  after  reduction  for
treasury shares.  The common stock options and warrants (See Note 15.) have been
excluded from the net loss per share  calculation for fiscal 1997, 1996 and 1995
since their inclusion would have been anti-dilutive.

13. INCOME TAXES

The income tax expense for the years ended September 30, 1997, 1996 and 1995 
of $482,000,  $1,543,300 and $610,000  consist of the reversal of previously
recorded deferred tax assets and state income taxes.


<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

13. INCOME TAXES (continued)

A valuation  allowance  is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The Company has determined, based
on  expected  future  taxable  income  which can be  predicted  with  reasonable
certainty,  that it is more likely than not that the net  deferred tax assets at
September 30, 1997 will not be realized  before the expiration of the underlying
net  operating   loss  carry   forwards  which  will  begin  expiring  in  2001.
Accordingly,  a full valuation  allowance has been recorded on the potential tax
benefit generated from the operating loss carry forwards.

At September  30, 1997,  the Company has net tax basis  Federal  operating  loss
carryforwards of approximately  $30,800,000,  which may be used to offset future
taxable income,  if any. The Company's net operating loss  carryforwards  expire
between 2001 and 2012.

Cash paid for state  income  taxes for the years ended  September  30,  1997,
1996 and 1995 was approximately $124,000,  $140,000 and $45,000, respectively.

14. RELATED PARTY TRANSACTIONS

In May 1997, the Company entered into an employment agreement ("Agreement") with
the new President and Chief Executive Officer (CEO) of the Company.  The term of
this Agreement is three years through May 21, 2000  ("Employment  Period").  The
Agreement  provides for a base salary of $300,000  ("Annual Base  Salary").  The
President/CEO  shall also be  eligible  to  receive a cash  bonus  ("Performance
Bonus") as described  below for each  successive  period of four fiscal quarters
(prorated for any partial  period) during the Employment  Period,  as defined in
the Agreement,  in an amount of between zero and 100% of the Annual Base Salary.
The Performance Bonus, if any, for each successive  four-quarter period shall be
paid within 60 days after the end of such period.  The  Performance  Bonus shall
consist  of the  following  two  components:  (A)  the  first  component  of the
Performance  Bonus shall be an amount of between zero and 50% of the Annual Base
Salary based on the Company  meeting  earnings per share targets of between $.01
and $.05 as defined in the Agreement.


     (B) The second  component  of the  Performance  Bonus shall be an amount of
between  zero and 50% of the Annual Base Salary  based on the Company  achieving
approximately  five  performanced  based  targets for each period of four fiscal
quarters during the Employment Period. As of September 30, 1997, no bonuses were
paid.  In June,  1997,  the Company was  authorized by the Board of Directors to
lend the  President/CEO up to $30,000 evidenced by a three- year promissory note
payable to the Company bearing  interest of 9% . At September 30, 1997, the note
payable  balance with  interest was  $30,685.  The accrued  interest was paid in
October, 1997.

The  Earnings Per Share  targets and five  performanced  based  targets for each
succeeding  four quarter period during the Employment  Period shall be reset and
established  annually by the  Compensation  Committee  in its sole and  absolute
discretion.  The Compensation  Committee shall notify the President/CEO promptly
in writing upon its determination of such subsequent targets.

In addition to the payments  provided above,  on May 21, 1997, the  Compensation
Committee  granted to the  President/CEO,  outside of the stock  option  plan as
described in Note 15. Stock and Stock Option Plans,  options to purchase 500,000
shares of the Company's  Common Stock,  with the purchase price upon exercise of
such  options  equal to $2.00 per share (i.e.,  the closing  price of the Common
Stock on the American  Stock  Exchange on the date of such  grant).  The options
shall vest as follows:  (a) 100,000 options will become exercisable on the first
anniversary  of the date of this  Agreement;  (b)  100,000  options  will become
exercisable on the second anniversary of the date of this Agreement; (c) 100,000
options will become  exercisable  on the third  anniversary  of the date of this
Agreement;  (d) 100,000 options will become  exercisable  when the closing price
for the  Company's  common stock on the American  Stock  Exchange (or such other
exchange or trading system that  constitutes  the primary trading market for the
Company's  common stock) is $7.00 per share or higher for 30  consecutive  days;
and (e) 100,000 options will become  exercisable  when the closing price for the
Company's common stock on the American Stock Exchange (or such other

<PAGE>




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

14.   RELATED PARTY TRANSACTIONS  (Continued)

exchange or trading system that  constitutes  the primary trading market for the
Company's common stock) is $9.00 per share or higher for 30 consecutive  trading
days; provided,  however,  that the vesting of such options shall be accelerated
in the event of a change in control.  Such options shall be non-qualified  stock
options to fullest extent permitted by applicable law and the Stock Option Plan.

In Fiscal 1993, the Former  President and Chief  Executive  Officer (Former CEO)
and the current  Chairman of the Board of Directors of the Company  entered into
an employment  agreement.  The term of this employment  agreement was five years
through August 18, 1998.  (The  Employment  Agreement was extended until June 1,
1999 due to a breach  in the terms of his  original  employment  agreement,  see
below.) The  agreement  provides for a base annual  salary of $200,000 per year.
The Company's Compensation Committee will review the base salary annually during
the term, and may increase, but not decrease, the base salary. Additionally, the
agreement  calls for incentive  compensation  payments based upon the following:
(1) revenue (at the rate of 1% of quarterly revenue, for quarterly revenue up to
$6.25 million and descending  downward to the rate of .75% of quarterly  revenue
if it is between $6.25 million to $12.5 million and .5% of quarterly  revenue if
quarterly revenue is over $12.5 million),  and (2) profitability (at the rate of
50% of the  incentive  amount based on revenue if net income is 8% of net sales,
up to a rate of twice the incentive amount based on revenue if net income is 20%
or greater) of the Company during the term, payable after the end of each of the
Company's  fiscal  quarters  according  to specific  formulas  contained  in the
agreement.  The incentive cash  compensation  expense for fiscal 1997,  1996 and
1995  was  $178,406,  $206,965,  and  $189,688,  respectively.  In the  event of
termination  without  cause or if the  Chairman  resigns for "good  reason",  as
defined in the agreement, the Company is required to make 36 consecutive monthly
payments  equal to his base and incentive  compensation.  The Chairman will also
continue to receive medical,  life and disability  insurance coverage during the
36 month term.  As a result of the hiring of a new CEO, a breach in the terms of
the original agreement occurred,  thus, the Former CEO could have requested that
the "Good Reason"  clause of his contract be triggered  effective  July 1, 1997.
This clause has been waived by the Former CEO with the  approval of the Board of
Directors  as it was  determined  to be in the best  interests of the Company to
retain the Former CEO for a minimum period of one year. This waiver is effective
until  July 1, 1998 or  earlier,  if elected by the Former CEO at which time the
original  terms of the  termination  agreement  will  remain in effect  with the
exception  of the  incentive  payments  which  will be  calculated  based on the
previous  sales for the  period  from July 1, 1996  through  July 1,  1997.  The
Chairman also has a $75,000  promissory  note dated June 1, 1997,  with interest
payable on the last day of each calendar quarter commencing  September 30, 1997,
with an interest rate of 9%. The principal and all accrued interest shall be due
and payable on August 6, 2001.  This  promissory note is secured by a collateral
assignment  of $75,000 of the  proceeds of a term life  insurance  policy and by
current and future employment agreement payments. The note receivable balance of
$76,002 which includes accrued interest is disclosed in the accompanying balance
sheet. The accrued interest was paid in October 1997.

15. STOCK AND STOCK OPTION PLANS

The "1990 Stock Plan", as amended,  covers  3,300,000 shares of common stock and
is intended to provide:  (a) officers and other employees of the Company and its
Related Corporations  opportunities to purchase stock in the Company pursuant to
options  granted  hereunder  which qualify as incentive  stock options  ("ISOs")
under the Internal  Revenue Code of 1986, as amended;  (b) directors,  officers,
employees  and   consultants  of  the  Company  and  its  Related   Corporations
opportunities  to  purchase  stock in the Company  pursuant  to options  granted
hereunder  which  do  not  qualify  as  ISO's  ("Non-Qualified   Options");  (c)
directors,  officers,  employees and  consultants of the Company and its Related
Corporations awards of stock in the Company ("Awards"); (d) directors, officers,
employees  and   consultants  of  the  Company  and  its  Related   Corporations
opportunities  to make direct  purchases of stock in the Company  ("Purchases");
and (e)  directors  of the  Company  and its  Related  Corporations  who are not
employees  of the Company or its  Related  Corporations  with  Non-Discretionary
Options.



<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

15. STOCK AND STOCK OPTION PLANS (Continued)

The  1990  Stock  Plan is  administered  by a  committee  of  four  non-employee
directors.  The  committee,  subject to certain  restrictions  in the 1990 Stock
Plan, has the authority to grant or issue,  as applicable,  ISOs,  Non-Qualified
Options,  Awards,  Purchases and  Non-Discretionary  Options. The committee also
establishes exercise or issue prices, vesting schedules and expiration dates.

In August  1993,  the Company  established  a 1993 Stock  Option Plan (the "1993
Plan") covering  1,500,000 shares of common stock.  The 1993 Plan provides:  (a)
officers  and  other  employees  of the  Company  and its  Related  Corporations
opportunities  to  purchase  stock in the Company  pursuant  to options  granted
hereunder which qualify as "ISOs";  and (b) directors,  officers,  employees and
consultants of the Company and Related  Corporations  opportunities  to purchase
stock in the Company pursuant to options granted  hereunder which do not qualify
as ISOs ("Non-Qualified Options").

The 1993 Plan is administered by a committee of four non-employee directors. The
committee,  subject to certain  restrictions in the 1993 Plan, has the authority
to (i) determine the employees of the Company and Related  Corporations  to whom
ISOs may be granted, and determine to whom Non-Qualified Options may be granted;
(ii)  determine  the  time or  times  at which  Options  may be  granted;  (iii)
determine  the  exercise  price of shares  subject to  Options;  (iv)  determine
whether Options granted shall be ISOs or  Non-Qualified  Options;  (v) determine
the time or times when the Options shall become exercisable, the duration of the
exercise  period  and  when the  Options  shall  vest;  (vi)  determine  whether
restrictions  such as repurchase  options are to be imposed on shares subject to
Options and the nature of such  restrictions,  if any, and (vii)  interpret  the
1993 Plan and promulgate and rescind rules and regulations relating to it.

The 1993 Plan also  provides  for the  automatic  grant of 30,000  non-qualified
options to any  director who is not an employee of the  Company.  These  options
vest in increments of 5,000 options per director every six months commencing six
months from the date of the director's election to the board, provided that they
are still  serving as a director at that time. In December  1994,  the 1993 Plan
was amended to change the vesting  periods for both directors and employees from
every six months to June 30 and December 31. However,  in the event any director
resigns prior to full vesting, the options will vest on a pro-rata basis.

The  Company  has  issued the  following  options  and  warrants  to  directors,
officers,  employees  and  consultants  during 1997,  1996 and 1995.  All of the
following options and warrants were generally issued at the fair market value of
the  underlying  stock at the date of  grant;  therefore,  no  expense  has been
recognized.


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

15. STOCK AND STOCK OPTION PLANS (Continued)
<TABLE>
<CAPTION>
                                       1997                                  1996                                  1995
                              -------------------                    ------------------                  ----------------------
<S>                       <C>               <C>                    <C>           <C>                  <C>            <C>

                                       WEIGHTED AVERAGE                      WEIGHTED AVERAGE                      WEIGHTED AVERAGE
                                       EXERCISE PRICE                        EXERCISE PRICE                        EXERCISE PRICE

                            OPTIONS                               OPTIONS                              OPTIONS

Outstanding,
beginning of year:
                            2,681,314        $3.57                3,079,450        $2.85                3,537,562        $2.07

Granted                     1,148,257        $2.12                  514,572        $6.66                  613,750        $6.76

Expiration Dates    11/11/2006-9/25/2007                  10/24/2005-6/30/2006                  10/25/2004-8/31/2005

Exercised                    (15,000)        $1.37                (715,000)        $1.77              (1,015,082)        $2.38

Expired or
Canceled                    (653,991)        $5.50                (197,708)        $6.78                 (56,780)        $6.01
                            ---------                             ---------                              --------

Outstanding,   end
of year:                    3,160,580        $2.66                2,681,314        $3.57                3,079,450        $2.85
                            =========                             =========                             =========

Exercisable,   end
of year:                    2,089,163        $2.85                1,969,226        $2.76                2,298,700        $2.18
                            =========                             =========                             =========

Weighted-average
fair value of
options granted
during the year                 $1.46                                 $5.49                                   N/A
                                =====                                 =====                                   ===

Available for
grant, end of                 539,561
year:

</TABLE>


Included in the above table are 725,000  options  which were granted  outside of
the Stock  Option  Plans  during  Fiscal 1997 with a weighted  average  price of
$1.95.



<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

15. STOCK AND STOCK OPTION PLANS (Continued)



Information  about stock  options in various  price ranges at September 30, 1997
follows:


<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                                                   OPTIONS EXERCISABLE
---------------------------------------------------------------------------------------------      ------------------------------

<S>      <C>                             <C>            <C>                 <C>                 <C>              <C>

                                                         Weighted-Average
                                                              Remaining
                                                          Contractual Life
                                          Outstanding          (Years)           Weighted         Exercisable     Weighted-Average
              Range of                       as of                               -Average            as of         Exercise Price
           Exercise Prices                 09/30/97                           Exercise Price        09/30/97

             $0.00  -     $1.00                  552,500         2.9              $0.53            540,000         $0.53
             $1.01  -     $2.00                1,108,257         8.7              $1.83            187,132         $1.69
             $2.01  -     $3.00                  762,500         6.0              $2.12            717,500         $2.11
             $3.01  -     $5.00                  210,200         5.9              $3.95            210,200         $3.95
             $5.01  -     $8.00                  472,123         7.6              $6.79            379,331         $6.76
             $8.01  -    $10.00                   55,000         7.1              $8.52             55,000         $8.52
             ----         ------                   ---          -----              ----             ------         -----
                                               3,160,580         6.7              $2.66          2,089,163         $2.85
                                               =========                                          =========
</TABLE>

The  Company has  adopted  the  disclosure  only  provisions  of  statements  of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation."  Accordingly,  no  compensation  cost has been recognized for its
Stock Option Plans. Had compensation for the Company's stock-based  compensation
plans been determined  pursuant to FASB Statement No. 123 the Company's net loss
and loss per share would have  increased  accordingly.  Using the  Black-Scholes
option  pricing  model for all  options  granted  after  October  1,  1995,  the
Company's  pro forma net loss and pro forma  net loss per  share,  with  related
assumptions, are as follows:

                                             1997                      1996
                                             ----                      ----
Proforma net loss                        $(3,619,598)              $(6,839,341)
Pro forma net loss per share                 (.13)                     (.24)
Expected life (years)                           7                         7
Risk-Free interest rate                       6.51%                     6.08%
Expected volatility                            81%                       81%
Quarterly dividend                            none                      none
                                      



<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------

         15.  STOCK AND STOCK OPTION PLANS (continued)

Because  FASB  Statement  No. 123 method of  accounting  has not been applied to
options  granted prior to October,  1995,  the resulting pro forma  compensation
cost may not be representative of that to be expected in future years.

On November 12, 1996, the Company announced that it put into effect a stock
repurchase  plan to  repurchase up to 400,000  shares of its common stock.  From
November 12, 1996 through April 22, 1997,  the Company had  repurchased  378,700
shares at an average purchase price of $3.21 per share. The Company  anticipates
no further stock  repurchases for the immediate  future,  and is restricted from
doing so under the terms of its NationsBank Agreement. (See Note 10. Debt)

16. CONCENTRATION OF CREDIT RISK

In fiscal 1997, the majority of the Company's overall revenue was derived in the
automotive technology segment from one customer, an OEM, which accounted for 97%
of the total business activity.  That same customer accounted for 99% and 91% of
net  sales  in both  1996 and  1995.  As of  September  30,  1997 the  Company's
receivable  balance  from this OEM customer was  approximately  $2,174,683.  The
majority  of  this  receivable  was  subsequently  collected.  The  loss of this
customer would have a material  adverse  effect on the Company.  Export sales in
1997, 1996 and 1995 were insignificant.


17. SALE  OF  ENGINE  FUEL  ECONOMY  EMISSIONS  CONTROL  REDUCTION  SYSTEM
    TECHNOLOGY ("EFECS") TO ADRENALINE, INC.

On May 10, 1995, the Company entered into an "Agreement" with  Adrenaline,  Inc.
("Adrenaline"),  the  original  inventor  of the Engine  Fuel  Economy  Emission
Control  Reduction  System ("EFECS")  technology,  to assign its interest in the
proprietary  technology to  Adrenaline.  Under the terms of the  Agreement,  the
Company assigned its interest in this technology in return for future royalties.

In  order  to  facilitate  and  accelerate  the  commercialization  of  EFECS by
Adrenaline  and  Edward  Van Duyne  (the  founder  of  Adrenaline,  Inc.) and to
maximize  the  opportunity  for the Company,  on February 22, 1996,  the Company
agreed to amend the  original  terms  stated in the  Agreement  to items 1 and 2
below:

         1. On  June 1,  1996,  the  Company  began  receiving  monthly  royalty
         payments in the amount of $4,167 per month as a minimum royalty payment
         up to a maximum  of  $400,000  instead  of annual  payments  of $50,000
         annually (originally scheduled to commence in January, 1997);

         2.   Commencing  on  the  first   anniversary  of  the  date  on  which
         Adrenaline's patent revenues for the prior 12 months exceed $2,500,000,
         Adrenaline  will pay to the Company an annual royalty  payment equal to
         two  percent  (2%)  of all  patent  revenues.  Patent  revenue  royalty
         payments  shall  not  exceed  $150,000  in  any  12  month  period  and
         $1,500,000  during the entire term of the Agreement  unless  Adrenaline
         consummates an initial public  offering or sells  substantially  all of
         the assets or capital  stock of  Adrenaline.  As of September 30, 1997,
         Adrenaline  had not received any revenue  relating to the EFECS patent.
         The  timing  of  the  commencement  of  EFECS  revenues,   if  any,  is
         indeterminable.

Additionally, the Company was granted 45,000 options, or not less than an amount
equal to 3% of the Company's  shares on a fully diluted basis,  on  Adrenaline's
common  stock  at a price  of $1.20  per  share.  These  option  shares  are not
exercisable  until  Adrenaline  either  consummates a successful  initial public
offering  or  sells  substantially  all  of  the  assets  or  capital  stock  of
Adrenaline. The option agreement is subject to the Company's approval.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

17.   SALE OF ENGINE FUEL ECONOMY EMISSIONS CONTROL REDUCTION SYSTEM TECHNOLOGY
      ("EFECS")  TO ADRENALINE, INC., (continued)



The Company is  currently  recognizing  the monthly  royalty  payments on a cash
basis until it can readily  determine the pre-  dictability of payments.  During
Fiscal 1997, the Company had received a total of $50,000 in royalty payments.

18. SEGMENT INFORMATION

The Company currently classifies its operations into the following segments: (1)
automotive  technology which primarily  consists of the Overhead Speaker System,
and (2) Oil Analysis Service which primarily  consists of TSI operations.  Items
below exclude amounts from UTG operations.  Corporate and other includes general
corporate assets consisting primarily of cash and cash equivalents, property and
equipment,  deferred  income tax assets,  and corporate  expenses.  The material
components  of corporate  general and  administrative  expenses are salaries and
benefits; travel and entertainment; consulting; and proxy, printing and transfer
costs. In fiscal 1997, 1996 and 1995, corporate expenses (salaries, benefits and
general and  administrative  expenses) have been  allocated to the segments.  In
1996,  management  changed certain  assumptions on these  allocations.  If these
assumptions  were used in 1995,  corporate  expenses would have been reallocated
from the Corporate and Other segment into the Automotive  Technology segment and
the Oil  Analysis  Service  segment  in the  amount of  $779,165  and  $658,727,
respectively.  Financial  information about the Company's operations by segments
for the years ended September 30, 1997, 1996 and 1995 is as follows:



<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------

18. SEGMENT INFORMATION, (continued)

<TABLE>
<S>                        <C>                <C>            <C>            <C>                      
                            Automotive      Oil Analysis      Corporate
                            Technology        Service         and Other      Consolidated
  Revenue:
        1997                  $16,580,270    $     403,853    $    -            $ 16,984,123  
        1996                  $16,102,523    $      44,001    $    -            $ 16,146,524            
        1995                  $13,893,459    $      13,895    $    -            $ 13,907,354
                                                                         

Operating Income
(Loss):
        1997                 $  3,091,161    $ (4,203,111)   $ (1,486,510)    $  (2,598,460)
        1996                 $  3,093,833    $ (4,605,624)   $ (1,544,428)    $  (3,056,219)
        1995                 $  4,008,392    $ (2,565,929)   $ (3,808,990)    $  (2,366,527)

Depreciation and
Amortization:
        1997                 $     76,573    $     917,820   $     117,078     $   1,111,471
        1996                 $     94,080    $     701,510   $     135,973     $     931,563
        1995                 $     79,085    $     572,760   $     118,441     $     770,286

Identifiable
Assets:
        1997                 $  3,679,544     $  4,783,365    $  2,892,121      $ 11,355,030
        1996                 $  1,373,326     $  2,555,431    $  8,245,491      $ 12,174,248                     
        1995                 $  4,336,403     $  5,397,470    $  3,573,810      $ 13,307,683

Capital
Expenditures:
        1997                $     357,940     $  1,055,572    $     28,753     $   1,442,265
        1996                $     516,968     $  1,190,629    $    149,407     $   1,857,004
        1995                $     778,804     $    774,857    $    128,357     $   1,682,018

</TABLE>


19. OTHER INCOME

Included  in Other  Income  in fiscal  1996 and 1995 is  $56,367  and  $229,500,
respectively,  which  relates to the  recovery  of funds  from the  Professional
Services Inc. ("PSI") lawsuit. PSI was a privately owned oil analysis laboratory
acquired by the Company in July of 1993 and later merged into UTG.

20. RESTRUCTURING

On September  12, 1996,  the Board of Directors  approved a  restructuring  plan
which included the  restructuring  of management,  relocating the TSI office and
laboratories as well as certain personnel.  The Company has recorded $725,000 of
restructuring charges in fiscal 1996 which consist primarily of severance costs,
lease cancellation  costs and other expenses that have no future benefit.  As of
September 30, 1997, all of these restructuring costs have been paid.


<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------

20. RESTRUCTURING , (continued)

During July 1997,  the Company  undertook and  substantially  completed  another
restructuring. During this time period, the Company closed its New York investor
relations  office,   consolidated  its  Top  Source  Instruments  operations  in
Farmington  Hills,  Michigan  into its Top Source  Automotive  facility in Troy,
Michigan and reduced its personnel in July 1997 by approximately  one-third from
78 employees to 54 employees.  The Company  believes that these  reductions will
not  have  an  adverse  impact  on  its  sales,   marketing  and  administrative
capabilities.  This  restructuring  resulted in a one-time charge to earnings in
the fourth  quarter of fiscal 1997 of  approximately  $416,000  which  primarily
consisting of severance of $350,000 and facilities of $66,000.  As of January 1,
1998, the remaining liability is approximately $217,000.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE


         None


                                                              PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
         Incorporated  by  reference  from the Proxy  Statement,  for the Annual
         Meeting of Stockholders to be held on April 23, 1998,  section entitled
         "Election of Directors".

ITEM 11.  EXECUTIVE COMPENSATION
         Incorporated  by  reference  from the Proxy  Statement,  for the annual
         meeting of stockholders to be held on April 23, 1998,  section entitled
         "Executive Officer Compensation".

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
         Incorporated  by  reference  from the Proxy  Statement,  for the annual
         meeting of stockholders to be held on April 23, 1998,  section entitled
         "Voting Securities and Principal Holders".

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
               None



<PAGE>



ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
                                                          
                                                                          Page
(a)      (1)Financial Statements. (See Item 8 of Form 10-K................ 17
 
(a)      (2)  Financial Statement Schedules required to be filed.
              Schedule II - Valuation and Qualifying Accounts............. 42
        
          All other  schedules  have been  omitted  because the required
          information is shown in the consolidated  financial statements
          or notes thereto or they are not applicable.

(a)      (3)  Exhibits

         3.0 Amended and Restated Certificate of Incorporation.............(1)
         3.1 Amendment to Certificate of Incorporation.....................(8)
         3.2 Bylaws of Registrant..........................................(2)
         3.3 Amendment to Bylaws of Registrant.............................(8)
         3.4 Amendment to the Amended and Restated Certificate 
              of Incorporation............................................(10)
         4.0 1990 Stock Plan...............................................(3)
         4.1 1993 Stock Option Plan........................................(4)
         10.0 Employment Agreement Between Registrant and Mr.Stuart Landow.(5)
         10.2 First Amendment to Employment Agreement of Stuart Landow.....(8)
         10.4 Master License Lease Agreement - Exxon......................(10)
         10.5 Equipment Purchase Agreement - Thermo Jarrell Ash
               Corporation................................................(10)
         10.6 First Amendment to Lease of On-Site Analysis, Inc., Atlanta,
               Georgia....................................................(10)
         10.8 Shareholder Rights Plan......................................(7)
         10.9 Note Purchase  Agreement  dated as of June 9, 1995
                Regarding 9% Senior  Subordinated  Convertible  Notes
                Due June 9, 2000 by and among Top Source Technologies,
                Inc. Purchasers and Ganz Capital Management, Inc..........(11)
         10.10 Agreement by and between Top Source Technologies, 
                Inc., dated May 10, 1995, Adrenaline, Inc. and Edward
                Van Duyne (EFECS Technology)..............................(11)
         10.11 First Amendment to Shareholder Rights Plan.................(12)
         10.12 Second Amendment to Shareholder Rights Plan................(13)
         10.15 Lease Agreement dated February  10, 1995 for Michigan
                facility, Troy, MI........................................(14)
         10.16 Employment Agreement of David Natan........................(15)
         10.17 Master Purchase Agreement - Thermo Jarrell Ash
                Corporation...............................................(16)
         10.18 Lease of Office Space dated December 20, 1995 of Top 
                Source Technologies, Inc., Palm Beach Gardens, FL.........(16)
         10.21 Asset Purchase Agreement between Top Source Technologies,
                Inc., Conam Inspection, Inc. and United Testing Group,
                Inc. dated  October 30, 1996..............................(18)
         10.22 Amendment No. 1 to the Agreement between Adrenaline 
                Research, Inc., Top Source Technologies, Inc. and Edward 
                Van Duyne dated February 22, 1996................... .....(20)
         10.23 Marketing Agreement between On-Site Analysis, Inc. and
                Conam Inspection, Inc. dated  November 14, 1996...........(20)
         10.25 NationsCredit Agreement dated July 1, 1997.................(21)
         10.26 Amendment to Stuart Landow Employment Agreement............(22)
         10.27 Employment Agreement of William C. Willis, Jr..............(22)
         10.28 Indemnification Agreement dated July 14, 1997 between
                Christer Rosen and Top Source Technologies, Inc...........(22)
         27.0  Financial Data Schedule....................................(22)

(b)      Reports on Form 8-K

         There  were no  reports  filed  on Form  8-K  for the  quarter  ended
         September 30, 1997.

Exhibit Index
    (1)      Contained in the Form 8-A dated July 10, 1993.
    (2)      Contained  in  the   documents   previously   filed  with  the
             Securities  and Exchange  Commission in  conjunction  with the
             Form 8-B on 11/16/92.
    (3)      Contained  in  the   documents   previously   filed  with  the
             Securities  and Exchange  Commission in  conjunction  with the
             12/31/90 Form 10-K.
    (4)      Contained as an exhibit to the Proxy  Statement  dated January 11,
             1994.
    (5)      Contained in Amendment No. 1 to the Registration Statement
             on Form S-3 filed on November 16, 1993.
    (6)      Not used.
    (7)      Contained in Form 8-K dated January 5, 1995.
    (8)      Contained  in the  documents  filed  with the  Securities  and
             Exchange Commission in conjunction with the 9/30/93 Form 10-K.
    (9)      Not used.
    (10)     Contained  in the  documents  filed  with the  Securities  and
             Exchange Commission in conjunction with the 9/30/94 Form 10-K.
    (11)     Contained in documents  filed with the Securities and Exchange
             Commission in conjunction with the 6/30/95 Form 10-Q.
    (12)     Contained in the Form 8-A/A No. 1 dated July 17, 1995.
    (13)     Contained in the Form 8-A/A No. 2 dated December 5, 1995.
    (14)     Contained in Amendment No. 1 to the Registration Statement
             on Form S-3 filed May 4, 1995.
    (15)     Contained in Amendment No. 3 to the Registration Statement
             on Form S-3 filed September 27, 1995.
    (16)     Contained in documents filed with the Securities and Exchange
             Commission in conjunction with the September 30, 1995 Form 10-K.
    (17)     Contained in documents  filed with the Securities and Exchange
             Commission  in  conjunction  with the  December  31, 1995 Form
             10-Q.
    (18)     Contained in the Form 8-K dated November 12, 1996.
    (19)     Not used.
    (20)     Contained in documents  filed with the Securities and Exchange
             Commission  in  conjunction   with  September  30,  1996  Form
             10-K/A No. 1.
    (21)     Contained in documents  filed with the Securities and Exchange
             Commission in conjunction with the June 30, 1997 Form 10-Q.
    (22)     Contained in documents  filed with the Securities and Exchange
             commission in conjunction with September 30, 1997 Form 10-K.

<PAGE>

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995


<TABLE>
<S>                                 <C>                 <C>            <C>                <C>                 <C>    
                                       Balance at       Charged to       Additions
                                       Beginning of     Costs and        Charged to                          Balance at End of
                                       Period           Expenses         Other Accounts                      Period
Description                                                                                Deductions
====================================== ---------------- ---------------- ----------------- ----------------- ==================
Deducted from Accounts Receivable -
Allowance for Doubtful Accounts
====================================== ---------------- ---------------- ----------------- ----------------- ==================
Year Ended September 30,
1997                                   $  83,650        $     -          $       -                            $     -
                                                                                           ($83,650)
====================================== ---------------- ---------------- ----------------- ----------------- ==================
Year Ended September 30, 1996
                                       $145,703         $     -          $      -          ($62,053)         $ 83,650
-------------------------------------- ---------------- ---------------- ----------------- ----------------- ==================
Year Ended September 30 1995
                                       $150,000         $159,645         $       -                           $145,703
                                                                                           ($163,942)
-------------------------------------- ---------------- ---------------- ----------------- ----------------- ==================


</TABLE>




<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  Registrant's  report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

                                                                 
                      TOP SOURCE TECHNOLOGIES, INC.



                       By: \s\William C. Willis, Jr.
                            William C. Willis, Jr
                            President and Chief Executive Officer          
                              

                        By: \s\David Natan
                             David Natan
                             Vice President, Chief Financial Officer
                             and Secretary
                             (Principal Financial and Accounting Officer)


 Dated:   January  12, 1998                                                  


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

SIGNATURE                       TITLE                        DATE

\s\ Stuart Landow                                                    
Stuart Landow                   Chairman of the             
                                Board of Directors           January 12, 1998

\s\ William C. Willis, Jr.      President and Chief
William C. Willis, Jr.          Executive Officer            January  12, 1998


\s\ Ronald P. Burd              Director                     January  12, 1998
Ronald P. Burd

\s\ Clinton D. Lauer            Director                     January  12, 1998
Clinton D. Lauer

\s\ G. Jeff Mennen              Director                     January  12, 1998
G.    Jeff Mennen

\s\ Paul F. Moore               Director                     January  12, 1998
Paul F. Moore

\s\ Mani A. Sadeghi             Director                     January  12, 1998
Mani A. Sadeghi





<PAGE>